<PAGE>
As filed with the Securities and Exchange Commission on September 3, 1997
Registration No. 333-26679-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 3
to
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------------------------
Education Loans Incorporated
(Exact name of registrant as specified in its charter)
Delaware 91-1819974
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
105 First Avenue Southwest
Aberdeen, South Dakota 57401
(605) 622-4400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
A. Norgrin Sanderson
105 First Avenue Southwest
Aberdeen, South Dakota 57401
(605) 622-4400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
Timothy S. Hearn, Esq. David M. Reicher, Esq.
Dorsey & Whitney LLP Foley & Lardner
Pillsbury Center South Firstar Center
220 South Sixth Street 777 East Wisconsin Avenue
Minneapolis, Minnesota Milwaukee, Wisconsin 53202-5367
(612) 340-7802 (414) 297-5763
-------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the 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 SEPTEMBER 3, 1997
PROSPECTUS
$_______,000
Education Loans Incorporated
----------------------------
STUDENT LOAN ASSET-BACKED REDEEMABLE NOTES, SERIES 1997-1
consisting of
$_______,000 Tax Exempt Auction Rate Student Loan Asset-Backed Redeemable Notes,
Senior Series 1997-1A through E
$_______,000 Tax Exempt Fixed Rate Student Loan Asset-Backed Redeemable Notes,
Senior Series 1997-1F
$______,000 Taxable Auction Rate Student Loan Asset-Backed Redeemable Notes,
Senior Series 1997-1G and H
$___________,000 Taxable LIBOR Rate Student Loan Asset-Backed Redeemable Notes,
Senior Series 1997-1I and J
$______,000 Tax Exempt Fixed Rate Student Loan Asset-Backed Redeemable Notes,
Subordinate Series 1997-1K
$______,000 Taxable LIBOR Rate Student Loan Asset-Backed Redeemable 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 Redeemable Notes, Series 1997-1 (the "Series 1997-1 Notes"). In
connection with an election to be made by the Original Issuer under Section
150(d)(3) of the Internal Revenue Code of 1986, as amended, Education Loans
Incorporated, a separate, newly organized Delaware corporation (the
"Corporation"), will, immediately upon the issuance of the Series 1997-1 Notes,
assume all of the Original Issuer's liabilities and obligations with respect to
the Notes, and the Original Issuer will be released from all such liabilities
and obligations. See "The Original Issuer" and "The Corporation" herein.
(cover continued on next page)
Prospective investors in the Series 1997-1 Notes should consider the
discussion of certain material factors set forth under "Risk Factors" on page
[__] of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Series 1997-1 Notes will represent limited obligations of the
Corporation, payable solely from the Trust Estate created under the Indenture
and described herein. The Series 1997-1 Notes are not insured or guaranteed by
any government agency or instrumentality, by any affiliate of the Corporation
(including the Original Issuer), by any insurance company or by any other person
or entity. The Holders will have recourse to the Trust Estate pursuant to the
Indenture, but will not have recourse to any other assets of the Corporation or
the Original Issuer. The Corporation, moreover, will have no significant assets
available to make payment on the Series 1997-1 Notes other than the Trust Estate
pledged as collateral for the Notes under the Indenture.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Proceeds to
Underwriting Original
Price to Public Fee (1) Issuer (2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Exempt Auction Rate Series 1997-1 Senior Notes..... % .___% .___%
Tax Exempt Fixed Rate Series 1997-1 Senior Notes....... % .___% .___%
Taxable Auction Rate Series 1997-1 Senior Notes........ % .___% .___%
Taxable LIBOR Rate Series 1997-1 Senior Notes.......... % .___% .___%
Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes.. % .___% .___%
Taxable LIBOR Rate Series 1997-1 Subordinate Notes..... % .___% .___%
Total.................................................. $___________ $___________ $___________
======================================================================================================
</TABLE>
(1) SLFC has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
(2) Before deducting expenses payable by the Original Issuer, estimated to be
$__________.
As a result of the transfer requirements described herein, the Auction Rate
Series 1997-1 Senior Notes will not be freely transferable, which may limit the
liquidity and marketability of Auction Rate Series 1997-1 Senior Notes and
therefore may not yield a Noteholder the best possible price for an Auction Rate
Series 1997-1 Senior Note. The ratings of the Auction Rate Series 1997-1 Senior
Notes by the Rating Agencies will not address the market liquidity of such
Notes.
The Series 1997-1 Notes are offered by the Underwriters subject to prior
sale, when, as and if issued to the Underwriters. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the Series 1997-1 Notes will be made in
book-entry-only form through the Same Day Funds Settlement System of The
Depository Trust Company and also Cedel Bank, societe anonyme or the Euroclear
System on or about __________, 1997.
Smith Barney Inc.
FBS Investment Services, Inc. Dougherty Dawkins LLC
Miller & Schroeder Financial, Inc. Norwest Investment Services, Inc.
The date of this Prospectus is __________, 1997.
<PAGE>
(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 Redeemable 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 Redeemable Notes,
Senior Series 1997-1F (the "Tax Exempt Fixed Rate Series 1997-1 Senior Notes"),
Taxable Auction Rate Student Loan Asset-Backed Redeemable Notes, Senior Series
1997-1G and 1997-1H (the "Taxable Auction Rate Series 1997-1 Senior Notes"),
Taxable LIBOR Rate Student Loan Asset-Backed Redeemable 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 Redeemable Notes, Subordinate Series
1997-1K (the "Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes"), and
Taxable LIBOR Rate Student Loan Asset-Backed Redeemable Notes, Subordinate
Series 1997-1L (the "Taxable LIBOR Rate Series 1997-1 Subordinate Notes"). See
"Description of Series 1997-1 Notes" herein.
The rights of the Holders of Tax Exempt Fixed Rate Student Loan Asset-
Backed Notes, Subordinate Series 1997-1K and Taxable LIBOR Rate Student Loan
Asset-Backed Notes, Subordinate Series 1997-1L to receive payments with respect
to the Notes and to direct remedies upon default will be subordinated to such
rights of the Series 1997-1 Senior Noteholders and any other Senior
Beneficiaries to the extent described in this Prospectus. See "Source of Payment
and Security for the Notes -- Priorities."
The Tax Exempt Auction Rate Series 1997-1 Senior Notes, the Tax Exempt
Fixed Rate Series 1997-1 Senior Notes, the Taxable Auction Rate Series 1997-1
Senior Notes, the Taxable LIBOR Rate Series 1997-1 Senior Notes, the Tax Exempt
Fixed Rate Series 1997-1 Subordinate Notes and the Taxable LIBOR Rate Series
1997-1 Subordinate Notes will be issued in the initial aggregate principal
amounts of $___________, $__________, $___________, $___________, $___________
and $__________, respectively. The Series 1997-1 Notes will be issued pursuant
to an Indenture of Trust dated as of ____________, 1997 (as amended and
supplemented from time to time, the "Indenture") from the Original Issuer to
First Bank National Association, as trustee (together with any successor and any
other corporation which may be substituted in its place pursuant to the
Indenture, the "Trustee"). The Series 1997-1 Notes will be payable from and
secured by: (i) Financed Student Loans (which are loans for post-secondary
education originated or acquired with moneys held under the Indenture) and
moneys due or paid thereunder after the applicable date of acquisition or
origination; (ii) funds on deposit in certain trust funds and accounts held
under the Indenture (including investment earnings thereon); and (iii) rights of
the Corporation in and to certain agreements, including the Servicing Agreement,
the Student Loan Purchase Agreements and the Guarantee Agreements, as the same
relate to Financed Student Loans (as more specifically described herein, the
"Trust Estate"). See "Prospectus Summary -- Trust Estate" and "Source of Payment
and Security for the Notes--General". At the time of acquisition or origination
from moneys held under the Indenture, Student Loans are required to meet certain
eligibility criteria described herein, and upon acquisition or origination such
Student Loans are referred to as Financed Eligible Loans. See "Glossary of
Certain Defined Terms". The initial Financed Eligible Loans have been acquired
by the Original Issuer pursuant to its programs of purchasing Student Loans from
lenders. Additional Financed Eligible Loans are expected to be originated or
acquired by the Trustee on behalf of the Corporation. The Corporation will
contract with Student Loan Finance Corporation, a newly organized South Dakota
corporation ("SLFC"), to provide origination, acquisition, administration and
collection services with respect to the Financed Student Loans and to perform
certain of the Corporation's obligations under the Indenture (referred to in
such capacities as the Servicer). See "The Servicer" and "Certain Relationships
Among Financing Participants" herein.
The Series 1997-1 Notes are subject to optional and special redemption and
prepayment as more fully described herein. See "Description of Series 1997-1
Notes" herein.
Interest on the Tax Exempt Auction Rate Series 1997-1 Senior Notes and the
Taxable Auction Rate Series 1997-1 Senior Notes (collectively, the "Auction Rate
Series 1997-1 Senior Notes") will accrue at the Initial Interest Rates described
herein during the respective Initial Interest Periods, being the periods from
the Date of Issuance
-2- (cover continued on next page)
<PAGE>
(continued from previous)
through ___________, 1997 for the Series 1997-1A Notes, __________, 1997
for the Series 1997-1B Notes, ______________, 1997 for the Series 1997-1C
Notes, _______________, 1997 for the Series 1997-1D Notes, _____________,
1997 for the Series 1997-1E Notes, _______________, 1997 for the Series
1997-1G Notes and _______________, 1997 for the Series 1997-1H Notes.
Thereafter, interest on each series of the Auction Rate Series 1997-1
Senior Notes will accrue at the Auction Rate with respect thereto,
determined from time to time pursuant to the applicable Auction Procedures
described herein. Interest on the Tax Exempt Auction Rate Series 1997-1
Senior Notes will be paid on each June 1 and December 1, commencing
December 1, 1997. Interest on the Taxable Auction Rate Series 1997-1
Senior Notes will be paid on the first Business Day following the
expiration of each respective Auction Period. The Auction Rate Series
1997-1 Senior Notes will mature June 1, 2020. See "Terms of the Tax Exempt
Auction Rate Series 1997-1 Senior Notes" and "Terms of the Taxable Auction
Rate Series 1997-1 Senior Notes."
The purpose of the Auction Procedures is to set the interest rates on
the Auction Rate Series 1997-1 Notes. By purchasing Auction Rate Series
1997-1 Senior Notes, whether in an Auction (as defined herein) or
otherwise, each purchaser will be deemed to have agreed: (i) to participate
in Auctions on the terms described herein, and (ii) so long as the
beneficial ownership of the Auction Rate Series 1997-1 Senior Notes is
maintained in book-entry form, to sell, transfer or otherwise dispose of
the Auction Rate Series 1997-1 Senior Notes only pursuant to a bid or a
sell order in an Auction, or to or through a specified broker-dealer
(initially, Smith Barney Inc.); provided, that in the case of any transfer
other than one pursuant to an Auction, either the owner of the Auction Rate
Series 1997-1 Senior Notes so transferred, its participant or a specified
broker-dealer advises the Auction Agent (as defined herein) of such
transfer. Broker-Dealer Fees (which are based on the Broker-Dealer Fee
Rate specified in the Indenture) are paid by the Auction Agent from moneys
furnished to it by the Corporation or the Trustee from amounts available
therefor under the Indenture. Noteholders do not pay additional fees and
commissions in disposing of Auction Rate Series 1997-1 Notes. See "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
"Terms of the Tax Exempt Fixed Rate Series 1997-1 Senior Notes."
Interest on each series of the Taxable LIBOR Rate Series 1997-1 Senior
Notes will be payable monthly on the first day of each month, commencing
__________, 1997. The Taxable LIBOR Rate Series 1997-1 Senior Note
Interest Rate with respect to each series of Taxable LIBOR Rate Series
1997-1 Senior Notes will be determined by the Trustee monthly as described
herein to equal the One-Month LIBOR plus ____% per annum with respect to
the Series 1997-1I Notes and the One-Month LIBOR plus ____% per annum with
respect to the Series 1997-1J Notes. The Taxable LIBOR Rate Series 1997-1
Senior Notes will mature June 1, 2020. See "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 "Terms of the Tax Exempt
Fixed Rate Series 1997-1 Subordinate Notes."
(cover continued on next page)
-3-
<PAGE>
(continued from previous page)
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 "Terms of the Taxable LIBOR Rate Series 1997-1 Subordinate
Notes."
Principal payments on Financed Student Loans are not anticipated to be
used to retire principal of the Taxable Auction Rate Series 1997-1 Senior
Notes until all Taxable LIBOR Rate Series 1997-1 Notes have been paid in
full, and principal of the Series 1997-1J Notes will not be paid from
principal payments on Financed Student Loans until the Series 1997-1I Notes
have been paid in full.
The Indenture authorizes the issuance of other Notes ("Additional
Notes") in the future, which Additional Notes may be issued on a parity
basis (as to payment and security) with the Series 1997-1 Senior Notes or
with the Series 1997-1 Subordinate Notes or on a subordinate basis to all
such Notes. The Series 1997-1 Notes and any Additional Notes are
collectively referred to herein as the "Notes." Any Additional Notes will
not be offered or sold pursuant to this Prospectus.
In the opinion of Bond Counsel, under existing laws, regulations,
rulings and decisions, interest on the Tax Exempt Series 1997-1 Notes is
not includable in the gross income of the owners thereof for federal income
tax purposes. Interest on the Tax Exempt Series 1997-1 Notes is an item of
tax preference which is included in alternative minimum taxable income for
purposes of the federal alternative minimum tax applicable to all
taxpayers, and is includable in certain other taxes imposed upon
corporations. For a more detailed description of the tax status of the
interest on the Tax Exempt Series 1997-1 Notes, Bond Counsel's opinion with
respect thereto (including its reliance on the Original Issuer's, SLFC's
and the Corporation's compliance with covenants made by them to satisfy
certain requirements of the Internal Revenue Code of 1986, as amended) and
certain income tax consequences of Tax Exempt Series 1997-1 Note ownership,
see "Tax Matters -- Tax Exempt Series 1997-1 Notes."
Neither the Original Issuer nor the Corporation has authorized any
offer of Series 1997-1 Notes to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 (the "U.K.
Regulations"). The Series 1997-1 Notes may not lawfully be offered or sold
to persons in the United Kingdom except in circumstances which do not
result in an offer to the public in the United Kingdom within the meaning
of the U.K. Regulations or otherwise are in compliance with all applicable
provisions of the U.K. Regulations.
Certain persons participating in this offering may engage in
transactions which stabilize, maintain or otherwise affect the price of the
Series 1997-1 Notes, including over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids. See "Plan of
Distribution" herein.
There is currently no secondary market for the Series 1997-1 Notes and
there is no assurance that one will develop. The Underwriters expect, but
will not be obligated, to make a market in the Series 1997-1 Notes. There
is no assurance that such a market will develop or, if such a market does
develop, that such market will continue. The Series 1997-1 Notes will not
be listed on any national securities exchange or quoted on any inter-dealer
quotation system.
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."
(cover continued on next page)
-4-
<PAGE>
(continued from previous page)
Upon receipt of a request by an investor who has received an electronic
Prospectus from any Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus,
such Underwriter will promptly deliver, or cause to be delivered, without
charge, to such investor a paper copy of the Prospectus.
-5-
<PAGE>
AVAILABLE INFORMATION
The Corporation has filed a Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), with the Securities
and Exchange Commission (the "Commission") with respect to the Series 1997-
1 Notes. The Registration Statement and amendments thereof and the exhibits
thereto, as well as certain reports referred to below under "Reports to
Noteholders" and other information, are available for inspection without
charge at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th
Floor, New York, New York 10048; and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the
Registration Statement and amendments thereof and exhibits thereto may be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants, such as
the Corporation, that file electronically with the Commission at the
following address: (http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly unaudited reports concerning the Notes and the Trust Estate
(the "Monthly Servicing Reports"), prepared by the Servicer, will be
provided to the Noteholders as required by the Indenture. The Series 1997-1
Notes will be issued in book-entry form and registered in the name of Cede
& Co. ("Cede & Co."), the nominee of The Depository Trust Company, New
York, New York ("DTC"). Unless and until definitive Notes are issued (which
will occur under the limited circumstances described herein) all Monthly
Servicing Reports will be provided to Cede & Co., as the sole Holder of the
Notes. The receipt by a beneficial owner of a Series 1997-1 Note of any
Monthly Servicing Report will depend on Cede & Co. forwarding such report
to the appropriate Participant or Indirect Participant of DTC, and such
Participant or Indirect Participant then forwarding such report to the
beneficial owner. See "Description of Series 1997-1 Notes -- Book-Entry-
Only System" herein. In addition, at the request of any beneficial owner
of Series 1997-1 Notes, the Trustee will mail Monthly Servicing Reports
directly to such beneficial owner. The Corporation will file with the
Commission such periodic reports as are required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules and
regulations of the Commission thereunder, and will suspend the filing of
such reports at its option if not so required. In accordance with the
Exchange Act and such rules and regulations, the Corporation expects that
its obligation to file such reports will be terminated after June 30, 1998.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Corporation with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act, subsequent to the date of this Prospectus and prior to the termination
of the offering of the Series 1997-1 Notes, shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this
Prospectus from the date of the filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as
so modified or superseded, to constitute part of this Prospectus. The
Corporation will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for
such copies should be directed to Education Loans Incorporated, 105 First
Avenue Southwest, Aberdeen, South Dakota 57401, Attention: Vice President
Comptroller, telephone number (605) 622-4554.
-6-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Capitalized terms
used herein and not defined shall have the respective meanings assigned to them
under "Glossary of Certain Defined Terms" beginning on page [__] of this
Prospectus.
Issuer The Series 1997-1 Notes will be issued by Education Loans
Incorporated, a South Dakota nonprofit corporation formerly
known as Student Loan Finance Corporation (the "Original
Issuer"). The Original Issuer is a corporation described in
Section 150(d) of the Code. Section 150(d) permits certain
nonprofit corporations (such as the Original Issuer) to
finance the acquisition of Student Loans made under the
Higher Education Act by issuing obligations, the interest on
which is not includable in the gross income of the owners
thereof for federal income tax purposes. In connection with
the Original Issuer's election under Section 150(d)(3) of
the Code to terminate its status as a corporation described
in Section 150(d) following the issuance of the Series 1997-
1 Notes, the Original Issuer will issue the Series 1997-1
Notes and then immediately transfer its interest in the
Trust Estate (see "Trust Estate" below) and be released from
all obligations with respect to the Notes and under the
Indenture.
Immediately following the issuance of the Series 1997-1
Notes, 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 Student Loan Finance
Corporation, a newly organized South Dakota corporation and
wholly-owned subsidiary of the Original Issuer ("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.
Immediately upon the transfer of the Original Issuer's
interest in the Trust Estate to SLFC, SLFC will assign such
interest in the Trust Estate to Education Loans
Incorporated, a separate, newly organized Delaware
corporation (the "Corporation"), which will assume all of
the obligations of the Original Issuer with respect to the
Notes and under the Indenture. In connection with these
assignments and assumptions, SLFC and the Corporation will
not issue new Notes to the Holders of the Series 1997-1
Notes in exchange for those issued by the Original Issuer.
Thus, the securities offered by this Prospectus are
obligations of the issuer under the Indenture, which
initially will be the Original Issuer but immediately after
the issuance thereof will be the Corporation (and not the
Original Issuer). Although the Original Issuer and the
Corporation initially will have the same name, they are
different entities. Because all functions and obligations
of the issuer of the Series 1997-1 Notes under the Indenture
will immediately be assumed by the Corporation, discussions
of those functions and obligations in this Prospectus
generally refer to the Corporation, notwithstanding that the
Series 1997-1 Notes will actually be issued by the Original
Issuer.
Following the transfer described above, the Original Issuer
will have no further obligations or liabilities with respect
to the Notes or otherwise under the Indenture. It also will
change its name to Great Plains Education Foundation, Inc.
and continue to exist, though it will change its purposes.
Section 150(d)(3) of the Code requires, however, that it
continue to be an organization described in Section
501(c)(3) of the Code. A Section 501(c) organization must
be organized and operated exclusively for certain purposes
specified in the Code, including charitable or educational
purposes, and
-7-
<PAGE>
no part of its net earnings may inure to the benefit of any
private individual or shareholder. The Original Issuer
expects that its new purposes following the transfer will be
charitable or educational. See "The Original Issuer", "The
Corporation" and "Certain Relationships Among Financing
Participants" herein.
A portion of the proceeds of the Series 1997-1 Notes will be
used to refund [$_________] aggregate outstanding principal
amount of bonds and notes of the Original Issuer which have
been issued to finance the Original Issuer's Student Loan
program, bearing interest as of [________, 1997] at rates
per annum between [____%] and [____%], and maturing from
August 1, 1998 through August 1, 2020.
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 or origination from moneys
under the Indenture; (ii) moneys and investment securities in the
Funds and Accounts held by the Trustee under the Indenture; (iii)
rights of the Corporation in and to the Servicing Agreement, the
Student Loan Purchase Agreements and the Guarantee Agreements, as
the same relate to Financed Student Loans, and (iv) the rights of
the Corporation under certain other related contracts.
Securities The Series 1997-1 Notes are to be issued in twelve series,
Offered 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 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 other Senior Obligations, as more fully described
herein. The Series 1997-1 Notes will be issued pursuant to the
Indenture as hereinafter described.
Risk Factors There are material risks associated with an investment in the
Series 1997-1 Notes. See "Risk Factors".
-8-
<PAGE>
Payment of Interest
on Series 1997-1
Notes
Tax Exempt The Tax Exempt Fixed Rate Series
Fixed Rate 1997-1 Senior Notes maturing on the
Series 1997-1 dates set forth below will bear
Senior Notes interest at the respective rates per
annum set forth below, payable on
each June 1 and December 1,
commencing December 1, 1997, to the
Holders thereof as of the fifteenth
day of the month preceding the
Interest Payment Date:
Maturity Date Interest Rate
------------- -------------
June 1, 2010 %
June 1, 2020
Tax Exempt The Series 1997-1A, 1997-1B, 1997-1C,
Auction 1997-1D and 1997-1E Notes will bear
Rate Series 1997-1 interest at initial rates of
Senior Notes _____%,_____%, _____%, _____%, and
_____% per annum, respectively,
through the respective Initial
Auction Dates, which will be
__________, 1997 for the Series
1997-1A Notes, ___________, 1997 for
the Series 1997-1B Notes,
___________, 1997 for the Series
1997-1C Notes, ___________, 1997 for
the Series 1997-1D Notes, and
___________, 1997 for the Series
1997-1E Notes.
After the Initial Interest Period for
the Tax Exempt Auction Rate Series
1997-1 Senior Notes of each series,
each Interest Period will initially
consist of 35 days, subject to
adjustment as set forth in "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 "Auction of
the Auction Rate Series 1997-1 Senior
Notes - Auction Procedures" (but in
no event exceeding the Maximum
Auction Rate, as defined herein).
See "Auction Procedures" below.
Interest on the Tax Exempt Auction
Rate Series 1997-1 Senior Notes will
be payable on each June 1 and
December 1, commencing December 1,
1997, to the Holders thereof as of
the fifteenth day of the month
preceding the Interest Payment
Date.
Taxable Auction The Series 1997-1G and 1997-1H Notes
Rate Series 1997-1 will bear interest at initial rates
Senior Notes of _____% and _____% per annum,
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.
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 "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 "Auction of
the Auction Rate Series 1997-1 Senior
Notes - Auction Procedures" (but in
no event exceeding the Maximum
Auction Rate, as defined herein).
See "Auction Procedures" below.
Interest on each series of Taxable
Auction Rate Series 1997-1 Senior
Notes will be payable on the first
Business Day following the expiration
of each Auction Period for such
series, to the Holders thereof as of
the Business Day next preceding each
Auction Date.
-9-
<PAGE>
Auction The following summarizes certain
Procedures procedures that will be used in
determining the interest rates on the
Auction Rate Series 1997-1 Senior
Notes. "Auction of the Auction Rate
Series 1997-1 Senior Notes - Auction
Procedures" provides a more detailed
description of these procedures.
Prospective investors in the Auction
Rate Series 1997-1 Senior Notes
should read carefully the following
summary, along with the more detailed
description in "Auction of the
Auction Rate Series 1997-1 Senior
Notes - Changes in Auction Terms -
Changes in Auction Period or
Periods."
The interest rate on each series of
Auction Rate Series 1997-1 Senior
Notes will be determined periodically
(generally, for periods ranging from
7 days to one year, and initially 28
days, in the case of the Taxable
Auction Rate Series 1997-1 Senior
Notes, or 35 days, in the case of the
Tax Exempt Auction Rate Series 1997-1
Senior Notes) by means of a "Dutch
auction." In this Dutch auction,
investors and potential investors
submit orders through an eligible
Broker-Dealer as to the principal
amount of Auction Rate Series 1997-1
Senior Notes such investors wish to
buy, hold or sell at various interest
rates. The Broker-Dealers submit
their clients' orders to the Auction
Agent, who processes all orders
submitted by all eligible
Broker-Dealers and determines the
interest rate for the upcoming
interest period. The Broker-Dealers
are notified by the Auction Agent of
the interest rate for the upcoming
interest period and are provided with
settlement instructions relating to
purchases and sales of Auction Rate
Series 1997-1 Senior Notes.
Taxable LIBOR The Taxable LIBOR Rate Series 1997-1
Rate Series 1997-1 Senior Note Interest Rate with
Senior Notes respect to each series of Taxable
LIBOR Rate Series 1997-1 Senior Notes
will be determined by the Trustee
monthly as described herein to equal
the One-Month LIBOR plus ____% per
annum with respect to the Series
1997-1I Notes and the One-Month LIBOR
plus ____% per annum with respect to
the Series 1997-1J Notes. Interest
on each series of the Taxable LIBOR
Rate Series 1997-1 Senior Notes will
be payable monthly on the first day
of each month, commencing __________,
1997, to the Holders thereof as of
the last Business Day preceding the
Interest Payment Date. See "Terms of
the Taxable LIBOR Rate Series 1997-1
Senior Notes."
Tax Exempt Fixed The Series 1997-1K Notes will bear
Rate Series interest at the rate of __% per
1997-1 annum, payable on each June 1 and
Subordinate December 1, commencing December 1,
Notes 1997, to the Holders thereof as of
the fifteenth day of the month
preceding the Interest Payment Date.
Taxable LIBOR The Taxable LIBOR Rate Series 1997-1
Rate Series Subordinate Note Interest Rate will
1997-1 be determined by the Trustee monthly
Subordinate as described herein to equal the
Notes One-Month LIBOR plus __% per annum.
Interest on the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes will
be payable monthly on the first day
of each month, commencing __________,
1997, to the Holders thereof as of
the last Business Day preceding the
Interest Payment Date. See "Terms of
the Taxable LIBOR Rate Series 1997-1
Subordinate Notes."
-10-
<PAGE>
Payment of
Principal on
Series 1997-1
Notes
Stated Maturity The Stated Maturity Dates and
Dates respective principal amounts 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 1997-1 Notes is June 1, 2020.
Optional At the Corporation's option, Auction
Redemption 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 Fixed
Rate Series 1997-1 Subordinate Notes
may be redeemed at any time on and
after December 1, 2007, in whole or
in part, at the following respective
Redemption Prices (expressed as
percentages of Principal Amount) plus
accrued interest thereon to the
Redemption Date:
Redemption Period
(both dates inclusive) Redemption Price
---------------------- ----------------
December 1, 2007, through November 30, 2008 102%
December 1, 2008, through November 30, 2009 101%
December 1, 2009 and thereafter 100%
Prepayment of Principal of the Taxable LIBOR Rate
Taxable LIBOR Rate Series 1997-1 Notes shall be prepaid
Series on any Interest Payment Date from
1997-1 Notes 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 of Taxable LIBOR Rate
Series 1997-1 Notes shall, subject to
the Senior Asset Requirement, be
allocated between the Taxable LIBOR
Rate Series 1997-1 Senior Notes and
the Taxable LIBOR Rate Series 1997-1
Subordinate Notes pro rata.
Principal of the Taxable LIBOR Rate
Series 1997-1 Senior Notes so
allocated to be prepaid shall be
applied to the Series 1997-1I Notes
so long as any such Notes remain
Outstanding, and thereafter to the
Series 1997-1J Notes. Within a given
series of Taxable LIBOR Rate Series
1997-1 Notes, the Principal Amount of
such series to be prepaid shall be
allocated pro rata to the reduction
of the Principal
-11-
<PAGE>
Amount of all Notes of such series.
The Senior Asset Requirement requires
the maintenance of certain ratios
between the Outstanding Principal
Amounts of the Series 1997-1 Senior
Notes and the Series 1997-1
Subordinate Notes and the Value of
the assets of the Trust Estate
following redemptions and
prepayments. In general, the Senior
Asset Requirement requires that the
Senior Percentage is at least 110%
and the Subordinate Percentage is at
least 100%, though each such
percentage may be lowered under the
conditions prescribed in the
Indenture. See "Description of
Series 1997-1 Notes -- Senior Asset
Requirement," "Glossary of Certain
Defined Terms" and "Summary of the
Indenture -- Redemption, Prepayment
or Purchase of Notes; Senior Asset
Requirement".
The Special Prepayment Amount is an
amount, as of the last day of any
month, equal to the excess, if any,
of (1) the sum of (a) all payments
received as of such last day with
respect to principal of Financed
Student Loans credited to the Series
1997-1 Taxable Acquisition Account,
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 Senior Notes as described
below under "Redemption of Auction
Rate Series 1997-1 Notes and Fixed
Rate Series 1997-1 Notes from Unused
Proceeds," minus (c) the principal
component of the repurchase price of
Student Loans originally Financed
from Balances in Series 1997-1
Taxable Acquisition Account which
have been repurchased from a
Guarantee Agency upon rehabilitation
of such Student Loans pursuant to the
Higher Education Act, over (2) the
sum of (a) the aggregate amount of
all previous prepayments of the
Principal Amount of all Taxable LIBOR
Rate Series 1997-1 Notes, plus (b)
the aggregate Principal Amount of
Taxable LIBOR Rate Series 1997-1
Notes to be prepaid on the next
regularly scheduled Interest Payment
Date from Balances then on hand in
the Retirement Account. Payments
described in clause (1)(a) of the
preceding sentence include, without
limitation, any prepayments by
borrowers from the proceeds of a
consolidation loan made or acquired
by the Trustee on behalf of the
Corporation or from any other
sources, but exclude, for this
purpose, proceeds of the sale or
other disposition of Financed Student
Loans to any Person other than a
Guarantee Agency, with respect to
Guarantee payments, or a Lender, with
respect to the repurchase of Financed
Student Loans by such Lender pursuant
to its repurchase obligation under a
Student Loan Purchase Agreement.
In general, this prepayment provision
is intended to require the
Corporation to prepay Taxable LIBOR
Rate Series 1997-1 Notes in amounts
related to the amount of principal
payments received with respect to
Student Loans Financed with proceeds
of the Taxable Series 1997-1 Notes in
the Acquisition Fund. See "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 -- Holders of Series
1997-1 Notes Which are Prepaid or
Redeemed Due to Accelerated Payments
with respect to Financed Student
Loans May Have to Reinvest Amounts
Received From Prepayments or
Redemptions at a Lower Rate of
Return" and " -- The Average Life of
the Series 1997-1 Notes May Be
Lengthened As a Result of Extension
of Payments on the Financed Student
Loans".
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<PAGE>
Special
Redemption
Redemption of Tax Exempt Auction Rate Series 1997-1
Tax Exempt Senior Notes of any series, Tax
Auction Exempt Fixed Rate Series 1997-1
Rate Series 1997-1 Senior Senior Notes and Tax Exempt Fixed
Notes, Tax Rate Series 1997-1 Subordinate Notes,
Exempt Fixed may, at the Corporation's option, be
Rate Series 1997-1 Senior Notes and redeemed, in whole or in part, at a
Tax Exempt Fixed Redemption Price of 100% of Principal
Rate Series 1997-1 Subordinate Amount of such Notes to be redeemed,
Notes from plus accrued interest thereon to the
Excess Revenues Redemption Date, on any Interest Rate
Adjustment Date for such series or on
any regularly scheduled Interest
Payment Date for such series
occurring on or after ________ 1,
199 , from amounts transferred to the
Series 1997-1 Tax Exempt Retirement
Sub-Account from the Series 1997-1
Tax Exempt Surplus Sub-Account and
the Series 1997-1 Tax Exempt Reserve
Account. In general, such transfers
are intended to allow the Corporation
to redeem Tax Exempt Auction Rate
Series 1997-1 Senior 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 "Summary of the
Indenture -- Funds and Accounts --
Surplus Fund" and " -- Reserve
Fund".
Redemption of Taxable Auction Rate Series 1997-1
Taxable Auction Rate Series 1997-1 Senior Notes of any series may, at
Senior Notes from Excess Revenues the Corporation's option, be
redeemed, 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, 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 Senior Notes to the extent
that revenues under the Indenture
allocable to Taxable Series 1997-1
Notes exceed scheduled debt service
payments on the Taxable Series 1997-1
Notes, prepayments of Taxable LIBOR
Rate Series 1997-1 Notes, payments on
other Indenture Obligations and other
expenses payable under the Indenture.
Such revenues could result in whole
or in part from Student Loans
acquired with, and from investment
earnings on, the proceeds of
Additional Notes. (Any Additional
Notes will not be offered or sold
pursuant to this Prospectus.) See
"Description of Series 1997-1 Notes
-- Special Redemption -- From Moneys
in the Surplus Account" and "Summary
of the Indenture -- Funds and
Accounts -- Surplus Fund" and
"--Reserve Fund."
Redemption of Taxable Auction Rate Series 1997-1
Auction Rate Senior Notes of any series may, at
Series 1997-1 the Corporation's option, be
Senior Notes and Tax Exempt Fixed redeemed, in whole or in part, at a
Rate Series 1997-1 Notes from Unused Redemption Price of 100% of Principal
Proceeds Amount of such Notes to be redeemed,
plus accrued interest to the
Redemption Date, on any regularly
scheduled Interest Payment Date for
such series, 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. Such Series 1997-1 Notes
shall be so redeemed on the regularly
scheduled Interest Payment Date for
such series in September 1998 (from
proceeds remaining as of August 1,
1998), unless the Trustee receives
certain certifications from the
Corporation. See "Description of
Series 1997-1 Notes -- Special
Redemption -- From Unused Proceeds"
and "Summary of the Indenture --
Funds and Accounts --
Acquisition
-13-
<PAGE>
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 Senior
Notes remain Outstanding) Tax Exempt
Fixed Rate Series 1997-1 Notes may,
at the Corporation's option, be
redeemed, in whole or in part, on any
date, in each case at a Redemption
Price of 100% of Principal Amount of
such Notes to be redeemed, plus
accrued interest thereon to the
Redemption Date, from proceeds of the
Series 1997-1 Notes in the Series
1997-1 Tax Exempt Acquisition Account
that have not been used to acquire
Eligible Loans and from amounts in
the Series 1997-1 Tax Exempt Reserve
Account. Such Series 1997-1 Notes
shall be so redeemed on June 1, 2001
(to the extent the proceeds remaining
in the Series 1997-1 Tax Exempt
Acquisition Account exceed [$_______]
as of April 15, 2001) and on June 1,
2002 (from such proceeds remaining as
of April 15, 2002), in each case
unless the Trustee receives certain
certifications from the Corporation.
See "Description of Series 1997-1
Notes -- Special Redemption -- From
Unused Proceeds" and "Summary of the
Indenture -- Funds and Accounts --
Acquisition Fund" and " -- Reserve
Fund".
Redemption of The Series 1997-1 Notes may, at the
Series 1997-1 Corporation's option, be redeemed, in
Notes upon whole but not in part, at a
Reduction of Redemption Price of 100% of Principal
Portfolio Balance Amount, plus accrued interest thereon
to the Redemption Date, on any date
when the remaining aggregate
outstanding principal balance of
Student Loans Financed with the
proceeds of the Series 1997-1 Notes
is less than 10% of the amount
deposited to the Acquisition Fund on
the Date of Issuance.
Selection of Series 1997-1 Notes for If less than all Outstanding Series
Redemption 1997-1 Notes are to be redeemed, the
particular series to be redeemed will
be determined by the availability of
particular amounts (in the case of
special redemption) or the
Corporation's decision to redeem
Notes of such series based upon its
analysis that such redemption is in
the best interest of the Corporation
(in the case of optional redemption).
To the extent Series 1997-1
Subordinate Notes are subject to
redemption, such Notes will (unless
specifically provided otherwise or
unless the Corporation elects
otherwise and provides certain
required certifications) be redeemed
pro rata with Series 1997-1 Senior
Notes. If less than all Outstanding
Series 1997-1 Notes of a given series
are to be redeemed, the particular
Notes to be redeemed will be
determined by lot. See "Description
of Series 1997-1 Notes -- Selection
of Series 1997-1 Notes for
Redemption".
Date of Issuance __________________, 1997.
Denominations The Tax Exempt Auction Rate Series
1997-1 Senior Notes, the Taxable
Auction Rate Series 1997-1 Senior
Notes, the Taxable LIBOR Rate Series
1997-1 Senior Notes and the Taxable
LIBOR Rate Series 1997-1 Subordinate
Notes will be issued in denominations
of $100,000 in original Principal
Amount and any multiple thereof. The
Tax Exempt Fixed Rate Series 1997-1
Senior Notes and the Tax Exempt Fixed
Rate Series 1997-1 Subordinate Notes
will be issued in denominations of
$5,000 in original Principal Amount
and any multiple thereof.
-14-
<PAGE>
Indenture The Series 1997-1 Notes are being
issued pursuant to the Indenture
(including the First Supplemental
Indenture) between the Original
Issuer and the Trustee and are
payable solely from the funds and
assets held thereunder. The Original
Issuer's rights under the Indenture
will be assigned to, and the Original
Issuer's obligations under the
Indenture will be assumed by, the
Corporation. The Corporation expects
to issue additional series of Notes
in the future which also will be
secured by the Trust Estate.
The Series 1997-1 Senior Notes
constitute "Senior Notes" under the
Indenture, secured on a basis which
is on a parity with any other Senior
Obligations 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 other
Subordinate Obligations and which is
subordinate to the Series 1997-1
Senior Notes and any other Senior
Obligations. Additional Notes or
other Indenture Obligations 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 Notes or
other Indenture Obligations may be
secured on a basis which is senior to
or on a parity with the Series 1997-1
Subordinate Notes. Any Additional
Notes will not be offered or sold
pursuant to this Prospectus.
Trustee First Bank National Association, the
headquarters of which is located in
Minneapolis, Minnesota. The Trustee
is also the trustee for the Original
Issuer's outstanding bond and note
issues, which will be refunded by the
Series 1997-1 Notes. The Trustee,
either directly or through its
affiliates, has in the past entered
into student loan purchase agreements
with the Original Issuer, including
Student Loan Purchase Agreements
pursuant to which the Original Issuer
acquired Eligible Loans which will be
Financed under the Indenture. The
Corporation expects that the Trustee
will enter into Student Loan Purchase
Agreements providing for the sale of
a substantial amount of additional
Eligible Loans. The Original Issuer
also has obtained (and the
Corporation may in the future obtain)
financial services from the Trustee
and related entities. FBS Investment
Services, Inc., one of the
Underwriters of the Series 1997-1
Notes, is a wholly-owned subsidiary
of the Trustee. 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 $
==========
-15-
<PAGE>
Approximately $___________ of the
proceeds deposited to the Series
1997-1 Tax Exempt Acquisition Account
and approximately $__________ of the
proceeds deposited to the Series
1997-1 Taxable Acquisition Account
are expected to be used on the Date
of Issuance to refinance a portfolio
of Student Loans currently owned by
the Original Issuer, which Student
Loans have been acquired by the
Original Issuer pursuant to its
secondary market program or
originated by the Original Issuer.
These Student Loans currently secure
outstanding obligations of the
Original Issuer used to acquire such
Student Loans, which will be refunded
from the proceeds of the Series
1997-1 Notes. The remaining proceeds
deposited to the Series 1997-1 Tax
Exempt Acquisition Account are
expected to be used to purchase
Eligible Loans from Lenders or to
originate Eligible Loans on or before
April 15, 2002. At the Corporation's
option, or if not expended as of
certain dates, 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
August 1, 1998. At the Corporation's
option, or if not expended as of
August 1, 1998, such proceeds may be
transferred to the Retirement Account
and used to redeem Taxable Auction
Rate Series 1997-1 Senior Notes. See
"Description of Series 1997-1 Notes
-- Special Redemption -- From Unused
Proceeds" herein.
The Financed Financed Eligible Loans will
Eligible Loans initially consist solely of loans
originated pursuant to the Federal
Family Education Loan Program as
described herein under "Description
of the Federal Family Educational
Loan Program" to students or parents
of students enrolled in qualified
accredited institutions of higher
education. The Corporation expects
that of the Eligible Loans to be
Financed on the Date of Issuance with
the proceeds of the Series 1997-1
Notes, approximately 59.2% will be
guaranteed by Education Assistance
Corporation ("EAC"), approximately
34.6% will be guaranteed by
Pennsylvania Higher Education
Assistance Agency ("PHEAA"), and the
remainder will be guaranteed by one
of the following Guarantee Agencies:
United Student Aid Funds, Inc.,
Northstar Guarantee Inc., Great Lakes
Higher Education Corporation, Student
Loans of North Dakota, Iowa College
Aid Commission, Missouri Coordinating
Board for Higher Education, Illinois
Student Aid Commission, or
Educational Credit Management
Corporation (formerly known as
Transitional Guaranty Agency, Inc.).
The Corporation expects that
California Student Aid Commission
also will be a Guarantee Agency for
Eligible Loans to be Financed
following the Date of Issuance. Any
other state agency or private
nonprofit institution or organization
which administers a Guarantee Program
may also be a Guarantee Agency of
Eligible Loans to be Financed,
subject to meeting certain
requirements of the Indenture. See
"Description of the Guarantee
Agencies."
The Corporation may in the future
acquire or originate (or cause the
Trustee to acquire or originate)
Eligible Loans under the Indenture
which are not originated pursuant to
the Federal Family Education Loan
Program.
Some Financed Eligible Loans will
have been originated by the Original
Issuer or by the Trustee on behalf of
the Corporation. The remainder of
the Financed Eligible Loans will have
been originated by independent third
parties and subsequently sold to the
Original Issuer (before the Date of
Issuance) or to the Trustee on behalf
of the Corporation (after the Date of
Issuance). The Financed Eligible
Loans included in the Trust Estate
will vary from time to time and are
required to be Eligible Loans.
Eligible Loans are (A) Student Loans
which: (1) have been or will be made
to an Eligible Borrower for
post-secondary education, (2) are
guaranteed by a Guarantee Agency as
to at least 98% of the principal of
and accrued interest on such Student
Loans and are covered by
Federal
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<PAGE>
Reimbursement Contracts providing,
among other things, for reimbursement
to the Guarantee Agency for losses
incurred by it on defaulted Financed
Student Loans insured or guaranteed
by the Guarantee Agency to the extent
provided in the Higher Education Act,
(3) are "eligible loans" as defined
in Section 438 of the Higher
Education Act for purposes of
receiving Special Allowance Payments
(other than Nonsubsidized Stafford
Loans originally financed by the
Original Issuer), and (4) bear
interest at rates per annum not less
than or in excess of the applicable
rates of interest provided by the
Higher Education Act, or such lesser
rates as may be approved by the
Rating Agencies; or (B) other Student
Loans if the Corporation shall have
received the necessary Rating Agency,
Bond Counsel and other approvals.
See "Glossary of Certain Defined
Terms." The Corporation expects that
most of the Eligible Loans to be
acquired with the proceeds of the
Series 1997-1 Notes will be those
described in clause (A) above.
Eligible Loans to be Financed with
the proceeds of the Tax Exempt Series
1997-1 Notes (or from Balances in the
Series 1997-1 Tax Exempt Surplus
Sub-Account) must be made to an
Eligible Borrower for the
post-secondary education of (a) a
resident of the State of South Dakota
attending a post-secondary school
located within or without the State
of South Dakota, or (b) a resident of
a state other than the State of South
Dakota attending a post-secondary
school located within the State of
South Dakota.
Although other types of Eligible
Loans may be permitted to be Financed
under clause (B), in general, the
descriptions of Eligible Loans in
this Prospectus relate to those
described in clause (A). The
Corporation has no current plans to
acquire Eligible Loans described
under clause (B) and cannot predict
what the terms of any such Eligible
Loans might be. However, a broad
range of loans, including loans which
are not made under the Federal Family
Education Loan Program, may qualify
as Eligible Loans under clause (B)
upon receiving the necessary
approvals from the Rating Agencies
and Bond Counsel. Eligible Loans not
made under the Federal Family
Education Loan Program may be insured
by other entities or uninsured.
The Federal The Financed Student Loans will
Family initially consist solely of, and are
Education Loan expected at all times to consist
Program primarily of, student loans
originated pursuant to the Federal
Family Education Loan Program under
the Higher Education Act. Pursuant
to the Federal Family Education Loan
Program, each such Financed Eligible
Loan is guaranteed as to the payment
of at least 98% of principal and
interest by a state or private
non-profit Guarantee Agency. The
Guarantee Agencies each have
reinsurance contracts with the
Secretary of the United States
Department of Education (the
"Department of Education"), pursuant
to which the Department of Education
reimburses the Guarantee Agencies for
such portions of guarantee claims
paid by the Guarantee Agencies as is
provided in the Higher Education Act.
In addition, the Department of
Education is obligated to make
certain interest and other subsidy
payments to the holders of such
Financed Eligible Loans. See
"Description of the Federal Family
Educational Loan Program" for a more
complete description of the
provisions of the Higher Education
Act that provide for such programs.
The obligations of the Guarantee
Agencies to the holders of loans,
such as the Trustee, are payable from
the general funds available to each
such Guarantee Agency, including
reserve funds maintained by the
Guarantee Agencies as required by the
Higher Education Act. Certain delays
in receiving reimbursement could
occur if a Guarantee Agency fails to
meet its obligations. In addition,
failure to properly originate or
service an Eligible Loan can cause an
Eligible Loan to lose its guarantee
and/or its eligibility for federal
interest payments and subsidies. See
"Risk Factors -- Risk That Failure to
Comply with Student Loan Origination
and Servicing Procedures for Financed
Student Loans May Result in the
Department of Education's Refusal to
Make Certain Payments to Guarantee
Agencies and the Trustee and the
Guarantee Agencies' Refusal to
Make
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<PAGE>
Guarantee Payments to the Trustee"
and " -- Risk That Financial Status
of Guarantee Agencies Will Affect
Their Ability to Make Guarantee
Payments".
Student Loan The pool of Financed Student Loans
Portfolio included in the Trust Estate from
Characteristics time to time is sometimes referred to
herein as the "Student Loan
Portfolio." A description of the
initial Student Loan Portfolio
expected to be Financed with the
proceeds of the Series 1997-1 Notes
and pledged to the Trustee on the
Date of Issuance is included herein
under "Characteristics of the Initial
Financed Eligible Loans." The
Corporation expects the Trustee to
originate and acquire additional
Student Loans on behalf of the
Corporation, and Financed Student
Loans may be sold and certain events
may occur with respect to individual
Financed Student Loans.
Consequently, the Student Loan
Portfolio characteristics are
expected to change during the period
that the Series 1997-1 Notes are
Outstanding. See "Risk Factors --
Changes in the Assets of the Trust
Estate, Including Future Funding of
Student Loans, Changing
Characteristics of Financed Student
Loans, Financed Eligible Loans That
are Not Made Under the Federal Family
Education Loan Program, and Financed
Student Loans That are Not Eligible
Loans in the Surplus Account" and "--
Reduction in Amounts Available to Pay
Notes Due to the Variability of
Actual Cash Flows and Due to the
Inability of Guarantee Agencies to
Make Guarantee Payments,"
"Description of the Federal Family
Education Loan Program," and "Certain
Characteristics of the Financed
Eligible Loans".
Investment of The Corporation expects that the
Proceeds in proceeds of the Series 1997-1 Notes
Investment that are deposited into the Reserve
Agreements Fund and, pending use to finance
additional Student Loans, proceeds
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. The
Corporation also expects that amounts
deposited in the Revenue Fund, the
Note Fund and the Surplus Fund
relating to the Series 1997-1 Notes
also will be invested under a series
of investment agreements. Each
investment agreement will require the
financial institution with which such
proceeds or amounts are invested
(each, an "Investment Provider") to
repay such proceeds or amounts 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 or amounts 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. Such investment
agreements will be part of the Trust
Estate securing the Series 1997-1
Notes.
Servicer and the SLFC shall act as the Servicer and
SLFC Servicing custodian of the Financed Student
Agreement Loans. See "The Servicer" and
"Certain Relationships Among
Financing Participants".
The Corporation and the Trustee will
enter into a Servicing Agreement,
dated as of July 1, 1997 (the "SLFC
Servicing Agreement"), with SLFC.
Pursuant to the SLFC Servicing
Agreement, SLFC agrees to provide
services to the Corporation and the
Trustee in connection with the
origination and acquisition of
Student Loans to be Financed, and to
service the Financed Student Loans.
SLFC is required to perform all
services under the SLFC Servicing
Agreement in compliance with the
Higher Education Act, applicable
requirements of the Guarantee
Agencies and all other applicable
federal, state and local laws and
regulations. SLFC may perform all or
part of its origination,
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<PAGE>
acquisition, and servicing activities
through a subcontractor (for which
SLFC will be responsible).
SLFC also agrees to perform various
administrative and management
activities on behalf of the
Corporation, including duties of the
Corporation under the Indenture. The
SLFC Servicing Agreement subjects
SLFC to various obligations relating
to audits, examinations and
inspections.
SLFC is required to be paid a monthly
fee for the performance of its
functions under the SLFC Servicing
Agreement (from funds available for
such purpose under the Indenture) in
an amount each month equal to
0.104167% of the outstanding
principal balance of all Financed
Student Loans as of the last day of
the immediately preceding month.
Such fee is subject to adjustment
under certain circumstances. See "The
SLFC Servicing Agreement."
Lenders With the exception of certain
Consolidation Loans that have been
originated by the Original Issuer and
certain Eligible Loans that may be
originated by the Trustee on behalf
of the Corporation, the Student Loans
expected to be Financed have been or
will be originated by banks, savings
and loan associations, credit unions
and other financial institutions that
qualify as "eligible lenders" under
the Higher Education Act. The
Lenders have sold or will sell the
Student Loans to be Financed to the
Original Issuer, or to the Trustee on
behalf of the Corporation, pursuant
to Student Loan Purchase Agreements.
Repurchases and Exchanges of Pursuant to each Student Loan
Loans Purchase Agreement, the 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 of Education or a
Guarantee Agency, as the case may be,
refuses to honor all or part of a
claim filed with respect to a
Financed Eligible Loan on account of
any circumstance or event that
occurred prior to the sale of such
Financed Eligible Loan to the
Original Issuer or to the Trustee, on
behalf of the Original Issuer or the
Corporation, as the case may be; or
(iii) on account of any
circumstance or event that occurred
prior to the sale of a 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, 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.
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<PAGE>
Funds and Pursuant to the Indenture, there will
Accounts be established the Acquisition Fund,
the Revenue Fund, the Note Fund, the
Administration Fund, the Reserve Fund,
the Rebate Fund and the Surplus Fund.
Acquisition Fund The Indenture establishes the
Acquisition Fund, within which will be
established a Series 1997-1 Tax Exempt
Acquisition Account and a Series 1997-1
Taxable Acquisition Account. With
respect to each series of Notes, the
Trustee shall credit to the Acquisition
Fund the amount, if any, specified in
the Supplemental Indenture providing for
the issuance of such series of Notes
(which amount, with respect to the
Series 1997-1 Notes, is described
below). The Trustee shall also deposit
in the Acquisition Fund: (i) any funds
to be transferred thereto from the
Surplus Fund, and (ii) any other amounts
specified in a Supplemental Indenture.
Balances in the Acquisition Fund shall
be used only for (a) the purchase or
origination of Eligible Loans, (b) the
redemption or purchase of Notes as
provided in a Supplemental Indenture
providing for the issuance of such
series of Notes, (c) the payment of Debt
Service on the Senior Notes and Other
Senior Obligations when due (upon
transfer to the Note Fund), (d) the
payment of the purchase price of any
Senior Notes required to be purchased on
a Purchase Date or a Mandatory Tender
Date (upon transfer to the Note Fund),
or (e) to cure deficiencies in the
Rebate Fund. The Trustee shall make
payments to Lenders from the Acquisition
Fund for the acquisition of Eligible
Loans (such payments to be made from the
Series 1997-1 Tax Exempt and Taxable
Acquisition Accounts at a purchase price
not in excess of 100% of the remaining
unpaid principal amount of such Eligible
Loan, plus accrued noncapitalized
borrower interest thereon, if any, to
the date of purchase, reasonable
transfer, origination or assignment
fees, if applicable, and a premium not
to exceed certain limitations set forth
in the Indenture). The Trustee shall
also make payments from the Acquisition
Fund for the origination of Eligible
Loans.
The sum of $___________ will be
deposited in the Series 1997-1 Tax
Exempt and Taxable Acquisition Accounts
on the Date of Issuance of the Series
1997-1 Notes and approximately
$___________ of such amount will be used
on the Date of Issuance to refinance a
portfolio of Eligible Loans, which is
described herein. See "Characteristics
of the Initial Financed Eligible Loans"
herein. The remaining proceeds deposited
in the Series 1997-1 Tax Exempt and
Taxable Acquisition Accounts in the
Acquisition Fund on the Date of Issuance
are expected to be used to acquire
additional Eligible Loans from Lenders
or to originate Eligible Loans on or
before April 15, 2002. Proceeds
deposited in the Series 1997-1 Tax
Exempt and Taxable Acquisition Accounts
in the Acquisition Fund and not used to
purchase Eligible Loans may be
transferred to the Retirement Account
and used to redeem Series 1997-1
Notes.
Revenue Fund The Indenture establishes the Revenue
Fund, which is comprised of two
Accounts: the Repayment Account and the
Income Account. The Trustee shall credit
to the Revenue Fund: (i) all amounts
received as interest, including federal
interest subsidy payments, and principal
payments with respect to Financed
Student Loans, including all Guarantee
Payments and all Special Allowance
Payments with respect to Financed
Student Loans (excluding, except in the
case of the Eligible Loans to be
Financed on the Date of Issuance, 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
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<PAGE>
or income from Investment Securities in
the Acquisition Fund, the Reserve Fund,
the Administration Fund, the Surplus
Fund and the Note Fund, and (iv) all
amounts to be transferred to the Revenue
Fund from the Rebate Fund. The Trustee
shall deposit and credit all such
amounts received as payments of
principal of Financed Student Loans to
the Repayment Account, and all other
such amounts shall be credited by the
Trustee to the Income Account. The
Indenture requires the Trustee to
transfer moneys on a monthly basis
(after taking into account any periodic
rebate fee payment required to be made
in respect of Student Loans Financed
under the Indenture), first from the
Repayment Account and then from the
Income Account, to the following Funds
and Accounts in the following order: the
Rebate Fund, the Interest Account for
the payment of Senior Obligations, the
Principal Account for the payment of
Senior Obligations, the Retirement
Account for the redemption of Senior
Notes, the Interest Account for the
payment of Subordinate Obligations, the
Principal Account for the payment of
Subordinate Obligations, the Retirement
Account for the redemption of
Subordinate Notes, the Administration
Fund (but only from the Income Account),
the Reserve Fund, the Principal Account
(relating to cumulative sinking fund
installments with respect to Subordinate
Term Notes to be redeemed on a Sinking
Fund Payment Date), the Special
Redemption and Prepayment Account and
the Surplus Account. In addition, any
amounts payable by a Swap Counterparty
pursuant to a Swap Agreement are
required to be credited directly to the
Interest Account.
Note Fund The Indenture establishes the Note Fund,
which is comprised of three Accounts:
the Interest Account, the Principal
Account and the Retirement Account. The
Note Fund shall be used only for the
payment when due of principal of,
premium, if any, and interest on the
Senior Notes and the Subordinate Notes,
the purchase price of Senior Notes and
Subordinate Notes to be purchased on a
Purchase Date or Mandatory Tender Date
in accordance with the Indenture, Other
Indenture Obligations and Carry-Over
Amounts (including any accrued interest
thereon) and to make transfers to the
credit of the Rebate Fund. The principal
of and interest on the Class C Notes are
payable from the Surplus Fund.
Interest Account The Trustee shall deposit in the
Interest Account (i) that portion of
the proceeds from the sale of
Financed Student Loans representing
accrued interest and Special
Allowance Payments thereon, (ii) that
portion of the proceeds from the sale
of the Corporation's bonds, notes or
other evidences of indebtedness, if
any, to be used to pay interest on
the Senior Notes or the Subordinate
Notes, (iii) all Counterparty Swap
Payments, (iv) all payments under any
Credit Enhancement Facilities to be
used to pay interest on (or the
interest portion of the purchase
price of) the Notes and (v) all
amounts required to be transferred
thereto from other Funds and
Accounts, as described below.
To provide for the payment of each
installment of interest which falls due
upon Senior Notes or Subordinate Notes
on each regularly scheduled Interest
Payment Date and all Corporation Swap
Payments and fees to a Credit Facility
Provider payable on such Interest
Payment Date, the Trustee shall make
deposits to the credit of the Interest
Account on each Monthly Payment Date
(less certain credits against such
payments). If, on any Interest Payment
Date (including a Redemption Date or a
date that Notes are to be purchased that
is not a regularly scheduled Interest
Payment Date), moneys in the Interest
Account are insufficient to pay the
accrued interest due on the Senior Notes
and Subordinate Notes and all
Corporation Swap Payments and fees to a
Credit Enhancement Facility Provider
payable on such Interest Payment Date or
constituting a portion of the purchase
price of Notes to be so purchased, the
Trustee shall deposit immediately to the
credit of the Interest Account an amount
equal to such deficiency by transfer
from the
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<PAGE>
following Funds and Accounts, in the
following order of priority: the Revenue
Fund, the Surplus Fund (other than that
portion of the Balance thereof
consisting of Eligible Loans), the
Reserve Fund, the Administration Fund,
the Surplus Fund (including any portion
of the Balance thereof consisting of
Eligible Loans), the Retirement Account,
the Principal Account and, as to Senior
Notes and Other Senior Obligations only,
the Acquisition Fund (other than that
portion of the Balance thereof
consisting of Student Loans); provided
that such transfers in respect of
Subordinate Notes or Other Subordinate
Obligations shall be so made from the
Principal Account or the Retirement
Account only if, and to the extent, any
amounts to be so transferred are in
excess of the requirements of such
Accounts with respect to Senior
Obligations payable therefrom.
If, as of any regularly scheduled
Interest Payment Date, any Carry-Over
Amount (including any accrued interest
thereon) is due and payable with respect
to a series of Notes, as provided in the
related Supplemental Indenture, the
Trustee shall transfer to the Interest
Account (to the extent amounts are
available therefor in the Surplus
Account, after taking into account all
other amounts payable from the Surplus
Fund on such Interest Payment Date) an
amount equal to such Carry-Over Amount
(including any accrued interest thereon)
so due and payable.
Balances in the Interest Account shall
be transferred to the credit of the
Rebate Fund to the extent necessary,
after transfers thereto from the Revenue
Fund, the Surplus Fund, the Reserve
Fund, the Administration Fund, the
Retirement Account and the Principal
Account, to make any deposit to the
credit of the Rebate Fund required by
the Indenture. (See "Rebate Fund"
below.)
Apart from transfers to the Rebate Fund
and transfers to the Principal Account
as described under "Principal Account"
below, Balances in the Interest Account
shall be applied, first, to the payment
of interest on all Senior Notes,
Corporation Swap Payments under Senior
Swap Agreements and fees payable to
Senior Credit Facility 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 Facility Providers
due on an Interest Payment Date, and if
such money (after the transfers
hereinabove described, including all
amounts, to the extent necessary, in the
Principal Account over and above the
amount on deposit therein to meet any
accrued obligations to pay principal of
the Senior Notes or amounts, other than
fees, to Senior Credit Facility
Providers) is less than such interest
and Other Subordinate Obligations on
such Interest Payment Date, such money
shall be applied, pro rata, among such
indebtedness based upon such amounts
then owing to Subordinate Beneficiaries
and to be paid from the Interest
Account; and third, to the payment of
all Carry-Over Amounts (including any
accrued interest thereon) due and
payable on all series of Notes, and if
such money is less than such Carry-Over
Amounts (including any accrued interest
thereon) on an Interest Payment Date,
such money shall be applied, pro rata,
among such Carry-Over Amounts (including
any accrued interest thereon) based upon
such amounts then otherwise due and
payable to Noteholders and to be paid
from the Interest Account.
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<PAGE>
Other Indenture Obligations payable from
the Interest Account would include
reimbursement to any Credit Facility
Provider for interest paid on Senior
Notes or Subordinate Notes from amounts
derived from the related Credit
Enhancement Facility, which
reimbursement shall have the same
priority of payment from the Interest
Account as the interest so paid.
Principal Account The Trustee shall deposit to the credit
of the Principal Account: (i) that
portion of the proceeds from the sale of
Financed Student Loans representing
principal thereof, (ii) that portion of
the proceeds from the sale of the
Corporation's bonds, notes or other
evidences of indebtedness, if any, to be
used to pay principal of the Senior
Notes and the Subordinate Notes, (iii)
all payments under any Credit
Enhancement Facilities to be used to pay
principal of Senior Notes or Subordinate
Notes or the purchase price of Senior
Notes or Subordinate Notes to be
purchased on a Purchase Date or
Mandatory Tender Date, and (iv) all
amounts required to be transferred
thereto from the following Funds, in the
following order of priority: (1) in the
case of payment of principal of Notes at
Stated Maturity, redemption of Senior
Notes on a Sinking Fund Payment Date or
the purchase of Notes on a Purchase Date
or Mandatory Tender Date, the Revenue
Fund, the Surplus Fund (other than that
portion of the Balance thereof
consisting of Eligible Loans), the
Reserve Fund, the Administration Fund
and the Surplus Fund (including any
portion of the Balance thereof
consisting of Eligible Loans), and (2)
in the case of redemption of Subordinate
Notes on a Sinking Fund Payment Date,
the Revenue Fund and the Surplus Fund
(other than that portion of the Balance
thereof consisting of Eligible Loans);
provided, however, that if principal is
payable on Senior Notes at the Stated
Maturity thereof or upon a Sinking Fund
Payment Date therefor, or the purchase
price is payable on Senior Notes on a
Purchase Date or Mandatory Tender Date,
and money credited to the Principal
Account, after the foregoing transfers,
is insufficient to pay such principal or
purchase price, funds shall be
transferred, to the extent necessary, to
the Principal Account for this purpose,
(i) from the Interest Account, but only
to the extent that the Balance in the
Interest Account exceeds any then
accrued payments of interest on the
Senior Notes, Corporation Swap Payments
under Senior Swap Agreements and fees
owing to Senior Credit Enhancement
Providers and (ii) thereafter from the
Acquisition Fund (other than that
portion of the Balance thereof
consisting of Student Loans).
To provide for the payment of principal
due on the Stated Maturity of Senior or
Subordinate Serial Notes or on a Sinking
Fund Payment Date for Senior or
Subordinate Term Notes, the Trustee
shall make deposits to the credit of the
Principal Account on each Monthly
Payment Date from amounts available
therefor in the Revenue Fund and the
other Funds referred to above.
In the event that the Corporation is
required to furnish moneys to the
Depositary to purchase Notes on a
Purchase Date or Mandatory Tender Date,
the Trustee shall, subject to the
applicable provisions of the related
Supplemental Indenture, immediately
deposit to the credit of the Principal
Account moneys sufficient to pay the
purchase price thereof.
Balances in the Principal Account shall
be transferred to the credit of the
Rebate Fund to the extent necessary,
after transfers thereto from the Revenue
Fund, the Surplus Fund, the Reserve
Fund, the Administration Fund and the
Retirement Account, to make any required
deposit to the credit of the Rebate
Fund. (See "Rebate Fund" below.)
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<PAGE>
Balances to the credit of the
Principal Account shall be applied in
the following order of priority:
first, for transfer to the Rebate
Fund; second, to the Interest Account
to the extent required (see "Interest
Account" above) for the payment of
interest on Senior Notes and Other
Senior Obligations payable therefrom;
third, to the payment of Senior Notes
at their Stated Maturity or on their
Sinking Fund Payment Date and Other
Senior Obligations payable therefrom;
fourth, to the payment of the
purchase price of Senior Notes on a
Purchase Date or Mandatory Tender
Date; fifth, to the Interest Account
to the extent required (see "Interest
Account" above) for the payment of
interest on Subordinate Notes and
Other Subordinate Obligations payable
therefrom; sixth, to the payment of
Subordinate Notes at their Stated
Maturity and Other Subordinate
Obligations payable therefrom;
seventh, to the payment of the
purchase price of Subordinate Notes
on a Purchase Date or Mandatory
Tender Date; and eighth, to the
payment of Subordinate Term Notes on
a Sinking Fund Payment Date.
Other Indenture Obligations payable
from the Principal Account would
include reimbursement to any Credit
Facility Provider for principal or
the purchase price paid on Senior
Notes or Subordinate Notes from
amounts derived from the related
Credit Enhancement Facility, which
reimbursement shall have the same
priority of payment from the
Principal Account as the principal so
paid.
Balances in the Principal Account may
also be applied to the purchase of
Senior Notes or Subordinate Notes.
Any such purchase shall be limited to
those Senior Notes or Subordinate
Notes whose Stated Maturity or
Sinking Fund Payment Date is the next
succeeding Principal Payment Date.
Retirement The Trustee shall deposit to the
Account credit of the Retirement Account (i)
any amounts transferred thereto from
the Reserve Fund and the Surplus
Fund, (ii) that portion of the
proceeds from the sale of the
Corporation's bonds, notes or other
evidences of indebtedness, if any, to
be used to pay the principal or
Redemption Price of Senior Notes or
Subordinate Notes on a date other
than the Stated Maturity thereof or a
Sinking Fund Payment Date therefor,
and (iii) all payments under any
Credit Enhancement Facilities to be
used to pay the Redemption Price of
Notes payable from the Retirement
Account. All Senior Notes or
Subordinate Notes which are to be
retired, or the principal of which is
to be prepaid, other than with moneys
in the Principal Account shall be
retired or prepaid with moneys
deposited to the credit of the
Retirement Account.
Balances in the Retirement Account
shall be transferred to the credit of
the Rebate Fund to the extent
necessary, after transfers thereto
from the Revenue Fund, the Surplus
Fund, the Reserve Fund and the
Administration Fund, to make any
required deposit to the Rebate Fund.
(See "Rebate Fund" below.) After
taking into account any such required
transfers to the Rebate Fund,
Balances in the Retirement Account
shall be transferred to the credit of
the Interest Account to the extent
required (see "Interest Account"
above) for the payment of interest on
Notes and Other Indenture Obligations
payable therefrom.
Other Indenture Obligations payable
from the Retirement Account will
include reimbursement to any Credit
Facility Provider for the Redemption
Price paid on Senior Notes or
Subordinate Notes from amounts
derived from the related Credit
Enhancement Facility, which
reimbursement shall have the same
priority of payment from the
Retirement Account as the Redemption
Price so paid.
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<PAGE>
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.
Administration Fund With respect to each series of Notes,
the Trustee shall, upon delivery
thereof and from the proceeds
thereof, credit to the Administration
Fund established under the Indenture
the amount, if any, specified in the
Supplemental Indenture providing for
the issuance of such series of Notes.
The Trustee shall also credit to the
Administration Fund all amounts
transferred thereto from the Revenue
Fund and the Surplus Account.
Amounts in the Administration Fund
shall be used to pay Costs of
Issuance, Administrative Expenses and
Note Fees or to reimburse another
fund, account or other source of the
Corporation for the previous payment
of Costs of Issuance, Administrative
Expenses or Note Fees.
Balances in the Administration Fund
shall also be applied to remedy
deficiencies in the Rebate Fund and the
Note Fund after transfers thereto from
the Revenue Fund, the Surplus Fund
(other than that portion of the Balance
thereof consisting of Eligible Loans)
and the Reserve Fund.
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 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.
Reserve Fund Immediately upon the delivery of any
series of Senior Notes or Subordinate
Notes, and from the proceeds thereof or,
at the option of the Corporation, from
any amounts to be transferred thereto
from the Surplus Fund, the Trustee shall
credit to the Reserve Fund the amount,
if any, specified in the Supplemental
Indenture providing for the issuance of
that series of Notes, such that, upon
issuance of such Notes, the Balance in
the Reserve Fund shall not be less than
the Reserve Fund Requirement, which is
an amount initially equal to the greater
of ___% of the aggregate principal
amount of all Notes then Outstanding or
$ __________.
If on any Monthly Payment Date the
Balance in the Reserve Fund is less than
the Reserve Fund Requirement, the
Trustee shall transfer and credit
thereto an amount equal to the
deficiency from moneys available
therefor in the following Funds and
Accounts in the following order of
priority: the Repayment Account, the
Income Account and the Surplus Fund.
The Balance in the Reserve Fund shall be
used and applied solely for (i)
transfers to the Rebate Fund to the
extent necessary, after transfers
thereto from the 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.
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<PAGE>
of Senior Notes and Subordinate Notes on
a Purchase Date or Mandatory Tender
Date, and the other purposes specified
in the Indenture (see "Note Fund"
above).
Rebate Fund The Indenture establishes the Rebate
Fund into which the Trustee is required
to make annual deposits from Balances in
the Revenue Fund, the Surplus Fund, the
Reserve Fund, the Administration Fund,
the Bond Fund and the Acquisition Fund,
in that order, equal to the amount
computed under Section 148(f) of the
Code as being subject to rebate to the
United States (the "Rebate Amount") and
certain amounts constituting Excess
Earnings on the Financed Student Loans.
The Trustee is required to pay to the
United States Treasury, at least once
every five years, an amount which
ensures that not less than 90% of the
cumulative Rebate Amount will have been
paid to the United States Treasury. The
Trustee is required to consult with Bond
Counsel and take such action as may be
required under the Code (which may
include forgiveness of principal of
Financed Student Loans or payments to
the 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.
Surplus Fund The Indenture establishes a Surplus Fund
comprised of two Accounts: the Special
Redemption and Prepayment Account and
the Surplus Account. The Trustee shall
deposit to the credit of the Surplus
Fund Balances in the Revenue Fund not
required for deposit to any other Fund
or Account. Deposits to the Surplus Fund
from the Revenue Fund shall be credited
to the Special Redemption and Prepayment
Account to the extent the Balance
thereof is less than the Special
Redemption and Prepayment Account
Requirement for each series of Notes,
and otherwise to the Surplus Account.
Balances in the Surplus Fund shall be
used first to make up deficiencies in,
or make required transfers to, the
Rebate Fund, the Note Fund, the
Administration Fund and the Reserve
Fund. Balances in the Surplus Fund may
also be applied, as determined by the
Corporation from time to time, to the
payment of principal of or interest on
Class C Notes when due or upon the
redemption thereof at the option of the
Corporation, subject to meeting certain
conditions described in "Summary of the
Indenture -- Funds and Accounts --
Surplus Fund" are met.
If the Trustee shall have first
certified that no deficiencies exist in
any of the Rebate Fund, the Note Fund,
the Reserve Fund or the Special
Redemption and Prepayment Account, and
shall have received certain
certifications from the Corporation,
Balances in the Surplus Account may be
used to redeem Notes (including Series
1997-1 Notes as described under
"Description of Series 1997-1 Notes --
Special Redemption --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.
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<PAGE>
Balances in the Special Redemption and
Prepayment Account may be transferred to
the credit of the Retirement Account to
redeem or prepay Senior Notes or
Subordinate Notes as provided in a
Supplemental Indenture relating thereto
(provision for which, in the case of the
Taxable LIBOR Rate Series 1997-1 Notes
has been made in the First Supplemental
Indenture and is described under
"Prepayment of Taxable LIBOR Rate Series
1997-1 Notes" above) or to the
Acquisition Fund for the acquisition or
origination of Eligible Loans as
provided in the Indenture and as further
authorized or limited in a Supplemental
Indenture. Balances in the Special
Redemption and Prepayment Account (other
than any portion thereof to be applied
to the mandatory prepayment of principal
of any Notes) may also be transferred to
the Note Fund for the purchase of Notes.
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<PAGE>
FLOW OF REVENUES IN THE FUNDS
AND ACCOUNTS
|Student Loan
|Revenues and
|Investment
|Earnings
|
-------------------
Revenue
Fund
-------------------
|
- -------------------------------------- |
Rebate and |
Excess Interest Rebate ------------ |Bond
Fund | |Proceeds
------ | |
| |----------- | |
| | ------------------- | -------------------
| | | |
| | |--------------------|----------- Acquisition
| | | | Fund
|----|------------------------------ |
| ------------ | -------------------
- --|---------------- Bond -----------| | |
| Principal and Fund | | |
| Interest on | Acquire | |
| Bonds | Eligible| |Eligible
| | ------------------- | Loans | |Loans
| | |
| | |
| | |
| | ------------------- |
|----|----------- -----------|--------
| | Reserve |Bond
| ------------ Fund -----------|Proceeds
| |
| |
| ------------------- |
| |
| |
| |
| ------------------- |
|---------------- |
- --|---------------- Administration -----------|
|Administrative Fund |
|Expenses |
| ----- |
| | ------------------- |
| | |
| | |
| | |
| | ------------------- |
| | |
|---------------- Surplus ------------
| Fund
-----
- -------------------
To Corporation -------------------
The above chart is intended to illustrate, in simple form, the flow of revenues
to and from the Funds and Accounts under the Indenture. For a more detailed
description of such flow of revenues, see "Source of Payment and Security for
the Notes--Description of Flow of Revenues in the Funds" and "Summary of the
Indenture--Fund and Accounts."
<PAGE>
Additional Parity The Corporation may, upon complying
Notes with the provisions of the Indenture,
issue from time to time Additional
Notes or incur certain other
Indenture Obligations secured by the
Trust Estate on a parity with or
subordinate to the Senior Notes. Any
Additional Notes will not be offered
or sold pursuant to this Prospectus.
See "Summary of the Indenture" herein.
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 other Senior
Beneficiaries to the extent described
in this Prospectus. This
subordination is intended to enhance
the likelihood of timely receipt by
the Series 1997-1 Senior Noteholders
of the full amount of scheduled
payments of principal and interest
due them. Thus, payments of interest
and principal on the Series 1997-1
Subordinate Notes will be made when
due (on a parity basis with any other
Subordinate Obligations) only to the
extent there are sufficient monies
available for such payment, after
making all payments due on such date
with respect to the Senior
Obligations. So long as Senior
Obligations remain Outstanding under
the Indenture, the failure to make
interest or principal payments on the
Series 1997-1 Subordinate Notes will
not constitute an Event of Default
under the Indenture. Payments of
principal and interest on the Series
1997-1 Subordinate Notes would be
similarly subordinated to Senior
Obligations if the Notes were
accelerated because of an Event of
Default.
The Series 1997-1 Subordinate Notes
are also subordinated to the Series
1997-1 Senior Notes and any other
Senior Obligations as to the
direction of remedies upon default.
Federal Income In the opinion of Dorsey & Whitney
Tax Treatment of LLP, the Series 1997-1 Notes will be
Series 1997-1 Notes treated as debt of the Original
Issuer (and upon the assumption by
the 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
Taxable Series 1997-1 Notes as paid
or accrued, in accordance with their
respective accounting methods and the
provisions of the Code. See "Tax
Matters -- Federal Income Tax
Consequences".
Exclusion of In the opinion of Dorsey & Whitney
Interest on Tax LLP, as Bond Counsel, under existing
Exempt Series laws, regulations, rulings and
1997-1 Notes decisions, interest on the Tax Exempt
from Gross Income Series 1997-1 Notes is not includable
in the gross income of the owners
thereof for federal income tax
purposes. Interest on the Tax Exempt
Series 1997-1 Notes is an item of tax
preference which is included in
alternative minimum taxable income
for purposes of the federal
alternative minimum tax applicable to
all taxpayers, and is includable in
certain other taxes imposed upon
corporations. For a more detailed
description of the tax status of the
interest on the Tax Exempt Series
1997-1 Notes, Bond Counsel's opinion
with respect thereto (including its
reliance on the Original Issuer's,
SLFC's and the Corporation's
compliance with covenants made by
them to satisfy certain requirements
of the Code) and certain income tax
consequences of Tax Exempt Series
1997-1 Note ownership, see "Tax
Matters -- Tax Exempt Series 1997-1
Notes".
ERISA The Series 1997-1 Notes are eligible
Considerations for 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".
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<PAGE>
Ratings It is a condition to the issuance of the
Series 1997-1 Notes that the Series
1997-1 Senior Notes each be rated "AAA"
by Fitch Investors Service, L.P. and
"Aaa" by Moody's Investors Services,
Inc., and that the Series 1997-1
Subordinate Notes 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.
The ratings do not address the market
liquidity of Series 1997-1 Notes or the
likelihood of prepayments of the Series
1997-1 Notes. A rating is not a
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
Notes initially will be represented by one or
more certificates registered in the name
of Cede & Co., as a nominee of DTC. No
person acquiring an interest in such
Notes will be entitled to a definitive
certificate representing such person's
interest, except in the event that
definitive securities are issued under
the limited circumstances described
herein. See "Description of Series
1997-1 Notes--Book-Entry-Only System".
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<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the following
factors regarding the purchase of the Series 1997-1 Notes.
The Series 1997-1 Notes are Limited Recourse Obligations and Limited Assets of
the Corporation are Available for the Payment of the Series 1997-1 Notes
The Corporation is a special purpose corporation and the Series 1997-1
Notes will represent obligations solely of the Corporation. The Series 1997-1
Notes are not insured or guaranteed by any government agency or instrumentality,
by any affiliate of the Corporation, by any insurance company or by any other
person or entity. The Corporation will have no significant assets available to
make payment on the Series 1997-1 Notes other than the Trust Estate pledged as
collateral for the Notes under the Indenture. Moreover, the Series 1997-1 Notes
are limited obligations of the Corporation, payable solely from the Trust Estate
and not from any other assets which the Corporation may have or any other
revenues to which the Corporation may be entitled. The Trust Estate will not
have, nor is it expected to have, any significant assets or sources of funds
other than the Financed Student Loans, the Acquisition Fund, the Reserve Fund
and the other Funds and Accounts. Payments on the Series 1997-1 Notes will
depend solely on the amount and timing of payments and collections in respect of
the Financed Student Loans, investment earnings on the various Funds and
Accounts established pursuant to the Indenture, amounts on deposit in the
Reserve Fund and the other Funds and Accounts, and the payment priority of the
Series 1997-1 Notes, any Additional Notes to be issued in the future and any
credit enhancement obtained with respect to such Additional Notes. (Any
Additional Notes will not be offered or sold pursuant to this Prospectus.) There
will be no additional recourse to the Corporation or any other person if such
proceeds are insufficient. As a result, Noteholders must depend on the cash flow
with respect to the Financed Student Loans and funds on deposit in the
Acquisition Fund, the Reserve Fund and the other Funds and Accounts for payment
of principal of and interest on the Series 1997-1 Notes.
Holders of the Series 1997-1 Subordinate Notes are Subordinate in Payment
Priority and as to the Direction of Remedies
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 other Senior Obligations that
may be outstanding from time to time. See "Source of Payment and Security for
the Notes". The Series 1997-1 Subordinate Notes are also subordinated to the
Series 1997-1 Senior Notes and any other Senior Obligations as to the direction
of remedies upon an Event of Default.
Failure to Comply with Student Loan Origination and Servicing Procedures for
Financed Student Loans May Result in the Department of Education's Refusal to
Make Certain Payments to Guarantee Agencies and the Trustee and the Guarantee
Agencies' Refusal to Make Guarantee Payments to the Trustee
The Higher Education Act requires lenders and their agents making and
servicing student loans under the Federal Family Education Loan Program and
Guarantee Agencies guaranteeing such student loans to follow specified
procedures, including due diligence procedures, to ensure that such student
loans are properly originated, disbursed and collected. Certain of those
procedures, which are specifically set forth in the Higher Education Act, are
summarized herein. See "Description of Financed Eligible Loan Program" and
"Description of the Federal Family Education Loan Program." Generally, those
procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower under the Higher
Education Act be made, the borrower's responsibilities under the loan be
explained to him or her, the promissory note evidencing the loan be executed by
the borrower and the loan proceeds be disbursed by the lender in a specified
manner. After the loan is made, the lender must establish repayment terms with
the borrower, properly administer deferments and forbearances and credit the
borrower for payments made. If a borrower becomes delinquent in repaying a loan,
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<PAGE>
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 SLFC Servicing Agreement to
perform origination, servicing and collection procedures on behalf of the
Trustee and the Corporation in compliance with those procedures. However,
failure of the Original Issuer to have followed these procedures with respect to
the existing Student Loan Portfolio, failure of SLFC or any successor Servicer
to follow these procedures or failure of any Lender or any other originator or
Servicer of the Financed Student Loans to have followed or to follow these
procedures with respect to any Financed Student Loans may result in the
Department of Education's refusal to make reinsurance payments to the Guarantee
Agencies or to make Special Allowance Payments or Interest Subsidy Payments to
the Trustee with respect to such Financed Student Loans or in the Guarantee
Agencies' refusal to make payments under their Guarantee Agreements with the
Trustee ("Guarantee Payments") with respect to such Financed Student Loans.
Failure of the Guarantee Agencies to receive reinsurance payments from the
Department of Education could adversely affect the Guarantee Agencies' ability
or legal obligation to make Guarantee Payments to the Trustee. Loss of any such
Guarantee Payments, Special Allowance Payments or Interest Subsidy Payments with
respect to Financed Student Loans could adversely affect the amount of revenues
under the Indenture and the Corporation's ability to pay principal of and
interest on the Series 1997-1 Notes. See "Description of the Federal Family
Education Loan Program."
No Recourse Exists Against the Original Issuer for Any Failures to Comply with
Origination and Servicing Procedures Relating to the Financed Student Loans
The transfer of the original portfolio of Financed Student Loans from the
Original Issuer to the Trustee is without recourse. Neither the Corporation nor
the Trustee will have any right to resell the Financed Student Loans to the
Original Issuer or otherwise to make recourse to or collect from the Original
Issuer if such Financed Student Loans should fail to meet the requirements of an
Eligible Loan for any reason or if such transfer should fail to provide the
Trustee with good title to such Financed Student Loans.
The failure of any Financed Student Loan to conform to all of the
requirements of the Higher Education Act or the Guarantee Agencies with respect
thereto could result in the loss of the Trustee's right to receive Guarantee
Payments, Special Allowance Payments, and/or Interest Subsidy Payments with
respect to such Financed Student Loan.
Changes in Law Could Adversely Affect the Federal Family Education Loan Program
and the Financed Student Loans
There can be no assurance that the Higher Education Act or other relevant
federal or state laws, rules and regulations and the programs implemented
thereunder will not be amended or modified in the future in a manner that will
adversely impact the programs described herein and the loans made thereunder,
including the Financed Student Loans or the Guarantee Agencies. The Federal
Family Education Loan Program has been the subject of numerous amendments and
proposed amendments to the Higher Education Act, including amendments designed
to reduce the federal budget deficit. Amendments to the Higher Education Act in
the past several years have reduced the portion of loans covered by Guarantee
Payments and the portion of Guarantee Payments covered by reinsurance, reduced
certain administrative expense allowances paid by the Department of Education to
Guarantee Agencies, reduced the premiums and default collections that Guarantee
Agencies are entitled to receive and/or retain, and given the Department of
Education broad powers over Guarantee Agencies and their reserves, including the
authority to require a Guarantee Agency to pay a portion or all reserve funds to
the Department of Education in certain circumstances.
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<PAGE>
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.
The Competing Federal Direct Student Loan Program May Result in Higher Servicer
Costs Because of Reduced Economies of Scale; a Smaller Secondary Market and
Reduced Value for Financed Student Loans; and Higher Prepayments of Financed
Student Loans Through Consolidations
The Higher Education Act provides for a Federal Direct Student Loan
Program. This program, established in academic year 1994-1995, has a statutory
target volume of 60% of student loan demand in academic year 1998-1999, which
could result in reductions in the volume of loans made under the Federal Family
Education Loan Program. As the Federal Direct Student Loan Program expands, the
Servicer may experience increased costs due to reduced economies of scale to the
extent the volume of new loans serviced by the Servicer is reduced. Such cost
increases could affect the ability of the Servicer to satisfy its obligations to
service the Financed Eligible Loans. Such volume reductions could also reduce
revenues received by the Guarantee Agencies available to pay claims on defaulted
Eligible Loans. Finally, the level of competition currently in existence in the
secondary market for loans made under the Federal Family Education Loan Program
could be reduced, resulting in fewer potential buyers of the Eligible Loans and
lower prices available in the secondary market for those loans. Further, the
Department of Education has implemented a direct consolidation loan program,
which program may further reduce the volume of loans made under the Federal
Family Education Loan Program and is expected to result in prepayments of
Financed Student Loans. See "Description of the Federal Family Education Loan
Program."
Additional Notes May be Issued Without Noteholder Consent
The Corporation may, from time to time pursuant to the provisions of the
Indenture, issue Additional Notes or incur other Indenture Obligations secured
by the Trust Estate on a parity with or subordinate to the Series 1997-1 Senior
Notes and senior to, on a parity with or subordinate to the Series 1997-1
Subordinate Notes, as determined by the Corporation, without the consent or
approval of the Holders of any Notes then Outstanding. While the Indenture
requires that the Corporation satisfy certain conditions, including, but not
limited to, the condition that the issuance of the Additional Notes will not
adversely affect the ratings on the then outstanding Notes, if Additional Notes
are issued and the Financed Student Loans acquired with the proceeds of such
Additional Notes do not produce sufficient revenue to pay principal of and
interest on those Additional Notes, it may result in a delay in or reduction of
payments on the Series 1997-1 Notes. Moreover, if Additional Notes are issued
and an Event of Default occurs with respect to such Additional Notes and such
Event of Default is not cured or waived, then all Notes which are then
outstanding, including the Series 1997-1 Notes, are subject to acceleration. Any
Additional Notes will not be offered or sold pursuant to this Prospectus. This
Prospectus relates only to the Series 1997-1 Notes. See "Additional Notes"
herein.
The Interest Rates on Financed Student Loans and Other Investments May be
Insufficient to Cover Interest on the Series 1997-1 Notes (Other Than Tax Exempt
Fixed Rate Series 1997-1 Senior Notes and Tax Exempt Fixed Rate Series 1997-1
Subordinate Notes) Due to Rate-Index Difference
The interest rates with respect to the Series 1997-1 Notes (other than the
Tax Exempt Fixed Rate Series 1997-1 Senior Notes and the Tax Exempt Fixed Rate
Series 1997-1 Subordinate Notes) may fluctuate from one interest period to
another in response to changes in benchmark rates or general market conditions.
The Corporation can make no representation as to what such rates may be in the
future. The interest rates on each series of Auction Rate Series 1997-1 Senior
Notes will be based generally on the outcome of each Auction of such series of
Notes. The interest rates on each series of Taxable LIBOR Rate Series 1997-1
Notes will be based generally on One-Month LIBOR. The Financed Student Loans,
however, generally bear interest at an effective rate (taking into account any
Special Allowance Payments, the "Loan Rates") equal to the average bond
equivalent rates of weekly auctions of
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<PAGE>
91-day Treasury bills for each quarter (the "91-day Treasury Bill Rate") (or, in
certain circumstances, 52-week Treasury bills) plus margins specified for such
Financed Student Loans. See "Description of the Federal Family Education Loan
Program -- Loan Terms -- Interest Rates" and " --Federal Special Allowance
Payments." As a result of these differences between the indices used to
determine the Loan Rates and the interest rates on the variable rate Series
1997-1 Notes, there could be periods of time when the Loan Rates are inadequate
to cover the interest on the Series 1997-1 Notes and expenses required under the
Indenture. To the extent that the Loan Rates decrease or do not increase as fast
as the variable interest rates with respect to the Taxable Series 1997-1 Notes,
the interest rates with respect to such Taxable Series 1997-1 Notes may be
limited to the Net Loan Rate or may be deferred to future periods. There can be
no assurance that sufficient funds will be available in future periods to make
up for any shortfalls in the current payments of interest on the Taxable Series
1997-1 Notes. Further, if there is a decline in the Loan Rates, the amount of
funds representing interest deposited into the Trust Estate may be reduced and,
even if there is a similar reduction in the variable interest rates applicable
to any series of Series 1997-1 Notes, there may not necessarily be a similar
reduction in the other amounts required to be funded out of such funds (such as
certain administrative expenses). In addition, proceeds of and revenues relating
to the Series 1997-1 Notes in the Reserve Fund, the Acquisition Fund, the
Revenue Fund, the Note Fund and the Surplus 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.
Changes in the Assets of the Trust Estate, Including Future Funding of Student
Loans, Changing Characteristics of Financed Student Loans, Financed Eligible
Loans That are Not Made Under the Federal Family Education Loan Program and
Financed Student Loans That are Not Eligible Loans in the Surplus Account
The initial Student Loan Portfolio to be Financed on the Date of Issuance
with a portion of the proceeds of the Series 1997-1 Notes is described herein
under "Characteristics of the Initial Financed Eligible Loans." The investment
agreements in which the remaining proceeds of the Series 1997-1 Notes will be
invested on the Date of Issuance are described herein under "Application of
Series 1997-1 Note Proceeds." After the Date of Issuance, the Corporation
intends to cause the Trustee to purchase Financed Eligible Loans from Lenders
and to originate Eligible Loans from amounts initially deposited in the
Acquisition Fund and invested pursuant to such investment agreements. The actual
characteristics of the Student Loan Portfolio will change from time to time due
to factors such as adjustments made in the normal course of business, amendments
to the Higher Education Act, changes in the classifications of Eligible Loans,
sales or exchanges of Eligible Loans by the Trustee on behalf of the
Corporation, scheduled amortization, prepayment or the occurrence of
delinquencies or defaults. In addition, the Indenture allows the Corporation to
apply balances in the Surplus Account to the acquisition of Student Loans that
do not qualify as Eligible Loans. See "Summary of the Indenture - Funds and
Accounts - Surplus Fund." Moreover, though all Financed Eligible Loans will
initially be loans made under the Federal Family Education Loan Program,
Eligible Loans that are not made under such program may be Financed in the
future and such other Eligible Loans may have different features and be of
lesser credit quality. Among possible differences, such loans may be Guaranteed
at lesser reimbursement rates by the Guarantee Agencies, may be insured by
private entities or uninsured, may have different interest rates and repayment
terms, and may not have any third party subsidies. If Student Loans are Financed
which are not Eligible Loans (whether or not made under the Federal Family
Education Loan Program), they may have no third party guarantee or eligibility
for interest subsidies and Special Allowance Payments, and thus may bear a lower
rate of return and a greater risk of loss from borrower default in payment.
Reliance Upon Lenders' Representations and Warranties Relating to Financed
Student Loans Without Conducting Complete Individual Student Loan Document
Examinations
The Original Issuer has acquired the majority of the initial Student Loan
Portfolio, and the Corporation expects to cause the Trustee to acquire
additional Financed Eligible Loans, from Lenders pursuant to Student Loan
Purchase Agreements under which each Lender has agreed or will agree to sell to
the Original Issuer or to the Trustee, on behalf of the Corporation, Eligible
Loans which comply with certain representations and warranties.
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The Student Loan Purchase Agreements provide for the repurchase by the Lender of
Financed Student Loans that do not comply with such representations and
warranties. However, neither the Original Issuer, SLFC nor the Corporation has
conducted or will conduct an examination of documents relating to the Eligible
Loans to be Financed of sufficient scope to determine whether the Lenders who
have sold such Eligible Loans to the Original Issuer, or will sell such Eligible
Loans to the Trustee on behalf of the Corporation, have met or will have met all
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.
Inability of Lenders to Honor Their Obligations to Repurchase Financed Student
Loans
Under the circumstances set forth in the Student Loan Purchase Agreements,
a Lender may be obligated to repurchase Financed Student Loans from the Trustee.
If a Lender were to become insolvent or otherwise be unable to repurchase such
Financed Student Loans, it is unlikely that a repurchase of such Financed
Student Loan from the Trustee would occur. The failure of such a Lender to
repurchase a Financed Student Loan would constitute a breach of the respective
Student Loan Purchase Agreement, enforceable by the Trustee, but would not
constitute an Event of Default under the Indenture or permit the exercise of
remedies thereunder.
Geographically Concentrated Borrowers May be Subject to Regional Economic
Conditions that Adversely Affect Their Ability to Repay Student Loans
Although the Original Issuer has not experienced any geographical risks, it
is possible that geographically concentrated borrowers will be subject to
economic risks specific to their region which could adversely affect their
ability to repay Student Loans. See "Characteristics of the Initial Financed
Eligible Loans -- Distribution of Financed Eligible Loans by Borrowers' Address
As of June 30, 1997 (Based on Address as of July 3, 1997)."
Possible Loss of Tax Exemption of the Interest on the Tax Exempt Series 1997-1
Notes
Provisions of the Code impose continuing requirements that must be met
after the issuance of the Tax Exempt Series 1997-1 Notes for interest thereon to
be and remain excludable from gross income for federal income tax purposes.
Noncompliance with such requirements may cause the interest on the Tax Exempt
Series 1997-1 Notes to be includable in gross income for such purposes, either
prospectively or retroactively to the date of issuance of the Tax Exempt Series
1997-1 Notes. These requirements include, but are not limited to, provisions
that prescribe that the proceeds of the Tax Exempt Series 1997-1 Notes and
certain other amounts are subject to yield and other investment limits and
provisions that require that certain investment earnings be rebated on a
periodic basis to the Treasury Department of the United States.
In addition, Section 150(d)(3) of the Code contains numerous provisions
that must be complied with at and after the time an election under such section
is made for interest on the Tax Exempt Series 1997-1 Notes to be and remain
excludable from gross income. Although the Original Issuer and the Corporation
believe that the issuance of the Series 1997-1 Notes, the organization of SLFC
and the Corporation, and the transfers of assets and assumptions of obligations
described herein under "The Original Issuer" and "The Corporation" will comply
with the requirements of Section 150(d)(3) of the Code, no determination has
been obtained or is expected to be sought from the Internal Revenue Service with
respect to such compliance. Moreover, the Original Issuer believes that it will
be the first entity to make the election provided for in Section 150(d)(3) of
the Code, and no established practices have developed nor have any regulations
or other guidance been published by the Internal Revenue Service.
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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.
Insolvency of the Original Issuer, SLFC or the Corporation
The Corporation has taken steps in structuring the transactions
contemplated hereby that are intended to ensure that the voluntary or
involuntary application for relief by the Original Issuer or SLFC under the
United States Bankruptcy Code or other insolvency laws, as the case may be
("Insolvency Laws"), will not result in consolidation of the assets and
liabilities of the Corporation with those of the Original Issuer and/or SLFC.
These steps include the creation of the Corporation as a separate, limited-
purpose subsidiary of SLFC pursuant to a certificate of incorporation containing
certain limitations (including restrictions on the nature of the Corporation's
business and 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", "The Corporation" and "Certain Relationships
Among Financing Participants."
The Original Issuer will transfer all of its rights and interest in and to
the Financed Student Loans (subject to the lien of the Trustee under the
Indenture) to SLFC, and SLFC will in turn transfer all such rights and interest
in and to the Financed Student Loans to the Corporation.
The Original Issuer intends that its transfer of the Financed Student Loans
to SLFC constitute a sale of all of the Original Issuer's rights in such
Financed Student Loans (subject to the lien of the Trustee under the Indenture),
rather than a pledge to secure indebtedness. Similarly, SLFC intends that its
transfer of the Financed Student Loans to the Corporation constitute a sale of
all of SLFC's rights in such Financed Student Loans, rather than a pledge to
secure indebtedness. Dorsey & Whitney LLP, counsel to the Original Issuer and
SLFC, will deliver a legal opinion of the effect that, subject to the
qualifications and limitations expressed therein, the transfers of the Financed
Student Loans from the Original Issuer to SLFC and from SLFC to the Corporation
each constitute a true sale, rather than a pledge to secure indebtedness, and
that the Financed Student Loans would not be considered property of the Original
Issuer or SLFC should either entity thereafter become subject to any Insolvency
Law.
If, however, the Original Issuer or SLFC were to become subject to any
Insolvency Law and a creditor or trustee-in-bankruptcy of the Original Issuer or
SLFC were to take the position that the sale of the Financed Student Loans by
the Original Issuer to SLFC or by SLFC to the Corporation, as appropriate,
should instead be treated as a pledge of such interest to secure a borrowing
from SLFC or the Corporation, as appropriate, delays in payments on the Notes
from collections on Financed Student Loans could occur or (should the court rule
in favor of the Original Issuer or SLFC, as appropriate, or such creditor)
reductions in the amounts of such payments could result.
Upon the occurrence of any of certain events of bankruptcy or insolvency
with respect to the Corporation, the Financed Student Loans may be liquidated.
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
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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 the Indenture-
Events of Default."
As the Servicer of the Financed Student Loans, the insolvency of SLFC may
result in a disruption in the servicing of the Financed Student Loans and the
receipt of payments with respect thereto, and also may result in a failure to
comply with servicing requirements of the Department of Education and the
Guarantee Agencies.
Failure to Comply with the Original Issuer's Plan for Doing Business May Result
in the Department of Education Refusing to Make Special Allowance Payments with
Respect to Financed Student Loans or Seeking to be Reimbursed for Prior Special
Allowance Payments
The Higher Education Act provides that, for holders of Federal Family
Education Loan Program loans that are financed with tax exempt debt to be
eligible for Special Allowance Payments with respect to such loans, the issuer
of the debt must adopt, obtain approval of, and comply with, a plan for doing
business meeting the requirements of the Higher Education Act. The Original
Issuer has adopted, and the Governor of the State of South Dakota has approved,
such a plan. Because the Original Issuer expects to terminate its participation
in the Federal Family Education Loan Program, the Original Issuer will no longer
be capable of carrying out certain provisions of such plan for doing business.
The Original Issuer, SLFC, and the Corporation will each covenant to comply with
the provisions of such plan for doing business that apply to their respective
operations. However, if any such party fails to comply with such provisions of
the plan for doing business, or if the Original Issuer failed to comply in the
past with all provisions of its plan for doing business, or if the Department of
Education determines that the Original Issuer's plan for doing business or the
reallocation of responsibilities thereunder in connection with the Original
Issuer's election under Section 150(d)(3) of the Code does not comply with the
Higher Education Act, Financed Student Loans could lose their eligibility for
Special Allowance Payments and the Original Issuer, the Corporation and/or the
Trustee may be required to repay Special Allowance Payments theretofore made to
the Original Issuer or the Trustee with respect to Financed Student Loans.
Depending on the amount involved, loss of Special Allowance Payments or required
repayment of Special Allowance Payments could have a materially adverse affect
on the Corporation's ability to pay the principal of and interest on the Series
1997-1 Notes.
Use of a Shared Lender Identification Number May Result in The Guarantee
Agencies and the Department of Education Offsetting Against Guarantee Payments
and Other Federal Benefit Payments Owed to the Trustee
Due to Department of Education policy limiting the granting of new lender
identification numbers, the Indenture will allow the Trustee, if necessary, to
use the Department of Education lender identification number that it uses for
the Financed Student Loans for other Student Loans held by the Trustee as
trustee under other indentures, if any, securing obligations of the Corporation
or obligations of other subsidiaries of SLFC, or for trusts established by the
Corporation or other subsidiaries of SLFC. In that event, the billings submitted
to the Department of Education for interest subsidy payments and Special
Allowance Payments on Financed Student Loans would be consolidated with the
billings for such payments for Student Loans held under such other indentures
and trusts using the same lender identification number and payments on such
billings would be made by the Department of Education to the Trustee in lump sum
form. Such lump sum payments would then be allocated by the Trustee among the
various trusts and indentures using the same lender identification number.
In addition, such sharing of the lender identification number may result in
the receipt of Guarantee Payments by Guarantee Agencies in lump sum form. In
that event, such payments would be allocated by the Trustee among the various
trusts and indentures in a manner similar to the allocation process for interest
subsidy payments and Special Allowance Payments.
The Department of Education regards the Trustee as the party primarily
responsible to the Department of Education for any liabilities owed to the
Department of Education or Guarantee Agencies resulting from the Trustee's
activities in the Federal Family Education Loan Program. As a result, if the
Department of Education
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or a Guarantee Agency were to determine that the Trustee owes a liability to the
Department of Education or a Guarantee Agency on any Student Loans for which the
Trustee is or was legal titleholder, including loans held under the Indenture or
such other trusts or indentures, the Department of Education or the Guarantee
Agency might seek to collect that liability by offset against payments due the
Trustee under the Indenture. If the Department of Education or a Guarantee
Agency determines such a liability exists in connection with a trust or
indenture using the shared lender identification number, the Department of
Education or the Guarantee Agency would be likely to collect that liability by
offsetting against amounts due the Trustee under the shared lender
identification number, including amounts owed in connection with the Financed
Student Loans. Such offsetting of payments due to the Trustee with respect to
the Financed Student Loans could adversely affect the receipt of revenues under
the Indenture and the Corporation's ability to pay interest and principal on the
Notes.
In addition, other trusts or indentures using the shared lender
identification number may in a given quarter incur origination fees that exceed
the interest subsidy payments and Special Allowance Payments payable by the
Department of Education on the loans held under such other trusts and
indentures, resulting in the payment from the Department of Education received
by the Trustee under such shared lender identification number for that quarter
equaling an amount that is less than the amount owed by the Department of
Education on the Financed Student Loans for that quarter.
The Indenture and the indentures or trust agreements under which the
Trustee may separately hold Student Loans which share the lender identification
number to be used by the Trustee (the separate trusts created thereunder being
collectively referred to herein as the "Corporation Trusts") may require a
Corporation Trust (including the Trust Estate under the Indenture) to indemnify
the other Corporation Trusts for a shortfall or an offset by the Department of
Education or a Guarantee Agency arising from the Student Loans held by the
Trustee on such Corporation Trust's behalf. To the extent that the Trustee is
required to indemnify other Corporation Trusts from the assets held under the
Indenture as part of the Trust Estate with respect to an offset by the
Department of Education or a Guarantee Agency arising from Financed Student
Loans held by the Trustee under the Indenture, such indemnification obligation
could adversely affect the amount of assets in the Trust Estate and the
Corporation's ability to pay principal of and interest on the Notes. Also, to
the extent that the Trustee may be entitled to indemnification with respect to
an offset by the Department of Education or a Guarantee Agency arising from
Student Loans held by the Trustee for a Corporation Trust other than the Trust
Estate under the Indenture, there can be no assurance that the amount of funds
available to the Trustee with respect to such right of indemnification may be
adequate to compensate the Trust Estate under the Indenture and Noteholders for
any previous reduction in the Trust Estate.
Defeat or Lack of Perfected Security Interest in Trust Estate Assets
The Higher Education Act provides that a security interest in student loans
made pursuant to the Federal Family Education Loan Program may be perfected
either through the taking of possession of such loans or by the filing of notice
of such security interest in the manner in which security interests in accounts
may be perfected by applicable state law. The Uniform Commercial Code as in
effect in the State of South Dakota provides for perfection of security
interests in accounts by the filing of financing statements with the Secretary
of State. The perfection of the security interest in the Financed Student Loans
granted by the Corporation to the Trustee is to be accomplished by the filing of
financing statements. SLFC, acting as custodial agent for the Trustee, will
retain possession of the promissory notes evidencing the Financed Student Loans.
The Corporation is a wholly-owned subsidiary of SLFC. If, through fraud,
inadvertence or otherwise, a third-party lender or purchaser acting in good
faith were to obtain possession of any such promissory notes, the security
interest of the Trustee in the related Financed Student Loans could be defeated.
See "Certain Relationships Among Financing Participants" herein.
The Trustee's security interest in revenues, moneys, evidences of
indebtedness (including any Financed Student Loans that are not made under the
Federal Family Education Loan Program) and, unless registered in the name of the
Trustee, securities payable into the various Funds and Accounts under the
Indenture does not constitute
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a perfected security interest until such revenues, moneys, evidences of
indebtedness and securities are received by the Trustee.
Insolvency of Lenders Affecting the Transfer of Student Loans
Each Student Loan Purchase Agreement is structured as, and intended to
effectuate, a valid sale and assignment by the Lender to the Original Issuer or
the Trustee on behalf of the Corporation, as applicable, of the Financed Student
Loans transferred thereunder. Notwithstanding the foregoing, if a Lender were to
become subject to any Insolvency Law and a creditor or trustee-in-bankruptcy of
such Lender were to take the position that the sale of Financed Student Loans by
such Lender should instead be treated as a pledge of such Financed Student Loans
to secure a borrowing, delays in payments on the Notes from collections on
Financed Student Loans could occur or (should the court rule in favor of such
Lender or such creditor) reductions in the amounts of such payments could
result. In the event of insolvency of any such Lender that is a bank, moreover,
its affairs might become subject to Federal Deposit Insurance Corporation
("FDIC") receivership. In such case, the FDIC, as a receiver, or a court could
treat the transfer of the Financed Student Loans to the Original Issuer or the
Trustee on behalf of the Corporation as an assignment of collateral as security
for the benefit of the Original Issuer or the Corporation as a creditor of such
Lender. If the transfer of the Financed Student Loans to the Original Issuer or
the Trustee on behalf of the Corporation is deemed to create a security interest
therein, a tax or government lien on property of such Lender arising before the
Financed Student Loans were transferred may have priority over the Trustee's
interest in such Financed Student Loans. If such Lender becomes subject to
receivership, to the extent that the transfer of the Financed Student Loans is
deemed to create a security interest, and that such interest was validly
perfected before such Lender's insolvency and was not taken in contemplation of
insolvency or with the intent to hinder, delay or defraud such Lender or its
creditors, such security interest should not be subject to avoidance and
payments with respect to the Financed Student Loans should not be subject to
recovery by such Lender's creditors. The Corporation will receive an opinion of
counsel, subject to the assumptions and limitations set forth therein, that the
provisions of the Indenture, the Student Loan Purchase Agreements, and the SLFC
Servicing Agreement and the actions required thereunder in connection with the
acquisition of Financed Student Loans are sufficient to create both a perfected
security interest in favor of the Trustee against any such Lender in the
Financed Student Loans, if the transfer of Financed Student Loans by such Lender
is considered as an assignment of collateral as security for an obligation, as
well as a perfected security interest in favor of the Trustee against the
Corporation in the Financed Student Loans. No assurance can be given that delays
in receipt of funds with respect to the Financed Student Loans will not occur
even if no such prior liens exist. Moreover, no assurance can be given that the
FDIC would not seek to effect the release of the Financed Student Loans to it,
as receiver, by accelerating such Lender's "debt" and repaying the outstanding
amount thereof.
Failure to Comply with Consumer Protection Laws
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. These state laws are, in large
part, preempted by the Higher Education Act. However, the form of promissory
notes required by the Department of Education for Federal Family Education Loan
Program loans provides that holders of such promissory notes evidencing certain
loans made to borrowers attending for-profit schools are subject to any defenses
that the borrower may have against the school. Moreover, the Indenture permits,
under certain circumstances, the Financing of Student Loans other than those
made under the Federal Family Education Loan Program. Such state laws may not be
pre-empted as they apply to any such Student Loans.
Holders of Auction Rate Series 1997-1 Notes and Tax Exempt Fixed Rate Series
1997-1 Notes May Have to Reinvest Amounts Received From Redemptions From Unused
Proceeds at a Lower Rate of Return
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The Corporation expects approximately $___________________ of the Series
1997-1 Note proceeds deposited in the Series 1997-1 Tax Exempt Acquisition
Account to be used to originate or purchase Eligible Loans on or before April
15, 2002. If such proceeds are not so used, they may be used to redeem Tax
Exempt Auction Rate Series 1997-1 Senior Notes and, if no Tax Exempt Auction
Rate Series 1997-1 Senior Notes remain Outstanding, Tax Exempt Fixed Rate Series
1997-1 Notes. Investors holding such Tax Exempt Series 1997-1 Notes
(particularly Tax Exempt Fixed Rate Series 1997-1 Notes) which are redeemed may
be unable to reinvest the proceeds of the redemption at the same yield as the
Tax Exempt Series 1997-1 Notes. Also, depending on the price at which investors
purchased such Series 1997-1 Notes, their yield may be adversely affected by
such early redemption.
The Corporation expects approximately $__________ of the Series 1997-1 Note
proceeds deposited in the Series 1997-1 Taxable Acquisition Account to be used
to originate or purchase Eligible Loans on or before August 1, 1998. If such
proceeds are not so used, they may be transferred to the Retirement Account and
used to redeem Taxable Auction Rate Series 1997-1 Senior Notes. Investors
holding such Taxable Auction Rate Series 1997-1 Senior Notes which are redeemed
may be unable to reinvest the proceeds of the redemption at the same yield as
the Taxable Auction Rate Series 1997-1 Senior Notes. Also, depending on the
price at which investors purchased such Series 1997-1 Notes, their yield may be
adversely affected by such early redemption. See "Application of Series 1997-1
Note Proceeds" and "Description of Series 1997-1 Notes -- Special Redemption --
From Unused Proceeds."
Reduction in Amounts Available to Pay Notes Due to the Variability of Actual
Cash Flows and Due to the Inability of Guarantee Agencies to Make Guarantee
Payments
Amounts received with respect to the Financed Student Loans for a
particular period may vary in both timing and amount from the payments actually
due on the Financed Student Loans for a variety of economic, social and other
factors, including both individual factors, such as additional periods of
deferment or forbearance prior to or after a borrower's commencement of
repayment, and general factors, such as a general economic downturn which could
increase the amount of defaulted Financed Student Loans. Failures by borrowers
to pay timely the principal and interest on the Financed Student Loans will
affect the amount of revenues, which may reduce the amount available to be paid
to the Series 1997-1 Noteholders. The inability of any Guarantee Agency to meet
its guarantee obligations could reduce the amount available to be paid to the
Series 1997-1 Noteholders.
Holders of Series 1997-1 Notes Which are Prepaid or Redeemed Due to Accelerated
Payments with respect to Financed Student Loans May Have to Reinvest Amounts
Received From Prepayments or Redemptions at a Lower Rate of Return
Principal payments with respect to the Financed Student Loans may be
influenced by a variety of economic, geographic, social and other factors. The
Financed Student Loans may be prepaid at any time without penalty. The
Corporation believes that in a fluctuating interest rate environment a factor
affecting the prepayment rate on a large pool of loans such as the Student Loan
Portfolio is the difference between the interest rates on the loans and
prevailing interest rates generally (giving consideration to the cost of any
refinancing). In general, if interest rates fall below the interest rates on the
Financed Student Loans, the rate of prepayment would be expected to increase.
Conversely, if interest rates rise above the interest rates on the Financed
Student Loans, the rate of prepayment would be expected to decrease.
Historically, the Original Issuer has not tracked instances of partial or full
prepayment of its Student Loan Portfolio except to the extent such prepayments
occurred in connection with defaults. No assurances can be given as to the
actual rate of prepayment with respect to the Financed Student Loans in the
Student Loan Portfolio. Other factors affecting prepayment of loans include
changes in the borrower's employment and other economic circumstances, and
refinancing opportunities which may provide more favorable repayment terms such
as those offered under various consolidation loan programs, including the
federal direct consolidation loan programs. Because of the benefits of
consolidating numerous Student Loans into a single loan and, in some cases,
obtaining more favorable repayment terms, a borrower may choose to prepay
Financed Student Loans through consolidation programs regardless of the general
level of interest rates. In addition, the rate of the payments of
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principal on the Notes will be directly related to the actual amortization
schedules of the Financed Eligible Loans. See "Description of Federal Family
Education Loan Program -- Loan Terms -- Repayment."
Receipt of principal and interest on Financed Student Loans may be
accelerated due to: (1) default claims or claims due to the disability, death or
bankruptcy of the borrowers or school closure; (2) actual principal amortization
periods which are shorter than those assumed based upon the current analysis of
the expected Student Loan Portfolio; (3) the commencement of principal repayment
by borrowers on earlier dates than are assumed based upon the current analysis
of the expected Student Loan Portfolio; and (4) economic conditions being such
that borrowers elect to refinance or prepay their loans prior to maturity.
Eligible lenders, including the Trustee on behalf of the Corporation, and the
Secretary of Education may make Consolidation Loans to borrowers for the purpose
of retiring borrowers' existing loans under various federal higher education
loan programs. To the extent that Financed Student Loans are repaid with
Consolidation Loans, the Corporation will realize payment of such loans earlier
than projected. In addition, under certain circumstances, a Lender will be
obligated to repurchase Financed Student Loans from the Trust Estate pursuant to
its Student Loan Purchase Agreement as a result of breaches of its
representations, warranties or covenants.
Taxable LIBOR Rate Series 1997-1 Notes are subject to prepayment in amounts
related to the amount of principal payments received with respect to Student
Loan Financed with the proceeds of the Taxable Series 1997-1 Notes in the
Acquisition Fund. Because of the uncertainties relating to the timing of receipt
of principal of Student Loans expected to be Financed with proceeds of the
Taxable Series 1997-1 Notes, the actual level of prepayments resulting therefrom
cannot be definitively stated. Investors holding Taxable LIBOR Rate Series 1997-
1 Notes which are prepaid may be unable to reinvest the proceeds of the
prepayment at the same yield as the Taxable LIBOR Rate Series 1997-1 Notes.
Also, depending on the price at which investors purchased such Series 1997-1
Notes, their yield may be adversely affected by such prepayment.
The Series 1997-1 Notes (other than the Taxable LIBOR Rate Series 1997-1
Notes) are subject to redemption from revenues under the Indenture in excess of
required debt service payments and other expenses under the Indenture and all
Series 1997-1 Notes are subject to redemption if the Student Loan Portfolio
balance is less than 10% of the amount deposited to the Acquisition Fund on the
Date of Issuance. Investors holding Series 1997-1 Notes which are redeemed may
be unable to reinvest the proceeds of the redemption at the same yield as the
Series 1997-1 Notes they previously held. Also, depending on the price at which
investors purchased such Series 1997-1 Notes, their yield may be adversely
affected by such redemption.
Differences in Principal Payments Among Series of Taxable Series 1997-1 Notes
with respect to Receipt of Payments on the Financed Student Loans
The Taxable Auction Rate Series 1997-1 Senior Notes are not expected to
receive any payments of principal from principal payments on Financed Student
Loans until all Taxable LIBOR Rate Series 1997-1 Notes have been paid in full.
Series 1997-1J Notes will receive no payments of principal from such source
until the Series 1997-1I Notes have been paid in full. Therefore, the Series
1997-1I Notes and (as compared to all Taxable Series 1997-1 Notes other than
Series 1997-1I Notes) the Series 1997-1J Notes bear relatively greater risk than
other series of Taxable Series 1997-1 Notes of an increased rate of principal
payments derived from principal payments relating to Financed Student Loans.
The Average Life of the Series 1997-1 Notes May Be Lengthened As a Result of
Extension of Payments on the Financed Student Loans
Principal and interest payments on Financed Student Loans may be delayed
due to: (1) borrowers entering Deferment Periods due to a return to school or
other eligible purposes; (2) forbearance being granted to borrowers; (3) loans
becoming delinquent for periods longer than assumed; (4) actual loan principal
amortization periods which are longer than those expected based upon the current
analysis of the expected Student Loan Portfolio; and (5) the commencement of
principal repayment by borrowers at dates later than those assumed based upon
the current
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analysis of the Eligible Loans expected to be Financed. These factors may
lengthen the remaining term of the Financed Student Loans and the average
life of the Series 1997-1 Notes. See "Description of Federal Family
Education Loan Program -- Loan Terms -- Repayment."
The Trustee's Inability to Liquidate Financed Student Loans and Possible
Insufficiency of Trust Estate Assets
If an Event of Default occurs under the Indenture, subject to certain
conditions, the Trustee is authorized, without the consent of the
Noteholders, to sell the Financed Student Loans. There can be no assurance
that the Trustee would be able to find a purchaser for the Financed Student
Loans in a timely manner or that the market value of such Financed Student
Loans would, at any time, be sufficient to provide for the payment of all
amounts due with respect to the Notes. The Higher Education Act requires
that the purchaser of the Student Loans must be an eligible lender under
the Higher Education Act.
Additionally, any such sale by the Trustee would need to comply with
the applicable requirements of the Uniform Commercial Code then in effect
in the State of South Dakota, which currently provides that such sale may
be by private or public proceedings conducted at any time or place and on
any terms, provided that every aspect of the sale, including the method,
manner, time, place and terms, be commercially reasonable. If it were
established that the Trustee failed to proceed in a commercially reasonable
manner, the Corporation may be entitled to recover from the Trustee (which
would, in turn, look to the Trust Estate for indemnification) any loss to
the Corporation caused by such failure. However, if the Trustee sells the
Student Loans in the usual manner in any recognized market therefor, or
sells at the price current in such market at the time of such sale, or has
otherwise sold the Student Loans in conformity with reasonable commercial
practices among dealers in Student Loans, the Trustee will have sold the
Student Loans in a commercially reasonable manner. Further, a sale which
has been approved in any judicial proceeding or by any bona fide creditors'
committee or representatives of creditors of the Corporation shall
conclusively be deemed to be commercially reasonable. Seeking such
approval could result in delays in the ultimate disposition of the Financed
Student Loans.
The Financial Status of Guarantee Agencies Will Affect Their Ability to
Make Guarantee Payments
The Higher Education Act requires all loans made under the Federal
Family Education Loan Program to be unsecured. As a result, the only
security for payment of the Financed Eligible Loans is the Guarantee
Agreements between the Trustee and each Guarantee Agency. A deterioration
in the financial status of the Guarantee Agencies and their ability to
honor guarantee claims with respect to the Financed Eligible Loans could
result in a delay in making or a failure to make Guarantee Payments to the
Trustee. Failures by borrowers of Student Loans generally to pay timely
the principal and interest due on such Student Loans could obligate the
Guarantee Agencies to make payments thereon, which could adversely affect
the solvency of the Guarantee Agencies and their ability to meet their
guarantee obligations (including with respect to the Financed Student
Loans). Moreover, to the extent that the Department of Education pays
reimbursement claims submitted by a Guarantee Agency for any fiscal year
exceeding certain specified levels (see "Description of the Guarantee
Agencies -- Effect of Annual Claims Rate"), the Department of Education's
obligation to reimburse the Guarantee Agency for losses will be reduced on
a sliding scale from a maximum of 100% (98% for loans made on or after
October 1, 1993) to a minimum of 80% (78% for loans made on or after
October 1, 1993) of Guarantee Agency payments, except that death,
disability, bankruptcy, closed school and false certification claims are
reimbursed 100% by the Department of Education.
Pursuant to Section 432(o) of the Higher Education Act, if the
Department of Education has determined that a Guarantee Agency is unable to
meet its insurance obligations, the holders of loans guaranteed by such
Guarantee Agency may submit claims directly to the Department of Education
and the Department of Education is required to pay the full Guarantee
Payment due with respect thereto in accordance with standards no more
stringent than those applied by the Guarantee Agency. However, the
Department of Education's obligation to pay guarantee claims directly in
this fashion is contingent upon the Department of Education making the
determination referred to above. There can be no assurance that the
Department of Education would ever make such a determination with
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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."
Investment of Series 1997-1 Note Proceeds and Revenues in Investment
Agreements
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. Revenues deposited in the Revenue Fund, the Note Fund and the
Surplus Fund also are expected to 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.
Change of Ratings of the Series 1997-1 Notes
It is a condition to issuance of the Series 1997-1 Notes that they be
rated as indicated under the caption "Ratings." Ratings are based
primarily on the credit underlying the Financed Eligible Loans, the
existence and amount of subordinate debt, any credit enhancement and the
legal structure of the transaction. The ratings are not a recommendation
to purchase, hold or sell Series 1997-1 Notes and do not take into account
factors such as the market price or suitability for a particular investor.
There is no expectation that any additional rating agency will rate the
Series 1997-1 Notes, and there can be no assurance the rating that would be
assigned by any such other rating agency would be equivalent to the initial
ratings described herein. Moreover, there can be no assurance that the
ratings will remain for any given period of time or that ratings will not
be lowered or withdrawn by any Rating 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.
Limited Liquidity of the Series 1997-1 Notes
The Series 1997-1 Notes will not be listed on any national security
exchange. There is currently no secondary market for the Series 1997-1
Notes and there is no assurance that one will develop or, if such a market
does develop, that such market will continue. The Underwriters expect, but
will not be obligated, to make a market in the Series 1997-1 Notes. As a
result, investors must be prepared to bear the risk of holding the Series
1997-1 Notes for so long as the Series 1997-1 Notes remain outstanding.
Swap Agreements
Under the Indenture, the Corporation may execute Swap Agreements if
certain requirements are met, including that the Trustee shall have
received written confirmation from each Rating Agency that the execution
and delivery of the Swap Agreement will not cause the reduction or
withdrawal of any rating or ratings then applicable to any Outstanding
Notes. No Swap Agreement is being entered into in connection with the
issuance of the Series 1997-1 Notes. See "Source of Payment and Security
for the Notes -- Additional Indenture Obligations." Swap Agreements carry
risks relating to the credit quality of the counterparty and the legal
enforceability of the Swap Agreement.
Effect of Book-Entry Registration
Initially, the Series 1997-1 Notes will be in the form of certificates
registered in the name of Cede & Co., the nominee for DTC, and will not be
registered in the names of the beneficial owners of the Series 1997-1 Notes
or their nominees. Because of this, unless and until definitive securities
are issued, beneficial owners of the Series
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1997-1 Notes will not be recognized by the Trustee as "Holders" (as such
term is used in the Indenture). Therefore, unless and until certificated
securities are issued, beneficial owners of the Series 1997-1 Notes will
only be able to exercise the rights of Holders indirectly through DTC and
its participating organizations in the United States or Cedel Bank, societe
anonyme or the Euroclear System in Europe. See "Description of Series
1997-1 Notes -- Book-Entry-Only System."
DESCRIPTION OF SERIES 1997-1 NOTES
The Series 1997-1 Notes will be issued pursuant to the Indenture. The
form of the Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Terms of the Series 1997-1 Notes
For summaries of the terms of the Series 1997-1 Notes, see "Terms of
the Tax Exempt Auction Rate Series 1997-1 Senior Notes," "Terms of the Tax
Exempt Fixed Rate Series 1997-1 Senior Notes," "Terms of the Taxable
Auction Fixed Rate Series 1997-1 Senior Notes," "Terms of the Taxable LIBOR
Rate Series 1997-1 Senior Notes," "Terms of the Tax Exempt Fixed Rate
Series 1997-1 Subordinate Notes" and "Terms of the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes."
Book-Entry-Only System
The description which follows of the procedures and record keeping
with respect to beneficial ownership interests in the Series 1997-1 Notes,
payment of principal of and interest on the Series 1997-1 Notes to DTC
Participants, Cedel Participants and Euroclear Participants (as hereinafter
respectively defined) or to purchasers of the Series 1997-1 Notes,
confirmation and transfer of beneficial ownership interests in the Series
1997-1 Notes, and other securities-related transactions by and between DTC,
Cedel, Euroclear, DTC Participants, Cedel Participants, Euroclear
Participants and Beneficial Owners (as hereinafter defined), is based
solely on information furnished by DTC, Cedel and Euroclear and has not
been independently verified by the Original Issuer, the Corporation or the
Underwriters. The inclusion of this information is not, and should not be
construed as, a representation by the Original Issuer, the Corporation or
the Underwriters as to its accuracy or completeness or otherwise.
DTC will act as securities depository for the Series 1997-1 Notes.
Upon the issuance of the Series 1997-1 Notes, one or more fully registered
notes for each series, in the aggregate principal amount of the Series
1997-1 Notes, are to be registered in the name of Cede & Co., as nominee
for DTC. So long as Cede & Co. is the Holder of the Series 1997-1 Notes,
as nominee of DTC, references herein to the owners or Holders of the Series
1997-1 Notes shall mean DTC or its nominee, Cede & Co., and shall not mean
the Beneficial Owners of the Series 1997-1 Notes. Noteholders may hold
their certificates through DTC (in the United States) or Cedel or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Notes. Cedel and
Euroclear will hold omnibus positions on behalf of the Cedel Participants
and the Euroclear Participants, respectively, through customers' securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositories (collectively, the "Depositories") which in turn will hold
such positions in customers' securities accounts in the Depositories' names
on the books of DTC.
DTC is a limited-purpose trust company organized under New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency"
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registered pursuant to the provisions of Section 17A of the Exchange Act.
DTC holds securities that its participants (the "DTC Participants") deposit
with DTC. DTC also facilitates the settlement among DTC Participants of
securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in DTC
Participants' accounts, thereby eliminating the need for physical movement
of securities certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations, and certain
other organizations. DTC is owned by a number of DTC Participants and by
the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and
the National Association of Securities Dealers, Inc. Access to the DTC
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
"Indirect Participants"). The Rules applicable to DTC and the DTC
Participants are on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants
will occur in the ordinary way in accordance with their applicable rules
and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its Depository; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its Depository to take action to effect final settlement on
its behalf by delivering or receiving securities in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositories.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Cedel Participant or Euroclear Participant on such business day.
Cash received in Cedel or Euroclear as a result of sales of securities by
or through a Cedel Participant or a Euroclear Participant to a DTC
Participant will be received with value on the DTC settlement date but will
be available in the relevant Cedel or Euroclear cash account only as of the
business day following settlement in DTC.
Day traders that use Cedel or Euroclear and that purchase the globally
offered Series 1997-1 Notes from DTC Participants for delivery to Cedel
Participants or Euroclear Participants should note that these trades may
fail on the sale side unless affirmative actions are taken. Participants
should consult with their clearing system to confirm that adequate steps
have been taken to assure settlement.
Purchases of the Series 1997-1 Notes (in authorized denominations)
under the book-entry system may be made only through brokers and dealers
who are, or act through, DTC Participants. The DTC Participants purchasing
the Series 1997-1 Notes will receive a credit balance in the records of
DTC. The ownership interest of the actual purchaser of each Series 1997-1
Note (a "Beneficial Owner") will be recorded in the records of the
applicable DTC Participant or Indirect Participant. Beneficial Owners will
not receive written confirmation from DTC of their purchase, but Beneficial
Owners are expected to receive from the applicable DTC Participant or
Indirect Participant written confirmations providing details of the
transaction, as well as periodic statements of their holdings. Transfers
of beneficial ownership of the Series 1997-1 Notes will be accomplished by
book entries made by the DTC Participants or Indirect Participants who act
on behalf of the Beneficial Owners and, if necessary, in turn by DTC. No
Series 1997-1 Notes will be registered in the names of the Beneficial
Owners, and Beneficial Owners will not receive certificates representing
their ownership interest in the Series 1997-1 Notes, except in the event
participation in the book-entry system is discontinued as described below.
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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.
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 DTC Participant, which in turn will maintain records
of such beneficial ownership, and to authorize such DTC 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 DTC 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
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received by the Corporation or the Trustee, and the Corporation and the
Trustee will have no responsibility for transmitting payments to,
communicating with, notifying, or otherwise dealing with any Beneficial
Owners of the Series 1997-1 Notes.
If (i) the Series 1997-1 Notes of any series are not eligible for the
services of DTC, (ii) DTC determines to discontinue providing its services
with respect to the Series 1997-1 Notes of any series or (iii) the
Corporation determines that a system of book-entry transfers for Series
1997-1 Notes of any series, or the continuation thereof, through DTC is not
in the best interest of the Beneficial Owners or the Corporation, the
Corporation may either identify another qualified securities depository or
direct or cause Series 1997-1 Note certificates for such series to be
delivered to Beneficial Owners thereof or their nominees and, if
certificates are delivered to the Beneficial Owners, the Beneficial Owners
or their nominees, upon authentication of the Series 1997-1 Notes of such
series in authorized denominations and registration thereof in the
Beneficial Owners' or nominees' names, shall become the Holders of such
Series 1997-1 Notes for all purposes. In any such event, the Trustee is to
mail an appropriate notice to the securities depository for notification to
DTC Participants and Beneficial Owners of the substitute securities
depository or the issuance of Series 1997-1 Note certificates to Beneficial
Owners or their nominees, as applicable.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws
of Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel
Participants through electronic book-entry changes in accounts of Cedel
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Cedel in any of 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and
securities lending and borrowing. Cedel interfaces with domestic markets
in several countries. As a professional depository, Cedel is subject to
regulation by the Luxembourg Monetary Institute. Cedel Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations and may include the
underwriters of the Series 1997-1 Notes. Indirect access to Cedel is also
available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to
clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk
from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in any of 32 currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in 25
countries generally similar to the arrangements for cross-market transfers
with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the
"Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, Societe Cooperative, a Belgian cooperative corporation
(the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear
cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative Board establishes policy for the Euroclear
System. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial
intermediaries and may include the underwriters of any Series of Notes.
Indirect access to the Euroclear System is also available to other firms
that maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission.
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Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System
(collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts
of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only
on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
The Euroclear Operator has advised Euroclear as follows: Under
Belgian law, investors that are credited with securities on the records of
the Euroclear Operator have a co-property right in the fungible pool of
interests in securities on deposit with the Euroclear Operator in an amount
equal to the amount of interests in securities credited to their accounts.
In the event of the insolvency of the Euroclear Operator, Euroclear
Participants would have a right under Belgian law to the return of the
amount and type of interests in securities credited to their accounts with
the Euroclear Operator. If the Euroclear Operator did not have a
sufficient amount of interests in securities on deposit of a particular
type to cover the claims of all Participants credited with such interests
in securities on the Euroclear Operator's records, all Participants having
an amount of interests in securities of such type credited to their
accounts with the Euroclear Operator would have the right under Belgian law
to the return of their pro-rata share of the amount of interests in
securities actually on deposit. Under Belgian law, the Euroclear Operator
is required to pass on the benefits of ownership in any interests in
securities on deposit with it (such as dividends, voting rights and other
entitlements) to any person credited with such interests in securities on
its records.
Distributions with respect to Series 1997-1 Notes held through Cedel
or Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depository. Such distributions
will be subject to tax reporting in accordance with relevant United States
tax laws and regulations. See "Tax Matters -- Federal Tax Consequences"
and "-- Certain U.S. Federal Income Tax Documentation Requirements." Cedel
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Series 1997-1 Noteholder under the Indenture on
behalf of a Cedel Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to its Depository's
ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Series 1997-1 Notes among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Denomination and Payment
The Tax Exempt Auction Rate Series 1997-1 Senior Notes and the Taxable
Series 1997-1 Notes are being issued in denominations of $100,000 in
original Principal Amount and any multiple thereof. The Tax Exempt Fixed
Rate Series 1997-1 Notes are being issued in denominations of $5,000 in
original Principal Amount and any multiple thereof.
The principal of and premium, if any, on the Series 1997-1 Notes,
together with interest payable on the Series 1997-1 Notes at the Maturity
thereof if the date of such Maturity is not a regularly scheduled Interest
Payment Date, shall be payable in lawful money of the United States of
America upon, except as otherwise provided in the Indenture with respect to
a Securities Depository, presentation and surrender of such Series 1997-1
Notes at the Principal Office of the Trustee, as Paying Agent with respect
to the Series 1997-1 Notes, or a duly appointed successor Paying Agent.
Interest on each series of the Series 1997-1 Notes shall be payable on each
regularly scheduled Interest Payment Date with respect to such series,
except as otherwise provided in the Indenture with respect to a Securities
Depository, by check or draft drawn upon the Paying Agent and mailed to the
person who is the Holder thereof as of 5:00 p.m. in the city in which the
Principal Office of the Note Registrar is located on the Regular Record
Date for such Interest Payment Date at the address of such Holder as it
appears on the Note
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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
established by the Trustee (a "Special Record Date") for the payment of any
such Defaulted Interest. Such Special Record Date shall be fixed by the
Trustee whenever moneys become available for payment of the Defaulted
Interest, and notice of the Special Record Date shall be given to the
Holders of the Series 1997-1 Notes not less than 10 days prior thereto by
first-class mail to each such Holder as shown on the Note Register on a
date selected by the Trustee, stating the date of the Special Record Date
and the date fixed for the payment of such Defaulted Interest. All payments
of principal of and interest on the Series 1997-1 Notes shall be made in
lawful money of the United States of America.
Prepayment of Taxable LIBOR Rate Series 1997-1 Notes
Principal of the Taxable LIBOR Rate Series 1997-1 Notes shall be
prepaid on any Interest Payment Date from moneys credited to the Retirement
Account as hereinafter described. The Corporation is required to direct
the Trustee to transfer to the Retirement Account from the Special
Redemption and Prepayment Account any moneys therein, up to an amount equal
to the Special Prepayment Amount, which the Corporation has not determined
are reasonably expected to be required to be transferred to the Note Fund,
the Rebate Fund or the Reserve Fund prior to the next succeeding regularly
scheduled Interest Payment Date, provided no deficiencies exist at the time
of such transfer in the Note Fund, the Rebate Fund or the Reserve Fund.
See "Source of Payment and Security for the Notes -- Description of Flow of
Revenues in the Funds." Such prepayments of principal of Taxable LIBOR
Rate Series 1997-1 Notes shall, subject to the Senior Asset Requirement, be
allocated between the Taxable LIBOR Rate Series 1997-1 Senior Notes and the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes pro rata. 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.
Within a given series of Taxable LIBOR Rate Series 1997-1 Notes, the
Principal Amount of such series to be prepaid shall be allocated pro rata
to the reduction of the Principal Amount of all Notes of such series.
The Special Prepayment Amount is an amount, as of the last day of any
month, equal to the excess, if any, of (1) the sum of (a) all payments
received as of such last day with respect to principal of Financed Student
Loans credited to the Series 1997-1 Taxable Acquisition Account, 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 Senior Notes as described below under "Special
Redemption -- From Unused Proceeds," less (c) the principal component of
the repurchase price of Student Loans originally Financed from Balances in
Series 1997-1 Taxable Acquisition Account which have been repurchased from
a Guarantee Agency upon rehabilitation of such Eligible Loans pursuant to
the Higher Education Act, over (2) the sum of (a) the aggregate of the
amounts previously applied to the reduction of the Principal Amount of all
Taxable LIBOR Rate Series 1997-1 Notes, plus (b) the aggregate Principal
Amount of Taxable LIBOR Rate Series 1997-1 Notes to be prepaid on the next
regularly scheduled Interest Payment Date from Balances then on hand in the
Retirement Account. Payments described in clause (1)(a) of the preceding
sentence include, without limitation, any prepayments by borrowers from the
proceeds of a Consolidation Loan made or acquired by the Trustee on behalf
of the Corporation or from any other sources, but exclude, for this
purpose, proceeds of the sale or other disposition of Financed Student
Loans
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<PAGE>
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 "Weighted Average Life of the Taxable LIBOR Rate Series 1997-1 Notes."
Because of the uncertainties relating to the timing of receipt of principal of
Student Loans expected to be Financed with proceeds of the Taxable Series 1997-1
Notes, the actual level of prepayments resulting therefrom cannot be
definitively stated. See "Risk Factors -- Holders of Series 1997-1 Notes Which
are Prepaid or Redeemed Due to Accelerated Payments with respect to Financed
Student Loans May Have to Reinvest Amounts Received From Prepayments or
Redemptions at a Lower Rate of Return."
Special Redemption
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 but
subject to compliance with the conditions described under "Senior Asset
Requirement" below, be redeemed, in whole or in part, and if in part as
described under "Selection of Series 1997-1 Notes for Redemption" below, at
a Redemption Price equal to 100% of Principal Amount of such Notes to be
redeemed, plus accrued interest thereon to the Redemption Date, on any
Interest Rate Adjustment Date or 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 Senior
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 "Summary of the Indenture -- Funds and Accounts --
Surplus Fund" and " -- Reserve Fund".
Taxable Auction Rate Series 1997-1 Senior Notes of any series may, at
the Corporation's option but subject to compliance with the conditions
described under "Senior Asset Requirement" below, be redeemed, in whole or
in part, and if in part as described under "Selection of Series 1997-1
Notes for Redemption" below, at a Redemption Price equal to 100% of
Principal Amount of such Notes to be redeemed, plus accrued interest
thereon to the Redemption Date, on any Interest Rate Adjustment Date or
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 Senior 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 Series 1997-1 Notes exceed scheduled
debt service payments on the Taxable Series 1997-1 Notes, prepayments of
Taxable LIBOR Rate Series 1997-1 Notes, payments on other Indenture
Obligations and other expenses payable under the Indenture. Such revenues
could result in whole or in part from Student Loans acquired with, and from
investment earnings on, the proceeds of Additional Notes. (Any Additional
Notes will not be offered or sold pursuant to this Prospectus.) See
"Summary 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
Subject to compliance with the conditions described under "Senior Asset
Requirement" below, Taxable Auction Rate Series 1997-1 Senior Notes of any
series may, at the Corporation's option, be redeemed (and shall be so redeemed
under the circumstances described below), in whole or in part, and if in part as
described under "Selection of Series 1997-1 Notes for Redemption" below, on any
Interest Rate Adjustment Date or regularly scheduled Interest Payment Date for
such series at a Redemption Price of 100% of Principal Amount of such Notes to
be redeemed, plus accrued interest thereon to the Redemption Date, from proceeds
of the Series 1997-1 Notes in the Series 1997-1 Taxable Acquisition Account that
have not been used to acquire Eligible Loans and from amounts in the Series
1997-1 Taxable Reserve Account. Such Series 1997-1 Notes shall be so redeemed
on the regularly scheduled Interest Payment Date for such series in September
1998 (from such proceeds remaining as of August 1, 1998), unless the Corporation
delivers to the Trustee: (i) 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 (ii)
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 "Summary of the Indenture -- Funds and Accounts -- Acquisition Fund"
and "-- Reserve Fund".
Subject to compliance with the conditions described under "Senior Asset
Requirement" below, Tax Exempt Auction Rate Series 1997-1 Senior Notes of any
series may, at the Corporation's option, be redeemed (and shall be so redeemed
under the circumstances described below), in whole or in part, and if in part as
described under "Selection of Series 1997-1 Notes for Redemption" below, on any
Interest Rate Adjustment Date or regularly scheduled Interest Payment Date for
such series, and (if no Tax Exempt Auction Rate Series 1997-1 Senior Notes
remain Outstanding) Tax Exempt Fixed Rate Series 1997-1 Notes may, at the
Corporation's option, be redeemed (and shall be so redeemed under the
circumstances described below), in whole or in part, and if in part as described
under "Selection of Series 1997-1 Notes for Redemption" below, on any date, in
each case at a Redemption Price of 100% of Principal Amount of such Notes to be
redeemed, plus accrued interest thereon to the Redemption Date, from proceeds of
the Series 1997-1 Notes in the Series 1997-1 Tax Exempt Acquisition Account that
have not been used to acquire Eligible Loans and from amounts in the Series
1997-1 Tax Exempt Reserve Account. Such Series 1997-1 Notes shall be so
redeemed on June 1, 2001 (to the extent the proceeds remaining in the Series
1997-1 Tax Exempt Acquisition Account exceed [$______] as of April 15, 2001)
and on June 1, 2002 (from such proceeds remaining as of April 15, 2002), in
each case 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 "Summary of the
Indenture -- Funds and Accounts -- Acquisition Fund" and " -- Reserve Fund".
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Redemption of Series 1997-1 Notes Upon Reduction of Portfolio Balance
The Series 1997-1 Notes may, at the Corporation's option but subject to
compliance with the conditions described under "Senior Asset Requirement" below,
be redeemed, in whole but not in part, at a Redemption Price of 100% of
Principal Amount, plus accrued interest thereon to the Redemption Date, on any
date when the remaining aggregate outstanding principal balance of Student Loans
Financed with the proceeds of the Series 1997-1 Notes is less than 10% of the
amount deposited to the Acquisition Fund on the Date of Issuance.
Optional Redemption
At the Corporation's option but subject to compliance with the conditions
described under "Senior Asset Requirement" below, 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, and if in part as described under "Selection of
Series 1997-1 Notes for Redemption" below, 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 but subject to compliance with the conditions
described under "Senior Asset Requirement" below, Tax Exempt Fixed Rate Series
1997-1 Senior Notes and Tax Exempt Series 1997-1 Subordinate Notes may be
redeemed on December 1, 2007, or on any date thereafter, in whole or in part,
and if in part as described under "Selection of Series 1997-1 Notes for
Redemption" below, at the following Redemption Prices (expressed as a percentage
of Principal Amount) plus accrued interest to the Redemption Date:
<TABLE>
<CAPTION>
Redemption Period
(both dates inclusive) Redemption Price
---------------------- ----------------
<S> <C>
December 1, 2007, through November 30, 2008 102%
December 1, 2008, though November 30, 2009 101%
December 1, 2009 and thereafter 100%
</TABLE>
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" or as described in clause (2), to the extent Series 1997-1
Subordinate Notes are subject to redemption, that Principal Amount thereof shall
be redeemed which bears, as nearly as practicable, the same proportion to the
Principal Amount of all Series 1997-1 Notes to be redeemed as the aggregate
Principal Amount of Outstanding Series 1997-1 Subordinate Notes bears to the
aggregate Principal Amount of all Outstanding Series 1997-1 Notes, or (2) if the
Trustee receives a Corporation certificate certifying that, based on a Cash Flow
Projection, a different proportion of Series 1997-1 Subordinate Notes to be
redeemed will not materially adversely affect the Corporation's ability to pay
Debt Service on the Outstanding Notes and other Indenture Obligations, Carry-
Over Amounts (including accrued interest thereon) with respect to Outstanding
Notes, Administrative Expenses or Note Fees or to make required deposits to the
Rebate Fund, Series 1997-1 Subordinate Notes shall be redeemed in such principal
amount as is designated by the Corporation in such certificate. The
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<PAGE>
remaining Series 1997-1 Notes to be redeemed on a given Redemption Date shall be
selected from the appropriate series of Series 1997-1 Senior Notes.
If less than all Outstanding Series 1997-1 Senior Notes subject to
redemption are to be redeemed, and more than one series of Series 1997-1 Senior
Notes is so subject, the Principal Amounts of each series of Series 1997-1 Notes
to be redeemed shall be selected from each such series in such Principal Amounts
as the Corporation may designate or, in the absence of such designation, from
each such series in, as nearly as practicable, the same proportion to the
aggregate Principal Amount of all Outstanding Series 1997-1 Senior Notes to be
redeemed as the aggregate Principal Amount of Outstanding Series 1997-1 Senior
Notes of such series bears to the aggregate Principal Amount of all Outstanding
Series 1997-1 Senior Notes subject to such redemption.
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 appropriate series of the Series
1997-1 Senior Notes according to the provisions described above.
If less than all of the Outstanding Series 1997-1 Notes of a given series
are to be redeemed, the particular Series 1997-1 Notes to be redeemed shall be
selected by the Trustee by lot in such manner as the Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
of the principal of Series 1997-1 Notes in authorized denominations.
Senior Asset Requirement
No redemption or prepayment of any Series 1997-1 Note under any of the
foregoing provisions is to be made unless, after giving effect to the redemption
or prepayment: (a) in the case of the redemption or prepayment of Series 1997-1
Senior Notes, either the Senior Asset Requirement will be met or the Senior
Percentage will be greater than it would have been without such redemption or
prepayment, and (b) in the case of the redemption or prepayment of Series 1997-1
Subordinate Notes, the Senior Asset Requirement will be met. Compliance with the
Senior Asset Requirement will be determined as of the date of the selection of
Series 1997-1 Notes to be redeemed or as of the date on which moneys are
transferred to the Retirement Account to make any prepayment of Taxable LIBOR
Rate Series 1997-1 Notes, as the case may be, 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 110% and the Subordinate
Percentage is at least 100%, although each such percentage may be lowered under
the conditions prescribed in the Indenture. See "Glossary of Certain Defined
Terms" and "Summary of the Indenture -- Redemption, Prepayment or Purchase of
Notes; Senior Asset Requirement".
Notice and Effect of Redemption
Notice of redemption of the Series 1997-1 Notes shall be given by first
class mail, mailed not less than 15 days (in the case of Auction Rate Series
1997-1 Senior Notes) or 30 days (in the case of any other Series 1997-1 Notes),
as the case may be, prior to the date fixed for redemption to each Holder (which
initially will be DTC or its nominee) of Series 1997-1 Notes to be redeemed at
the address of such Holder appearing in the Note Register; but no defect in or
failure to give such mailed notice of redemption shall affect the validity of
proceedings for the redemption of any Series 1997-1 Note not affected by such
defect or failure. All notices of redemption shall state: (i) the Redemption
Date; (ii) the Redemption Price; (iii) the name, Stated Maturity and CUSIP
numbers of the Series 1997-1 Notes to be redeemed, the principal amount of
Series 1997-1 Notes of each series to be redeemed and, if less than all
Outstanding Notes of such series are to be redeemed, the identification (and, in
the case of partial redemption, the respective principal amounts) of the Series
1997-1 Notes to be redeemed; (iv) that, on the Redemption Date, the Redemption
Price of and accrued interest on each such Series 1997-1 Note will become due
and payable and interest thereon shall cease to accrue on and after such date;
(v) the place or places where such
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Series 1997-1 Notes are to be surrendered for payment of the Redemption Price
thereof and accrued interest thereon; and (vi) if it be the case, that such
Series 1997-1 Notes are to be redeemed by the application of certain specified
trust moneys and for certain specified reasons.
Notice of redemption having been given as provided above, the Series 1997-1
Notes designated in such notice shall become due and payable at the applicable
Redemption Price, plus interest accrued thereon to the Redemption Date, and,
upon surrender in accordance with such notice, shall be so paid, and thereafter
such Series 1997-1 Notes shall cease to accrue interest.
No such notice shall be required with respect to prepayments of the Taxable
LIBOR Rate Series 1997-1 Notes as described above under "Prepayment of Taxable
LIBOR Rate Series 1997-1 Notes."
APPLICATION OF SERIES 1997-1 NOTE PROCEEDS
The Original Issuer and the Corporation intend to use the proceeds of the
sale of the Series 1997-1 Notes in the following amounts for the following
purposes:
(1) $___________ will be deposited in the Series 1997-1 Tax Exempt
Acquisition Account and used as follows:
(a) approximately $___________ will be used on the Date of
Issuance to refinance approximately $_______ aggregate principal
amount of Eligible Loans previously acquired or originated by the
Original Issuer; and
(b) the remainder will be used to acquire or originate additional
Eligible Loans;
(2) $___________ will be deposited in the Series 1997-1 Taxable
Acquisition Account and used as follows:
(a) approximately $___________ will be used on the Date of
Issuance to refinance approximately $_______ aggregate principal
amount of Eligible Loans previously acquired or originated by or on
behalf of the Original Issuer; and
(b) the remainder will be used to acquire or originate
additional Eligible Loans; and
(3) $_________ will be deposited in the Reserve Fund.
It is expected that immediately after the deposit of the proceeds of the
Series 1997-1 Notes as described above, the principal amount of, and accrued
interest on and Special Allowance Payments with respect to, Financed Eligible
Loans, together with the remaining proceeds in the Acquisition Fund and the
Balance in the Reserve Fund, will equal ___% of the principal amount of the
Series 1997-1 Notes.
The characteristics as of June 30, 1997 of the Eligible Loans expected to
be Financed on the Date of Issuance with proceeds deposited to the Series 1997-1
Tax Exempt Acquisition Account and to the Series 1997-1 Taxable Acquisition
Account (aggregating approximately $560.5 million) are more particularly
described under "Characteristics of the Initial Financed Student Loans." These
Eligible Loans currently secure outstanding obligations of the Original Issuer
used to acquire such Student Loans, which will be refunded from the proceeds of
the Series 1997-1 Notes .
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The Corporation expects the remaining proceeds deposited to the Series
1997-1 Tax Exempt Acquisition Account (approximately $___________________ or __%
of the Series 1997-1 Note proceeds) to be used to purchase Eligible Loans (see
"Glossary of Certain Defined Terms") from Lenders or to originate Eligible Loans
on or before April 15, 2002, approximately according to the following
schedule:
<TABLE>
<CAPTION>
Amount
By June 30 (millions)
---------- ----------
<S> <C>
1998 $60.3
1999 60.9
2000 62.4
2001 64.0
2002 [_____]
</TABLE>
At the Corporation's option, or if not expended as of certain dates, such
proceeds may be transferred to the Retirement Account and used to redeem Tax
Exempt Auction Rate Series 1997-1 Senior Notes and, if no Tax Exempt Auction
Rate Series 1997-1 Senior Notes remain Outstanding, Tax Exempt Fixed Rate Series
1997-1 Notes. See "Description of Series 1997-1 Notes --Special Redemption --
From Unused Proceeds" herein. Investors holding such Tax Exempt Series 1997-1
Notes (particularly Tax Exempt Fixed Rate Series 1997-1 Notes) which are
redeemed may be unable to reinvest the proceeds of the redemption at the same
yield as the Tax Exempt Series 1997-1 Notes. Also, depending on the price at
which investors purchased such Series 1997-1 Notes, their yield may be adversely
affected by such early redemption.
The Corporation expects the remaining proceeds deposited to the Series
1997-1 Taxable Acquisition Account (approximately $___________________ or __% of
the Series 1997-1 Note proceeds) to be used to purchase Eligible Loans from
Lenders or to originate Eligible Loans on or before August 1, 1998. At the
Corporation's option, or if not expended as of August 1, 1998, such proceeds may
be transferred to the Retirement Account and used to redeem Taxable Auction Rate
Series 1997-1 Senior Notes. See "Description of Series 1997-1 Notes -Special
Redemption -- From Unused Proceeds" herein. Investors holding such Taxable
Auction Rate Series 1997-1 Senior Notes which are redeemed may be unable to
reinvest the proceeds of the redemption at the same yield as the Taxable Auction
Rate Series 1997-1 Senior Notes. Also, depending on the price at which investors
purchased such Series 1997-1 Notes, their yield may be adversely affected by
such early redemption.
For a more detailed description of the Original Issuer's programs of
Financing Eligible Loans (which will be continued by SLFC on behalf of the
Corporation pursuant to the Servicing Agreement), Eligible Loans expected to be
Financed after the Date of Issuance, and possible limitations on the expenditure
of these proceeds as expected, see "Description of Financed Eligible Loan
Program." Use of the moneys in the Acquisition Fund pending Financing of
Eligible Loans is more particularly described in "Summary of the Indenture --
Funds and Accounts -- Acquisition Fund."
Balances in the Acquisition Fund representing proceeds of the Series 1997-1
Notes not used to acquire Eligible Loans on the Date of Issuance, and Balances
in the Reserve Fund, are expected to be invested pending use for Financing
Eligible Loans under one or more investment agreements meeting the requirements
of the Indenture. Each investment agreement will require the Investment Provider
(a financial institution with which such proceeds are invested) to repay such
proceeds when requested by the Corporation or the Trustee (subject to such
limitations as may be provided therein), and to pay interest on such invested
proceeds periodically. Each Investment Provider will be a party which meets the
Rating Agencies' criteria for creditworthiness or which has pledged collateral
satisfactory to the Rating Agencies to secure its repayment obligations. See
"Summary of the Indenture -- Investments".
Although the Corporation expects that the investment return on the Balances
in the Acquisition Fund pending its use to finance Eligible Loans, together with
other Pledged Revenues and Pledged Funds and Accounts (each as defined in
"Source of Payment and Security for the Notes -- General") under the Indenture
(including
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Financed Eligible Loans), will be sufficient to meet principal and interest
payments on the Series 1997-1 Notes and required expenses under the Indenture,
various risk factors could adversely affect that expectation. See "Risk
Factors."
The Costs of Issuance of the Series 1997-1 Notes will be paid by the
Original Issuer from other moneys available therefor.
SOURCE OF PAYMENT AND SECURITY FOR THE NOTES
General
The Notes will be limited obligations of the Corporation payable solely
from the Trust Estate created under the Indenture, consisting of certain
revenues ("Pledged Revenues") and Funds and Accounts pledged under the Indenture
(the "Pledged Funds and Accounts", which do not include the Rebate Fund). The
Pledged Revenues include: (i) payments of interest and principal made by
obligors of Financed Student Loans, (ii) Guarantee Payments made by the
Guarantee Agencies to or for the account of the Trustee as the holder of
defaulted Financed Student Loans, (iii) interest subsidy payments and Special
Allowance Payments made by the Department of Education to or for the account of
the Trustee as the holder of Financed Student Loans (excluding, except in the
case of the Eligible Loans to be Financed on the Date of Issuance, any Special
Allowance Payments and interest subsidy payments accrued prior to the date of
Financing the related Student Loan), (iv) income from investment of moneys in
the Pledged Funds and Accounts (except to the extent such income is required to
be deposited in the Rebate Fund), (v) payments from a Swap Counterparty under a
Swap Agreement, (vi) proceeds of any sale or assignment by the Corporation of
any Financed Student Loans, and (vii) available Note proceeds. In addition, the
Pledged Revenues with respect to one or more series of Notes may include
payments made by a Credit Facility Provider pursuant to a Credit Enhancement
Facility. No Credit Enhancement Facility or Swap Agreement is being delivered in
connection with the issuance of the Series 1997-1 Notes, and it is not expected
that any such revenues will be available to pay the Series 1997-1 Notes.
The principal of, premium, if any, and interest on the Notes will be
secured by a pledge of and a security interest in all rights, title, interest
and privileges of the Corporation (1) with respect to Financed Student Loans,
in, to and under any Servicing Agreement, the Student Loan Purchase Agreements,
the Guarantee Agreements and the Federal Reimbursement Contracts; (2) in, to and
under all Financed Student Loans (including the evidences of indebtedness
thereof and related documentation), any Swap Agreement and (subject to the
limitations therein or in the Indenture limiting the benefits thereunder to the
Notes of one or more series) any Credit Enhancement Facility; and (3) in and to
the proceeds from the sale of the Notes (until expended for the purpose for
which issued) and the Pledged Revenues, moneys, evidences of indebtedness and
securities in the Pledged Funds and Accounts. The security interest in revenues,
moneys, evidences of indebtedness and, unless registered in the name of the
Trustee, securities payable into the various Funds and Accounts does not
constitute a perfected security interest until received by the Trustee. Certain
Pledged Revenues are subject to withdrawal from the Pledged Funds and Accounts,
to prior applications to pay Costs of Issuance, Administrative Expenses and Note
Fees, and to certain other applications as described under "Description of Flow
of Revenues in the Funds" below and "Summary of the Indenture -- Funds and
Accounts".
Additional Indenture Obligations
The Indenture provides that, upon the satisfaction of certain conditions,
the Corporation may issue one or more series of Additional Notes thereunder.
(Any Additional Notes will not be offered or sold pursuant to this Prospectus.)
Additional Notes may be issued as Senior Notes on a parity basis with the Series
1997-1 Senior Notes; as Subordinate Notes on a parity basis with the Series
1997-1 Subordinate Notes; or as Class C Notes on a subordinate basis to the
Senior Notes and the Subordinate Notes. In addition, the Corporation may enter
into Swap
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Agreements and may obtain Credit Enhancement Facilities from one or more Credit
Facility Providers. The Corporation's obligations under the Swap Agreements, and
its obligations to pay the premiums or fees of Credit Facility Providers and, if
applicable, to reimburse payments made under Credit Enhancement Facilities, may
be parity obligations with the Senior Notes (such Other Senior Obligations,
together with the Senior Notes, being referred to herein as Senior Obligations)
or parity obligations with the Subordinate Notes (such Other Subordinate
Obligations, together with the Subordinate Notes, being referred to herein as
Subordinate Obligations). The Senior Obligations, the Subordinate Obligations,
and any Class C Notes are referred to herein as "Indenture Obligations". See
"Summary 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.
The Indenture also permits the Corporation to issue Class C Notes from time
to time upon satisfaction of the conditions specified therein. See "Summary of
the Indenture -- Additional Notes".
Priorities
The Series 1997-1 Senior Notes (and any other Senior Obligations) are
entitled to payment and certain other priorities over the Series 1997-1
Subordinate Notes (and any other Subordinate Obligations). Current payments of
interest and principal due on the Subordinate Notes on an Interest Payment Date
or Principal Payment Date will be made (on a parity basis with any other
Subordinate Obligations) only to the extent there are sufficient moneys
available for such payment, after making all such payments due on such date with
respect to Senior Obligations. So long as any Senior Obligations remain
Outstanding under the Indenture, the failure to make interest or principal
payments with respect to Subordinate Notes (including the Series 1997-1
Subordinate Notes) will not constitute an Event of Default under the Indenture.
In the event of an acceleration of the Notes, the principal of and accrued
interest on the Subordinate Notes will be paid (on a parity basis with any other
Subordinate Obligations) only to the extent there are moneys available under the
Indenture after payment of the principal of, and accrued interest on, all Senior
Notes and the satisfaction of all other Senior Obligations. In addition, holders
of Senior Notes and Beneficiaries of other Senior Obligations are entitled to
direct certain actions to be taken by the Trustee prior to and upon the
occurrence of an Event of Default, including election of remedies. See "Summary
of the Indenture --Remedies".
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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 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, except
in the case of the Eligible Loans to be Financed on the Date of Issuance,
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 revenues
received as payments of interest on or Special Allowance Payments with respect
to Financed Student Loans and income from Investment Securities) to the Income
Account. The Indenture requires the Trustee to transfer moneys on a monthly
basis (after taking into account any periodic rebate fee payment required to be
made in respect of Student Loans Financed under the Indenture), first from the
Repayment Account and then from the Income Account, to the following Funds and
Accounts in the following order: the Rebate Fund, the Interest Account for the
payment of Senior Obligations, the Principal Account for the payment of Senior
Obligations, the Retirement Account for the redemption of Senior Notes, the
Interest Account for the payment of Subordinate Obligations, the Principal
Account for the payment of Subordinate Obligations, the Retirement Account for
the redemption of Subordinate Notes, the Administration Fund (but only from the
Income Account), the Reserve Fund, the Principal Account (relating to cumulative
sinking fund installments with respect to Subordinate Term Notes to be redeemed
on a Sinking Fund Payment Date), the Special Redemption and Prepayment Account
and the Surplus Account. In addition, any amounts payable by a Swap Counterparty
pursuant to a Swap Agreement are required to be credited directly to the
Interest Account.
Moneys in the Administration Fund may be used, as provided in the
Indenture, to pay Costs of Issuance, Note Fees and Administrative Expenses.
Balances in the Surplus Fund shall be used first to make up deficiencies
in, or make required transfers to, the Rebate Fund, the Note Fund, the
Administration Fund and the Reserve Fund. Balances in the Surplus Fund may also
be applied, as determined by the Corporation from time to time, to the payment
of principal of or interest on Class C Notes when due or upon the redemption
thereof at the option of the Corporation; provided that the conditions described
under "Summary of the Indenture --Funds and Accounts -- Surplus Fund" are met.
If the Trustee shall have first certified that no deficiencies exist in any
of the Rebate Fund, the Note Fund, the Reserve Fund or the Special Redemption
and Prepayment Account, and shall have received certain certifications from the
Corporation, Balances in the Surplus Account may be used to redeem Notes
(including Series 1997-1 Notes as described under "Description of Series 1997-1
Notes -- Special Redemption -- 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
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will be not less than ___%, and (ii) the Subordinate Percentage will be not less
than ___%; provided that such percentages may be lower upon receipt of certain
approvals from each Rating Agency and, under certain circumstances, consent of
Other Beneficiaries.
The Indenture establishes a Rebate Fund into which the Trustee is required
to make annual deposits from Balances in the Revenue Fund, the Surplus Fund, the
Reserve Fund, the Administration Fund, the Bond Fund and the Acquisition Fund,
in that order, equal to the amount computed under Section 148(f) of the Code as
being subject to rebate to the United States (the "Rebate Amount") and certain
amounts constituting Excess Earnings on the Financed Student Loans. The Trustee
is required to pay to the United States Treasury, at least once every five
years, an amount which ensures that not less than 90% of the cumulative Rebate
Amount will have been paid to the United States Treasury. The Trustee is
required to consult with Bond Counsel and take such action as may be required
under the Code (which may include forgiveness of principal of Financed Student
Loans or payments to the 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 the
Indenture -- Funds and Accounts".
THE ORIGINAL ISSUER
The Original Issuer is a South Dakota nonprofit corporation organized in
December 1978, at the request of the then Governor of the State, to provide a
statewide student loan acquisition program pursuant to the provisions of the
Higher Education Act and Section 150(d) of the Code. Former Governor Wollman
designated the Original Issuer as the single nonprofit private agency in the
State acting as an eligible lender in connection with the student loan program
provided for by the Higher Education Act. The Original Issuer has received an
Internal Revenue Service determination that, based on its original organization
and purposes, it is a tax-exempt organization under Section 501(c)(3) of the
Code.
As required by Section 150(d) of the Code, the Original Issuer's Articles
of Incorporation provide that the Original Issuer is organized exclusively for
the purpose of acquiring student loan notes incurred under the Higher Education
Act, and that income of the Original Issuer may be used only for: (i) the
payment of expenses and debt service on bonds or notes issued by the Original
Issuer or the creation of reserves for such purposes; (ii) the acquisition of
additional student loan notes; or (iii) payment to the United States. In
connection with an election under Section 150(d)(3) of the Code to terminate its
status as a corporation described in Section 150(d), the Original Issuer will
enter into an agreement with Student Loan Finance Corporation, a newly organized
South Dakota corporation and wholly-owned subsidiary of the Original Issuer
("SLFC"), pursuant to which the Original Issuer will transfer all of its student
loans (including its rights in Financed Student Loans), student loan acquisition
and servicing operations and physical facilities, together with certain other
assets (including the Original Issuer's interest in the other assets comprising
the Trust Estate), to SLFC and SLFC will assume all of the Original Issuer's
obligations with respect to the Notes, the Indenture, the Trust Estate and all
related contracts. See "The Servicer" herein. The Original Issuer will transfer
such assets without recourse, and will be released from all obligations under
the Indenture or otherwise with respect to the Notes. Concurrently with such
transfer, the Original Issuer will amend its articles of incorporation to amend
its corporate purpose and change its name to Great Plains Education Foundation,
Inc. Under Section 150(d)(3) of the Code, the Original Issuer must continue to
be an
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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 rights and
interest in the Financed Student Loans and other assets of the Trust Estate
to the Corporation, which is a newly organized, bankruptcy-remote, limited
purpose Delaware corporation and wholly-owned subsidiary of SLFC, and the
Corporation will assume all of SLFC's obligations under the Indenture and
otherwise with respect to the Notes, the Trust Estate and the related
contracts. SLFC will also transfer such assets without recourse, and will
be released from all obligations under the Indenture or otherwise with
respect to the Notes (except in its capacity as Servicer). Neither the
Original Issuer nor SLFC (except in its capacity as Servicer) will be
obligated under the Indenture.
THE SERVICER
General
SLFC will be a newly organized South Dakota corporation. In
connection with the Original Issuer's election under Section 150(d)(3) of
the Code, all of the assets of the Original Issuer used in its business of
acquiring, originating, holding, servicing and collecting student loans,
including its physical facilities, computer hardware and software, and
certain other assets will be transferred to SLFC. At that time, all of the
Original Issuer's employees are expected to become employees of SLFC.
Immediately after such transfer, SLFC expects to operate the student loan
business formerly operated by the Original Issuer and service and collect
the Financed Eligible Loans in substantially the same manner (including
using the same staff, offices and computer hardware and software) in which
the Original Issuer currently administers its program and services and
collects such loans.
The Original Issuer has operated as a secondary market for student
loans since 1979. As of June 30, 1997, the Original Issuer had a staff of
87 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 June 30, 1997, the Original Issuer
owned and was servicing student loans to approximately 92,000 borrowers
representing approximately $560.5 million 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 $2.2 billion aggregate principal amount of bonds and
notes, of which $912,425,000 principal amount were outstanding as of June
30, 1997. All of such outstanding bonds and notes will be refunded with a
portion of the proceeds of the Series 1997-1 Notes. At the time of the
transfer of the assets described above to SLFC, the Original Issuer expects
to cease its participation in the student loan business.
The information included above concerning the Original Issuer has been
included solely to describe the expected future operations of SLFC. The
Original Issuer will not transfer all of its cash and investments to SLFC.
None of the assets retained by the Original Issuer will be available to
SLFC or for the payment of the Notes. The Original Issuer will have no
obligation with respect to (i) the Financed Eligible Loans or the servicing
thereof, (ii) the payment of the Series 1997-1 Notes, or (iii) the
administration of the Indenture. Moreover, the Original Issuer's transfer
of assets to SLFC will be without recourse or warranty. Thus, in the event
of a failure of the Original Issuer's hardware and software systems to
adequately function, or any other factor which adversely affects the value
of the assets transferred to SLFC or SLFC's ability to perform its
obligations under the SLFC Servicing Agreement, the Original Issuer would
have no obligation or liability with respect thereto.
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Delinquency and Loan Loss Experience
The following tables provide information regarding the delinquency status
of the student loan portfolio of the Original Issuer (which has been serviced by
the Original Issuer) as of June 30, 1997, 1996, 1995, 1994 and 1993. For each
delinquency status listed (based on number of days delinquent and claims filed),
the tables show the aggregate principal amount of Student Loans in each
delinquency status as of each date; the percent of the aggregate principal
amount of the Original Issuer's Student Loan portfolio in repayment, deferment,
forbearance and claims status as of each date represented by such principal
amounts; and the percent of the aggregate principal amount of the Original
Issuer's entire Student Loan portfolio as of each date represented by such
principal amounts. The Original Issuer's management believes that the
distribution of delinquent loans in the Original Issuer's Student Loan portfolio
has been consistent over the last five years and it is unaware of any current
trends that are expected to materially alter such distributions or materially
impact the future performance of the Financed Eligible Loans. Notwithstanding
the above, no assurance can be made that any such trends will continue or not
deteriorate.
Distribution of Original Issuer's Student Loan Portfolio by Delinquency Status
As of June 30, 1997, 1996, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Delinquency Status June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- -------------------------------------------------------------------------------------------------------
Principal Amount
- ----------------
<S> <C> <C> <C> <C> <C>
31 to 60 days $16,237,073 $17,766,179 $14,077,909 $13,639,924 $12,866,442
61 to 90 days 7,786,808 7,666,789 6,550,528 6,212,040 5,843,349
91 to 120 days 4,939,841 4,664,322 3,834,229 3,633,351 2,770,248
121 to 180 days 6,774,711 6,339,235 5,817,809 5,225,322 4,150,481
181 to 270 days 2,479,580 2,579,598 2,319,294 1,398,039 1,400,538
Over 270 days 9,061 3,532 0 147 4,227
Claims filed, not yet paid 1,736,799 1,193,954 1,200,925 1,460,674 2,096,725
-----------------------------------------------------------------------
Total $39,963,873 $40,212,609 $33,800,694 $31,569,497 $29,132,010
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
Percent of Outstanding
- ----------------------
Principal - Repayment
- ---------------------
Deferment, Forbearance and
- --------------------------
Claim Status Loans Only
- -----------------------
<S> <C> <C> <C> <C> <C>
31 to 60 days 3.2% 3.7% 3.5% 3.8% 3.9%
61 to 90 days 1.5 1.6 1.6 1.7 1.8
91 to 120 days 1.0 1.0 1.0 1.0 0.8
121 to 180 days 1.3 1.3 1.5 1.5 1.2
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
181 to 270 days 0.5 0.5 0.6 0.4 0.4
Over 270 days 0.0 0.0 0.0 0.0 0.0
Claims filed, not yet paid 0.3 0.2 0.3 0.4 0.6
-----------------------------------------------------------------------
Total 7.8% 8.3% 8.5% 8.8% 8.7%
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
Percent of Outstanding
- ----------------------
Principal -- Entire Portfolio
- -----------------------------
<S> <C> <C> <C> <C> <C>
31 to 60 days 2.9% 3.3% 3.2% 3.5% 3.6%
61 to 90 days 1.4 1.4 1.5 1.6 1.6
91 to 120 days 0.9 0.9 0.9 0.9 0.8
121 to 180 days 1.2 1.2 1.3 1.3 1.2
181 to 270 days 0.4 0.5 0.5 0.4 0.4
Over 270 days 0.0 0.0 0.0 0.0 0.0
Claims filed, not yet paid 0.3 0.2 0.3 0.4 0.6%
-----------------------------------------------------------------------
Total 7.1% 7.5% 7.7% 8.1% 8.2%
=======================================================================
ee</TABLE>
The following tables provide information regarding principal losses
relating to the Original Issuer's Student Loan portfolio (which has been
serviced by the Original Issuer) for each of the years ended June 30, 1993
through 1997. The first table shows the aggregate principal amount of losses
during each period, and the breakdown of such losses between the amount
representing the two percent portion of default claims filed with a Guarantee
Agency which is not paid by the Guarantee Agency with respect to loans made
after September 30, 1993, and the amount representing other principal write-offs
(i.e., for loans that may have lost Guarantee eligibility) net of recoveries.
The second table shows the percent of the Original Issuer's entire Student Loan
portfolio end-of-period balances represented by the aggregate losses listed in
the first table during the relevant period. Subject to compliance with
Department of Education and Guarantee Agency requirements, student loans made
under the Federal Family Education Loan Program prior to October 1, 1993 are
entitled to 100% guarantee coverage for defaulted loans while student loans made
on or after that date are entitled to 98% coverage. The Original Issuer's
management expects that overall write-offs of the portfolio related to this two
percent difference will increase over time as a greater percentage of the
portfolio consists of loans made on or after October 1, 1993. The Original
Issuer's management believes that the amount of other write-offs during this
period has been consistent and immaterial and it is unaware of any current
trends that are expected to materially alter the loss experience or materially
impact the future performance of the Financed Eligible Loans. Notwithstanding
the above, no assurance can be made that any such trends will continue or not
deteriorate.
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<PAGE>
Original Issuer's Student Loan Portfolio Principal Losses
Each of the Years Ended June 30, 1993 Through 1997
<TABLE>
<CAPTION>
Total
2% Claim Losses on 98% Other Principal Write-Offs, Principal
Guaranteed Loans Net of Recoveries Losses
---------------------- --------------------------- ----------
Principal Amounts
- ------------------------------
For the Fiscal Year Ended:
<S> <C> <C> <C>
June 30, 1997 $88,367 $ 7,020 $95,387
June 30, 1996 56,730 20,484 77,214
June 30, 1995 10,266 9,211 19,477
June 30, 1994 0 3,778 3,778
June 30, 1993 0 55 55
Percentage (Annualized) of
Principal Losses to End-of-
Period Portfolio Balances
- ----------------------------
For the Fiscal Year Ended:
June 30, 1997 0.016% 0.001% 0.017%
June 30, 1996 0.011% 0.004% 0.015%
June 30, 1995 0.002% 0.002% 0.004%
June 30, 1994 0.000% 0.001% 0.001%
June 30, 1993 0.000% 0.000% 0.000%
</TABLE>
The data presented in the foregoing tables are for illustrative purposes
only and there is no assurance that the delinquency and loss experience of the
Financed Student Loans will be similar to that set forth above.
THE CORPORATION
General
The Corporation is a newly organized, bankruptcy remote, limited purpose
Delaware corporation and a wholly owned subsidiary of SLFC. Immediately
following the issuance of the Series 1997-1 Notes, 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.
As a bankruptcy-remote entity, the Corporation's operations will be
restricted so that (i) it does not engage in business with, or incur liabilities
to, any other entity (other than the Noteholders and Other Beneficiaries, and
beneficiaries under indentures similar to the Indenture) which may bring
bankruptcy proceedings against the Corporation, and (ii) the risk that it will
be consolidated into the bankruptcy proceedings of any other entity is
diminished. The Corporation has covenanted in the Indenture that it will not
engage in any business other
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than financing, originating, purchasing, owning, selling and managing
Student Loans in the manner contemplated by its certificate of
incorporation and the Indenture and the activities incidental thereto.
The Corporation will have no substantial assets other than those
transferred to it from SLFC and pledged under the Indenture. The Corporation
will have no full-time employees. Certain responsibilities of the Corporation
under the Indenture will be administered by SLFC. See "The SLFC Servicing
Agreement" and "Certain Relationships Among Financing Participants."
The Corporation's address is 105 First Avenue Southwest, Aberdeen, South
Dakota 57401 and its phone number is (605) 622-4400.
Management's Discussion and Analysis of Results of Operations and Financial
Condition
As of the date of this Prospectus, the Corporation has had no operating
history. The proceeds of the sale of the Series 1997-1 Notes will be used
primarily to refinance a portfolio of Student Loans currently owned by the
Original Issuer and to purchase Eligible Loans from Lenders or to originate
Eligible Loans on or before April 15, 2002. See "Application of Series 1997-1
Note Proceeds." The Corporation is prohibited by its certificate of
incorporation from engaging in any business other than (i) receiving the assets
and assuming the liabilities transferred to it in connection with the Original
Issuer's election under Section 150(d)(3) of the Code; (ii) originating or
acquiring Student Loans; (iii) entering into certain agreements relating to
Student Loans; (iv) issuing bonds, notes, asset-backed certificates or other
securities payable solely from Student Loans and other assets pledged to the
payment thereof; and (v) engaging in acts incidental to and necessary, suitable
or convenient for the accomplishment of the foregoing purposes and permitted
under Delaware law. The Corporation's ability to incur, assume or guarantee
indebtedness for borrowed money is also restricted by its certificate of
incorporation.
Directors and Executive Officer
The following table identifies the directors and executive officer of the
Corporation and their ages and positions as of the date of this Prospectus.
Because the Corporation is organized as a special purpose entity and will be
largely passive, it is expected that the officers and directors in such capacity
will participate in the management of the Corporation only to a limited extent.
Most of the actions related to maintaining and servicing the assets will be
performed by SLFC.
<TABLE>
<CAPTION>
Name Age Positions
- ---------------------- --- ----------------------------------------------
<S> <C> <C>
A. Norgrin Sanderson 55 President, Treasurer and Chairman of the Board
V. G. Stoia 74 Director
Manley B. Feinstein 71 Director
Harvey C. Jewett 49 Director
</TABLE>
In order to comply with certain provisions of its certificate of
incorporation and the requirements of the Rating Agencies, the Board of
Directors will increase in size to six members and will appoint two
additional independent directors within 30 days after the closing of the
offering of the Series 1997-1 Notes.
Mr. Sanderson has been President, Treasurer and Chairman of the
Corporation since its formation in May 1997. Mr. Sanderson is also the
President, Treasurer and Chairman of SLFC and has been President, Treasurer
and a Director of the Original Issuer since 1979. Prior to assuming his
positions with the Original Issuer, he was employed for 16 years by Norwest
Corporation, a bank holding company based in Minneapolis, Minnesota, where
he held Vice President and Branch Manager positions.
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<PAGE>
Mr. Stoia has been a Director of the Corporation since its formation in May
1997. Mr. Stoia is also a Director of SLFC and has been a Director of the
Original Issuer since its formation in 1978. Mr. Stoia is a Chartered Financial
Consultant with the firm of Stoia, Seiler and Associates in Aberdeen, South
Dakota. Currently, Mr. Stoia also serves on the Board of Trustees of St. Luke's
Hospital and as a member of the Board of Northern State University Foundation.
In the past, he served as a member of the Board of the South Dakota Foundation
of Private Colleges, Presentation College and South Dakota Crippled Children's
School. He served as President of the Aberdeen Development Corporation from 1972
to 1987.
Mr. Feinstein is also a Director of SLFC and has been a Director of the
Original Issuer since its formation in 1978. He also is a Director of EAC. Mr.
Feinstein has been self-employed as a business consultant in Aberdeen, South
Dakota since 1990.
Mr. Jewett has been a Director of the Corporation since its formation in
May 1997. Mr. Jewett is also a Director of SLFC and has been a Director of the
Original Issuer since 1979. He also is a Director of EAC. Mr. Jewett has been
the President and Chief Operating Officer of The Rivett Group, L.L.C., a motel
management operation, since 1987, and has been an attorney in private practice
in Aberdeen, South Dakota since 1974. Mr. Jewett is a member of the Board of
Directors of Norwest South Dakota, N.A., a bank with branches throughout South
Dakota, which has sold a substantial number of Student Loans to the Original
Issuer in past years and is expected to continue selling Student Loans to the
Corporation in the future.
Except for Mr. Sanderson, none of the directors and officers listed above
will be compensated directly by the Corporation nor with any funds or assets of
the Corporation. Mr. Sanderson will be paid for serving as an executive officer
of the Corporation. Mr. Sanderson's compensation will be based upon the amount
of time he spends handling the Corporation's affairs. It is currently estimated
that he will receive approximately $35,000 per year for his service as an
executive officer of the Corporation.
It is anticipated that the independent directors of the Corporation to be
appointed as described above will receive compensation of approximately $2,500
per year.
THE SLFC SERVICING AGREEMENT
In General
The Corporation and the Trustee will enter into a Servicing Agreement,
dated as of July 1, 1997 (the "SLFC Servicing Agreement"), with SLFC. A form of
the SLFC Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summary describes
certain provisions of the SLFC Servicing Agreement. The summary does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of the SLFC Servicing Agreement.
Pursuant to the SLFC Servicing Agreement, SLFC agrees to provide
services to the Corporation and the Trustee in connection with the
origination and acquisition of Student Loans to be Financed, to commence
servicing the Financed Student Loans as of the day they are Financed and to
service the Financed Student Loans, all in accordance with the SLFC
Servicing Agreement. SLFC may perform all or part of its origination,
acquisition, and servicing activities through a subcontractor. SLFC is
required to perform or cause its subcontractor to perform all services
under the SLFC Servicing Agreement in compliance with the Higher Education
Act, applicable requirements of the Guarantee Agency and all other
applicable federal, state and local laws and regulations. SLFC will be
responsible for the performance of its obligations under the SLFC Servicing
Agreement, whether such obligations are performed by SLFC or by its
subcontractor, and SLFC will be responsible for any fees and payments
required by the subcontractor. The SLFC Servicing Agreement requires a
subcontractor to be subject to the same
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obligations relating to audits, examinations and inspections as to which
SLFC is subject. SLFC also agrees to perform various duties of the
Corporation under the Indenture.
Acquisition Process
Unless and until otherwise directed in writing by the Corporation, SLFC
agrees to provide to the Trustee all certificates and directions required to be
delivered by the Corporation to the Trustee under the Indenture in connection
with the Financing through acquisition of Eligible Loans and Student Loans
thereunder. SLFC also agrees to work with the Lenders to obtain from each Lender
loan documentation and information relating to each Student Loan to be Financed
and to establish and maintain all records delivered to SLFC with respect to each
Financed Student Loan, and complete records of SLFC's servicing of the Financed
Student Loan from the date SLFC's servicing commences. However, SLFC will not
conduct a complete file and note examination of each Student Loan to be
Financed.
Origination Process
Unless and until otherwise directed in writing by the Corporation, SLFC
agrees to provide to the Trustee all certificates and directions required to be
delivered by the Corporation to the Trustee under the Indenture in connection
with the Financing through origination of Eligible Loans and Student Loans
thereunder. SLFC also agrees to provide disbursement and origination services in
connection with the origination and disbursement of Eligible Loans under the
Indenture.
Servicing
SLFC agrees to perform all servicing obligations relating to the Financed
Student Loans required of the Corporation or the Trustee, or which the
Corporation or the Trustee is required to cause the Servicer to perform. The
SLFC Servicing Agreement specifies various activities and obligations to be
performed by SLFC in servicing the Financed Student Loans. These activities and
obligations include, without limitation, file maintenance; maintaining Guarantee
coverage on Financed Student Loans; handling borrower requests for forbearance
and deferments; exercising due diligence (within the meaning of the Higher
Education Act and the Guarantee Program regulations) in the servicing,
administration and collection of all Financed Student Loans; collecting payments
of principal and interest, Special Allowance Payments, and Guarantee Payments
with respect to Financed Student Loans and causing all such interest subsidy
payments and Special Allowance Payments to be forwarded by the Secretary of
Education directly to the Trustee for immediate deposit into the appropriate
fund or account under the Indenture and depositing all other such payments
immediately upon receipt into a lock-box account (which shall be part of the
Revenue Fund) to be established by the Trustee in the name of and for the
account of the Trustee; representing the interests of the Corporation and the
Trustee in handling discrepancies or disputes, if any, with the Secretary of
Education; preparing and maintaining all appropriate accounting records with
respect to all transactions related to each Financed Student Loan; for defaulted
Financed Student Loans, taking steps necessary to file and prove a claim for
loss with the Secretary of Education or the Guarantee Agency, as the case may be
and as required, and assuming responsibility for all necessary communications
and contacts with the Secretary of Education or the Guarantee Agency, as the
case may be and as required, to recover on such defaulted Financed 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.
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<PAGE>
Right of Inspection and Audits
The SLFC Servicing Agreement provides that, subject to any restrictions of
applicable law, the Corporation, the Trustee, the Guarantee Agency, the
Secretary of Education and/or any governmental agency having jurisdiction over
the Corporation or the Trustee (and, in each case, such entities'
representatives), will have the right, at any time and from time to time, during
normal business hours, and upon reasonable notice to SLFC, to examine and audit
any and all of the SLFC's records or accounts pertaining to any Financed Student
Loan. The Corporation and the Trustee also may require SLFC to furnish such
documents as they from time to time deem necessary to determine that SLFC has
complied with the provisions of the SLFC Servicing Agreement, the Student Loan
Purchase Agreements and the Indenture.
SLFC also agrees to have prepared and submitted to the Secretary of
Education and the Guarantee Agencies any third-party servicer compliance audits
and audited financial statements required under the Higher Education Act and the
Guarantee Program regulations relating to SLFC and its servicing of Financed
Student Loans, and any lender compliance audits required under the Higher
Education Act and the Guarantee Program regulations relating to the Trustee (as
the holder of the Financed Student Loans) and the Financed Student Loans. SLFC
agrees to provide to the Corporation and the Trustee these and various other
specified reports and audits.
Administration and Management
SLFC agrees to perform various administrative activities and
obligations on behalf of the Corporation under the SLFC Servicing
Agreement. These include providing all necessary personnel, facilities,
equipment, forms and supplies for operating the Program in accordance with
the Indenture; disseminating information on the Program to Lenders and to
student financial aid officers and to other persons as necessary;
controlling and accounting for the receipt and expenditure of the
Corporation's funds in accordance with the resolutions of the Corporation's
board of directors and the Indenture and maintaining accurate and complete
records on all aspects of the Program; reviewing all statements and reports
to the Corporation required of the Trustee, the Servicer and the Lender in
accordance with the provisions of the Indenture, the SLFC Servicing
Agreement and the Student Loan Purchase Agreements; and preparing and
submitting to the Trustee the Monthly Servicing Reports required to be
delivered to the Noteholders pursuant to the Indenture. SLFC also agrees
to prepare for filing, and provide such other assistance as is required by
the Corporation to file, any other reports required to be filed by the
Corporation under the Indenture or under any applicable law, including
without limitation, the Higher Education Act and any federal and state
securities laws.
Servicer as Bailee
The SLFC Servicing Agreement provides that SLFC, in holding documents
relating to the Financed Student Loans, will hold such documents as bailee for
and on behalf of the Trustee.
Plan for Doing Business
In providing administrative services on behalf of the Corporation under the
SLFC Servicing Agreement, SLFC agrees to operate the Program in compliance with
the Plan for Doing Business of the Original Issuer, to advise the Original
Issuer if any amendments to the Plan for Doing Business are required from time
to time, and to assist the Original Issuer in preparing, obtaining approval of,
and filing any such amendments to the Plan for Doing Business.
Servicing Fees
The SLFC Servicing Agreement provides that SLFC shall be paid for the
performance of its functions under the SLFC Servicing Agreement (from funds
available for such purpose under the Indenture) a monthly fee in an amount each
month equal to 0.104167% of the outstanding principal balance of all Financed
Student Loans
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<PAGE>
as of the last day of the immediately preceding month. Such fee is
required to be paid to SLFC on a monthly basis within fifteen (15) days of
receipt by the Trustee of a written monthly billing statement from SLFC. If
SLFC believes that it is necessary to increase the monthly fee payable
under the SLFC Servicing Agreement, it shall provide a written request to
the Corporation and the Trustee of its need for an increase in such fee,
together with all information required under the Indenture for the Trustee
to approve an increase in the fees payable thereunder. SLFC acknowledges
in the SLFC Servicing Agreement that such fee shall not be increased unless
the conditions for increasing such fees under the Indenture have been
satisfied.
SLFC also acknowledges in the SLFC Servicing Agreement that the Corporation
and the Trustee contemplate paying all servicing fees payable under the SLFC
Servicing Agreement solely from funds available for such purpose in the
Administration Fund created under the Indenture, which funds are primarily
dependent upon collection by SLFC and receipt by the Trustee of payments with
respect to the Financed Student Loans. SLFC agrees to continue to be bound by
the terms and provisions of the SLFC Servicing Agreement relating to Financed
Student Loans in all respects, and to perform for a period of 120 days its
obligations thereunder, regardless of the receipt or non-receipt on a timely
basis by it of any payments in respect of servicing fees.
No Bankruptcy or Insolvency Petition
SLFC agrees that it will not at any time institute against the Corporation,
or join in any institution against the Corporation of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings, or other
proceedings under any federal or state bankruptcy or similar law in connection
with any obligation relating to the SLFC Servicing Agreement.
Benefit of the Noteholders
The SLFC Servicing Agreement recites that it is made and entered into for
the benefit of all Noteholders, and its provisions may be enforced not only by
the parties thereto but also by the Noteholders in the manner and to the extent
to which Noteholders may enforce provisions of the Indenture.
Amendment
The SLFC Servicing Agreement may be amended, supplemented or modified only
by written instrument duly executed by all parties thereto and only upon receipt
of a written certificate from the Corporation and the Trustee that such
amendment, supplement or modification will not deprive any Noteholder in any
material respect of the security afforded by the SLFC Servicing Agreement.
Term and Termination
The term of the SLFC Servicing Agreement continues for so long as any of
the Notes remain Outstanding, unless the SLFC Servicing Agreement is terminated
in accordance with its terms. The SLFC Servicing Agreement shall terminate:
A. If SLFC shall:
1. admit in writing its inability to pay its debts generally as
they become due;
2. consent to the appointment of a custodian (as that term is
defined in the federal Bankruptcy Code) for or assignment to
a custodian of the whole or any substantial part of SLFC's
property, or fail to stay, set aside or vacate within sixty
(60) days from the date of entry thereof any order or decree
entered by a court of competent jurisdiction ordering such
appointment or assignment;
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<PAGE>
3. commence any proceeding or file a petition under the
provisions of the federal Bankruptcy Code for liquidation,
reorganization or adjustment of debts, or under any
insolvency law or other statute or law providing for the
modification or adjustment of the rights of creditors, or
fail to stay, set aside or vacate within sixty (60) days
from the date of entry thereof any order or decree entered
by a court of competent jurisdiction pursuant to an
involuntary proceeding, whether under federal or state law,
providing for liquidation or reorganization of SLFC or
modification or adjustment of the rights of creditors; or
4. contest in writing the validity or enforceability of the
SLFC Servicing Agreement as a whole or deny in writing that
the SLFC Servicing Agreement as a whole is binding upon
SLFC;
B. upon written notice by the Corporation or the Trustee to SLFC, if
SLFC materially breaches its obligations, or any representation
or warranty, under the SLFC Servicing Agreement; or
C. upon written notice by the Corporation or the Trustee, if at any
time the Guarantee Agency or the Department of Education has
issued a notice of suspension or termination against SLFC, or has
suspended or terminated the payment of all claims with respect to
Financed Student Loans or, in the case of the Department of
Education, all Special Allowance Payments or interest benefit
payments with respect to Financed Student Loans as a result of
actions or omissions of SLFC (it being understood that the
cessation of less than all such claims or payments may constitute
a breach under clause (B) above).
Notwithstanding the foregoing, any termination pursuant to clauses (B) or
(C) will be subject to the following conditions. If such breach under
clause (B) or suspension or termination under clause (C) is capable of
being cured within 90 days without, in the judgment of the Trustee,
adversely affecting the security provided to the Noteholders by the
Financed Student Loans and the related Guarantee Payments, Special
Allowance Payments and interest subsidy payments, SLFC shall have the right
to cure such breach, within 90 days of the date SLFC learns of such breach
or receives notice of such breach from the Corporation or the Trustee,
prior to such termination. If such breach is not capable of being cured in
the manner specified above, no termination pursuant to clause (B) or (C)
shall occur if, in the judgment of the Trustee, such breach or suspension
or termination will not adversely affect the security provided the
Noteholders by the Financed Student Loans and the related Guarantee
Payments, Special Allowance Payments and interest subsidy payments.
SLFC agrees to promptly notify the Trustee and the Corporation of any
occurrence or condition which constitutes (or which with the passage of
time or the giving of notice or both would constitute) an event permitting
the termination of the SLFC Servicing Agreement.
DESCRIPTION OF FINANCED ELIGIBLE LOAN PROGRAM
Background of Original Issuer's Program
The Original Issuer was organized as a secondary market for student
loans for lenders throughout the State of South Dakota, including banks,
savings and loan associations and credit unions. The Original Issuer began
operating a secondary market program in 1979 and financed its initial
acquisitions of student loans through the issuance of its student loan
revenue bonds. The Original Issuer has ongoing contact with, and holds
numerous workshop meetings in various locations in the State and
surrounding States which are attended by, approximately 250 financial and
educational institutions. SLFC will undertake similar activities to make
the financial and education communities aware of its activities and
objectives.
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<PAGE>
The following table lists the approximate aggregate outstanding
principal balances of all Student Loans acquired by the Original Issuer
from the proceeds of its tax exempt student loan revenue bond issues during
each of the last six fiscal years. 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....... 69,716,000
</TABLE>
In addition to the loans included in the table above, the Original
Issuer has acquired Student Loans from the proceeds of its taxable
borrowings during each year since 1988. In general, the Original Issuer
has used the proceeds of these financings to acquire Student Loans for
which the borrower is neither a resident of the State nor attending an
eligible school located within the State. The following table lists the
approximate aggregate outstanding principal balances of all Student Loans
acquired by or on behalf of the Original Issuer from the proceeds of its
taxable borrowings for each of the last six fiscal years.
<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..... 42,856,000
</TABLE>
Description of Eligible Loans to be Financed
It is expected that approximately $__________ of the proceeds of the
Series 1997-1 Notes deposited in the Acquisition Fund will be used to
refinance the Original Issuer's existing portfolio of student loans,
certain characteristics of which are set forth below under "Characteristics
of the Initial Financed Eligible Loans." Approximately 48% of such
Financed Eligible Loans have been acquired by the Original Issuer from two
Lenders (and affiliates thereof).
It is expected that the remaining proceeds of the Series 1997-1 Notes
deposited in (i) the Series 1997-1 Tax Exempt Acquisition Account will be
used to acquire or originate approximately $___________ additional
aggregate principal amount of Eligible Loans that are In-State Loans on or
before April 15, 2002 and (ii) the Series 1997-1 Taxable Acquisition
Account will be used to acquire or originate approximately $___________
additional aggregate principal amount of Eligible Loans that are not In-
State Loans on or before August 1, 1998. See "Application of Series 1997-1
Note Proceeds."
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<PAGE>
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 Tax Exempt and Taxable Surplus Sub-Accounts to redeem Series
1997-1 Notes. See "Description of Series 1997-1 Notes -- Special
Redemption -- From Unused Proceeds".
The First Supplemental Indenture contains various limits on certain
types of Eligible Loans that may be Financed (originated or purchased)
after the Date of Issuance, with proceeds deposited in the Series 1997-1
Tax Exempt Acquisition Account and the Series 1997-1 Taxable Acquisition
Account without receiving further approval from the Rating Agencies. The
First Supplemental Indenture limits the amount of additional Consolidation
Loans that may be Financed after the Date of Issuance from (i) the Series
1997-1 Tax Exempt Acquisition Account (together with the Series 1997-1 Tax
Exempt Surplus Sub-Account) to $57,000,000 and (ii) the Series 1997-1
Taxable Acquisition Account (together with the Series 1997-1 Taxable
Surplus Sub-Account) to $19,400,000. The First Supplemental Indenture also
limits the aggregate amount of Financed Eligible Loans that may be subject
to various forms of interest rate reduction features to Borrowers. In
either case, the Corporation could use Balances in such Accounts or Sub-
Accounts to originate or acquire additional amounts of such Eligible Loans
if it delivers to the Trustee a Corporation certificate certifying that,
based on a Cash Flow Projection, the Financing of such Eligible Loans will
not materially adversely affect the Corporation's ability to pay Debt
Service on the Outstanding Notes and on Outstanding Other Indenture
Obligations, to pay Carry-Over Amounts (including accrued interest thereon)
with respect to Outstanding Notes or to make required deposits to the
Rebate Fund. The Corporation does not expect that these limitations will
prevent the expenditure of the proceeds of the Series 1997-1 Note proceeds
deposited in the Acquisition Fund.
For a more detailed description of student loans under the Higher
Education Act, see "Description of Federal Family Education Loan Program".
For a description of the Guarantee Agencies, see "Description of the
Guarantee Agencies".
The Indenture also permits the Financing of Student Loans from moneys
in the Surplus Account under certain circumstances. Such Student Loans are
not required to be Eligible Loans. See "Summary of the Indenture -- Funds
and Accounts -- Surplus Fund".
Summary of Student Loan Purchase Agreements
The Original Issuer entered into Student Loan Purchase Agreements with
457 Lenders for the purchase of Eligible Loans to be refinanced with the
proceeds of the Series 1997-1 Notes (the "Original Issuer Student Loan
Purchase Agreements"). The Original Issuer's right, title and interest in
the Original Issuer Student Loan Purchase Agreements will be pledged to the
Trustee. In addition, the Corporation expects to enter into Student Loan
Purchase Agreements with approximately 140 Lenders for the purchase of
additional Eligible Loans by the Trustee from the proceeds of the Series
1997-1 Notes and from Balances in the Series 1997-1 Tax Exempt and Taxable
Surplus Sub-Accounts (the "Corporation Student Loan Purchase Agreements").
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<PAGE>
As of June 30, 1997, approximately $96 million outstanding principal
amount of the Eligible Loans to be Financed on the Date of Issuance
represented Consolidation Loans originated by the Original Issuer (and not
acquired from Lenders pursuant to Original Issuer Student Loan Purchase
Agreements). Consolidation Loans and other Eligible Loans Financed after
the Date of Issuance which are originated by the Trustee also will not be
covered by Corporation Student Loan Purchase Agreements.
The Corporation Student Loan Purchase Agreements will provide for the
purchase by the Trustee on behalf of the Corporation, of Eligible Loans at
100% of their outstanding unpaid principal amount, plus accrued interest
thereon payable by the Borrower. The Corporation Student Loan Purchase
Agreements require the Lender to report and offset against its interest
subsidy and Special Allowance Payments all authorized origination fees.
Under certain circumstances, the Trustee will also pay to the Lender
reasonable transfer, origination or assignment fees and a premium to the
extent permitted by the Indenture. See "Summary of the Indenture -- Funds
and Accounts --Acquisition Fund".
Each Lender, with respect to each Financed Eligible Loan purchased
under a Student Loan Purchase Agreement, has represented or will represent
that at the date of sale by the Lender to the Original Issuer or the
Trustee, each Eligible Loan was or will be Guaranteed. Each Lender makes
additional representations as to the validity, enforceability and
transferability of each such Eligible Loan and as to the legal authority of
the Lender to engage in the transactions contemplated by the respective
Student Loan Purchase Agreement.
The Student Loan Purchase Agreements provide that if any
representation furnished by a Lender with respect to an Eligible Loan sold
to the Original Issuer or the Trustee proves to have been materially
incorrect, or if the Guarantee Agency refuses to honor all or part of a
Guarantee claim filed with respect to any Financed Eligible Loan on account
of any circumstance or event occurring prior to the sale of such Eligible
Loan to the Original Issuer or the Trustee, or under certain other
circumstances specified in the Student Loan Purchase Agreement, the Lender
shall repurchase such loan at a price equal to the then outstanding
principal balance, plus accrued interest and Special Allowance Payments,
plus any expenses incurred by the Corporation, the Original Issuer or the
Trustee in connection therewith and any other amounts paid to the Lender by
the Original Issuer or the Trustee in connection with the acquisition of
such loan.
Servicing and "Due Diligence"
The Servicer will service student loans originated or acquired by the
Trustee under the Indenture. The Corporation will covenant in the
Indenture to cause a Servicer to administer and collect all Financed
Student Loans in a competent, diligent and orderly fashion, and in
accordance with all requirements of the Higher Education Act, the Secretary
of Education, the Indenture, the Federal Reimbursement Contracts and the
Guarantee Agreements.
The Higher Education Act requires that the Original Issuer, the
Trustee (in its capacity as "eligible lender"), a Lender and their agents
(including the Servicer) and employees exercise "due diligence" in the
making, servicing and collection of Financed Student Loans and that a
Guarantee Agency exercise due diligence in collecting loans which it holds.
The Higher Education Act defines "due diligence" as requiring the holder of
a Student Loan to utilize servicing and collection practices at least as
extensive and forceful as those generally practiced by financial
institutions for the collection of consumer loans, and requires that
certain specified collection actions be taken within certain specified time
periods with respect to a delinquent loan or defaulted loan. The Guarantee
Agencies have established procedures and standards for due diligence to be
exercised by each Guarantee Agency and by Lenders (including the Original
Issuer and the Trustee) which hold loans that are guaranteed by the
respective Guarantee Agencies. The Original Issuer, the Trustee, a Lender,
or a Guarantee Agency may not relieve itself of its responsibility for
meeting these standards by delegation to any servicing agent. Accordingly,
if the Original Issuer has failed to meet such standards, or if a Lender or
the Servicer fails to meet such standards, the Trustee's ability to realize
the benefits of Guarantee Payments, and (with respect to Student Loans
eligible for such payments) interest subsidy payments and Special Allowance
Payments may be adversely affected. If a Guarantee Agency fails to meet
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<PAGE>
such standards, that Guarantee Agency's ability to realize the benefits of
federal reinsurance payments may be adversely affected.
CHARACTERISTICS OF THE INITIAL
FINANCED ELIGIBLE LOANS/*/
Composition of the Student Loan Portfolio as of June 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Aggregate Outstanding Principal Balance...................... $560,519,350
Number of Borrowers.......................................... 92,088
Average Outstanding Principal Balance Per Borrower........... $ 6,087
Number of Loans (Promissory Notes)........................... 264,330
Average Outstanding Principal Balance Per Loan............... $ 2,121
Repayment Status Loans:
Weighted Average Remaining Term (Months)................ 102
Weighted Average Payments Received (Months)............. 26
Weighted Average Interest Rate:
Based on Rates in Effect on June 30, 1997............... 8.23%
Based on Variable Rate Changes Effective July 1, 1997... 8.26%
</TABLE>
Distribution of the Financed Eligible Loans by Loan Type as of June 30, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
---------- --------- ------------ -----------------
<S> <C> <C> <C>
Stafford - Subsidized 212,577 $360,548,221 64.3%
Stafford - Unsubsidized/**/ 21,854 50,988,736 9.1
Stafford - Nonsubsidized/**/ 3,414 5,666,867 1.0
PLUS 11,557 27,333,159 4.9
SLS 7,740 19,990,049 3.6
Consolidation 7,188 $ 95,992,318 17.1%
-------------------------------------------
Total 264,330 $560,519,350 100.0%
===========================================
- ----------
</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 lonas are eligible
for Special Payments but are ineligible for interest subsidy
payments.
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<PAGE>
Distribution of the Financed Eligible Loans by Interest Rate as of June 30, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Range Loans Balance Balance
- --------------------- --------- ------------ -----------------
<S> <C> <C> <C>
Less Than 7.00% 83 $ 374,810 0.1%
7.00% to 7.49% 11,860 16,670,351 3.0
7.50% to 7.99% 12,417 31,006,689 5.5
8.00% to 8.49% 203,569 394,617,349 70.4
8.50% to 8.99% 19,297 47,323,208 8.4
9.00% to 9.49% 16,970 69,320,320 12.4
9.50% or greater 134 1,206,623 0.2
------- ------------ -----
Total 264,330 $560,519,350 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by School Types as of June 30, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Loans Balance Balance
- --------------- --------- ------------ -----------------
<S> <C> <C> <C>
Under 4 Year 42,576 $ 69,444,430 12.4%
4 and 5 Year 194,117 360,534,235 64.3
Proprietary 19,316 31,853,467 5.7
Consolidation 7,188 95,992,318 17.1
Other/Unknown 1,133 2,694,900 0.5
------- ------------ -----
Total 264,330 $560,519,350 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by
Borrower Payment Status as of June 30, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Borrower Payment Status Loans Balance Balance
- --------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
School 16,060 $ 40,346,786 7.2%
Grace 4,475 10,015,486 1.8
Repayment:
First Year Repayment 43,957 129,415,592 23.1
Second Year Repayment 35,639 96,826,019 17.3
Third Year Repayment 29,978 73,959,832 13.2
Fourth Year Repayment and 92,232 106,859,891 19.0
thereafter.
Deferment 23,203 58,766,562 10.5
Forbearance 16,737 40,188,431 7.2
Claims 2,049 4,140,751 0.7
------- ------------ -----
Total 264,330 $560,519,350 100.0%
======= ============ =====
</TABLE>
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<PAGE>
Distribution of the Financed Eligible Loans by
Guarantee Status as of June 30, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Guarantee Status Loans Balance Balance
------------------ --------- ------------ -----------------
<S> <C> <C> <C>
Guaranteed 100% 174,907 $279,662,211 49.9%
Guaranteed 98% 88,412 280,440,042 50.0
Non-Guaranteed 1,011 417,097 0.1
------- ------------ -----
Total 264,330 $560,519,350 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by Guarantee Agency as of
June 30, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Guarantee Status Loans Balance Balance
------------------ --------- ------------ ----------------
<S> <C> <C> <C>
EAC 138,693 $331,640,512 59.2%
PHEAA 106,457 194,078,822 34.6
Other Guarantee Agencies 18,169 34,382,919 6.1
Non-Guaranteed 1,011 417,097 0.1
------- ------------ -----
Total 264,330 $560,519,350 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by Range of Principal Balance
as of June 30, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans by
Number of Principal Outstanding
Principal Balance Range Borrowers Balance Balance
- ------------------------- --------- ------------ --------------------
<S> <C> <C> <C>
Less than $1,000 11,333 $ 6,051,147 1.1%
$1,000-$1,999 13,116 19,655,741 3.5
$2,000-$2,999 13,893 34,583,531 6.2
$3,000-$3,999 9,099 31,743,774 5.7
$4,000-$4,999 7,339 32,926,382 5.9
$5,000-$5,999 6,324 34,517,912 6.2
$6,000-$6,999 4,897 31,594,171 5.6
$7,000-$7,999 3,681 27,552,246 4.9
$8,000-$8,999 3,024 25,657,953 4.6
$9,000-$9,999 2,551 24,198,285 4.3
$10,000-$10,999 2,280 23,900,353 4.3
$11,000-$11,999 1,972 22,611,198 4.0
$12,000-$12,999 1,635 20,408,613 3.6
$13,000-$13,999 1,549 20,887,844 3.7
$14,000-$14,999 1,273 18,431,472 3.3
$15,000 or greater 8,122 185,798,728 33.1%
------ ------------ -----
Total 92,088 $560,519,350 100.0%
====== ============ =====
</TABLE>
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Distribution of Repayment Status Financed Eligible
Loans by Remaining Term
As of June 30, 1997
<TABLE>
<CAPTION>
Outstanding Percent By
Number Principal Outstanding
Remaining Term Of Loans Balance Balance
- -------------------------------------------------------------
<S> <C> <C> <C>
1 to 12 Months 14,653 $ 3,805,386 0.9%
13 to 24 Months 16,147 9,060,786 2.2
25 to 36 Months 17,046 14,568,188 3.6
37 to 48 Months 17,451 19,730,090 4.9
49 to 60 Months 18,849 25,824,064 6.3
61 to 72 Months 18,663 29,816,381 7.3
73 to 84 Months 19,773 38,492,119 9.5
85 to 96 Months 16,628 38,888,221 9.6
97 to 108 Months 28,728 73,295,648 18.0
109 to 120 Months 29,927 86,827,445 21.3
121 to 180 Months 2,810 34,933,273 8.6
181 to 240 Months 968 24,306,585 6.0
241 to 300 Months 128 5,469,630 1.3
Over 300 Months 35 2,043,518 0.5
-------------------------------------
Total 201,806 $407,061,334 100.0%
=====================================
</TABLE>
Distribution of Financed Eligible Loans by Borrowers' Address
As of June 30, 1997 (Based on Address as of July 3, 1997)
<TABLE>
<CAPTION>
Outstanding Percent By
Number Principal Outstanding
State of Borrowers' Address Of Loans Balance Balance
- --------------------------------------------------------------------
<S> <C> <C> <C>
South Dakota 111,380 $232,331,234 41.4%
Minnesota 50,868 106,129,006 18.9
North Dakota 23,574 47,605,184 8.5
Iowa 7,876 18,010,995 3.2
Nebraska 5,633 12,155,414 2.2
Colorado 5,057 10,501,988 1.9
</TABLE>
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<TABLE>
<CAPTION>
Outstanding Percent By
Number Principal Outstanding
State of Borrower's Address Of Loans Balance Balance
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Washington 5,093 10,212,937 1.8
Oregon 4,855 9,820,907 1.8
California 4,344 8,797,101 1.6
Texas 3,898 8,652,406 1.5
Wisconsin 3,061 7,298,459 1.3
Illinois 2,774 6,634,133 1.2
Idaho 3,045 6,472,178 1.2
Arizona 3,138 6,273,773 1.1
Alaska 2,090 5,738,909 1.0
Others Less Than 1% Each 27,644 63,884,726 11.4
---------------------------------------
Total 264,330 $560,519,350 100.0%
=======================================
</TABLE>
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, 2002, 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, 2006. 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 Balanced Budget Act of 1997 (the "1997 Amendments"), 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
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Postsecondary Student Assistance Amendments of 1981 (the "1981 Amendments")
and the Education Amendments of 1980 (the "1980 Amendments").
The 1993 Amendments made several changes to the terms of the Federal Family
Education Loan Program that are adverse to the Guarantee Agencies and lenders
under the Federal Family Education Loan Program. In addition, the 1993
Amendments authorized a program of student loans originated by schools on behalf
of the Secretary of Education to partially replace the Federal Family Education
Loan Program. See "Direct Loans" below. There can be no assurance that relevant
federal laws, including the Higher Education Act, will not be further changed in
a manner that may adversely impact the receipt of funds by the Guarantee
Agencies or by the Corporation or the Trustee with respect to Financed Eligible
Loans or the amount of loans made by Lenders and available for purchase by the
Trustee on behalf of the Corporation.
Proposals have been made by Congress and the Administration which, if
enacted into law, would amend the Higher Education Act and make various changes
to the Federal Family Education Loan Program, including changes that would
reduce various payments to Guarantee Agencies and restructure guarantee
agencies' operations and programs and revise terms of student loans and payments
to Lenders. There is no certainty that any of the proposals will be enacted into
law in their current form or at all, and the Corporation cannot predict at this
time how such legislation, if enacted, would affect SLFC's business or
operations, or the Corporation.
This is only a summary of certain provisions of the Higher Education Act.
Reference is made to the text of the Higher Education Act for full and complete
statements of its provisions.
Loan Terms
General
Four types of loans are currently available under the Federal Family
Education Loan Program: Stafford Loans, Unsubsidized Stafford Loans, Plus Loans
and Consolidation Loans. These loan types vary as to eligibility requirements,
interest rates, repayment periods, loan limits and eligibility for interest
subsidies and Special Allowance Payments. Some of these loan types have had
other names in the past. References herein to the various loan types include,
where appropriate, predecessors to such loan types.
The primary loan under the Federal Family Education Loan Program is the
Stafford Loan. Students who are not eligible for Stafford Loans based on their
economic circumstances may be able to obtain Unsubsidized Stafford Loans.
Parents of students may be able to obtain Plus Loans. Consolidation Loans are
available to borrowers with existing loans made under the Federal Family
Education Loan Program and certain other federal programs to consolidate
repayment of such existing loans. For periods of enrollment beginning prior to
July 1, 1994, SLS Loans were available to students with costs of education that
were not met by other sources and that exceeded the Stafford or Unsubsidized
Stafford Loan limits.
Eligibility
General. A student is eligible for loans made under the Federal Family
Education Loan Program only if he or she: (i) has been accepted for enrollment
or is enrolled in good standing at an eligible institution of higher education
(which term includes certain vocational schools), (ii) is carrying or planning
to carry at least one-half the normal full-time workload for the course of study
the student is pursuing as determined by the institution (which, in the case of
a loan to cover the cost of a period of enrollment beginning on or after July 1,
1987, must either lead to a recognized educational credential or be necessary
for enrollment in a course of study that leads to such a credential), (iii) has
agreed to notify promptly the holder of the loan concerning any change of
address, (iv) (if presently enrolled) is maintaining satisfactory progress in
the course of study he or she is pursuing, (v) does not owe a refund on, and is
not (except as specifically permitted under the Higher Education Act) in default
under, any
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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 Consolidation Loans disbursed prior to July 1, 1994 the
Borrower was required to have outstanding student loan indebtedness of at least
$7,500. Prior to the adoption of the 1993 Technical Amendments, Plus Loans could
not be included in the Consolidation Loan. For Consolidation Loans for which the
applications were received prior to January 1, 1993, the minimum student loan
indebtedness was $5,000 and the borrower could not be delinquent more than 90
days in the payment of such indebtedness.
Interest Rates
The Higher Education Act establishes maximum interest rates for each of the
various types of loans. These rates vary not only among loan types, but also
within loan types depending upon when the loan was made or when the borrower
first obtained a loan under the Federal Family Education Loan Program. The
Higher Education Act allows lesser rates of interest to be charged. Many Lenders
have offered repayment incentives or other programs that involve reduced
interest rates on certain loans made under the Federal Family Education Loan
Program.
Stafford Loans. For a Stafford Loan made prior to July 1, 1994, the
applicable interest rate for a borrower who, on the date the promissory note was
signed, did not have an outstanding balance on a previous loan which was made,
insured or guaranteed under the Federal Family Education Loan Program (a "New
Borrower"):
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(a) is 7% per annum for a loan covering a period of instruction beginning
before January 1, 1981;
(b) is 9% per annum for a loan covering a period of instruction
beginning on or after January 1, 1981, but before September 13,
1983;
(c) is 8% per annum for a loan covering a period of instruction
beginning on or after September 13, 1983, but before July 1,
1988;
(d) for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, is 8% per annum
for the period from the disbursement of the loan to the date
which is four years after the loan enters repayment, and
thereafter shall be adjusted annually, and for any 12-month
period commencing on a July 1 shall be equal to the bond
equivalent rate of 91-day U.S. Treasury bills auctioned at the
final auction prior to the preceding June 1, plus 3.25% per annum
(but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be adjusted
annually, and for any 12-month period commencing on a July 1
shall be equal to the bond equivalent rate of 91-day U.S.
Treasury bills auctioned at the final auction prior to the
preceding June 1, plus 3.1% per annum (but not to exceed 9% per
annum).
For a Stafford Loan made prior to July 1, 1994, the applicable interest
rate for a borrower who, on the date the promissory note evidencing the
loan was signed, had an outstanding balance on a previous loan made,
insured or guaranteed under the Federal Family Education Loan Program (a
"Repeat Borrower"):
(f) for a loan made prior to July 23, 1992 is the applicable interest
rate on the previous loan or, if such previous loan is not a
Stafford Loan, 8% per annum; or
(g) for a loan made on or after July 23, 1992 shall be adjusted
annually, and for any twelve month period commencing on a July 1
shall be equal to the bond equivalent rate of 91-day U.S.
Treasury bills auctioned at the final auction prior to the
preceding June 1, plus 3.1% per annum but not to exceed:
(i) 7% per annum in the case of a Stafford Loan made to a
borrower who has a loan described in clause (a) above;
(ii) 8% per annum in the case of (A) a Stafford Loan made to a
borrower who has a loan described in clause (c) above, (B) a
Stafford Loan which has not been in repayment for four years
and which was made to a borrower who has a loan described in
clause (d) above or (C) a Stafford Loan for which the first
disbursement was made prior to December 20, 1993 to a
borrower whose previous loans do not include a Stafford Loan
or an Unsubsidized Stafford Loan;
(iii) 9% per annum in the case of a (A) Stafford Loan made to a
borrower who has a loan described in clauses (b) or (e) above
or (B) a Stafford Loan for which the first disbursement was
made on or after December 20, 1993 to a borrower whose previous
loans do not include a Stafford Loan or an Unsubsidized
Stafford Loan; and
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(iv) 10% per annum in the case of a Stafford Loan which has been
in repayment for four years or more and which was made to a
borrower who has a loan described in clause (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994,
regardless of whether the borrower is a New Borrower or a Repeat Borrower,
is the rate described in clause (g) above, except that such rate shall not
exceed 8.25% per annum. For any Stafford Loan made on or after July 1,
1995, the interest rate is further reduced prior to the time the loan
enters repayment and during any Deferment Periods (as such term is defined
below under "Repayment"). During such periods, the formula described in
clause (g) above is applied, except that 2.5% is substituted for 3.1%, and
the rate shall not exceed 8.25% per annum.
For loans made on or after July 1, 1998, the applicable rate will
continue to be adjusted annually, but for any 12-month period commencing on
a July 1 will be equal to the bond equivalent rate of securities with a
comparable maturity (as established by the Secretary of Education), plus 1%
per annum, but not to exceed 8.25% per annum. There can be no assurance
that the interest rate provisions for such loans will not be further
amended, either before or after the rate described herein becomes
effective.
Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject
to the same interest rate provisions as Stafford Loans.
Plus Loans. The applicable interest rate on a Plus Loan:
(a) made on or after January 1, 1981, but before October 1, 1981 is
9% per annum;
(b) made on or after October 1, 1981, but before November 1, 1982 is
14% per annum;
(c) made on or after November 1, 1982, but before July 1, 1987 is 12%
per annum;
(d) made on or after July 1, 1987 and before October 1, 1992 shall be
adjusted annually, and for any 12-month period beginning on July
1 shall be equal to the bond equivalent rate of 52-week U.S.
Treasury bills auctioned at the final auction prior to the
preceding June 1, plus 3.25% per annum (but not to exceed 12% per
annum); or
(e) made on or after October 1, 1992 shall be adjusted annually, and
for any 12-month period beginning on July 1 shall be equal to the
bond equivalent rate of 52-week U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.1% per
annum (but not to exceed 10% per annum).
The applicable interest rate for Plus Loans made on or after July 1,
1994 is the same as that described in clause (e) above, except that such
rate shall not exceed 9% per annum. For Plus Loans made on or after July
1, 1998, the applicable rate will continue to be adjusted annually, but for
any 12-month period commencing on a July 1 will be equal to the bond
equivalent rate of securities with a comparable maturity (as established by
the Secretary of Education), plus 2.1% per annum, but not to exceed 9% per
annum.
If requested by the borrower, an eligible lender may consolidate SLS
or Plus Loans of the same borrower held by the lender under a single
repayment schedule. The repayment period for each included loan shall be
based on the commencement of repayment of the most recent loan. The
consolidated loan shall bear interest at a rate equal to the weighted
average of the rates of the included loans. Such a consolidation shall not
be treated as the making of a new loan. In addition, at the request of the
borrower, a lender may refinance an existing fixed rate SLS or Plus Loan
(including an SLS or Plus Loan held by a different lender who has refused
so to refinance such loan) at a variable interest rate. In such a case,
proceeds of the new loan are used to discharge the original loan.
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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
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.
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Plus Loans. For Plus Loans made on or after July 1, 1993, the amounts of
Plus Loans are limited only by the student's unmet need. Prior to that time Plus
Loans were subject to limits similar to those to which SLS Loans were then
subject (see "SLS Loans" below), applied with respect to each student on behalf
of whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and
second year of a program of undergraduate education could borrow an SLS Loan in
an amount of up to $4,000. A student who had successfully completed such first
and second year, but who had not successfully completed the remainder of a
program of undergraduate education could borrow up to $5,000 per year. Graduate
and professional students could borrow up to $10,000 per year. SLS Loans were
subject to an aggregate maximum of $23,000 ($73,000 for graduate and
professional students). Prior to the 1992 Amendments, SLS Loans were available
in amounts of $4,000 per academic year, up to a $20,000 aggregate maximum. Prior
to the 1986 Amendments, a graduate or professional student could borrow $3,000
of SLS Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year minus
the amount of all other Federal Family Education Loan Program loans to such
student for such academic year, up to a maximum amount of all Federal Family
Education Loan Program loans to that student of $12,500. The 1989 Amendments
limited the amount of SLS Loans for students enrolled in programs of less than
an academic year in length (similar to the limits described above under
"Stafford Loans"), and such limits were continued by the 1992 Amendments.
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 borrower's outstanding student loans (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.
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No principal repayments need be made during certain periods of deferment
prescribed by the Higher Education Act ("Deferment Periods"). For loans to a
borrower who first obtained a loan which was disbursed before July 1, 1993,
deferments are available (i) during a period not exceeding three years while the
borrower is a member of the Armed Forces, an officer in the Commissioned Corps
of the Public Health Service or, with respect to a borrower who first obtained a
student loan disbursed on or after July 1, 1987, or a student loan to cover the
cost of instruction for a period of enrollment beginning on or after July 1,
1987, an active duty member of the National Oceanic and Atmospheric
Administration Corps, (ii) during a period not in excess of three years while
the borrower is a volunteer under the Peace Corps Act, (iii) during a period not
in excess of three years while the borrower is a full-time volunteer under the
Domestic Volunteer Act of 1973, (iv) during a period not exceeding three years
while the borrower is in service, comparable to the service referred to in
clauses (ii) and (iii), as a full-time volunteer for an organization which is
exempt from taxation under Section 501(c)(3) of the Code, (v) during a period
not exceeding two years while the borrower is serving an internship, the
successful completion of which is required to receive professional recognition
required to begin professional practice or service, or a qualified internship or
residency program, (vi) during a period not exceeding three years while the
borrower is temporarily totally disabled, as established by sworn affidavit of a
qualified physician, or while the borrower is unable to secure employment by
reason of the care required by a dependent who is so disabled, (vii) during a
period not to exceed twenty-four months while the borrower is seeking and unable
to find full-time employment, (viii) during any period that the borrower is
pursuing a full-time course of study at an eligible institution (or, with
respect to a borrower who first obtained a student loan disbursed on or after
July 1, 1987, or a student loan to cover the cost of instruction for a period of
enrollment beginning on or after July 1, 1987, is pursuing at least a half-time
course of study for which the borrower has obtained a loan under the Federal
Family Education Loan Program), or is pursuing a course of study pursuant to a
graduate fellowship program or a rehabilitation training program for disabled
individuals approved by the Secretary of Education, (ix) during a period, not in
excess of 6 months, while the borrower is on parental leave, and (x) only with
respect to a borrower who first obtained a student loan disbursed on or after
July 1, 1987, or a student loan to cover the cost of instruction for a period of
enrollment beginning on or after July 1, 1987, (A) during a period not in excess
of three years while the borrower is a full-time teacher in a public or
nonprofit private elementary or secondary school in a "teacher shortage area"
(as prescribed by the Secretary of Education), and (B) during a period not in
excess of 12 months for mothers, with preschool age children, who are entering
or re-entering the work force and who are compensated at a rate not exceeding $1
per hour in excess of the federal minimum wage. For loans to a borrower who
first obtains a loan on or after July 1, 1993, deferments are available (a)
during any period that the borrower is pursuing at least a half-time course of
study at an eligible institution or a course of study pursuant to a graduate
fellowship program or rehabilitation training program approved by the Secretary,
(b) during a period not exceeding three years while the borrower is seeking and
unable to find full-time employment, and (c) during a period not in excess of
three years for any reason which the lender determines, in accordance with
regulations under the Higher Education Act, has caused or will cause the
borrower economic hardship. Economic hardship includes working full time and
earning an amount not in excess of the greater of the minimum wage or the
poverty line for a family of two. Additional categories of economic hardship are
based on the relationship between a borrower's educational debt burden and his
or her income. Prior to the 1992 Amendments, only the Deferment Periods
described above in clauses (vi) and (vii) (with respect to the parent borrower)
and the Deferment Period described in clause (viii) (with respect to the parent
borrower or a student on whose behalf the parent borrowed) were available to
Plus Loan borrowers, and only the Deferment Periods described above in clauses
(vi), (vii) and (viii) were available to Consolidation Loan borrowers. Prior to
the 1986 Amendments, Plus Loan borrowers were not entitled to Deferment Periods.
Deferment Periods extend the ten year maximum term.
The Higher Education Act also provides for periods of forbearance during
which the borrower, in case of temporary financial hardship, may defer any
payments. A borrower is entitled to forbearance for a period not to exceed three
years while the borrower's debt burden under Title IV of the Higher Education
Act (which includes the Federal Family Education Loan Program) equals or exceeds
20% of the borrower's gross income, and also is entitled to forbearance while he
or she is serving in a qualifying medical or dental internship program or in a
"national service position" under the National and Community Service Trust Act
of 1993. In addition, mandatory administrative forbearances are provided when
exceptional circumstances such as a local or national emergency or
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military mobilization exist; or when the geographical area in which the borrower
or endorser resides has been designated a disaster area by the President of the
United States or Mexico, the Prime Minister of Canada, or by the governor of a
state. In other circumstances, forbearance is at the lender's option. Such
forbearance also extends the ten year maximum term.
As described under "Contracts with Guarantee Agencies -- Federal Interest
Subsidy Payments" below, the Secretary of Education makes interest payments on
behalf of the borrower of certain eligible loans while the borrower is in school
and during Grace and Deferment Periods. Interest that accrues during periods of
forbearance and, if the loan is not eligible for interest subsidy payments,
while the borrower is in school and during the Grace and Deferment Periods, may
be paid monthly or quarterly or capitalized (added to the principal balance) not
more frequently than quarterly.
Disbursement
Loans made under the Federal Family Education Loan Program (except
Consolidation Loans) generally must be disbursed in two or more installments,
none of which may exceed 50% of the total principal amount of the loan.
Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to borrowers
of Consolidation Loans. However, lenders may be charged an insurance fee to
cover the costs of increased or extended liability with respect to Consolidation
Loans. For loans made prior to July 1, 1994, the maximum guarantee fee was 3% of
the principal amount of the loan, but no such guarantee fee was authorized to be
charged with respect to Unsubsidized Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the borrower
of a Stafford or Plus Loan an origination fee in an amount not to exceed 3% of
the principal amount of the loan, and is required to charge the borrower of an
Unsubsidized Stafford Loan an origination fee in the amount of 3% of the
principal amount of the loan. These fees must be deducted proportionately from
each installment payment of the loan proceeds prior to payment to the borrower
and are not retained by the eligible lender, but must be passed on to the
Secretary of Education. For loans made prior to July 1, 1994, the maximum
authorized fee for Stafford, Plus and SLS Loans was 5%, and the required fee for
Unsubsidized Stafford Loans was 6.5%, of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the Federal Family
Education Loan Program made on or after October 1, 1993 is required to pay to
the Secretary of Education a fee equal to 0.5% of the principal amount of such
loan.
Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan
made on or after October 1, 1993 is required to pay to the Secretary of
Education a monthly fee equal to .0875% (1.05% per annum) of the principal
amount of, and accrued interest on, such Consolidation Loan.
Loan Guarantees
Under the Federal Family Education Loan Program, Guarantee Agencies are
required to guarantee the payment of not less than 100% of the principal amount
of loans made prior to October 1, 1993 and covered by their respective guarantee
programs. For a description of the requirements for loans to be covered by such
guarantees, see "Description of the Guarantee Agencies". The 1993 Amendments
reduced the minimum percentage of the principal amount of loans which a
Guarantee Agency must pay to 98%, effective with respect to loans made on or
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after October 1, 1993. The Department of Education has taken the position that a
Guarantee Agency may not pay more than 98% of the principal amount of and
accrued interest on such a loan. Under certain circumstances, guarantees may be
assumed by the Secretary of Education or another Guarantee Agency. See
"Contracts with Guarantee Agencies" below.
Contracts with Guarantee Agencies
Under the Federal Family Education Loan Program, the Secretary of Education
is authorized to enter into guaranty and interest subsidy agreements with
Guarantee Agencies. The Federal Family Education Loan Program provides for
reimbursements to Guarantee Agencies for default claims paid by Guarantee
Agencies, support payments to Guarantee Agencies for administrative and other
expenses, advances for a Guarantee Agency's reserve funds, and interest subsidy
payments and Special Allowance Payments to the holders of qualifying student
loans made pursuant to the Federal Family Education Loan Program.
The 1992 Amendments gave the Secretary of Education certain oversight
powers over Guarantee Agencies. Guarantee Agencies are required to maintain
their reserves at certain levels based on the amount of outstanding loans that
they have guaranteed. If a Guarantee Agency falls below the required level in
two consecutive years, or its claims rate exceeds 9% in any year, or if the
Secretary determines that the agency's administrative or financial 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
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obligation as a result of the bankruptcy, death, or total and permanent
disability of a borrower (or in the case of a Plus Loan, the death of the
student on behalf of whom the loan was borrowed), or in certain circumstances,
as a result of school closures, which reimbursements are not to be included in
the calculations of the Guarantee Agency's Claims Rate experience for the
purpose of federal reimbursement under the Federal Reimbursement Contracts.
The formula for computing the percentage of federal reimbursement under the
Federal Reimbursement Contracts is not accumulated over a period of years but is
measured by the amount of federal reimbursement payments in any one federal
fiscal year as a percentage of the original principal amount of loans under the
Federal Family Education Loan Program guaranteed by the Guarantee Agency and in
repayment at the end of the preceding fiscal year. Under the formula, federal
reimbursement payments to a Guarantee Agency in any one fiscal year not
exceeding 5% of the original principal amount of loans in repayment at the end
of the preceding fiscal year are to be paid by the Secretary of Education at
100% (or 98% for loans made on or after October 1, 1993). Beginning at any time
during any fiscal year that federal reimbursement payments exceed 5%, and until
such time as they may exceed 9%, of the original principal amount of loans in
repayment at the end of the preceding fiscal year, then reimbursement payments
on claims submitted during that period are to be paid at 90% (or 88% for loans
made on or after October 1, 1993). Beginning at any time during any fiscal year
that federal reimbursement payments exceed 9% of the original principal amount
of loans in repayment at the end of the preceding fiscal year, then such
payments for the balance of that fiscal year will be paid at 80% (or 78% for
loans made on or after October 1, 1993). The original principal amount of loans
in repayment for purposes of computing reimbursement payments to a Guarantee
Agency means the original principal amount of all loans guaranteed by such
Guarantee Agency less: (1) guarantee payments on such loans, (2) the original
principal amount of such loans that have been fully repaid, and (3) the original
principal amount of such loans for which the first principal installment payment
has not become due or such first installment need not be paid because of a
Deferment Period.
Under present practice, after the Secretary of Education reimburses a
Guarantee Agency for a default claim paid on guaranteed loan, the Guarantee
Agency continues to seek repayment from the borrower. The Guarantee Agency
returns to the Secretary of Education payments that it receives from a borrower
after deducting and retaining (i) a percentage amount equal to the complement of
the reimbursement percentage in effect at the time the loan was reimbursed, and
(ii) an amount equal to 27% (or 18 1/2% in the case of a payment from the
proceeds of a Consolidation Loan) of such payments for certain administrative
costs. The Secretary of Education may, however, require the assignment to the
Secretary of defaulted guaranteed loans, in which event no further collections
activity need be undertaken by the Guarantee Agency, and no amount of any
recoveries shall be paid to the Guarantee Agency. Prior to the 1993 Amendments,
the percentage of collections which Guarantee Agencies could retain (as
described in clause (ii) above) was 30%.
A Guarantee Agency may enter into an addendum to its Interest Subsidy
Agreement (as hereinafter defined), which addendum provides for the Guarantee
Agency to refer to the Secretary of Education certain defaulted guaranteed
loans. Such loans are then reported to the Internal Revenue Service to "offset"
any tax refunds which may be due any defaulted borrower. To the extent that the
Guarantee Agency has originally received less than 100% reimbursement from the
Secretary of Education with respect to such a referred loan, the Guarantee
Agency will not recover any amounts subsequently collected by the federal
government which are attributable to that portion of the defaulted loan for
which the Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, the Secretary of Education
is authorized to enter into an agreement with a Guarantee Agency pursuant to
which the Guarantee Agency shall sell defaulted loans that are eligible for
rehabilitation to an eligible lender. The Guarantee Agency shall repay the
Secretary of Education an amount equal to 81.5% of the then current principal
balance of such loan, multiplied by the reimbursement percentage in effect at
the time the loan was reimbursed. The amount of such repayment shall be deducted
from
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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.
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
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costs of pre-claims assistance for default prevention and collection of
defaulted guaranteed loans, administrative costs of promoting commercial lender
participation, administrative costs of monitoring the enrollment and repayment
status of students, and for other such costs related to the Guarantee Agency's
Guarantee Program. The 1993 Amendments repealed such entitlement, effective
October 1, 1993. The 1993 Amendments, however, authorize payments for transition
support (including administrative costs) to Guarantee Agencies, in connection
with the transition to direct lending. See "Direct Loans" below. The Omnibus
Rescissions and Appropriations Act of 1996 provided for the payment to Guarantee
Agencies of an administrative expense allowance for the fiscal year ending
September 30, 1995 equal to 1% of the agency's new guarantee volume, and for the
fiscal year ending September 30, 1996 equal to 0.85% of the agency's new
guarantee volume. There are no assurances that Congress will require such
payments or that the Secretary of Education will determine to continue to make
any such payments in future years.
Federal Advances
Pursuant to agreements entered into between the Guarantee Agencies and the
Secretary of Education under Sections 422 and 422(c) of the Higher Education
Act, the Secretary of Education was authorized to advance moneys from time to
time to the Guarantee Agencies for the purpose of establishing and strengthening
the Guarantee Agencies' reserves. Section 422(c) currently authorizes the
Secretary of Education to make advances to Guarantee Agencies in various
circumstances, on terms and conditions satisfactory to the Secretary, including
if the Secretary is seeking to terminate the Guarantee Agency's reimbursement
contract or assume the Guarantee Agency's functions, to assist the Guarantee
Agency in meeting its immediate cash needs or to ensure the uninterrupted
payment of claims.
Federal Special Allowance Payments
The Higher Education Act provides for the payment by the Secretary of
Education of additional subsidies, called Special Allowance Payments, to holders
of qualifying student loans. The amount of the Special Allowance Payments, which
are made on a quarterly basis, is computed by reference to the average of the
bond equivalent rates of the 91-day Treasury bills auctioned during the
preceding quarter (the "91-day T-Bill Rate"). The quarterly rate for Special
Allowance Payments for Student Loans made on or after October 1, 1981, and
generally before November 16, 1986 is computed by subtracting the applicable
interest rate on such loans from the 91-day T-Bill Rate, adding 3.5% to the
resulting per centum, and dividing the resulting per centum by four. For loans
disbursed on or after November 16, 1986, or loans to cover the costs of
instruction for periods of enrollment beginning on or after November 16, 1986,
the 1986 Amendments and 1987 Amendments substituted 3.25% for 3.5% in the
foregoing formula. For loans disbursed on or after October 1, 1992, the 1992
Amendments substituted 3.1% for 3.5% in such formula. For Stafford and
Unsubsidized Stafford Loans made on or after July 1, 1995, the 1993 Amendments
substitute 2.5% for 3.1% in such formula prior to the time such loans enter
repayment and during any Deferment Periods. For loans made on or after July 1,
1998, the special allowance formula is to be revised similarly to the manner in
which the applicable interest rate formula is revised, as described above under
"Loan Terms -- Interest Rates -- Stafford Loans".
For Plus and SLS Loans which bear interest at rates adjusted annually,
Special Allowance Payments are made only in years during which the interest rate
ceiling on such loans operates to reduce the rate that would otherwise apply
based upon the applicable formula. See "Loan Terms -- Interest Rates-- Plus
Loans" and "-- SLS Loans" above. Under the 1993 Amendments, Special Allowance
Payments are paid with respect to Plus Loans made on or after July 1, 1994 only
if the rate that would otherwise apply exceeds 10% per annum, notwithstanding
that the interest rate ceiling on such loans is 9% per annum.
The Balanced Budget and Deficit Control Act of 1985, as amended (known as
the "Gramm-Rudman Law") requires the President to issue a sequester order for
any federal fiscal year in which the projected budget exceeds the target for
that year. A sequester order for any fiscal year would apply to loans made on or
after October 1 of
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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
(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.
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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 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.
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DESCRIPTION OF THE GUARANTEE AGENCIES
General
The Indenture permits the Financing of Eligible Loans guaranteed by various
Guarantee Agencies. The Corporation expects that of the Eligible Loans to be
Financed on the Date of Issuance with the proceeds of the Series 1997-1 Notes,
approximately 59.2% will be guaranteed by Education Assistance Corporation
("EAC"), approximately 34.6% will be guaranteed by Pennsylvania Higher Education
Assistance Agency ("PHEAA"), and the remainder will be guaranteed by one of the
following Guarantee Agencies: United Student Aid Funds, Inc., Northstar
Guarantee Inc., Great Lakes Higher Education Corporation, Student Loans of North
Dakota, Iowa College Aid Commission, Missouri Coordinating Board for Higher
Education, Illinois Student Aid Commission, or Educational Credit Management
Corporation (formerly known as Transitional Guaranty Agency, Inc.). The
Corporation expects that California Student Aid Commission also will be a
Guarantee Agency for Eligible Loans to be Financed following the Date of
Issuance. Any other state agency or private nonprofit institution or
organization which administers a Guarantee Program, may also be a Guarantee
Agency of Eligible Loans to be Financed, subject to confirmation of ratings on
any Outstanding Unenhanced Notes or, if no Unenhanced Notes are then Outstanding
but Other Indenture Obligations are Outstanding, consent of each Other
Beneficiary holding such Outstanding Other Indenture Obligations, as evidenced
in writing to the Trustee by each such Other Beneficiary.
The Corporation expects that the percentage of Financed Eligible Loans
guaranteed by EAC will increase over time, while the percentage guaranteed by
PHEAA will decrease. However, actual amounts guaranteed by these Guarantee
Agencies may vary from the Corporation's expectations. Proceeds of Additional
Notes issued on a parity basis under the Indenture, moreover, may be used to
finance Eligible Loans guaranteed by these or other Guarantee Agencies in
amounts unrelated to the expected amount of loans guaranteed by a particular
Guarantee Agency that is Financed with the proceeds of the Series 1997-1 Notes.
(Any Additional Notes will not be issued and sold under the Registration
Statement filed with respect to the Series 1997-1 Notes.)
A Guarantee Agency guarantees loans made to students or parents of students
by lending institutions such as banks, credit unions, savings and loan
associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Guarantee Fund"). A lender may submit a default claim to the Guarantee Agency
after the student loan has been delinquent for at least 180 days. Under the
Guarantee Agencies' current procedures, assuming that the defaulted student loan
complies with the Guarantee Agency's loan procedures manual or regulations, the
Guarantee Agency pays the lender for a default claim within 90 days of the
lender's filing the claim with the Guarantee Agency. The Guarantee Agency will
pay the lender interest accrued on the loan for up to 360 days after
delinquency. The Guarantee Agency must file a reimbursement claim with the
Department of Education within 45 days after the Guarantee Agency has paid the
lender for the default claim.
In general, a Guarantee Agency's Guarantee Fund has been funded principally
by administrative cost allowances paid by the Secretary of Education, guarantee
fees paid by lenders (the cost of which may be passed on to borrowers),
investment income on moneys in the Guarantee Fund, and a portion of the moneys
collected from borrowers on Guaranteed Loans that have been reimbursed by the
Secretary of Education to cover the Guarantee Agency's administrative expenses.
Various changes to the Higher Education Act have adversely affected the
receipt of revenues by the Guarantee Agencies and their ability to maintain
their Guarantee Funds at previous levels, and may adversely affect their ability
to meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the reduction and
possible elimination of administrative expense allowances from the Secretary of
Education; the reduction in supplemental preclaims assistance payments from the
Secretary of Education; and the reduction in retention by a Guarantee Agency of
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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. 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 a certain required level and taking various
actions relating to a Guarantee Agency if its administrative and financial
condition jeopardizes its ability to meet its obligations. These actions
include, among others, providing advances to the Guarantee Agency, terminating
the Guarantee Agency's Federal Reimbursement Contracts, assuming responsibility
for all functions of the Guarantee Agency, and transferring the Guarantee
Agency's guarantees to another guarantee agency or assuming such guarantees. The
Higher Education Act provides that a Guarantee Agency's Guarantee Fund shall be
considered to be the property of the United States to be used in the operation
of the Federal Family Education Loan Program or the Federal Direct Student Loan
Program, and, under certain circumstances, the Secretary of Education may demand
payment of amounts in the Guarantee Fund. The 1997 Amendments direct the
Secretary of Education to demand payment on September 1, 2002 of a total of one
billion dollars from all of the guarantee agencies participating in the Federal
Family Education Loan Program. The amounts to be demanded of each Guarantee
Agency shall be determined in accordance with formulas included in the Higher
Education Act. Each Guarantee Agency will be required to deposit funds in a
restricted account in installments, beginning in the federal fiscal year ending
September 30, 1998, to provide for such payment. The Secretary has not yet made
any determination of the amounts required to be so transferred by the Guarantee
Agencies. 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
additional portions or all of its Guarantee Fund to the Secretary of
Education.
Information relating to the particular Guarantee Agencies set forth in this
Prospectus has been provided by the respective Guarantee Agencies, and neither
such information nor information included in the reports referred to herein has
been verified by, or is guaranteed as to accuracy or completeness by, the
Original Issuer, the Corporation or the Underwriters. Such information should
not be construed as a representation by the Original Issuer, the Corporation or
the Underwriters. No representation is made by the Original Issuer, the
Corporation or the Underwriters as to the accuracy or adequacy of such
information or the absence of material adverse changes in such information
subsequent to the dates thereof.
Federal Agreements
Each Guarantee Agency and the Secretary of Education have entered into
Federal Reimbursement Contracts pursuant to Section 428(c) of the Higher
Education Act (which include, for older Guarantee Agencies, a supplemental
contract pursuant to former Section 428A of the Higher Education Act), which
provide for the Guarantee Agency to receive 80% to 100% reimbursement of
insurance payments that the Guarantee Agency makes to eligible lenders with
respect to loans guaranteed by the Guarantee Agency prior to the termination of
the Federal Reimbursement Contracts or the expiration of the authority of the
Higher Education Act. The 1993 Amendments reduced the reimbursement percentages
referred to above with respect to claims on most loans made on or after October
1, 1993. See "Effect of Annual Claims Rate" below. The Federal Reimbursement
Contracts provide for termination under certain circumstances and also provide
for certain actions short of termination by the Secretary
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of Education to protect the federal interest. See "Description of Federal Family
Education Loan Program --Contracts with Guarantee Agencies --Federal
Reimbursement".
In addition to guarantee benefits, qualified Student Loans acquired under
the Program benefit from certain federal subsidies. Each Guarantee Agency and
the Secretary of Education have entered into an interest subsidy agreement under
Section 428(b) of the Higher Education Act (as amended, the "Interest Subsidy
Agreement"), which entitles the holders of eligible loans guaranteed by the
Guarantee Agency to receive interest subsidy payments from the Secretary of
Education on behalf of certain students while the student is in school, during a
six to twelve month Grace Period after the student leaves school, and during
certain Deferment Periods, subject to the holders' compliance with all
requirements of the Higher Education Act. See "Description of Federal Family
Education Loan Program -- Contracts with Guarantee Agencies -- Federal Interest
Subsidy Payments" for a more detailed description of the interest subsidy
payments.
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the
contracts between the Secretary of Education and the Guarantee Agencies
described herein. Amendments to the Higher Education Act in 1986, 1987, 1992 and
1993, respectively (i) abrogated certain rights of guarantee agencies under
contracts with the Secretary of Education relating to the repayment of certain
advances from the Secretary of Education, (ii) authorized the Secretary of
Education to withhold reimbursement payments otherwise due to certain guarantee
agencies until specified amounts of such guarantee agencies' reserves had been
eliminated, (iii) added new reserve level requirements for guarantee agencies
and authorized the Secretary of Education to terminate the Federal Reimbursement
Contracts under circumstances that did not previously warrant such termination,
and (iv) expanded the Secretary of Education's authority to terminate such
contracts and to seize guarantee agencies' reserves. There can be no assurance
that future legislation will not further adversely affect the rights of the
Guarantee Agencies, or holders of loans guaranteed by a Guarantee Agency under
such contracts.
Effect of Annual Claims Rate
A Guarantee Agency's ability to meet its obligation to pay default claims
on Financed Eligible Loans will depend on the adequacy of its Guarantee Fund
and, under the current federal reinsurance arrangement, the default experience
of all lenders under the Guarantee Agency's Guarantee Program. A high default
experience among lenders participating in a Guarantee Agency's Guarantee Program
may cause the Guarantee Agency's Claims Rate (as defined below) for its
Guarantee Program to exceed the 5% and 9% levels described below, and result in
the Secretary of Education reimbursing the Guarantee Agency at lower percentages
of default claims payments made by the Guarantee Agency.
Each Guarantee Agency is currently entitled to receive reimbursement
payments under the Federal Reimbursement Contracts in amounts that vary
depending on the Claims Rate experience of the Guarantee Agency. The "Claims
Rate" is computed by dividing total default claims since the previous September
30 by the total original principal amount of the Guarantee Agency's guaranteed
loans in repayment on such September 30. On October 1 of each year the Claims
Rate begins at zero, regardless of the experience in preceding years. For loans
made prior to October 1, 1993, if the Claims Rate remains equal to or below 5%
within a given federal fiscal year (October 1 through September 30), the
Secretary of Education is currently obligated to provide 100% reimbursement; if
and when the Claims Rate exceeds 5% and until such time, if any, as it exceeds
9% during the fiscal year, the reimbursement rate is at 90%; if and when the
Claims Rate exceeds 9% during the fiscal year, the reimbursement rate for the
remainder of the fiscal year is at 80%. For loans made prior to October 1, 1993,
each Guarantee Agency is currently entitled to at least 80% reimbursement from
the Secretary of Education on default claims that it purchases, regardless of
its Claims Rate. The reimbursement percentages for loans made on or after
October 1, 1993 are reduced from 100%, 90% and 80% to 98%, 88% and 78%,
respectively. See "Description of Federal Family Education Loan Program".
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The Claims Rates for EAC and PHEAA for each of the last five federal fiscal
years is set forth in the table under "Certain Historical Information for
Guarantee Agencies -- Claims Rate" below.
Education Assistance Corporation -- EAC
EAC is a South Dakota nonprofit corporation organized in 1978 to administer
the guaranteed loan program in the State. Since 1983, EAC also has provided
student loan guarantees and other services to certain lenders, borrowers and
schools in other states. EAC has no members. Two of the present seven members of
the Board of Directors of EAC are presently members of the Boards of Directors
of the Original Issuer, the Corporation and SLFC. EAC presently employs a staff
of 54 persons, plus part time help employed on a periodic basis.
From January 16, 1979 through September 30, 1996, EAC had guaranteed
approximately $992,300,000 principal amount of loans under the Higher Education
Act, of which EAC estimates that approximately $480,293,000 aggregate unpaid
principal amount was outstanding as of September 30, 1996. As of September 30,
1996, EAC had total assets of approximately $22,368,000, total liabilities of
approximately $14,789,000, and a fund balance of approximately $7,579,000. On
May 21, 1997, EAC prepaid various long term borrowings in the aggregate
principal amount of $6,464,912, plus accrued interest in the amount of $122,745,
thus reducing its assets and liabilities as of such date by an aggregate amount
of $6,587,657. EAC will provide a copy of its most recent annual report upon
receipt of a written request directed to Education Assistance Corporation, 115
First Avenue, Southwest, Aberdeen, South Dakota 57401, Attention: President.
EAC ceased issuing new loan guarantees as of December 22, 1987 in
connection with the enactment of the Omnibus Budget Reconciliation Act of 1987
(the "1987 Budget Amendments") and EAC's related dispute with the Secretary of
Education concerning EAC's right to retain its reserves. In January 1988, EAC
entered into an arrangement with PHEAA, whereby EAC processed applications and
guarantee claims and undertook other administrative tasks with respect to loans
made after December 21, 1987 that EAC would otherwise have guaranteed, and PHEAA
guaranteed such loans. EAC recommenced guaranteeing student loans in July 1991,
around which time PHEAA ceased guaranteeing South Dakota loans pursuant to this
arrangement. In May 1997, EAC recommenced guaranteeing loans to borrowers
neither resident in South Dakota nor attending school in South Dakota, and
ceased its arrangement with PHEAA with respect to such loans.
EAC has created Educational Assistance Service Company, Inc. ("EASCI"), a
wholly-owned subsidiary of EAC, the primary purpose of which is to furnish a
complete range of loan origination, processing, monitoring and related services
with respect to student loans made under the federal guaranteed student loan
program. EASCI commenced operations on March 6, 1985. As of September 30, 1996,
EASCI provided services to 136 lenders for a portfolio of approximately
$223,466,000 outstanding principal amount. The persons that presently constitute
EAC's Board of Directors also are the Directors of EASCI. EAC shares some
personnel, office space, overhead and computer time with EASCI.
Pennsylvania Higher Education Assistance Agency -- PHEAA
PHEAA is a body corporate and politic constituting a public corporation and
government instrumentality of the Commonwealth of Pennsylvania (the
"Commonwealth") created pursuant to the Act of August 7, 1963, P.L. 549 (as
amended, the "PHEAA Act"). PHEAA's statutory purpose of improving higher
education opportunities by assisting students in meeting their expenses involves
a variety of activities, including administering numerous grant programs,
originating and purchasing student loans, servicing student loans made by PHEAA
and others and guaranteeing student loans.
PHEAA is designated by the Secretary of Education as the Guarantee Agency
for the Commonwealth and for the States of West Virginia and Delaware. PHEAA has
approximately 2,100 employees. Its principal office is located in Harrisburg,
Pennsylvania, with six regional offices located throughout Pennsylvania and
additional offices located in California, West Virginia and Delaware.
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PHEAA's activities are subject to audit by the Commonwealth's Department of
the Auditor General, and PHEAA is required to make an annual report to the
Governor of the Commonwealth and the legislature showing its condition at the
end of the Commonwealth's fiscal year.
PHEAA will provide a copy of its most recent annual report upon receipt of
a written request directed to Pennsylvania Higher Education Assistance Agency,
1200 North 7th Street, Harrisburg, Pennsylvania 17102-1444, Attention: Timothy
A. Guenther, Senior Vice President and Chief Financial Officer.
The PHEAA Act created an educational loan assistance fund within the State
Treasury (the "Educational Loan Assistance Fund"). The PHEAA Act provides that
this fund is a continuing fund in which may be deposited moneys received from
repayments of principal on loans from the fund and payments of interest and
other fees and charges with respect to loans made pursuant to the PHEAA Act,
insurance premiums and charges assessed and collected by PHEAA on loans made
from the fund, appropriations made to the fund by the legislature, proceeds of
the sale of notes, bonds or other indebtedness to the extent and in the manner
provided by resolution of PHEAA's Board of Directors, 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 of Directors 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 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.
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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.
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.
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PHEAA acts as an originator and secondary market for various types of
student loans, including loans it has guaranteed under the Higher Education Act,
loans insured by the United States Department of Health and Human Services under
the Health Education Assistance Loan Program, and loans which are insured by
PHEAA without any form of federal reinsurance. PHEAA has financed most of its
acquisitions and originations of student loans through the issuance of student
loan revenue bonds. PHEAA has, however, used moneys in the Assistance Fund to
finance student loans. As of June 30, 1996, the Assistance Fund contained the
following approximate outstanding principal amounts of student loans which are
not otherwise pledged to secure PHEAA's financings: $33 million of student loans
which are not insured or reinsured; $23.8 million of student loans guaranteed by
PHEAA under the Higher Education Act which are reinsured (approximately $9.6
million of which were Consolidation Loans); and $6.6 million of health education
assistance loans which are federally insured. Of those amounts, $4 million of
student loans guaranteed by PHEAA under the Higher Education Act which are
federally reinsured, are not eligible for federal interest subsidy payments or
Special Allowance Payments. Other student loans owned by PHEAA in the Assistance
Fund and the PHEAA Bond Fund are pledged to certain financings and unavailable
to meet PHEAA's guarantee obligations. As of such date, approximately $163.1
million of the Assistance Fund was deposited with and invested by the State
Treasurer.
PHEAA had outstanding debt and/or credit facilities (under which the entire
aggregate amount of funds available has not been drawn) in the amount of
approximately $2 billion as of June 30, 1996. Although most of PHEAA's debt
issues are limited obligations of PHEAA, under certain circumstances, PHEAA's
reimbursement obligations to certain credit facility providers are not limited
to the assets pledged to those debt issues. For instance, PHEAA is party to
several credit facilities relating to certain series of bonds requiring purchase
by PHEAA of specified student loans from the applicable trust estate when a
claim for insurance has been denied. Such covenants are sometimes general
obligations of PHEAA. Even if these financings are fully collateralized,
therefore, credit enhancement providers may be able to seek repayment from the
Assistance Fund. None of the above referenced indebtedness is general obligation
debt of, or is backed by the faith, credit and taxing power of, the Commonwealth
or any of its political subdivisions.
PHEAA is also a party to various sublease agreements and lease purchase
agreements in connection with debt financings used to provide funds for the
acquisition of office buildings, parking facilities, and equipment for PHEAA.
PHEAA's financial obligations under such agreements are payable from the
Assistance Fund.
Certain Historical Information for Guarantee Agencies
Set forth below is certain historical information with respect to each
Guarantee Agency that is expected to guaranty 5% or more of the Financed
Eligible Loans as of the Date of Issuance (EAC and PHEAA) and with respect to
all guarantors of loans under the Federal Family Education Loan Program. Except
as otherwise indicated below, the information regarding each Guarantee Agency
has been obtained from the Department of Education's Federal Fiscal Year 1993
Loan Programs Data Book (the "DOE Data Book"). No independent verification of
such information has been or will be made by the Corporation, the Original
Issuer or the Underwriters.
Guarantee Volume. The following table sets forth the approximate
aggregate principal amount of loans under the Federal Family Education Loan
Program that have first become committed to be guaranteed by EAC and PHEAA and
by all guarantors of such loans in each of the five federal fiscal years 1992
through 1996:*
<TABLE>
<CAPTION>
Federal Stafford, Unsubsidized Stafford, SLS, PLUS and
Consolidated Loans Guaranteed
Fiscal Dollars in Millions All
Year EAC PHEAA Guarantors
--------- --------- --------------------- -----------
<S> <C> <C> <C>
1992 $ 66.7 $1,410.4 $16,114.0
1993 85.7 1,857.1 19,356.6
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
1994 120.3 2,003.4 **
1995 142.8 2,221.5 **
1996 128.2 2,227.7 **
</TABLE>
__________
* The information set forth in the table above has been obtained from
EAC, PHEAA and, as to All Guarantors, the DOE Data Book.
** Not available.
Reserve Ratio. Each Guarantee Agency's reserve ratio is
determined by dividing its cumulative cash reserves by the original
principal amount of the outstanding loans it has agreed to guarantee. The
term "cumulative cash reserves" refers to cash reserves plus (i) sources of
funds (including insurance premiums, state appropriations, federal
advances, federal reinsurance payments, administrative cost allowances,
collections on claims paid and investment earnings) minus (ii) uses of
funds (including claims paid to lenders, operating expenses, lender fees,
the Department's share of collections on claims paid, returned advances and
reinsurance fees). The "original principal amount of outstanding loans"
consists of the original principal amount of loans guaranteed by such
Guarantee Agency minus (i) the original principal amount of loans
cancelled, claims paid, loans paid in full and loan guarantees transferred
from such Guarantee Agency to other guarantors, plus (ii) the original
principal amount of loan guarantees transferred to such Guarantee Agency
from other guarantors. The following table sets forth each EAC's and
PHEAA's cumulative cash reserves and their corresponding reserve ratios and
the national average reserve ratio for all guarantors for the five federal
fiscal years 1992 through 1996.* As discussed above under "Education
Assistance Corporation -- EAC," on May 21, 1997, EAC prepaid various long
term borrowings in the aggregate principal amount of $6,464,912, plus
accrued interest in the amount of $122,745, thus reducing its assets and
liabilities as of such date by an aggregate amount of $6,587,657. This
will result in EAC's cumulative cash reserve being reduced by this amount
and the Original Issuer's management expects that it will result in a
reduction of EAC's reserve ratio.
<TABLE>
<CAPTION>
EAC PHEAA
-------------------- -------------------- National
Federal Cumulative Cumulative Average
Fiscal Cash Reserve Cash Reserve Reserve
Year Reserves** Ratio Reserves** Ratio Ratio
- --------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
1992 $ 9.2 2.6% $ 85.9 1.1% 1.5%
1993 12.1 3.1 100.9 1.1 1.7
1994 14.2 3.1 133.6 1.3 1.4
1995 15.7 2.9 166.3 1.5 1.7
1996 17.0 2.8 210.6 1.6 1.8
</TABLE>
__________
* The information set forth in the table above has been obtained from
EAC, PHEAA and, as to the national average, the DOE Data Book (with
respect to fiscal years 1992 and 1993) and from the Department of
Education (with respect to fiscal years 1994, 1995 and 1996).
According to the Department of Education, available cash reserves may
not always be an accurate barometer of a guarantor's financial health.
** Dollars in millions.
Recovery Rates. A Guarantee Agency's recovery rate is determined
by dividing the amount recovered from borrowers by such Guarantee Agency by
the aggregate amount of default claims paid by such
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Guarantee Agency during the applicable federal fiscal year with respect to
borrowers. The table below sets forth the recovery rates for EAC and PHEAA
and the national average recovery rates for all guarantors with respect to
Stafford Loans (the only type of Student Loan for which the DOE Data Book
discloses recovery rates) for the five federal fiscal years 1992 through
1996.* PHEAA's recovery rates have exceeded the national average recovery
rate in each of the five federal fiscal years shown in the Recovery Rate
table below, while EAC's equalled or exceeded such average in each of the
last three federal fiscal years. The Original Issuer's management does not
believe that recovery rates provide an accurate indication of a guarantor's
financial health.
<TABLE>
<CAPTION>
Federal Recovery Rate
Fiscal --------------- National
Year EAC PHEAA Average
- --------- ------- ------ ---------
<S> <C> <C> <C>
1992 29.86% 46.5 % 35.09%
1993 34.94 48.2 37.96
1994 40.20 52.90 39.23
1995 41.26 53.29 40.68
1996 43.12 55.04 43.12**
</TABLE>
__________
* The information set forth in the table above has been obtained from
EAC, PHEAA and, as to the national average, the Department of
Education.
** 1996 national average does not include all guarantor data, as all
guarantors have not been processed.
Loan Loss Reserve. The DOE Data Book does not disclose whether any
guarantor has established a segregated loan loss reserve with respect to its
student loan guarantee obligations. Accordingly, to the extent that a guarantor
has not established such a segregated loan loss reserve, if a guarantor receives
less than full reimbursement of its guarantee obligations from the Department of
Education, the guarantor would be forced to look to its existing assets to
satisfy any such guarantee obligations not so reimbursed.
Claims Rate. The following table sets forth the Claims Rate of EAC and
PHEAA and the national average for all guarantors for the five federal fiscal
years 1992 through 1996:*
<TABLE>
<CAPTION>
Federal Claims Rate
Fiscal ------------- National
Year EAC PHEAA Average
- --------- ----- ------ ---------
<S> <C> <C> <C>
1992 1.25% 2.84% 4.15%
1993 1.28 2.32 3.83
1994 1.43 2.18 3.44
1995 1.56 1.97 3.21
1996 1.54 1.58 3.25
</TABLE>
__________
* The information set forth in the table above has been obtained from EAC,
PHEAA and, as to the national average, the Department of Education.
EAC's and PHEAA's Claims Rate have been lower than the national average
Claims Rate in each of the five federal fiscal years shown in the Claims Rate
table above. Management of EAC and PHEAA have indicated to the Corporation that
they are currently unaware of any trends or conditions which would cause their
respective Claims Rate to exceed 5% and thereby result in less than maximum
reimbursement for reinsurance claims to the
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<PAGE>
Department of Education. Notwithstanding the above, no assurance can be
made that any such trends will continue or not deteriorate, or that any
Guarantee Agency will receive full reimbursement for reinsurance claims (or
the full 98% maximum reimbursement for loans first disbursed on or after
October 1, 1993).
TERMS OF THE TAX EXEMPT AUCTION RATE SERIES 1997-1 SENIOR NOTES
Generally
The Tax Exempt Auction Rate Series 1997-1 Senior Notes will be dated
as of the date of their initial issuance and, subject to the redemption
provisions referred to below, will mature on June 1, 2020. The Tax Exempt
Auction Rate Series 1997-1 Senior Notes will bear interest, payable on each
June 1 and December 1, commencing December 1, 1997, at rates determined as
described below under "Interest Rate on the Tax Exempt Auction Rate Series
1997-1 Senior Notes". The Tax Exempt Auction Rate Series 1997-1 Senior
Notes will be issued in fully registered form, without coupons, and when
issued will be registered in the name of Cede & Co., as nominee of DTC.
DTC will act as securities depository for the Tax Exempt Auction Rate
Series 1997-1 Senior Notes. Individual purchases of the Tax Exempt Auction
Rate Series 1997-1 Senior Notes will be made in book-entry form only in the
principal amount of $100,000 or multiples thereof. Purchasers of the Tax
Exempt Auction Rate Series 1997-1 Senior Notes will not receive
certificates representing their interest in the Tax Exempt Auction Rate
Series 1997-1 Senior Notes purchased. See "Description of Series 1997-1
Notes - Book-Entry-Only System".
Interest Rate on the Tax Exempt Auction Rate Series 1997-1 Senior Notes
The Initial Interest Rate Adjustment Dates for the Tax Exempt Auction
Rate Series 1997-1 Senior Notes will be as follows:
<TABLE>
<CAPTION>
Initial Interest Rate
Series Adjustment Date
- --------- ---------------------
<S> <C>
1997-1A _________, 1997
1997-1B _________, 1997
1997-1C _________, 1997
1997-1D _________, 1997
1997-1E _________, 1997
</TABLE>
During the Initial Interest Period, each series of the Tax Exempt Auction
Rate Series 1997-1 Senior Notes will bear interest at the Auction Rate
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 an Auction Rate Series 1997-1 Senior Note
Interest Rate based on an Auction Period of 35 days, subject to adjustment
as described in "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 Auction Rate Series 1997-1 Senior Note Interest Rate exceed
the applicable Auction Rate Series 1997-1 Senior Note Interest Rate
Limitation of ___% per annum.
For each series of the Tax Exempt Auction Rate Series 1997-1 Senior
Notes during the Initial Interest Period and each Auction Period
thereafter, interest at the 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 Auction Rate Series 1997-1 Senior Note Interest 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
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<PAGE>
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 Auction Rate
Series 1997-1 Senior Note Interest 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 "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 Auction Rate Series
1997-1 Senior Note Interest 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 Auction Rate Series 1997-1 Senior Note Interest 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 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 Auction Rate
Series 1997-1 Senior Note Interest 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 Non-
Payment Rate on the first day of each such Interest Period.
In any event, no Auction will be held on any Auction Date under the
First Supplemental Indenture during the continuance of a Payment Default.
The Auction Agent is to promptly give written notice to the Trustee
and the Corporation of each Auction Rate Series 1997-1 Senior Note Interest
Rate (unless the Auction Rate Series 1997-1 Senior Note Interest Rate is
the 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 Auction Rate
Series 1997-1 Senior Note Interest 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 Auction Rate Series 1997-1 Senior Note Interest 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 Auction Rate Series 1997-1 Senior Note Interest 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 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 Auction Rate, the Maximum Auction Rate is
to be determined by a securities dealer appointed by the Corporation
capable of making such a determination in accordance with the provisions of
the Indenture, and written notice of such determination is to be given by
such securities dealer to the Trustee.
Interest Limited to the Extent Permissible by Law
In no event shall the cumulative amount of interest paid or payable on
a series of Tax Exempt Auction Rate Series 1997-1 Senior Notes exceed the
amount permitted by applicable law. If the applicable law is ever
judicially
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<PAGE>
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.
Redemption of Tax Exempt Auction Rate Series 1997-1 Senior Notes
The Tax Exempt Auction Rate Series 1997-1 Series Senior Notes
will be subject to redemption as described in the Prospectus under the captions
"Description of Series 1991-1 Notes -- Special Redemption" and "-- Optional
Redemption."
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
computed on the assumption that each year contains 360 days and is composed
of twelve 30-day months and 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 "-- Optional
Redemption."
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<PAGE>
TERMS OF THE TAXABLE AUCTION RATE SERIES 1997-1 SENIOR NOTES
Generally
The Taxable Auction Rate Series 1997-1 Senior Notes will be dated
as of the date of their initial issuance and, subject to the tender
provisions set forth below and the redemption provisions referred to below,
will mature on June 1, 2020. The Taxable Auction Rate Series 1997-1 Senior
Notes will bear interest, payable on the Business Day following the
expiration of each Auction Period, at rates determined as described below
under "Interest Rate on the Taxable Auction Rate Series 1997-1 Senior
Notes." The Taxable Auction Rate Series 1997-1 Senior Notes will be issued
in fully registered form, without coupons, and when issued will be
registered in the name of Cede & Co., as nominee of DTC. DTC will act as
securities depository for the Taxable Auction Rate Series 1997-1 Senior
Notes. Individual purchases of the Taxable Auction Rate Series 1997-1
Senior Notes will be made in book-entry form only in the principal amount
of $100,000 or multiples thereof. Purchasers of the Taxable Auction Rate
Series 1997-1 Senior Notes will not receive certificates representing their
interest in the Taxable Auction Rate Series 1997-1 Senior Notes purchased.
See "Description of Series 1997-1 Notes - Book-Entry-Only System".
Interest Rate on the Taxable Auction Rate Series 1997-1 Senior Notes
The Initial Interest Rate Adjustment Date for the Taxable Auction
Rate Series 1997-1 Senior Notes will be as follows:
<TABLE>
<CAPTION>
Initial Interest Rate
Series Adjustment Date
- --------- ---------------------
<S> <C>
1997-1G __________, 1997
1997-1H __________, 1997
</TABLE>
During the Initial Interest Period, each series of the Taxable Auction Rate
Series 1997-1 Senior Notes will bear interest at the Auction Rate Series
1997-1 Senior Note Initial Interest Rate for such series. Thereafter,
except with respect to an Auction Period Adjustment as described in
"Auction of the Auction Rate Series 1997-1 Senior Notes", the Taxable
Auction Rate Series 1997-1 Senior Notes will bear interest at an Auction
Rate 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
applicable Auction Rate Series 1997-1 Senior Note Interest Rate Limitation
of ___% per annum.
Interest on each series of the Taxable Auction Rate Series 1997-1
Senior Notes will be paid on the Business Day following each Auction Period
for such series. For each series of the Taxable Auction Rate Series 1997-1
Senior Notes during the Initial Interest Period and each Auction Period
thereafter, interest at the 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.
The Auction Rate Series 1997-1 Senior Note Interest Rate to be
borne by each series of the Taxable Auction Rate Series 1997-1 Senior Notes
after the Initial Interest Period for each Auction Period until an Auction
Period Adjustment, if any, will be determined as hereinafter described.
Each such Auction Period will commence on and include the
__________________ following the expiration of the immediately preceding
Auction Period and terminate on and include the _____ immediately preceding
the __________________ of the fourth following week; provided, however,
that in the case of the Auction Period that immediately follows the Initial
Interest Period for a series of the Taxable Auction Rate Series 1997-1
Senior Notes, such Auction Period will commence on the Initial Interest
Rate Adjustment Date for such series. The Auction Rate Series 1997-1
Senior Note Interest 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 "Auction of the Auction Rate Series 1997-1
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<PAGE>
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 Auction Rate Series
1997-1 Senior Note Interest Rate on such series for the next succeeding
Auction Period will be the Net Loan Rate (subject to the applicable Auction
Rate 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 Auction Rate Series 1997-1 Senior Note Interest 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 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 Auction Rate
Series 1997-1 Senior Note Interest 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 Non-
Payment Rate on the first day of each such Interest Period.
In any event, no Auction will be held on any Auction Date under the
First Supplemental Indenture on which there are insufficient moneys in the
Note Fund to pay, or otherwise held by the Trustee under the Indenture and
available to pay, the principal, if any, of and interest due on the Taxable
Auction Rate Series 1997-1 Senior Notes on the Interest Payment Date
immediately following such Auction Date.
The Auction Agent is to promptly give written notice to the Trustee
and the Corporation of each Auction Rate Series 1997-1 Senior Note Interest
Rate (unless the Auction Rate Series 1997-1 Senior Note Interest Rate is
the Non-Payment Rate) and either the Auction Rate or the Net Loan Rate, as
the case may be, when such rate is not the Auction Rate Series 1997-1
Senior Note Interest 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 Auction Rate Series
1997-1 Senior Note Interest 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 Auction Rate Series 1997-1 Senior Note Interest 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 Auction Rate Series 1997-1 Senior Note Interest 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.
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<PAGE>
Carry-Over Amounts on the Taxable Auction Rate Series 1997-1 Senior Notes
If the Auction Rate for a series of the Taxable Auction Rate Series
1997-1 Senior Notes is greater than the Net Loan Rate, then the Auction
Rate Series 1997-1 Senior Note Interest Rate applicable to such series for
that Interest Period will be the Net Loan Rate. If the Auction Rate Series
1997-1 Senior Note Interest Rate for a series of Taxable Auction Rate
Series 1997-1 Senior Notes for any Interest Period is the Net Loan Rate,
the Trustee shall determine the Carry-Over Amount, if any, with respect to
such series for such Interest Period. Such determination of the Carry-Over
Amount shall be made separately for each series of Taxable Auction Rate
Series 1997-1 Senior Notes. Each Carry-Over Amount shall bear interest
calculated at a rate equal to One-Month LIBOR (as determined by the Auction
Agent, provided the Trustee has received notice of One-Month LIBOR from the
Auction Agent, and, if the Trustee shall not have received such notice from
the Auction Agent, then as determined by the Trustee) from the Interest
Payment Date for the Interest Period with respect to which such Carry-Over
Amount was calculated, until paid. Any payment in respect of Carry-Over
Amount shall be applied, first, to any accrued interest payable thereon
and, thereafter, in reduction of such Carry-Over Amount. For purposes of
the Indenture and the Taxable Auction Rate Series 1997-1 Senior Notes, any
reference to "principal" or "interest" therein shall not include, within
the meaning of such words, Carry-Over Amount or any interest accrued on any
such Carry-Over Amount. Such Carry-Over Amount shall be separately
calculated for each Taxable Auction Rate Series 1997-1 Senior Note of such
series by the Trustee during such Interest Period in sufficient time for
the Trustee to give notice to each Holder of such Carry-Over Amount as
required in the next succeeding sentence. On the Interest Payment Date for
an Interest Period with respect to which such Carry-Over Amount has been
calculated by the Trustee, the Trustee shall give written notice to each
Holder of the Carry-Over Amount applicable to such Holder's Taxable Auction
Rate Series 1997-1 Senior Note, which written notice may accompany the
payment of interest by check made to each such Holder on such Interest
Payment Date or otherwise shall be mailed on such Interest Payment Date by
first-class mail, postage prepaid, to each such Holder at such Holder's
address as it appears on the registration books maintained by the Note
Registrar. Such notice shall state, in addition to such Carry-Over Amount,
that, unless and until a Taxable Auction Rate Series 1997-1 Senior Notes
has been redeemed or has been deemed no longer Outstanding under the
Indenture (after which all accrued Carry-Over Amount with respect to such
Taxable Auction Rate Series 1997-1 Senior Note (and all accrued interest
thereon) that remains unpaid shall be cancelled and no Carry-Over Amount
(or interest accrued thereon) shall be paid with respect to such Taxable
Auction Rate Series 1997-1 Senior Note), (i) the Carry-Over Amount (and
interest accrued thereon) shall be paid by the Trustee on such Taxable
Auction Rate Series 1997-1 Senior Note on the first occurring Interest
Payment Date for a subsequent Interest Period if and to the extent that (l)
the Eligible Carry-Over Make-Up Amount with respect to such Interest Period
is greater than zero, and (2) moneys are available pursuant to the terms of
the First Supplemental Indenture to pay such Carry-Over Amount (and
interest accrued thereon), and (ii) interest shall accrue on the Carry-Over
Amount at a per annum rate equal to One-Month LIBOR until such Carry-Over
Amount is paid in full or is cancelled.
The Carry-Over Amount (and interest accrued thereon) for a series of
the Taxable Auction Rate Series 1997-1 Senior Notes shall be paid by the
Trustee on Outstanding Taxable Auction Rate Series 1997-1 Senior Notes of
such series on the first occurring Interest Payment Date for a subsequent
Interest Period if and to the extent that (i) the Eligible Carry-Over Make-
Up Amount with respect to such Interest Period is greater than zero, and
(ii) moneys in the Surplus Account are available on such Interest Payment
Date for transfer to the Interest Account for such purpose in accordance
with the priorities described in the second paragraph under "Summary of the
Indenture -- Funds and Accounts -- Surplus Fund", after taking into account
all other amounts payable from the Surplus Fund in accordance with such
paragraph on such Interest Payment Date. Any Carry-Over Amount (and any
interest accrued thereon) with respect to any Taxable Auction Rate Series
1997-1 Senior Note which is unpaid as of an Interest Payment Date, which
Taxable Auction Rate Series 1997-1 Senior Note is to be redeemed or deemed
no longer Outstanding under the First Supplemental Indenture on such
Interest Payment Date, shall be paid to the Holder thereof on such Interest
Payment Date to the extent that moneys are available therefor in accordance
with the provisions of the preceding sentence; provided, however, that any
Carry-Over Amount (and any interest accrued thereon) which is not so paid
on such Interest Payment Date shall be cancelled with respect to such
Taxable Auction Rate Series 1997-1 Senior Note on such Interest Payment
Date and shall not be paid on any succeeding Interest
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<PAGE>
Payment Date. To the extent that any portion of the Carry-Over Amount (and
any interest accrued thereon) remains unpaid after payment of a portion
thereof, such unpaid portion shall be paid in whole or in part until fully
paid by the Trustee on the next occurring Interest Payment Date or Dates,
as necessary, for a subsequent Interest Period or Periods, if and to the
extent that the conditions in the first sentence of this paragraph are
satisfied. On any Interest Payment Date on which the Trustee pays less
than all of the Carry-Over Amount (and any interest accrued thereon) with
respect to a Taxable Auction Rate Series 1997-1 Senior Note, the Trustee
shall give written notice in the manner set forth in the immediately
preceding paragraph to the Holder of such Taxable Auction Rate Series 1997-
1 Senior Note of the Carry-Over Amount remaining unpaid on such Taxable
Auction Rate Series 1997-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount for a series
of the Taxable Auction Rate Series 1997-1 Senior Notes will be paid is to
be determined by the Trustee as described in the immediately preceding
paragraph, and the Trustee is to make payment of the Carry-Over Amount in
the same manner as, and from the same Account from which, it pays interest
on the Taxable Auction Rate Series 1997-1 Senior Notes on an Interest
Payment Date. ANY UNPAID CARRY-OVER AMOUNT, INCLUDING ANY ACCRUED AND
UNPAID INTEREST THEREON, ON A TAXABLE AUCTION RATE SERIES 1997-1 SENIOR
NOTE NOT PAYABLE ON ANY REDEMPTION DATE WITH RESPECT TO SUCH TAXABLE
AUCTION RATE SERIES 1997-1 SENIOR NOTE WILL BE FORFEITED UPON THE
REDEMPTION (WHETHER OPTIONAL OR SPECIAL) OR AT MATURITY OF SUCH TAXABLE
AUCTION RATE SERIES 1997-1 SENIOR NOTE, OR ON SUCH EARLIER INTEREST PAYMENT
DATE, IF ANY, ON WHICH SUCH TAXABLE AUCTION RATE SERIES 1997-1 SENIOR NOTE
CEASES TO BE OUTSTANDING UNDER THE FIRST SUPPLEMENTAL INDENTURE. FITCH'S
RATING ON THE TAXABLE AUCTION RATE SERIES 1997-1 SENIOR NOTES WILL NOT
APPLY TO ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE TAXABLE AUCTION RATE
SERIES 1997-1 SENIOR NOTES.
Interest Limited to the Extent Permissible by Law
In no event shall the cumulative amount of interest paid or payable on
a series of Taxable Auction Rate Series 1997-1 Senior Notes exceed the
amount permitted by applicable law. If the applicable law is ever
judicially interpreted so as to render usurious any amount called for under
the Taxable Auction Rate Series 1997-1 Senior Notes of a series or related
documents or otherwise contracted for, charged, reserved, taken or received
in connection with the Taxable Auction Rate Series 1997-1 Senior Notes of
such series, or if the redemption or acceleration of the maturity of the
Taxable Auction Rate Series 1997-1 Senior Notes of such series results in
payment to or receipt by the Holder or any former Holder of the Taxable
Auction Rate Series 1997-1 Senior Notes of such series of any interest in
excess of that permitted by applicable law, then, notwithstanding any
provision of the Taxable Auction Rate Series 1997-1 Senior Notes of such
series or related documents to the contrary, all excess amounts theretofore
paid or received with respect to the Taxable Auction Rate Series 1997-1
Senior Notes of such series shall be credited on the principal balance of
the Taxable Auction Rate Series 1997-1 Senior Notes of such series (or, if
the Taxable Auction Rate Series 1997-1 Senior Notes of such series have
been paid or would thereby be paid in full, refunded by the recipient
thereof), and the provisions of the Taxable Auction Rate Series 1997-1
Senior Notes of such series and related documents shall automatically and
immediately be deemed reformed and the amounts thereafter collectible
thereunder reduced, without the necessity of the execution of any new
document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for under the Taxable
Auction Rate Series 1997-1 Senior Notes of such series and under the
related documents.
Redemption of the Taxable Auction Rate Series 1997-1 Senior Notes
The Taxable Auction Rate Series 1997-1 Senior Notes will be subject to
redemption as described in the Prospectus under the captions "Description
of Series 1997-1 Notes -- Special Redemption" and "-- Optional Redemption."
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<PAGE>
TERMS OF THE TAXABLE LIBOR RATE SERIES 1997-1 SENIOR NOTES
Generally
The Taxable LIBOR Rate Series 1997-1 Senior Notes will be dated
as of the date of their initial issuance and, subject to the redemption and
prepayment provisions referred below, will mature on June 1, 2020. The
Taxable LIBOR Rate Series 1997-1 Senior Notes will bear interest, payable
on the first day of each month, commencing ________, 1997, at rates
determined as described below under "Interest Rate on the Taxable LIBOR
Rate Series 1997-1 Senior Notes." The Taxable Series 1997-1 Senior Notes
will be issued in fully registered form, without coupons, and when issued
will be registered in the name of Cede & Co., as nominee of DTC, New York,
New York. DTC will act as securities depository for the Taxable LIBOR Rate
Series 1997-1 Senior Notes. Individual purchases of the Taxable LIBOR Rate
Series 1997-1 Senior Notes will be made in book-entry form only in the
principal amount of $5,000 or multiples thereof. Purchasers of the Taxable
LIBOR Rate Series 1997-1 Senior Notes will not receive certificates
representing their interest in the Taxable LIBOR Rate Series 1997-1 Senior
Notes purchased. See "Description of the Series 1997-1 Notes - Book-Entry-
Only System."
Interest Rate on the Taxable LIBOR Rate Series 1997-1 Senior Notes
During the Initial Interest Period for the Taxable LIBOR Rate
Series 1997-1 Senior Notes, being the period from the date of delivery
through ____________, 1997, the Taxable LIBOR Rate Series 1997-1 Senior
Notes of each series will bear interest at the Initial Interest Rate for
such series. The Taxable LIBOR Rate Series 1997-1 Senior Note Interest
Rate for each Interest Period after the Initial Interest Period will be the
Taxable LIBOR Rate Series 1997-1 Senior Note LIBOR-Based Rate based upon
One-Month LIBOR plus the Taxable LIBOR Rate Series 1997-1 Senior Note
Spread, determined and subject to certain limitations as hereinafter
described.
Interest on the Taxable LIBOR Rate Series 1997-1 Senior Notes
shall be computed on the basis of actual days elapsed and accrue daily from
the date thereof (on the basis of a 360-day year), and shall be payable on
each regularly scheduled Interest Payment Date with respect thereto (which
shall be the first day, whether or not a Business Day, of each calendar
month, commencing ____________, 1997) prior to the maturity thereof and at
the maturity thereof. The interest payable on each Interest Payment Date
for the Taxable LIBOR Rate Series 1997-1 Senior Notes shall be that
interest which has accrued through the last day of the last complete
Interest Period immediately preceding the Interest Payment Date or, in the
case of the maturity thereof, the last day preceding the date of such
maturity. Each such Interest Period (other than the Initial Interest
Period) will commence on and include the first day of a calendar month and
terminate on and include the last day preceding the next Interest Rate
Adjustment Date. Each Interest Rate Adjustment Date shall be the Interest
Payment Date for the preceding Interest Period. The Taxable LIBOR Rate
Series 1997-1 Senior Note Interest Rate shall be effective as of and on the
Interest Rate Adjustment Date of the applicable Interest Period and be in
effect thereafter through the end of such Interest Period.
The interest rate to be borne by the Taxable LIBOR Rate Series
1997-1 Notes during each Interest Period after the Initial Interest Period
shall be determined on the related Interest Rate Determination Date and
shall be equal to the lesser of (i) the sum of One-Month LIBOR determined
with respect to such Interest Rate Determination Date plus the applicable
Taxable LIBOR Rate Series 1997-1 Senior Note Spread of ___% per annum (in
the case of the Series 1997-1I Notes or ___% per annum (in the case of the
Series 1997-1J Notes), as the case may be (which is herein referred to as
the "Taxable LIBOR Rate Series 1997-1 Senior Note LIBOR-Based Rate"), and
(ii) the Net Loan Rate determined with respect to such Interest Rate
Determination Date. The Trustee shall determine such interest rate on each
Interest Rate Determination Date and shall give the Corporation written
notice thereof prior to 2:00 p.m., New York City time, on such Interest
Rate Determination Date. The Net Loan Rate with respect to each Interest
Rate Determination Date shall be determined by or on behalf of the
Corporation and written notice thereof given to the Trustee prior to 10:00
a.m., New York City time, on such Interest Rate Determination Date. See
"Carry-Over Amounts on the Taxable LIBOR Rate Series 1997-1 Senior Notes"
below.
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In the event that the Trustee no longer determines, or fails to
determine, when required, the Taxable LIBOR Rate Series 1997-1 Senior 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 Senior 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 Corporation shall fail or refuse to determine such Net Loan Rate, the
Net Loan Rate shall be determined by a securities dealer appointed by the
Trustee capable of making such a determination in accordance with the
provisions of the First Supplemental Indenture and written notice of such
determination shall be given by such securities dealer to the Trustee.
Carry-Over Amounts on the Taxable LIBOR Rate Series 1997-1 Senior Notes
If the Taxable LIBOR Rate Series 1997-1 Senior Note LIBOR-Based
Rate determined with respect to a given Interest Rate Determination Date is
greater than the Net Loan Rate, then the Taxable LIBOR Rate Series 1997-1
Senior Note Interest Rate for the related Interest Period will be the Net
Loan Rate. If the Taxable LIBOR Rate Series 1997-1 Senior Note Interest
Rate for any Interest Period is the Net Loan Rate, the Trustee shall
determine the Carry-Over Amount, if any, with respect to the Taxable LIBOR
Rate Series 1997-1 Senior Notes for such Interest Period. Each such Carry-
Over Amount shall bear interest calculated at a rate equal to the Taxable
LIBOR Rate Series 1997-1 Senior 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 Senior Notes, any reference to "principal" or "interest"
therein shall not include, within the meaning of such words, Carry-Over
Amount or any interest accrued on any such Carry-Over Amount. Such Carry-
Over Amount shall be separately calculated for each Taxable LIBOR Rate
Series 1997-1 Senior Note by the Trustee during such Interest Period in
sufficient time for the Trustee to give notice to each Holder of such
Carry-Over Amount as required in the next succeeding sentence. On the
Interest Payment Date for an Interest Period with respect to which such
Carry-Over Amount has been calculated by the Trustee, the Trustee shall
give written notice to each Holder of the Carry-Over Amount applicable to
such Holder's Taxable LIBOR Rate Series 1997-1 Senior Note, which written
notice may accompany the payment of interest by check made to each such
Holder on such Interest Payment Date or otherwise shall be mailed on such
Interest Payment Date by first-class mail, postage prepaid, to each such
Holder at such Holder's address as it appears on the registration books
maintained by the Note Registrar. Such notice shall state, in addition to
such Carry-Over Amount, that, unless and until a Taxable LIBOR Rate Series
1997-1 Senior Note has been redeemed or has been deemed no longer
Outstanding under the Indenture (after which all accrued Carry-Over Amount
with respect to such Taxable LIBOR Rate Series 1997-1 Senior Note (and all
accrued interest thereon) that remains unpaid shall be cancelled and no
Carry-Over Amount (or interest accrued thereon) shall be paid with respect
to such Taxable LIBOR Rate Series 1997-1 Senior Note), (i) the Carry-Over
Amount (and interest accrued thereon) shall be paid by the Trustee on such
Taxable LIBOR Rate Series 1997-1 Senior Note on the first occurring
Interest Payment Date for a subsequent Interest Period if and to the extent
that (a) the Eligible Carry-Over Make-Up Amount with respect to such
Interest Period is greater than zero, and (b) moneys are available pursuant
to the terms of the First Supplemental Indenture to pay such Carry-Over
Amount (and interest accrued thereon), and (ii) interest shall accrue on
the Carry-Over Amount at a per annum rate equal to the Taxable LIBOR Rate
Series 1997-1 Senior Note LIBOR-Based Rate until such Carry-Over Amount is
paid in full or is cancelled.
The Carry-Over Amount (and interest accrued thereon) for the
Taxable LIBOR Rate Series 1997-1 Senior Notes shall be paid by the Trustee
on Outstanding Taxable LIBOR Rate Series 1997-1 Senior Notes on the first
occurring Interest Payment Date for a subsequent Interest Period if and to
the extent that (a) the Eligible Carry-Over Make-Up Amount with respect to
such Interest Period is greater than zero, and (b) moneys in the Surplus
Account are available on such Interest Payment Date for transfer to the
Interest Account for such purpose in accordance with the second paragraph
under "Summary of the Indenture -- Funds and Accounts -- Surplus Account",
after taking into account all other amounts payable from the Surplus Fund
in accordance with such paragraph on such Interest Payment Date. Any
Carry-Over Amount (and any interest accrued thereon) with respect to any
Taxable LIBOR
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Rate Series 1997-1 Senior Note which is unpaid as of an Interest Payment
Date, which Taxable LIBOR Rate Series 1997-1 Senior Note is to be redeemed
or deemed no longer Outstanding under the First Supplemental Indenture on
such Interest Payment Date, shall be paid to the Holder thereof on such
Interest Payment Date to the extent that moneys are available therefor in
accordance with the provisions of the preceding clauses (a) and (b);
provided, however, that any Carry-Over Amount (and any interest accrued
thereon) which is not so paid on such Interest Payment Date shall be
cancelled with respect to such Taxable LIBOR Rate Series 1997-1 Senior Note
on such Interest Payment Date and shall not be paid on any succeeding
Interest Payment Date. To the extent that any portion of the Carry-Over
Amount (and any interest accrued thereon) remains unpaid after payment of a
portion thereof, such unpaid portion shall be paid in whole or in part
until fully paid by the Trustee on the next occurring Interest Payment Date
or Dates, as necessary, for a subsequent Interest Period or Periods, if and
to the extent that the conditions in the first sentence of this paragraph
are satisfied. On any Interest Payment Date on which the Trustee pays less
than all of the Carry-Over Amount (and any interest accrued thereon) with
respect to a Taxable LIBOR Rate Series 1997-1 Senior Note, the Trustee
shall give written notice in the manner set forth in the immediately
preceding paragraph to the Holder of such Taxable LIBOR Rate Series 1997-1
Senior Note of the Carry-Over Amount remaining unpaid on such Taxable LIBOR
Rate Series 1997-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount (or any
interest accrued thereon) for the Taxable LIBOR Rate Series 1997-1 Senior
Notes shall be paid shall be determined by the Trustee in accordance with
the provisions of the immediately preceding paragraph, and the Trustee
shall make payment of the Carry-Over Amount (and any interest accrued
thereon) in the same manner as, and from the same Account from which, it
pays interest on the Taxable LIBOR Rate Series 1997-1 Senior Notes on an
Interest Payment Date. ANY UNPAID CARRY-OVER AMOUNT, INCLUDING ANY ACCRUED
AND UNPAID INTEREST THEREON, ON A TAXABLE LIBOR RATE SERIES 1997-1 SENIOR
NOTE NOT PAYABLE ON ANY REDEMPTION DATE WITH RESPECT TO SUCH TAXABLE LIBOR
RATE SERIES 1997-1 SENIOR NOTE WILL BE FORFEITED UPON THE REDEMPTION OR AT
MATURITY OF SUCH TAXABLE LIBOR RATE SERIES 1997-1 SENIOR NOTE, OR ON SUCH
EARLIER INTEREST PAYMENT DATE, IF ANY, ON WHICH SUCH TAXABLE LIBOR RATE
SERIES SENIOR NOTE CEASES TO BE OUTSTANDING UNDER THE FIRST SUPPLEMENTAL
INDENTURE. FITCH'S RATING ON THE TAXABLE LIBOR RATE SERIES 1997-1 SENIOR
NOTES WILL NOT APPLY TO ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE
TAXABLE LIBOR RATE SERIES 1997-1 SENIOR NOTES.
Interest Limited to the Extent Permissible by Law
In no event shall the cumulative amount of interest paid or
payable on the Taxable LIBOR Rate Series 1997-1 Senior Notes exceed the
amount permitted by applicable law. If the applicable law is ever
judicially interpreted so as to render usurious any amount called for under
the Taxable LIBOR Rate Series 1997-1 Senior Notes or related documents or
otherwise contracted for, charged, reserved, taken or received in
connection with the Taxable LIBOR Rate Series 1997-1 Senior Notes, or if
the redemption or acceleration of the maturity of the Taxable LIBOR Rate
Series 1997-1 Senior Notes results in payment to or receipt by the Holder
or any former Holder of the Taxable LIBOR Rate Series 1997-1 Senior Notes
of any interest in excess of that permitted by applicable law, then,
notwithstanding any provision of the Taxable LIBOR Rate Series 1997-1
Senior Notes or related documents to the contrary, all excess amounts
theretofore paid or received with respect to the Taxable LIBOR Rate Series
1997-1 Senior Notes shall be credited on the principal balance of the
Taxable LIBOR Rate Series 1997-1 Senior Notes (or, if the Taxable LIBOR
Rate Series 1997-1 Senior Notes have been paid or would thereby be paid in
full, refunded by the recipient thereof), and the provisions of the Taxable
LIBOR Rate Series 1997-1 Senior Notes and related documents shall
automatically and immediately be deemed reformed and the amounts thereafter
collectible thereunder reduced, without the necessity of the execution of
any new document, so as to
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comply with the applicable law, but so as to permit the recovery of the
fullest amount otherwise called for under the Taxable LIBOR Rate Series
1997-1 Senior Notes and under the related documents.
Redemption and Prepayment of Taxable Taxable LIBOR Rate Series 1997-1
Senior Notes
The Taxable Taxable LIBOR Rate Series 1997-1 Senior Notes will be
subject to redemption and prepayment as described in the Prospectus under
the caption "Description of Series 1997-1 Notes -- Prepayment of Taxable
LIBOR Rate Series 1997-1 Notes" and "-- Special Redemption -- Redemption of
Series 1997-1 Notes Upon Reduction of Portfolio Balance."
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 computed on the assumption that each year
contains 360 days and is composed of twelve 30-day months and 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 "--
Optional Redemption."
TERMS OF THE TAXABLE LIBOR RATE SERIES 1997-1 SUBORDINATE NOTES
Generally
The Taxable LIBOR Rate Series 1997-1 Subordinate Notes will be
dated as of the date of their initial issuance and, subject to the
redemption and prepayment provisions referred below, will mature on June 1,
2020. The Taxable LIBOR Rate Series 1997-1 Subordinate Notes will bear
interest, payable on the first day of each month, commencing ________,
1997, at rates determined as described below under "Interest Rate on the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes." The Taxable Series
1997-1 Subordinate Notes will be issued in fully registered form, without
coupons, and when issued will be registered in the name of Cede & Co., as
nominee of DTC, New York, New York. DTC will act as securities depository
for the Taxable LIBOR Rate Series 1997-1 Subordinate Notes. Individual
purchases of the Taxable LIBOR Rate Series 1997-1 Subordinate Notes will be
made in book-entry form only in the original principal amount of $100,000
or multiples thereof. Purchasers of the Taxable LIBOR Rate Series 1997-1
Subordinate Notes will not receive certificates representing their interest
in the Taxable LIBOR Rate Series 1997-1 Subordinate Notes purchased. See
"Description of the Series 1997-1 Notes -Book-Entry-Only System."
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Interest Rate on the Taxable LIBOR Rate Series 1997-1 Subordinate Notes
During the Initial Interest Period for the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes, being the period from the date of delivery
through _____________, 1997, the Taxable LIBOR Rate Series 1997-1
Subordinate Notes will bear interest at the Initial Interest Rate for such
series. The Taxable LIBOR Rate Series 1997-1 Subordinate Note Interest
Rate for each Interest Period after the Initial Interest Period for the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes will be the Taxable
LIBOR Rate Series 1997-1 Subordinate Note LIBOR-Based Rate based upon One-
Month LIBOR plus the Taxable LIBOR Rate Series 1997-1 Subordinate Note
Spread, determined and subject to certain limitations as hereinafter
described.
Interest on the Taxable LIBOR Rate Series 1997-1 Subordinate
Notes shall be computed on the basis of actual days elapsed and accrue
daily from the date thereof (on the basis of a 360-day year), and shall be
payable on each regularly scheduled Interest Payment Date with respect
thereto (which shall be the first day, whether or not a Business Day, of
each calendar month, commencing ____________ 1, 1997) prior to the maturity
thereof and at the maturity thereof. The interest payable on each Interest
Payment Date for the Taxable LIBOR Rate Series 1997-1 Subordinate Notes
shall be that interest which has accrued through the last day of the last
complete Interest Period immediately preceding the Interest Payment Date
or, in the case of the maturity thereof, the last day preceding the date of
such maturity. Each such Interest Period (other than the Initial Interest
Period) will commence on and include the first day of a calendar month and
terminate on and include the last day preceding the next Interest Rate
Adjustment Date. Each Interest Rate Adjustment Date shall be the Interest
Payment Date for the preceding Interest Period. The Taxable LIBOR Rate
Series 1997-1 Subordinate Note Interest Rate shall be effective as of and
on the Interest Rate Adjustment Date of the applicable Interest Period and
be in effect thereafter through the end of such Interest Period.
The interest rate to be borne by the Taxable LIBOR Rate Series
1997-1 Subordinate Notes during each Interest Period after the Initial
Interest Period shall be determined on the related Interest Rate
Determination Date and shall be equal to the lesser of (i) the sum of One-
Month LIBOR determined with respect to such Interest Rate Determination
Date plus the Taxable LIBOR Rate Series 1997-1 Subordinate Note Spread of
____% per annum (which is herein referred to as the "Taxable LIBOR Rate
Series 1997-1 Subordinate Note LIBOR-Based Rate"), and (ii) the Net Loan
Rate determined with respect to such Interest Rate Determination Date. The
Trustee shall determine such interest rate on each Interest Rate
Determination Date and shall give the Issuer written notice thereof prior
to 2:00 p.m., New York City time, on such Interest Rate Determination Date.
The Net Loan Rate with 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
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Taxable LIBOR Rate Series 1997-1 Subordinate Note LIBOR-Based Rate (as
determined by the Trustee) from the Interest Payment Date for the Interest
Period with respect to which such Carry-Over Amount was calculated, until
paid. Any payment in respect of Carry-Over Amount shall be applied, first,
to any accrued interest payable thereon and, thereafter, in reduction of
such Carry-Over Amount. For purposes of the Indenture and the Taxable
LIBOR Rate Series 1997-1 Subordinate Notes, any reference to "principal" or
"interest" therein shall not include, within the meaning of such words,
Carry-Over Amount or any interest accrued on any such Carry-Over Amount.
Such Carry-Over Amount shall be separately calculated for each Taxable
LIBOR Rate Series 1997-1 Subordinate Note by the Trustee during such
Interest Period in sufficient time for the Trustee to give notice to each
Holder of such Carry-Over Amount as required in the next succeeding
sentence. On the Interest Payment Date for an Interest Period with respect
to which such Carry-Over Amount has been calculated by the Trustee, the
Trustee shall give written notice to each Holder of the Carry-Over Amount
applicable to such Holder's Taxable LIBOR Rate Series 1997-1 Subordinate
Note, which written notice may accompany the payment of interest by check
made to each such Holder on such Interest Payment Date or otherwise shall
be mailed on such Interest Payment Date by first-class mail, postage
prepaid, to each such Holder at such Holder's address as it appears on the
registration books maintained by the Note Registrar. Such notice shall
state, in addition to such Carry-Over Amount, that, unless and until a
Taxable LIBOR Rate Series 1997-1 Subordinate Note has been redeemed or has
been deemed no longer Outstanding under the Indenture (after which all
accrued Carry-Over Amount with respect to such Taxable LIBOR Rate Series
1997-1 Subordinate Note (and all accrued interest thereon) that remains
unpaid shall be cancelled and no Carry-Over Amount (or interest accrued
thereon) shall be paid with respect to such Taxable LIBOR Rate Series 1997-
1 Subordinate Note), (i) the Carry-Over Amount (and interest accrued
thereon) shall be paid by the Trustee on such Taxable LIBOR Rate Series
1997-1 Subordinate Note on the first occurring Interest Payment Date for a
subsequent Interest Period if and to the extent that (a) the Eligible
Carry-Over Make-Up Amount with respect to such Interest Period is greater
than zero, and (b) moneys are available pursuant to the terms of the First
Supplemental Indenture to pay such Carry-Over Amount (and interest accrued
thereon), and (ii) interest shall accrue on the Carry-Over Amount at a per
annum rate equal to the Taxable LIBOR Rate Series 1997-1 Subordinate Note
LIBOR-Based Rate until such Carry-Over Amount is paid in full or is
cancelled.
The Carry-Over Amount (and interest accrued thereon) for the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes shall be paid by the
Trustee on Outstanding Taxable LIBOR Rate Series 1997-1 Subordinate Notes
on the first occurring Interest Payment Date for a subsequent Interest
Period if and to the extent that (a) the Eligible Carry-Over Make-Up Amount
with respect to such Interest Period is greater than zero, and (b) moneys
in the Surplus Account are available on such Interest Payment Date for
transfer to the Interest Account for such purpose in accordance with the
second paragraph under "Summary of the Indenture -- Funds and Accounts --
Surplus Account", after taking into account all other amounts payable from
the Surplus Fund in accordance with such paragraph on such Interest Payment
Date. Any Carry-Over Amount (and any interest accrued thereon) with
respect to any Taxable LIBOR Rate Series 1997-1 Subordinate Note which is
unpaid as of an Interest Payment Date, which Taxable LIBOR Rate Series
1997-1 Subordinate Note is to be redeemed or deemed no longer Outstanding
under the First Supplemental Indenture on such Interest Payment Date, shall
be paid to the Holder thereof on such Interest Payment Date to the extent
that moneys are available therefor in accordance with the provisions of the
preceding clauses (a) and (b); provided, however, that any Carry-Over
Amount (and any interest accrued thereon) which is not so paid on such
Interest Payment Date shall be cancelled with respect to such Taxable LIBOR
Rate Series 1997-1 Subordinate Note on such Interest Payment Date and shall
not be paid on any succeeding Interest Payment Date. To the extent that
any portion of the Carry-Over Amount (and any interest accrued thereon)
remains unpaid after payment of a portion thereof, such unpaid portion
shall be paid in whole or in part until fully paid by the Trustee on the
next occurring Interest Payment Date or Dates, as necessary, for a
subsequent Interest Period or Periods, if and to the extent that the
conditions in the first sentence of this paragraph are satisfied. On any
Interest Payment Date on which the Trustee pays less than all of the Carry-
Over Amount (and any interest accrued thereon) with respect to a Taxable
LIBOR Rate Series 1997-1 Subordinate Note, the Trustee shall give written
notice in the manner set forth in the immediately preceding paragraph to
the Holder of such Taxable LIBOR Rate Series 1997-1 Subordinate Note of the
Carry-Over Amount remaining unpaid on such Taxable LIBOR Rate Series 1997-1
Subordinate Note.
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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 OR AT MATURITY OF SUCH TAXABLE LIBOR RATE SERIES 1997-1
SUBORDINATE NOTE, OR ON SUCH EARLIER INTEREST PAYMENT DATE, IF ANY, ON
WHICH SUCH TAXABLE LIBOR RATE SERIES 1997-1 SUBORDINATE NOTE CEASES TO BE
OUTSTANDING UNDER THE FIRST SUPPLEMENTAL INDENTURE. FITCH'S RATING ON THE
TAXABLE LIBOR RATE SERIES 1997-1 SUBORDINATE NOTES WILL NOT APPLY TO ANY
CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE TAXABLE LIBOR RATE SERIES 1997-1
SUBORDINATE NOTES.
Interest Limited to the Extent Permissible by Law
In no event shall the cumulative amount of interest paid or
payable on the Taxable LIBOR Rate Series 1997-1 Subordinate Notes exceed
the amount permitted by applicable law. If the applicable law is ever
judicially interpreted so as to render usurious any amount called for under
the Taxable LIBOR Rate Series 1997-1 Subordinate Notes or related documents
or otherwise contracted for, charged, reserved, taken or received in
connection with the Taxable LIBOR Rate Series 1997-1 Subordinate Notes, or
if the redemption or acceleration of the maturity of the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes results in payment to or receipt by the
Holder or any former Holder of the Taxable LIBOR Rate Series 1997-1
Subordinate Notes of any interest in excess of that permitted by applicable
law, then, notwithstanding any provision of the Taxable LIBOR Rate Series
1997-1 Subordinate Notes or related documents to the contrary, all excess
amounts theretofore paid or received with respect to the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes shall be credited on the principal balance
of the Taxable LIBOR Rate Series 1997-1 Subordinate Notes (or, if the
Taxable LIBOR Rate Series 1997-1 Subordinate Notes have been paid or would
thereby be paid in full, refunded by the recipient thereof), and the
provisions of the Taxable LIBOR Rate Series 1997-1 Subordinate Notes and
related documents shall automatically and immediately be deemed reformed
and the amounts thereafter collectible thereunder reduced, without the
necessity of the 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 -- Prepayment of Taxable
LIBOR Rate Series 1997-1 Notes" and "-- Special Redemption -- Redemption of
Series 1997-1 Notes Upon Reduction of Portfolio Balance."
WEIGHTED AVERAGE LIFE OF THE
TAXABLE LIBOR RATE SERIES 1997-1 NOTES
The following information is given solely to illustrate the
effect of prepayments on the Financed Student Loans held in the Series
1997-1 Taxable Acquisition Account on the weighted average life of the
Taxable LIBOR Rate Series 1997-1 Notes under the assumptions stated below
and is not a prediction of the
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prepayment rate that might actually be experienced by the Financed Student
Loans held in the Series 1997-1 Taxable Acquisition Account.
Weighted average life refers to the average amount of time from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Taxable LIBOR Rate Series 1997-1 Notes will be primarily a function of the
rate at which payments are made on the Financed Student Loans held in the
Series 1997-1 Taxable Acquisition Account. Payments on such Financed
Student Loans may be in the form of scheduled amortization of principal or
prepayments (including, for this purpose, reimbursements on defaults).
The Constant Prepayment Rate prepayment model ("CPR") represents
an assumed constant rate of prepayment of Financed Student Loans held in
the Series 1997-1 Taxable Acquisition Account outstanding as of the
beginning of each month expressed as a per annum percentage. There can be
no assurance that such Financed Student Loans will experience prepayments
at a constant prepayment rate or otherwise in the manner assumed by the
prepayment model.
The weighted average lives in the following table were determined
assuming that (i) scheduled payments of principal on the Financed Student
Loans held in the Series 1997-1 Taxable Acquisition Account are received in
a timely manner and prepayments are made at the percentages of the
prepayment model set forth in the table; (ii) the initial principal balance
of the Financed Student Loans held in the Series 1997-1 Taxable Acquisition
Account is [$________] and such Financed Student Loans have the
characteristics [described under "Characteristics of the Initial Financed
Student Loans"]; (iii) payments are made on the Taxable LIBOR Rate Series
1997-1 Notes on the 1st day of each month commencing in [_________] 1997;
and (iv) the Taxable LIBOR Rate Series 1997-1 Notes are issued on [August
__,] 1997. No representation is made that these assumptions will be
correct, including the assumption that the Financed Student Loans held in
the Series 1997-1 Taxable Acquisition Account will not experience
delinquencies or unanticipated losses. See "Risk Factors -- Changes in the
Assets of the Trust Estate, Including Future Funding of Student Loans,
Changing Characteristics of Financed Student Loans, Financed Eligible Loans
That are Not Made Under the Federal Family Education Loan Program and
Financed Student Loans That are Not Eligible Loans in the Surplus Account,"
"-- Reduction in Amounts Available to Pay Notes Due to the Variability of
Actual Cash Flows and Due to the Inability of Guarantee Agencies to Make
Guarantee Payments," "-- Holders of Series 1997-1 Notes Which are Prepaid
or Redeemed Due to Accelerated Payments with respect to Financed Student
Loans May Have to Reinvest Amounts Received From Prepayments or Redemptions
From at a Lower Rate of Return," and "-- The Average Life of the Series
1997-1 Notes May Be Lengthened As a Result of Extension of Payments on the
Financed Student Loans."
In making an investment decision with respect to the Taxable
LIBOR Rate Series 1997-1 Notes, investors should consider a variety of
possible prepayment scenarios, including the limited scenarios described in
the table below.
Weighted Average Life of the Taxable LIBOR Rate Series 1997-1 Notes
at the Respective CPRs Set Forth Below:
<TABLE>
<CAPTION>
Weighted Average Life (years)
--------------------------------------
0% CPR 3% CPR 5% CPR 7% CPR 10%CPR
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Senior Series 1997-1I Notes.......
Senior Series 1997-1J Notes.......
Subordinate Series 1997-1K Notes..
</TABLE>
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<PAGE>
AUCTION OF THE AUCTION RATE SERIES 1997-1 SENIOR NOTES
If not otherwise defined below, capitalized terms used below will
have the meanings given such terms under "Glossary of Certain Defined
Terms". Unless otherwise noted or the context otherwise requires, the
following description of Auctions and related procedures is applicable
separately to each series of the Auction Rate Series 1997-1 Senior Notes.
Summary of Auction Procedures
The following summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Series 1997-1 Senior
Notes. Immediately following this summary is a more detailed description
of these procedures. Prospective investors in the Auction Rate Series
1997-1 Senior Notes should read carefully the following summary, along with
the more detailed description.
The interest rate on each series of Auction Rate Series 1997-1
Senior Notes will be determined periodically (generally, for periods
ranging from 7 days to one year, and initially 28 days, in the case of the
Taxable Auction Rate Series 1997-1 Senior Notes, or 35 days, in the case of
Tax Exempt Auction Rate Series 1997-1 Senior Notes) by means of a "Dutch
auction." In this Dutch auction, investors and potential investors submit
orders through an eligible Broker-Dealer as to the principal amount of
Auction Rate Series 1997-1 Senior Notes such investors wish to buy, hold or
sell at various interest rates. The Broker-Dealers submit their clients'
orders to the Auction Agent, who processes all orders submitted by all
eligible Broker-Dealers and determines the interest rate for the upcoming
interest period. The Broker-Dealers are notified by the Auction Agent of
the interest rate for the upcoming interest period and are provided with
settlement instructions relating to purchases and sales of Auction Rate
Series 1997-1 Senior Notes.
In the auction procedure, the following orders may be submitted:
(i) "Bid Orders" - the minimum interest rate that a current investor
is willing to accept in order to continue to hold some or all of
its Auction Rate Series 1997-1 Senior Notes for the upcoming
interest period;
(ii) "Sell Orders" - an order by a current investor to sell a
specified principal amount of Auction Rate Series 1997-1 Senior
Notes, regardless of the upcoming interest rate;
(iii) "Hold Order" - an order by a current investor to hold a
specified principal amount of Auction Rate Series 1997-1 Senior
Notes, regardless of the upcoming interest rate; and
(iv) "Potential Bid Orders" - the minimum interest rate that a
potential investor (or a current investor wishing to purchase
additional Auction Rate Series 1997-1 Senior Notes) is willing to
accept in order to buy a specified principal amount of Auction
Rate Series 1997-1 Senior Notes.
If an existing investor does not submit orders with respect to all its
Auction Rate Series 1997-1 Senior Notes of a particular series, the
investor will be deemed to have submitted a Hold Order at the new interest
rate for that portion of such series for which no order was received.
In connection with each Auction, Auction Rate Series 1997-1 Senior
Notes will be purchased and sold between investors and potential investors
at a price equal to their then-outstanding principal balance (i.e., par)
plus any accrued interest. The following example helps illustrate how the
above-described procedures are used in determining the interest rate on the
Auction Rate Series 1997-1 Senior Notes.
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<PAGE>
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received for the Auction
<TABLE>
<CAPTION>
Bid Orders Sell Orders Potential Bid Orders
- -------------------- -------------- ---------------------
<S> <C> <C>
10 Units at 2.90% 50 Units Sell 20 Units of 2.95%
30 Units at 3.02% 50 Units Sell 30 Units of 3.00%
60 Units at 3.02% 100 Units Sell 50 Units of 3.05%
--------------
100 Units at 3.10% 200 Units 50 Units of 3.10%
100 Units at 3.12% 50 Units of 3.11%
- --------------------
300 Units 50 Units of 3.14%
100 Units of 3.15%
--------------------
350 Units
</TABLE>
Total units under existing Bid Orders, Hold Orders and Sell Orders
always equal issue size (in this case 500 units).
(c) Auction Agent organizes Orders in Ascending Order
<TABLE>
<CAPTION>
Order Number Cumulative Order Number Cumulative
Number of Units Total (Units) Percent Number of Units Total (Units) Percent
- ------ ------------- ------------- -------- ------ ----------- ------------- --------
<C> <S> <C> <C> <C> <C> <C> <C>
1. 10(W) 10 2.90% 7. 100(W) 300 3.10%
2. 20(W) 30 2.95 8. 50(W) 350 3.10
3. 30(W) 60 3.00 9. 50(W) 400 3.11
4. 30(W) 90 3.02 10. 100(W) 500 3.12
5. 50(W) 140 3.05 11. 50(L) 3.14
6. 60(W) 200 3.05 12. 100(L) 3.15
</TABLE>
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units.
All winning orders are awarded the winning rate (in this case, 3.12%) as
the interest rate for the next Interest Period, when another Auction will
be held. Multiple orders at the winning rate are allocated units on a pro
rata basis. Notwithstanding the foregoing, in no event will the interest
rate exceed (i) in the case of the Tax Exempt Auction Rate Series 1997-1
Senior Notes,
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<PAGE>
the Maximum Auction Rate, or (ii) in the case of the Taxable Auction Rate
Series 1997-1 Senior Notes, the lesser of the Net Loan Rate or the Maximum
Auction Rate.
The above example assumes that a successful Auction has occurred
(i.e., all Sell Orders and all Bid Orders below the new interest rate were
fulfilled). In certain circumstances, there may be insufficient Potential
Bid Orders to purchase all the Auction Rate Series 1997-1 Senior Notes
offered for sale. In such circumstances, the interest rate for the
upcoming Interest Period will equal (i) in the case of the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, the Maximum Auction Rate, or (ii)
in the case of the Taxable Auction Rate Series 1997-1 Senior Notes, the
lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all the
Auction Rate Series 1997-1 Senior Notes are subject to Hold Orders (i.e.,
each Holder of Auction Rate Series 1997-1 Senior Notes wishes to continue
holding its Auction Rate Series 1997-1 Senior Notes, regardless of the
interest rate), the interest rate for the upcoming Interest Period will
equal (i) in the case of the Tax Exempt Auction Rate Series 1997-1 Senior
Notes, the lesser of the Maximum Auction Rate and the All Hold Rate, or
(ii) in the case of the Taxable Auction Rate Series 1997-1 Senior Notes,
the least of the Maximum Auction Rate, the Net Loan Rate and the All Hold
Rate.
As stated above, the foregoing is only a summary of the Auction
Procedures. The remainder of this Section is a more detailed description
of these procedures.
Auction Participants
Existing Holders and Potential Holders
Participants in each Auction will include: (1) "Existing Holders",
which shall mean any Person (including a Broker-Dealer) who is a holder of
Auction Rate Series 1997-1 Senior Notes in the records of the Auction Agent
(described below) at the close of business on the Business Day preceding
each Auction Date; and (ii) "Potential Holders", which shall mean any
Person (including a Broker-Dealer), including any Existing Holder, who may
be interested in acquiring the Auction Rate Series 1997-1 Senior Notes (or,
in the case of an Existing Holder, an additional principal amount of the
Auction Rate Series 1997-1 Senior Notes). See "Broker-Dealer" below.
By purchasing the Auction Rate Series 1997-1 Senior Notes, whether in
an Auction or otherwise, each prospective purchaser of the Auction Rate
Series 1997-1 Senior Notes or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to participate in Auctions on the terms
described in the First Supplemental Indenture; (ii) to have its beneficial
ownership of the Auction Rate Series 1997-1 Senior Notes maintained at all
times in Book-Entry Form for the account of its Participant, which in turn
will maintain records of such beneficial ownership, and to authorize such
Participant to disclose to the Auction Agent such information with respect
to such beneficial ownership as the Auction Agent may request; (iii) so
long as the beneficial ownership of the Auction Rate Series 1997-1 Senior
Notes is maintained in Book-Entry Form, to sell, transfer or otherwise
dispose of the Auction Rate Series 1997-1 Senior Notes only pursuant to a
Bid (as defined below) or a Sell Order (as defined below) in an Auction, or
otherwise through a Broker-Dealer, provided that in the case of all
transfers other than those pursuant to an Auction, the Existing Holder of
the Auction Rate Series 1997-1 Senior Notes so transferred, its Participant
or Broker-Dealer advises the Auction Agent of such transfer; (iv) that a
Sell Order placed by an Existing Holder will constitute an irrevocable
offer to sell the principal amount of the Auction Rate Series 1997-1 Senior
Notes specified in such Sell Order; (v) that a Bid placed by an Existing
Holder will constitute an irrevocable offer to sell the principal amount,
or a lesser principal amount, of the Auction Rate Series 1997-1 Senior
Notes specified in such Bid if the rate specified in such Bid is greater
than, or in some cases equal to, the Auction Rate Series 1997-1 Senior Note
Interest Rate, determined as described herein; and (vi) that a Bid placed
by a Potential Holder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Auction Rate Series 1997-1
Senior Notes specified in such Bid if the rate specified in such Bid is,
respectively, less than or equal to the Auction Rate Series 1997-1 Senior
Note Interest Rate, determined as described herein.
The principal amount of the Auction Rate Series 1997-1 Senior Notes
purchased or sold may be subject to proration procedures on the Auction
Date. Each purchase or sale of the Auction Rate Series 1997-1 Senior Notes
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<PAGE>
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
Bankers Trust Company is appointed in the First Supplemental Indenture
as the initial Auction Agent to serve as agent for the Corporation in
connection with Auctions with respect to Tax Exempt Auction Rate Series
1997-1 Senior Notes. The Trustee and the Corporation will enter into the
initial Auction Agent Agreement relating to Tax Exempt Auction Rate Series
1997-1 Senior Notes with Bankers Trust Company, as the initial Auction
Agent. Bankers Trust Company also is appointed in the First Supplemental
Indenture as the initial Auction Agent to serve as agent for the
Corporation in connection with Auctions with respect to Taxable Auction
Rate Series 1997-1 Senior Notes. The Trustee and the Corporation will
enter into the initial Auction Agent Agreement relating to Taxable Auction
Rate Series 1997-1 Senior Notes with Bankers Trust Company, as the initial
Auction Agent. Any substitute Auction Agent shall be (i) a bank, national
banking association or trust company duly organized under the laws of the
United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such
other location as approved by the Trustee in writing and having a combined
capital stock or surplus of at least $50,000,000, or (ii) a member of the
National Association of Securities Dealers, Inc., having a capitalization
of at least $50,000,000, and, in either case, authorized by law to perform
all the duties imposed upon it under the First Supplemental Indenture and
the Auction Agent Agreement. The Auction Agent may at any time resign and
be discharged of the duties and obligations created by the First
Supplemental Indenture and the Auction Agent Agreement by giving at least
90 days' notice to the Trustee and the Corporation. The Auction Agent may
be removed at any time by the Trustee upon the written direction of an
Authorized Officer of the Corporation or the Holders of 66-2/3% of the
aggregate principal amount of the Auction Rate Series 1997-1 Senior Notes
of all series then Outstanding, and, if by such Holders, by an instrument
signed by such Holders or their attorneys and filed with the Auction Agent,
the Corporation and the Trustee upon at least 90 days' notice. Neither
resignation nor removal of the Auction Agent pursuant to the preceding two
sentences shall be effective unless and until a substitute Auction Agent
has been appointed and has accepted such appointment. If required by the
Corporation, a substitute Auction Agent Agreement shall be entered into
with a substitute Auction Agent. Notwithstanding the foregoing, the
Auction Agent may terminate the Auction Agent Agreement if, within 25 days
after notifying the Trustee and the Corporation in writing that it has not
received payment of any Auction Agent Fee due it in accordance with the
terms of the Auction Agent Agreement, the Auction Agent does not receive
such payment.
If the Auction Agent shall resign or be removed or be dissolved, or if
the property or affairs of the Auction Agent shall be taken under the
control of any state or federal court or administrative body because of
bankruptcy or insolvency, or for any other reason, the Trustee, at the
direction of an Authorized Officer of the Corporation, shall use its best
efforts to appoint a substitute Auction Agent.
The Auction Agent is acting as agent for the Corporation in connection
with Auctions. In the absence of bad faith, negligent failure to act or
negligence on its part, the Auction Agent shall not be liable for any
action taken, suffered or omitted or any error of judgment made by it in
the performance of its duties under the Auction Agent Agreement and shall
not be liable for any error of judgment made in good faith unless the
Auction Agent shall have been negligent in ascertaining (or failing to
ascertain) the pertinent facts.
The Corporation will pay the Auction Agent the Auction Agent Fee on
each Interest Payment Date and will reimburse the Auction Agent upon its
request for all reasonable expenses, disbursements and advances incurred or
made by the Auction Agent in accordance with any provision of the Auction
Agent Agreement or the Broker-Dealer Agreements (including the reasonable
compensation and the expenses and disbursements of its agents and counsel).
Such amounts are payable from the Administration Fund. The Corporation
will indemnify and hold harmless the Auction Agent for and against any
loss, liability or expense incurred without negligence or bad faith on the
Auction
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<PAGE>
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., which initially will be the only
Broker-Dealer for each of the Tax Exempt Auction Rate Series 1997-1 Senior
Notes and the Taxable Auction Rate Series 1997-1 Senior Notes, or any other
broker or dealer (each as defined in the Exchange Act), commercial bank or
other entity permitted by law to perform the functions required of a
Broker-Dealer set forth below which (i) is a Participant or an affiliate of
a Participant, (ii) has been selected by the Corporation and (iii) has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is
payable by the Auction Agent from monies received from the Corporation, on
each Interest Payment Date. Such Broker-Dealer Fee is payable from the
Administration Fund as provided in the First Supplemental Indenture.
Market Agent
Although Smith Barney Inc. is acting as an underwriter in connection
with the offering, in connection with the Auction Rate Series 1997-1 Senior
Notes, Smith Barney Inc. will initially be the Market Agent and will act
solely as agent of the Corporation when acting as the Market Agent and will
not assume any obligation or relationship of agency or trust for or with
any of the Beneficial Owners when so acting.
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 Terms of
the Tax Exempt Auction Rate Series 1997-1 Senior Notes -- Interest Rate on
the Tax Exempt Auction Rate Series 1997-1 Senior Notes" and "Terms of the
Taxable Auction Rate Series 1997-1 Senior 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".
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<PAGE>
The Auction Agent will calculate the Net Loan Rate, the Maximum Auction
Rate and the All Hold Rate on each Auction Date. If the ownership of the Auction
Rate Series 1997-1 Senior Notes is no longer maintained in Book-Entry Form, the
Trustee will calculate the Maximum Auction Rate and the Net Loan Rate on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of the Auction Rate Series 1997-1 Senior Notes. If a
Payment Default has occurred, the Trustee will calculate the Non-Payment Rate on
the Interest Rate Determination Date for (i) each Interest Period commencing
after the occurrence and during the continuance of such Payment Default and (ii)
any Interest Period commencing less than two Business Days after the cure of any
Payment Default. The Auction Agent shall determine (i) with respect to the
Taxable Auction Rate Series 1997-1 Senior Notes, the One-Month LIBOR or the
Three-Month LIBOR, as applicable, and (ii) with respect to the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, the After-Tax Equivalent, the "AA"
Composite Commercial Paper Rate and the Applicable Percentage for each Interest
Period other than the Initial Interest Period. If the ownership of the Auction
Rate Series 1997-1 Senior Notes is no longer maintained in Book-Entry Form, or
if a Payment Default has occurred, then the Trustee shall determine the One-
Month LIBOR or the Three-Month LIBOR, as applicable, the After-Tax Equivalent,
the "AA" Composite Commercial Paper Rate and the Applicable Percentage for each
such Interest Period. The determination by the Trustee or the Auction Agent, as
the case may be, of the One-Month LIBOR or the Three-Month LIBOR, as applicable,
the After-Tax Equivalent, the "AA" Composite Commercial Paper Rate and the
Applicable Percentage shall (in the absence of manifest error) be final and
binding upon all parties. The Auction Agent shall promptly advise the Trustee of
the One-Month LIBOR or the Three-Month LIBOR, as applicable, the After-Tax
Equivalent, the "AA" Composite Commercial Paper Rate and the Applicable
Percentage upon its determination thereof. The Market Agent shall calculate the
Index (if the Index is other than the PSA Index) with respect to the Tax Exempt
Auction Rate Series 1997-1 Senior Notes on each Interest Rate Determination Date
and shall notify the Trustee and the Auction Agent of the Index on each Interest
Rate Determination Date. The determination by the Market Agent of the Index
shall (in the absence of manifest error) be final and binding upon all parties.
If the Federal Reserve Bank of New York does not make available its 30-day
commercial paper rate for purposes of determining the "AA" Composite Commercial
Paper Rate, the Auction Agent shall notify the Trustee of such fact and the
Trustee shall thereupon request that an Authorized Officer of the Corporation
promptly appoint at least two Commercial Paper Dealers (in addition to Smith
Barney Inc.) to provide commercial paper quotes for purposes of determining the
"AA" Composite Commercial Paper Rate. Pending appointment of both such
additional Commercial Paper Dealers, Smith Barney Inc. and any other Commercial
Paper Dealer appointed and serving as such shall provide the required quotations
and such quotations shall be used for purposes of the First Supplemental
Indenture. Smith Barney Inc. has been appointed as a Commercial Paper Dealer to
provide commercial paper quotes for purposes of determining the "AA" Composite
Commercial Paper Rate as aforesaid.
Submission of Orders
So long as the ownership of a series of Auction Rate Series 1997-1 Senior
Notes is maintained in Book-Entry Form, an Existing Holder may sell, transfer or
otherwise dispose of Auction Rate Series 1997-1 Senior Notes of such series only
pursuant to a Bid or Sell Order (as hereinafter defined) placed in an Auction or
otherwise sell, transfer or dispose of such series through a Broker-Dealer,
provided that, in the case of all transfers other than pursuant to Auctions,
such Existing Holder, its Broker-Dealer or its Participant advises the Auction
Agent of such transfer. Auctions shall be conducted on each Auction Date, if
there is an Auction Agent on such Auction Date, in the following manner:
Prior to the Submission Deadline (defined as 12:30 p.m., New York City
time, on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time) on each Auction Date:
(a) each Existing Holder of Auction Rate Series 1997-1 Senior Notes may
submit to a Broker-Dealer by telephone or otherwise information as to:
(i) the principal amount of Outstanding Auction Rate Series 1997-1
Senior Notes, if any, held by such Existing Holder which
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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 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.
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<PAGE>
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.
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
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Existing Holder over the aggregate principal amount of Auction Rate
Series 1997-1 Senior Notes subject to valid Hold Orders and valid Bids
as referred to above.
If more than one Bid for Auction Rate Series 1997-1 Senior Notes is
submitted on behalf of any Potential Holder, each Bid submitted will be a
separate Bid with the rate and principal amount therein specified. Any Bid
or Sell Order submitted by an Existing Holder covering an aggregate
principal amount of Auction Rate Series 1997-1 Senior Notes not equal to an
Authorized Denomination will be rejected and will be deemed a Hold Order.
Any Bid submitted by a Potential Holder covering an aggregate principal
amount of Auction Rate Series 1997-1 Senior Notes not equal to an
Authorized Denomination will be rejected. Any Order submitted in an Auction
by a Broker-Dealer to the Auction Agent prior to the Submission Deadline on
any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted
Hold Order", a "Submitted Bid" and a "Submitted Sell Order", respectively
(collectively, "Submitted Orders").
Determination of Sufficient Bids and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) the excess of the total principal amount of Outstanding
Auction Rate Series 1997-1 Senior Notes over the sum of the aggregate
principal amount of Outstanding Auction Rate Series 1997-1 Senior
Notes subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Auction Rate Series 1997-1 Senior
Notes"); and
(b) from such Submitted Orders whether the aggregate principal
amount of Outstanding Auction Rate Series 1997-1 Senior Notes subject
to Submitted Bids by Potential Holders specifying one or more rates
equal to or lower than the Maximum Auction Rate exceeds or is equal to
the sum of (i) the aggregate principal amount of Outstanding Auction
Rate Series 1997-1 Senior Notes subject to Submitted Bids by Existing
Holders specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Outstanding Auction
Rate Series 1997-1 Senior Notes subject to Submitted Sell Orders (in
the event such excess or such equality exists other than because all
of the Outstanding Auction Rate Series 1997-1 Senior Notes are subject
to Submitted Hold Orders, such Submitted Bids by Potential Holders
above will be hereinafter referred to collectively as "Sufficient
Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate", which will
be the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Holders specifying
such lowest rate and all other Submitted Bids from Existing
Holders specifying lower rates were rejected (thus entitling such
Existing Holders to continue to hold the principal amount of
Auction Rate Series 1997-1 Senior Notes subject to such Submitted
Bids); and
(ii) each such Submitted Bid from Potential Holders
specifying such lowest rate and all other Submitted Bids from
Potential Holders specifying lower rates, were accepted,
the result would be that such Existing Holders described in
subparagraph (c)(i) above would continue to hold an aggregate
principal amount of Outstanding Auction Rate Series 1997-1 Senior
Notes which, when added to the aggregate principal amount of
Outstanding Auction Rate Series
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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 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".
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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 sell the
aggregate principal amount of Auction Rate Series 1997-1 Senior Notes
subject to such Submitted Bids;
(b) Existing Holders' Submitted Bids specifying any rate that
is lower than the Auction Rate Series 1997-1 Senior Note Interest Rate
will be rejected, thus entitling each such Existing Holder to continue
to hold the aggregate principal amount of Auction Rate Series 1997-1
Senior Notes subject to such Submitted Bids;
(c) Potential Holders' Submitted Bids specifying any rate that
is lower than the Auction Rate Series 1997-1 Senior Note Interest
Rate will be accepted;
(d) Each Existing Holder's Submitted Bid specifying a rate that
is equal to the Auction Rate Series 1997-1 Senior Note Interest Rate
will be rejected, thus entitling such Existing Holder to continue to
hold the aggregate principal amount of Auction Rate Series 1997-1
Senior Notes subject to such Submitted Bid, unless the aggregate
principal amount of Auction Rate Series 1997-1 Senior Notes subject to
such Submitted Bids will be greater than the principal amount of
Auction Rate Series 1997-1 Senior Notes (the "remaining principal
amount") equal to the excess of the Available Auction Rate Series
1997-1 Senior Notes over the aggregate principal amount of Auction
Rate Series 1997-1 Senior Notes subject to Submitted Bids described in
subparagraphs (b) and (c) above, in which event such Submitted Bid of
such Existing Holder will be rejected in part and such Existing Holder
will be entitled to continue to hold the principal amount of Auction
Rate Series 1997-1 Senior Notes subject to such Submitted Bid, but
only in an amount equal to the aggregate principal amount of Auction
Rate Series 1997-1 Senior Notes obtained by multiplying the remaining
principal amount by a fraction, the numerator of which will be the
principal amount of Outstanding Auction Rate Series 1997-1 Senior
Notes held by such Existing Holder subject to such Submitted Bid and
the denominator of which will be the sum of the principal amount of
Outstanding Auction Rate Series 1997-1 Senior Notes subject to such
Submitted Bids made by all such Existing Holders that specified a rate
equal to the Auction Rate Series 1997-1 Senior Note Interest Rate; and
(e) Each Potential Holder's Submitted Bid specifying a rate that
is equal to the Auction Rate Series 1997-1 Senior Note Interest Rate
will be accepted, but only in an amount equal to the principal amount
of Auction Rate Series 1997-1 Senior Notes obtained by multiplying the
excess of the aggregate principal amount of Available Auction Rate
Series 1997-1 Senior Notes over the aggregate principal amount of
Auction Rate Series 1997-1 Senior Notes subject to Submitted Bids
described in subparagraphs (b), (c) and (d) above by a fraction, the
numerator of which will be the aggregate principal amount of
Outstanding Auction Rate Series 1997-1 Senior Notes subject to such
Submitted
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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 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
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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
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.
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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
"Settlement Procedures for Auction Rate Series 1997-1 Senior Notes."
Trustee Not Responsible for Auction Agent, Market Agent and Broker-Dealers
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, the Market Agent or any Broker-Dealer
under the First Supplemental Indenture, the Auction Agent Agreement or any
Broker-Dealer Agreement. The Trustee may conclusively rely upon any
information required to be furnished by the Auction Agent, the Market Agent
or any Broker-Dealer without undertaking any independent review or
investigation of the truth or accuracy of such information.
Changes in Auction Terms
Changes in Auction Period or Periods
While any of the Auction Rate Series 1997-1 Senior Notes are
Outstanding, the Corporation may, from time to time, change the length of
one or more Auction Periods (an "Auction Period Adjustment") in order to
conform with then-current market practice with respect to similar
securities or to accommodate economic and financial factors that may affect
or be relevant to the length of the Auction Period and the interest rate
borne by the Auction Rate Series 1997-1 Senior Notes. The Corporation will
not initiate such change in the length of the Auction Period unless it
shall have received, not less than three days nor more than 20 days prior
to the Auction Period Adjustment, (i) in the case of the Tax Exempt Auction
Rate Series 1997-1 Senior Notes, a written opinion of Bond Counsel to the
effect that such Auction Period Adjustment will not adversely affect the
exclusion of interest on any of such Notes from income for federal income
tax purposes, (ii) the written consent of the Market Agent, which consent
shall not be unreasonably withheld, and (iii) written confirmation from
each of the Rating Agencies then rating the Auction Rate Series 1997-1
Senior Notes that such Auction Period Adjustment will not adversely affect
its ratings then applicable to any of the Auction Rate Series 1997-1 Senior
Notes. The Corporation will initiate an Auction Period Adjustment by
giving written notice to the Trustee, the Auction Agent, the Market Agent
and the Securities Depository in substantially the form of, or containing
substantially the information contained in, the First Supplemental
Indenture at least ten days prior to the Auction Date for such Auction
Period.
Any such Auction Period Adjustment shall not result in an Auction
Period of less than seven days nor more than 91 days. If any such Auction
Period Adjustment will result in an Auction Period of less than 35 days (in
the case of the Tax Exempt Auction Rate Series 1997-1 Senior Notes) or 28
days (in the case of the Taxable Auction Rate Series 1997-1 Senior Notes),
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
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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 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
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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 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.
SETTLEMENT PROCEDURES FOR AUCTION RATE
SERIES 1997-1 SENIOR NOTES
If not otherwise defined below, capitalized terms used below will have the
meanings given such terms under "Glossary of Certain Defined Terms" or "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;
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(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a
Bid on behalf of a Potential Holder, whether such Bid was accepted or
rejected, in whole or in part, and the principal amount of Auction Rate
Series 1997-1 Senior Notes, if any, to be purchased by such Potential
Holder;
(v) if the aggregate principal amount of Auction Rate Series 1997-1
Senior Notes to be sold by all Existing Holders on whose behalf such
Seller's Broker-Dealer submitted Bids or Sell Orders exceeds the aggregate
principal amount of Auction Rate Series 1997-1 Senior Notes to be purchased
by all Potential Holders on whose behalf such Buyer's Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers
(and the name of the Participant, if any, of each such Buyer's Broker-
Dealer) acting for one or more purchasers of such excess principal amount
of Auction Rate Series 1997-1 Senior Notes and the principal amount of
Auction Rate Series 1997-1 Senior Notes to be purchased from one or more
Existing Holders on whose behalf such Seller's Broker-Dealer acted by one
or more Potential Holders on whose behalf each of such Buyer's Broker-
Dealers acted;
(vi) if the aggregate principal amount of Auction Rate Series 1997-1
Senior Notes to be purchased by all Potential Holders on whose behalf such
Buyer's Broker-Dealer submitted a Bid exceeds the aggregate principal
amount of Auction Rate Series 1997-1 Senior Notes to be sold by all
Existing Holders on whose behalf such Seller's Broker-Dealer submitted a
Bid or a Sell Order, the name or names of one or more Seller's Broker-
Dealers (and the name of the Participant, if any, of each such Seller's
Broker-Dealer) acting for one or more sellers of such excess principal
amount of Auction Rate Series 1997-1 Senior Notes and the principal amount
of Auction Rate Series 1997-1 Senior Notes to be sold to one or more
Potential Holders on whose behalf such Buyer's Broker-Dealer acted by one
or more Existing Holders on whose behalf each of such Seller's Broker-
Dealers acted; and
(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;
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(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 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.
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(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.
SUMMARY OF THE INDENTURE
The following is a summary of the material provisions of the Indenture and
the First Supplemental Indenture and is not to be considered as a full statement
of the provisions of the Indenture or the First Supplemental Indenture. The
summary is qualified by reference to and is subject to the complete Indenture
and the First Supplemental Indenture, which are incorporated by reference
herein. Copies thereof, in reasonable quantity, may be obtained during the
offering period upon request directed to the Original Issuer at the address set
forth in "Incorporation of Certain Documents by Reference" in this Prospectus.
Although the following summary refers to the "Corporation" only, the use of such
term should also be read to include the Original Issuer prior to the Section
150(d)(3) Transfer.
The Indenture establishes the general provisions of Notes issued by the
Corporation thereunder and sets forth various covenants and agreements of the
Corporation relating thereto, default and remedy provisions, responsibilities
and duties of the Trustee and establishes the various Funds into which the
Corporation's revenues related to the Notes are deposited and transferred for
various purposes. The First Supplemental Indenture provides for the specific
terms and details of the Series 1997-1 Notes, pledges the Financed Student Loans
and the revenues related thereto and establishes the various Accounts in the
Funds related to the Series 1997-1 Notes.
General Terms of Notes
Each series of Notes shall be created by and issued pursuant to a
Supplemental Indenture and such Supplemental Indenture shall designate Notes of
each series as Senior Notes, Subordinate Notes or Class C Notes. The Notes of
each series shall bear such date or dates, shall be payable at such place or
places, shall have such Principal Payment Dates, shall bear interest at such
rate or rates, from such date or dates, payable in such installments and on
Interest Payment Dates and at such place or places, and may be redeemable or
prepayable at such Redemption Price or Prices and upon such terms, as shall be
provided for in the Supplemental Indenture creating that series.
The Stated Maturities and Sinking Fund Payment Dates of all Notes shall
occur on a June 1 or a December 1, unless otherwise specified with respect to
any series of Variable Rate Notes in the Supplemental Indenture providing for
the issuance thereof. All Corporation Swap Payments and other payments to be
made by the Corporation to Credit Facility Providers shall be payable on a
regularly scheduled Interest Payment Date.
Except as may be otherwise provided in a Supplemental Indenture, in any
case where the principal of, premium, if any, or interest on the Notes or
amounts due to any Other Beneficiary shall be due on a day other than a Business
Day, then payment of such principal, premium and interest or such amounts may be
made on the next
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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.
Additional Notes
Notes shall be issued under the Indenture only for the purposes of (a)
providing funds for the origination or purchase, or both, by the Trustee on
behalf of the Corporation or by the Corporation of Eligible Loans (including,
for this purpose, the acquisition under the Indenture of Eligible Loans
previously purchased or originated by the Corporation from other available
moneys of the Corporation), (b) refunding at or before their Stated Maturity any
or all Outstanding Notes issued for that purpose, and (c) paying Administrative
Costs, Note Fees, Costs of Issuance and capitalized interest on the Notes being
issued and making deposits to the Reserve Fund.
At any time, one or more series of Notes may be issued in such principal
amounts as may be determined by the Corporation for any of the purposes
hereinbefore specified upon compliance with certain conditions specified in the
Indenture (including the requirement that each Rating Agency shall have
confirmed that no outstanding ratings on any of the Outstanding Unenhanced Notes
will be reduced or withdrawn as a result of such issuance) and any additional
conditions specified in a Supplemental Indenture. Any Additional Notes will not
be offered or sold pursuant to this Prospectus.
Comparative Security of Noteholders and Other Beneficiaries
The Senior Notes (including the Series 1997-1 Senior Notes) are equally and
ratably secured under the Indenture with any Other Senior Obligations. The
Senior Obligations have payment and certain other priorities over the
Subordinate Notes, the Other Subordinate Obligations and the Class C Notes. The
Subordinate Notes (including the Series 1997-1 Subordinate Notes) are equally
and ratably secured under the Indenture with any Other Subordinate Obligations.
The Subordinate Obligations have payment and certain other priorities over the
Class C Notes. (See "Source of Payment and Security for the Notes -- Priorities"
in this Prospectus.) The Senior Notes and the Subordinate Notes are each payable
from the Note Fund and are secured by the Reserve Fund. The Class C Notes are
payable solely from the Surplus Fund.
The Corporation may at any time issue a series of Notes as described under
"Additional Notes" above, either as Senior Notes, Subordinate Notes or Class C
Notes. (Any Additional Notes will not be offered or sold pursuant to this
Prospectus.) In connection with any such Senior Notes or Subordinate Notes, the
Corporation may enter into a Swap Agreement or Credit Enhancement Facility as it
deems in its best interest, subject to the provisions described in the next
succeeding paragraphs, and the Swap Counterparty or the Credit Enhancement
Provider may become a Senior Beneficiary or a Subordinate Beneficiary, as herein
described.
The Corporation may enter into a Swap Agreement only if the Swap
Counterparty has outstanding obligations rated by each Rating Agency not lower
that in its third highest Specific Rating Category (or each Rating Agency has a
comparable other rating with respect to such Swap Counterparty, such as a
comparable rating of claims paying ability or deposits). No Swap Agreement shall
be designated as a Senior Swap Agreement unless, as of the date the Corporation
enters into such Swap Agreement, the Senior Asset Requirement will be met and
the
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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.
Funds and Accounts
Acquisition Fund
The Indenture establishes an Acquisition Fund. With respect to each series
of Notes, the Trustee shall, upon delivery to the initial purchasers thereof and
from the proceeds thereof, credit to the Acquisition Fund the amount, if any,
specified in the Supplemental Indenture providing for the issuance of such
series of Notes. The Trustee shall also deposit in the Acquisition Fund: (i) any
funds to be transferred thereto from the Surplus Fund, and (ii) any other
amounts specified in a Supplemental Indenture. In addition, the Trustee shall
also credit to the Acquisition Fund any Eligible Loans transferred thereto from
the Surplus Account as described under "Surplus Fund" below (any such Eligible
Loans so transferred being thereafter deemed to have been Financed with moneys
in the Acquisition Fund).
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Balances in the Acquisition Fund shall be used only for (a) the purchase or
origination of Eligible Loans, (b) the redemption or purchase of Notes as
provided in a Supplemental Indenture providing for the issuance of such series
of Notes, (c) the payment of Debt Service on the Senior Notes and Other Senior
Obligations when due, (d) the payment of the purchase price of any Senior Notes
required to be purchased on a Purchase Date or a Mandatory Tender Date, or (e)
to cure deficiencies in the Rebate Fund. The Trustee shall make, or authorize
any Deposit Agent to make, payments to Lenders from the Acquisition Fund for the
acquisition of Eligible Loans, such payments to be made from the Series 1997-1
Tax Exempt and Taxable Acquisition Accounts at a purchase price not in excess of
100% of the remaining unpaid principal amount of such Eligible Loan, plus
accrued noncapitalized borrower interest thereon, if any, to the date of
purchase, reasonable transfer, origination or assignment fees, if applicable,
and a premium not to exceed certain limitations set forth in the First
Supplemental Indenture. The Trustee shall also make, or authorize the Deposit
Agent to make, payments from the Acquisition Fund for the origination of
Eligible Loans.
Balances in the Acquisition Fund (other than any portion of such Balances
consisting of Student Loans) shall be (i) transferred to the credit of the
Rebate Fund to the extent necessary, after transfers thereto from the Revenue
Fund, the Surplus Fund, the Reserve Fund, the Administration Fund and the Note
Fund, to make any deposit to the credit of the Rebate Fund as described under
"Rebate Fund" below, (ii) after such transfer, if any, to be made pursuant to
the preceding clause (i) has been taken into account, transferred to the credit
of the Note Fund on the last Business Day preceding any Interest Payment Date,
Principal Payment Date or Redemption Date to the extent required to pay the Debt
Service due on the Senior Notes and any Other Senior Obligations, as described
under "Note Fund" below, and (iii) after such transfers, if any, to be made
pursuant to the preceding clauses (i) and (ii) have been taken into account,
transferred to the credit of the Principal Account on any Purchase Date or
Mandatory Tender Date with respect to Senior Notes, to the extent described
under "Note Fund" below. In the event that, after transfers to the Rebate Fund
from all other Funds and Accounts, a deficiency exists in the Rebate Fund, the
Trustee shall use its best efforts to sell Student Loans included in the Balance
of the Acquisition Fund at the best price available to the extent of such
deficiency; and the proceeds of any such sale shall be credited to the Rebate
Fund, to the extent of any deficiency in the Rebate Fund, and otherwise to the
Revenue Fund. If any amounts have been transferred to either or both of the
Rebate Fund or the Note Fund pursuant to this paragraph, the Trustee shall, to
the extent necessary to cure the deficiency in the Acquisition Fund as a result
of such transfer or transfers, transfer to the Acquisition Fund amounts from the
Revenue Fund as described below under "Revenue Fund".
Pending application of moneys in the Acquisition Fund for one or more
authorized purposes, such moneys shall be invested in Investment Securities, as
described under "Investments" below, and any earnings on or income from said
investments shall be deposited in the Revenue Fund.
Revenue Fund
The Indenture establishes a Revenue Fund, which is comprised of two
Accounts: the Repayment Account and the Income Account. The Trustee and any
Deposit Agent shall credit to the Revenue Fund: (i) all amounts received as
interest, including federal interest subsidy payments, and principal payments
with respect to Financed Student Loans, including all Guarantee payments and all
Special Allowance Payments with respect to Financed Student Loans (excluding,
except in the case of the Eligible Loans to be Financed on the Date of Issuance
and as otherwise provided in a Supplemental Indenture, any federal interest
subsidy payments and Special Allowance Payments that accrued prior to the date
on which such Student Loans were Financed), (ii) unless otherwise provided in a
Supplemental Indenture, proceeds of the resale to a Lender of any Financed
Student Loans pursuant to such Lender's repurchase obligation under the
applicable Student Loan Purchase Agreement, (iii) all amounts received as
earnings on or income from Investment Securities in the Acquisition Fund, the
Reserve Fund, the Administration Fund, the Surplus Fund and the Note Fund, and
(iv) all amounts to be transferred to the Revenue Fund from the Rebate Fund. The
Trustee shall deposit and credit all such amounts received as payments of
principal of Financed Student Loans to the Repayment Account, and all other such
amounts to the Income Account.
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Pending transfers from the Revenue Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below, and
any earnings on or income from said investments shall be retained therein.
Repayment Account. On each Monthly Payment Date and on any other date on
which the Balance in the Note Fund is not sufficient to pay all amounts payable
therefrom on such date, the Trustee shall, from the moneys received since the
preceding Monthly Payment Date in the Repayment Account, (1) make any periodic
rebate fee payments required to be made to the Secretary of Education in
connection with Financed Student Loans, and (2) transfer the remainder of such
moneys as follows:
First, to the credit of the Rebate Fund, to the extent necessary to
cure any deficiency therein as provided in the Indenture; second, to the
credit of the Interest Account, to the extent necessary to increase the
Balance thereof to the amount required on such Monthly Payment Date or such
other date pursuant to the Indenture for the payment of interest on Senior
Notes or Other Senior Obligations payable therefrom; third, to the credit
of the Principal Account, to the extent necessary to increase the Balance
thereof to the amount required on such Monthly Payment Date or such other
date pursuant to the Indenture for the redemption or payment of principal
or the purchase price of Senior Notes or the payment of Other Senior
Obligations payable therefrom; fourth, to the credit of the Retirement
Account, to the extent and in the manner provided in the Indenture with
respect to the redemption of Senior Notes from the Retirement Account or
the payment of Other Senior Obligations payable therefrom; fifth, to the
credit of the Acquisition Fund, to the extent described above under
"Acquisition Fund"; sixth, to the credit of the Interest Account, to the
extent necessary to increase the Balance thereof to the amount required on
such Monthly Payment Date or such other date pursuant to the Indenture for
the payment of interest on Subordinate Notes or Other Subordinate
Obligations payable therefrom; seventh, to the credit of the Principal
Account, to the extent necessary to increase the Balance thereof to the
amount required on such Monthly Payment Date or such other date pursuant to
the Indenture for the payment of principal at Stated Maturity or the
purchase price of Subordinate Notes or the payment of Other Subordinate
Obligations payable therefrom; eighth, to the credit of the Retirement
Account, to the extent and in the manner provided in the Indenture with
respect to the redemption of Subordinate Notes from the Retirement Account
or payment of Other Subordinate Obligations payable therefrom; ninth, to
the credit of the Reserve Fund, to the extent necessary to increase the
Balance thereof to the Reserve Fund Requirement; tenth, to the credit of
the Principal Account, to the extent necessary to increase the Balance
thereof to the amount required to meet the sinking fund installment with
respect to the redemption of Subordinate Term Notes on the next Sinking
Fund Payment Date therefor; eleventh, to the credit of the Special
Redemption and Prepayment Account, to the extent necessary to increase the
Balance thereof to the Special Redemption and Prepayment Account
Requirement with respect to each series of Notes; and twelfth, any
remainder to the credit of the Surplus Account.
Income Account. On each Monthly Payment Date and on any other date on
which the Balance in the Note Fund is not sufficient to pay all amounts payable
therefrom on such date, the Trustee shall, after transferring all amounts
received in the Repayment Account pursuant to the preceding paragraph, from the
moneys received since the preceding Monthly Payment Date in the Income Account,
(1) to the extent amounts in the Repayment Account were not sufficient therefor,
make any periodic rebate fee payments required to be made to the Secretary of
Education in connection with Financed Student Loans, and (2) transfer the
remainder of such moneys as follows:
First, to the credit of the Rebate Fund, to the extent necessary to
cure any deficiency therein as provided in the Indenture; second, to the
credit of the Interest Account, to the extent necessary to increase the
Balance thereof to the amount required on such Monthly Payment Date or such
other date pursuant to the Indenture for the payment of interest on Senior
Notes or Other
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Senior Obligations payable therefrom; third, to the credit of the Principal
Account, to the extent necessary to increase the Balance thereof to the
amount required on such Monthly Payment Date or such other date pursuant to
the Indenture for the redemption or payment of principal or the purchase
price of Senior Notes or the payment of Other Senior Obligations payable
therefrom; fourth, to the credit of the Retirement Account, to the extent
and in the manner provided in the Indenture with respect to the redemption
of Senior Notes from the Retirement Account or payment of Other Senior
Obligations payable therefrom; fifth, to the credit of the Acquisition
Fund, to the extent described above under "Acquisition Fund"; sixth, to the
credit of the Interest Account, to the extent necessary to increase the
Balance thereof to the amount required on such Monthly Payment Date or such
other date pursuant to the Indenture for the payment of interest on
Subordinate Notes or Other Subordinate Obligations payable therefrom;
seventh, to the credit of the Principal Account, to the extent necessary to
increase the Balance thereof to the amount required on such Monthly Payment
Date or such other date pursuant to the Indenture for the payment of
principal at Stated Maturity or the purchase price of Subordinate Notes or
the payment of Other Subordinate Obligations payable therefrom; eighth, to
the credit of the Retirement Account, to the extent and in the manner
provided in the Indenture with respect to the redemption of Subordinate
Notes from the Retirement Account or payment of Other Subordinate
Obligations payable therefrom; ninth, to the credit of the Administration
Fund, to the extent necessary to increase the Balance thereof to such
amounts as an Authorized Officer of the Corporation shall direct by
Corporation order for certain costs and expenses; tenth, to the credit of
the Reserve Fund, to the extent necessary to increase the Balance thereof
to the Reserve Fund Requirement; eleventh, to the credit of the Principal
Account, to the extent necessary to increase the Balance thereof to the
amount required to meet the sinking fund installment with respect to the
redemption of Subordinate Term Notes on the next Sinking Fund Payment Date
therefor; twelfth, to the credit of the Special Redemption and Prepayment
Account, to the extent necessary to increase the Balance thereof to the
Special Redemption and Prepayment Account Requirement with respect to each
series of Notes; and thirteenth, any remainder to the credit of the Surplus
Account.
Note Fund
The Indenture establishes a Note Fund, which is comprised of three
Accounts: the Interest Account, the Principal Account and the Retirement
Account. The Note Fund shall be used only for the payment when due of principal
of, premium, if any, and interest on the Senior Notes and the Subordinate Notes,
the purchase price of Senior Notes and Subordinate Notes to be purchased on a
Purchase Date or Mandatory Tender Date in accordance with the Indenture, Other
Indenture Obligations and Carry-Over Amounts (including any accrued interest
thereon) and to make transfers to the credit of the Rebate Fund. The principal
of and interest on the Class C Notes are payable from the Surplus Fund.
Interest Account. The Trustee shall deposit in the Interest Account (i)
that portion of the proceeds from the sale of Financed Student Loans
representing accrued interest and Special Allowance Payments thereon, (ii) that
portion of the proceeds from the sale of the Corporation's bonds, notes or other
evidences of indebtedness, if any, to be used to pay interest on the Senior
Notes or the Subordinate Notes, (iii) all Counterparty Swap Payments, (iv) all
payments under any Credit Enhancement Facilities to be used to pay interest on
(or the interest portion of the purchase price of) the Notes and (v) all amounts
required to be transferred thereto from the Funds and Accounts specified in the
last sentence of the following paragraph. The moneys in the Interest Account
shall be invested in Investment Securities as described under "Investments"
below, and any earnings on or income from such investments shall be deposited in
the Revenue Fund.
To provide for the payment of each installment of interest which falls due
upon Senior Notes or Subordinate Notes on each regularly scheduled Interest
Payment Date and all Corporation Swap Payments and fees to a Credit Facility
Provider payable on such Interest Payment Date, the Trustee shall make deposits
to the credit of the Interest
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Account on each Monthly Payment Date (less certain credits against such
payments). If, on any Interest Payment Date (including a Redemption Date or a
date that Notes are to be purchased that is not a regularly scheduled Interest
Payment Date), moneys in the Interest Account are insufficient to pay the
accrued interest due on the Senior Notes and Subordinate Notes and all
Corporation Swap Payments and fees to a Credit Enhancement Facility Provider
payable on such Interest Payment Date or constituting a portion of the purchase
price of Notes to be so purchased, the Trustee shall deposit immediately to the
credit of the Interest Account an amount equal to such deficiency. Each deposit
required by this paragraph shall be made by transfer from the following Funds
and Accounts, in the following order of priority: the Revenue Fund, the Surplus
Fund (other than that portion of the Balance thereof consisting of Eligible
Loans), the Reserve Fund, the Administration Fund, the Surplus Fund (including
any portion of the Balance thereof consisting of Eligible Loans), the Retirement
Account, the Principal Account and, as to Senior Notes and Other Senior
Obligations only, the Acquisition Fund (other than that portion of the Balance
thereof consisting of Student Loans); provided that such transfers in respect of
Subordinate Notes or Other Subordinate Obligations shall be so made from the
Principal Account or the Retirement Account only if, and to the extent, any
amounts to be so transferred are in excess of the requirements of such Accounts
with respect to Senior Obligations payable therefrom.
If, as of any regularly scheduled Interest Payment Date, any Carry-Over
Amount (including any accrued interest thereon) is due and payable with respect
to a series of Notes, as provided in the related Supplemental Indenture, the
Trustee shall transfer to the Interest Account (to the extent amounts are
available therefor in the Surplus Account, after taking into account all other
amounts payable from the Surplus Fund on such Interest Payment Date) an amount
equal to such Carry-Over Amount (including any accrued interest thereon) so due
and payable.
Balances in the Interest Account shall be transferred to the credit of the
Rebate Fund to the extent necessary, after transfers thereto from the Revenue
Fund, the Surplus Fund, the Reserve Fund, the Administration Fund, the
Retirement Account and the Principal Account, to make any deposit to the credit
of the Rebate Fund required by the Indenture. (See "Rebate Fund" below.)
Apart from transfers to the Rebate Fund and transfers to the Principal
Account as described under "Principal Account" below, Balances in the Interest
Account shall be applied, first, to the payment of interest on all Senior Notes,
Corporation Swap Payments under Senior Swap Agreements and fees payable to
Senior Credit Enhancement Providers due on an Interest Payment Date, and if such
money (after the transfers hereinabove described, including all amounts, to the
extent necessary, in the Principal Account) is less than such interest and Other
Senior Obligations on such Interest Payment Date, such money shall be applied,
pro rata, among such indebtedness based upon such amounts then owing to Senior
Beneficiaries and to be paid from the Interest Account; second, to the payment
of interest on all Subordinate Notes, Corporation Swap Payments under
Subordinate Swap Agreements and fees payable to Subordinate Credit Enhancement
Providers due on an Interest Payment Date, and if such money (after the
transfers hereinabove described, including all amounts, to the extent necessary,
in the Principal Account over and above the amount on deposit therein to meet
any accrued obligations to pay principal of the Senior Notes or amounts, other
than fees, to Senior Credit Facility Providers) is less than such interest and
Other Subordinate Obligations on such Interest Payment Date, such money shall be
applied, pro rata, among such indebtedness based upon such amounts then owing to
Subordinate Beneficiaries and to be paid from the Interest Account; and third,
to the payment of all Carry-Over Amounts (including any accrued interest
thereon) due and payable on all series of Notes, and if such money is less than
such Carry-Over Amounts (including any accrued interest thereon) on an Interest
Payment Date, such money shall be applied, pro rata, among such Carry-Over
Amounts (including any accrued interest thereon) based upon such amounts then
otherwise due and payable to Noteholders and to be paid from the Interest
Account.
Other Indenture Obligations payable from the Interest Account will include
reimbursement to any Credit Facility Provider for interest paid on Senior Notes
or Subordinate Notes from amounts derived from the related Credit Enhancement
Facility, which reimbursement shall have the same priority of payment from the
Interest Account as the interest so paid.
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Principal Account. The Trustee shall deposit to the credit of the
Principal Account: (i) that portion of the proceeds from the sale of
Financed Student Loans representing principal thereof, (ii) that portion of
the proceeds from the sale of the Corporation's bonds, notes or other
evidences of indebtedness, if any, to be used to pay principal of the
Senior Notes and the Subordinate Notes, (iii) all payments under any Credit
Enhancement Facilities to be used to pay principal of Senior Notes or
Subordinate Notes or the purchase price of Senior Notes or Subordinate
Notes to be purchased on a Purchase Date or Mandatory Tender Date, and (iv)
all amounts required to be transferred thereto from the following Funds, in
the following order of priority: (1) in the case of payment of principal
of Notes at Stated Maturity, redemption of Senior Notes on a Sinking Fund
Payment Date or the purchase of Notes on a Purchase Date or Mandatory
Tender Date, the Revenue Fund, the Surplus Fund (other than that portion of
the Balance thereof consisting of Eligible Loans), the Reserve Fund, the
Administration Fund and the Surplus Fund (including any portion of the
Balance thereof consisting of Eligible Loans), and (2) in the case of
redemption of Subordinate Notes on a Sinking Fund Payment Date, the Revenue
Fund and the Surplus Fund (other than that portion of the Balance thereof
consisting of Eligible Loans); provided, however, that if principal is
payable on Senior Notes at the Stated Maturity thereof or upon a Sinking
Fund Payment Date therefor, or the purchase price is payable on Senior
Notes on a Purchase Date or Mandatory Tender Date, and money credited to
the Principal Account, after the foregoing transfers, is insufficient to
pay such principal or purchase price, funds shall be transferred, to the
extent necessary, to the Principal Account for this purpose, (i) from the
Interest Account, but only to the extent that the Balance in the Interest
Account exceeds any then accrued payments of interest on the Senior Notes,
Corporation Swap Payments under Senior Swap Agreements and fees owing to
Senior Credit Enhancement Providers and (ii) thereafter from the
Acquisition Fund (other than that portion of the Balance thereof consisting
of Student Loans).
To provide for the payment of principal due on the Stated Maturity of
Senior or Subordinate Serial Notes or on a Sinking Fund Payment Date for
Senior or Subordinate Term Notes, the Trustee shall make deposits to the
credit of the Principal Account on each Monthly Payment Date from amounts
available therefor in the Revenue Fund and the other Funds referred to
above. To the extent there are not available moneys to make any monthly
payment with respect to the cumulative sinking fund redemption of
Subordinate Term Notes, subsequent monthly payments shall be increased to
make up any such deficiency, and to the extent that on any Sinking Fund
Payment Date the aggregate of such payments actually made as of the next-
to-the-last Monthly Payment Date prior to such Sinking Fund Payment Date is
less than the amount of the sinking fund installment due on such Sinking
Fund Payment Date, the amount of such deficiency shall be added to the
amount of the sinking fund installment due on the next Sinking Fund Payment
Date, and the increased amount thereupon shall be deemed to be the amount
due for such next sinking fund installment. However, the requirement for
payments of cumulative sinking fund installments on Subordinate Term Notes
shall not be construed to create an Event of Default in the event of any
such deficiency (other than, under certain circumstances, in amounts due
with respect to the Stated Maturity of Subordinate Term Notes) unless a
sinking fund installment of such Subordinate Term Notes shall not only be
due and not applied to the redemption or purchase of Subordinate Term
Notes, but also that all contingencies upon the obligation so to apply it
as of such time in fact have been satisfied.
In the event that the Corporation is required to furnish moneys to the
Depositary to purchase Notes on a Purchase Date or Mandatory Tender Date,
the Trustee shall, subject to the applicable provisions of the related
Supplemental Indenture, immediately deposit to the credit of the Principal
Account moneys sufficient to pay the purchase price thereof.
Balances in the Principal Account shall be transferred to the credit
of the Rebate Fund to the extent necessary, after transfers thereto from
the Revenue Fund, the Surplus Fund, the Reserve Fund, the Administration
Fund and the Retirement Account, to make any required deposit to the credit
of the Rebate Fund. (See "Rebate Fund" below.)
Balances to the credit of the Principal Account shall be applied in
the following order of priority: first, to the extent required by the
immediately preceding paragraph, for transfer to the Rebate Fund; second,
to the
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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 priority of payment from the Principal Account as the
principal so paid.
Subject to compliance with the provisions of the Indenture described
under "Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Principal Account may also be applied
to the purchase of Senior Notes or Subordinate Notes at a purchase price
(including any brokerage or other charges) not to exceed the Principal
Amount thereof plus accrued interest, as determined by the Corporation at
such time, provided the Trustee shall have first certified that no
deficiencies exist at such time in the Note Fund or the Rebate Fund. Any
such purchase shall be limited to those Senior Notes or Subordinate Notes
whose Stated Maturity or Sinking Fund Payment Date is the next succeeding
Principal Payment Date.
The moneys in the Principal Account shall be invested in Investment
Securities as described under "Investments" below, and any earnings on or
income from such investments shall be deposited in the Revenue Fund.
Retirement Account. The Trustee shall deposit to the credit of the
Retirement Account (i) any amounts transferred thereto from the Reserve
Fund and the Surplus Fund, (ii) that portion of the proceeds from the sale
of the Corporation's bonds, notes or other evidences of indebtedness, if
any, to be used to pay the principal or Redemption Price of Senior Notes or
Subordinate Notes on a date other than the Stated Maturity thereof or a
Sinking Fund Payment Date therefor, and (iii) all payments under any Credit
Enhancement Facilities to be used to pay the Redemption Price of Notes
payable from the Retirement Account. All Senior Notes or Subordinate Notes
which are to be retired, or the principal of which is to be prepaid, other
than with moneys in the Principal Account shall be retired or prepaid with
moneys deposited to the credit of the Retirement Account.
Balances in the Retirement Account shall be transferred to the credit
of the Rebate Fund to the extent necessary, after transfers thereto from
the Revenue Fund, the Surplus Fund, the Reserve Fund and the Administration
Fund, to make any required deposit to the Rebate Fund. (See "Rebate Fund"
below.) After taking into account any such required transfers to the
Rebate Fund, Balances in the Retirement Account shall be transferred to the
credit of the Interest Account to the extent required (see "Interest
Account" above) for the payment of interest on Notes and Other Indenture
Obligations payable therefrom.
Other Indenture Obligations payable from the Retirement Account will
include reimbursement to any Credit Facility Provider for the Redemption
Price paid on Senior Notes or Subordinate Notes from amounts derived from
the related Credit Enhancement Facility, which reimbursement shall have the
same priority of payment from the Retirement Account as the Redemption
Price so paid.
Subject to compliance with the provisions of the Indenture described
under "Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Retirement Account (other than any
portion thereof to be applied to the mandatory prepayment of principal of
any Notes) may also be applied to the purchase of Senior Notes or
Subordinate Notes at a purchase price (including any brokerage or other
charges) not to exceed
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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 be used to pay Costs of Issuance,
Administrative Expenses and Note Fees or to reimburse another fund, account
or other source of the Corporation for the previous payment of Costs of
Issuance, Administrative Expenses or Note Fees. Balances in the
Administration Fund shall also be applied to remedy deficiencies in the
Rebate Fund and the Note Fund after transfers thereto from the Revenue
Fund, the Surplus Fund (other than that portion of the Balance thereof
consisting of Eligible Loans) and the Reserve Fund.
The Trustee shall transfer and credit to the Administration Fund
moneys available under the Indenture for transfer thereto from the sources
set forth in the following paragraph and in such amounts and at such times
as an Authorized Officer of the Corporation shall direct by Corporation
order; provided such Corporation order shall certify that the amounts are
required and have been or will be expended within the next 90 days for a
purpose for which the Administration Fund may be used and applied.
Deposits to the credit of the Administration Fund shall be made from
the following sources in the following order of priority: the Income
Account after transfers therefrom to the Rebate Fund, the Interest Account,
the Principal Account (other than with respect to the payment of sinking
fund installments for Subordinate Notes), and the Retirement Account; and
the Surplus Account after transfers therefrom to the Rebate Fund, the
Interest Account, the Principal Account (other than with respect to the
payment of sinking fund installments for Subordinate Notes) and the
Retirement Account, provided that any such deposit from the Surplus Account
shall only be made to the extent that portion of the Balance thereof not
consisting of Eligible Loans is sufficient therefor.
Pending transfers from the Administration Fund, the moneys therein
shall be invested in Investment Securities, as described under
"Investments" below, and any earnings on or income from such investments
shall be deposited in the Revenue Fund.
Reserve Fund
The Reserve Fund is established under the Indenture only for the
security of the Senior Beneficiaries and the Subordinate Beneficiaries, and
not for the Holders of the Class C Notes (other than to provide funds for
transfers to the Rebate Fund for Tax Exempt Class C Notes as hereinafter
described). Immediately upon the delivery of any series of Senior Notes or
Subordinate Notes, and from the proceeds thereof or, at the option of the
Corporation, from any amounts to be transferred thereto from the Surplus
Fund and from any other available moneys of the Corporation not otherwise
credited to or payable into any Fund or Account under the Indenture or
otherwise subject to the pledge and security interest created by the
Indenture, the Trustee shall credit to the Reserve Fund the amount, if any,
specified in the Supplemental Indenture providing for the issuance of that
series of Notes, such that, upon issuance of such Notes, the Balance in the
Reserve Fund shall not be less than the Reserve Fund Requirement.
If on any Monthly Payment Date the Balance in the Reserve Fund is less
than the Reserve Fund Requirement, the Trustee shall transfer and credit
thereto an amount equal to the deficiency from moneys available therefor in
the following Funds and Accounts in the following order of priority: the
Repayment Account, the
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Income Account and the Surplus Fund; provided that any such transfer from
the Surplus Fund shall only be made to the extent that portion of the
Balance thereof not consisting of Eligible Loans is sufficient therefor.
The Balance in the Reserve Fund shall be used and applied solely for
(i) transfers to the Rebate Fund to the extent necessary, after transfers
thereto from the Revenue Fund and the Surplus Fund (other than that portion
of the Balance thereof consisting of Eligible Loans), to make any required
deposit to the Rebate Fund (see "Rebate Fund" below), and (ii) after such
transfer, if any, to be made pursuant to the preceding clause (i) has been
taken into account, the payment when due of principal and interest on the
Senior Notes and the Subordinate Notes and any Other Indenture Obligations
and the purchase price of Senior Notes and Subordinate Notes on a Purchase
Date or Mandatory Tender Date, and the other purposes specified in the
Indenture (see "Note Fund" above), and shall be so used and applied by
transfer by the Trustee to the credit of the Note Fund, (a) at any time and
to the extent that the Balance therein and the Balances available for
deposit to the credit thereof from the Revenue Fund and the Surplus Fund
(other than that portion of the Balance thereof consisting of Eligible
Loans) are insufficient to meet the requirements specified in the Indenture
for deposit to the credit of the Note Fund at such time (provided, however,
that such amounts shall be applied, first, to the payment of interest on
the Senior Notes and Other Senior Obligations payable from the Interest
Account, second, to the payment of principal and the purchase price of
Senior Notes and Other Senior Obligations payable from the Principal
Account, third, to the payment of interest on the Subordinate Notes and
Other Subordinate Obligations payable from the Interest Account, and,
fourth, to the payment of principal and the purchase price of Subordinate
Notes and Other Subordinate Obligations payable from the Principal Account)
and (b) at any time when a portion of the Balance therein is required to be
transferred to the Retirement Account to pay a portion of the Redemption
Price of Senior Notes or Subordinate Notes to be redeemed as provided in a
Supplemental Indenture relating thereto. If on any Monthly Payment Date
the Balance in the Reserve Fund exceeds the Reserve Fund Requirement, such
excess shall, upon Corporation order, be transferred to the Principal
Account, to the extent necessary to make the deposits required to be made
to the credit of the Principal Account on such Monthly Payment Date,
whether or not other moneys are available to make such deposits.
Pending transfers from the Reserve Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below
and any earnings on or income from such investments shall be deposited in
the Revenue Fund.
Rebate Fund
The Indenture establishes a Rebate Fund, which is comprised of two
Accounts: the Rebate Account and the Excess Earnings Account.
Rebate Account. The Trustee shall deposit to the credit of the Rebate
Account amounts from the Balances in the Revenue Fund, the Surplus Fund
(other than that portion of the Balance thereof consisting of Eligible
Loans), the Reserve Fund, the Administration Fund, the Surplus Fund
(including any portion of the Balance thereof consisting of Eligible
Loans), the Retirement Account, the Principal Account, the Interest Account
and the Acquisition Fund, in that order of priority, upon receipt of a
Corporation certificate (which the Corporation is required to provide on an
annual basis) that any amounts to be so transferred equal amounts which are
subject to rebate to the United States under Section 148 of the Code with
respect to each series of Tax-Exempt Notes. In addition, the Trustee shall
deposit to the credit of the Rebate Account all investment earnings
received on amounts in the Rebate Account. In determining the rebate
amount, the Corporation and the Trustee shall take into account all amounts
held under the Indenture and, pending the application of such amounts to
the purpose for which such amounts were removed, all amounts removed from
under the Indenture.
Moneys in the Rebate Account shall be paid by the Trustee to the
United States at such times and in such amounts as are necessary to comply
with the rebate provisions of Section 148 of the Code with respect to each
series of Tax-Exempt Notes. In addition, upon receipt by the Trustee of a
certification of the Corporation that certain amounts in the Rebate Account
are not subject to rebate and an opinion of Bond Counsel to the effect that
failure
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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.
Excess Earnings Account. On or prior to each date established under
the Indenture for the calculation of Excess Earnings with respect to each
series of Tax-Exempt Notes (each an "Excess Earnings Computation Date"),
the Trustee and the Corporation shall determine whether any Excess Earnings
have resulted with respect to such series of Notes. In this regard, a
portion of the proceeds of the Tax Exempt Series 1997-1 Notes will be
applied to the purchase of certain Eligible Loans previously financed with
the proceeds of other bonds or notes of the Original Issuer (the "Refunded
Obligations"), thereby refunding such bonds or notes. Excess Earnings on
such Eligible Loans shall be the "Excess Earnings" computed with respect to
the related series of Refunded Obligations in accordance with the
requirements of the indenture relating to such series, all deposits to the
Series 1997-1 Excess Earnings Sub-Account in respect of Excess Earnings for
each such series of Refunded Obligations shall be applied to reduce the
yield on the applicable Eligible Loans in accordance with the requirements
of the related indenture, and amounts in respect of such Excess Earnings
shall be deposited in, and shall be applied from, the Series 1997-1 Excess
Earnings Sub-Account prior to any other deposits in, or applications from,
the Excess Earnings Account. The foregoing provisions shall apply to each
series of Refunded Obligations until such series has been retired, after
which time Excess Earnings on the applicable Eligible Loans will be
computed with respect to the Tax Exempt Series 1997-1 Notes. The
Corporation shall, upon each such calculation, furnish the Trustee with a
Corporation certificate verifying such calculation and with any supporting
documentation required to calculate or evidence the Excess Earnings in
accordance with applicable Treasury Regulations. In the event any Excess
Earnings with respect to a series of Notes have resulted, the Trustee
shall, on or prior to such Excess Earnings Computation Date, transfer to
the Excess Earnings Account the amount, if any, which is necessary to
increase the balance in such Account to an amount equal to such Excess
Earnings. Any such transfer shall be made from the Balances in the Revenue
Fund, the Surplus Fund (other than that portion of the Balance thereof
consisting of Eligible Loans), the Reserve Fund, the Administration Fund,
the Surplus Fund (including any portion of the Balance thereof consisting
of Eligible Loans), the Retirement Account, the Principal Account, the
Interest Account and the Acquisition Fund, in that order of priority.
All amounts in the Excess Earnings Account, including all investment
earnings thereon, shall remain therein until transferred to the Revenue
Fund or paid by the Trustee to the United States Department of the Treasury
or for such other purpose as the Corporation may specify, upon receipt by
the Trustee of (a) a Corporation order directing the Trustee to so transfer
or pay a specified amount, and (b) a written opinion of Bond Counsel to the
effect that any such transfer or payment, upon satisfaction of any
conditions set forth in such opinion (e.g., forgiveness of indebtedness on
all or a portion of the related Financed Student Loans), would not cause
interest on any series of Tax-Exempt Notes to be includable in the gross
income of any owners thereof for federal income tax purposes.
Amounts in the Excess Earnings Account shall be used only for the
purposes specified in the preceding paragraph, and shall not be available
for any other purpose, including, but not limited to, payment of Debt
Service on or the purchase price of the Notes or any Other Indenture
Obligations.
Surplus Fund
The Indenture establishes a Surplus Fund, which is comprised of two
Accounts: the Special Redemption and Prepayment Account and the Surplus
Account. The Trustee shall deposit to the credit of the Surplus Fund
Balances in the Revenue Fund not required for deposit to any other Fund or
Account. Deposits to the Surplus Fund from the Revenue Fund shall be
credited to the Special Redemption and Prepayment Account to the extent the
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Balance thereof is less than the Special Redemption and Prepayment Account
Requirement for each series of Notes, and otherwise to the Surplus Account.
Balances in the Surplus Fund shall be applied to the following
purposes in the following order of priority: first, to remedy deficiencies
in the Rebate Fund (after transfers thereto from the Revenue Fund); second,
to remedy deficiencies in the Interest Account (after transfers thereto
from the Revenue Fund) for the payment of interest on Senior Notes or Other
Senior Obligations payable therefrom; third, to remedy deficiencies in the
Principal Account (after transfers thereto from the Revenue Fund) for the
redemption or payment of principal or the purchase price of Senior Notes or
the payment of Other Senior Obligations payable therefrom; fourth, to
remedy deficiencies in the Retirement Account (after transfers thereto from
the Revenue Fund) for the redemption of Senior Notes or the payment of
Other Senior Obligations payable therefrom; fifth, to remedy deficiencies
in the Interest Account (after transfers thereto from the Revenue Fund) for
the payment of interest on Subordinate Notes or Other Subordinate
Obligations payable therefrom; sixth, to remedy deficiencies in the
Principal Account (after transfers thereto from the Revenue Fund) for the
payment of the principal at Stated Maturity or the purchase price of
Subordinate Notes or the payment of Other Subordinate Obligations payable
therefrom; seventh, to remedy deficiencies in the Retirement Account (after
transfers thereto from the Revenue Fund) for the redemption of Subordinate
Notes or the payment of Other Subordinate Obligations payable therefrom;
eighth, to make deposits (but only from the Surplus Account) to the credit
of the Administration Fund (after transfers thereto from the Revenue Fund)
to the extent required pursuant to a Corporation order for certain costs
and expenses; ninth, to remedy deficiencies in the Reserve Fund (to the
extent that the Balance is less than the Reserve Fund Requirement after
transfers thereto from the Revenue Fund); tenth, to remedy deficiencies in
the Principal Account (after transfers thereto from the Revenue Fund) to
meet the sinking fund installment with respect to the redemption of
Subordinate Term Notes on a Sinking Fund Payment Date; eleventh, to make
transfers to the credit of the Retirement Account to redeem or prepay
Senior Notes or Subordinate Notes as provided in a Supplemental Indenture
relating thereto (provided that any such transfers shall be made only from
Balances in the Special Redemption and Prepayment Account); and twelfth, to
make deposits (but only from the Surplus Account) to the credit of the
Interest Account for the payment of Carry-Over Amounts (and accrued
interest thereon). Notwithstanding the foregoing, Balances in the Surplus
Fund consisting of Eligible Loans shall not be required to be applied (1)
pursuant to priorities first through seventh above until after any
transfers from the Reserve Fund have been taken into account, and (2) in
any event pursuant to priorities eighth through twelfth above. If the
Surplus Fund is to be used to make such transfers, transfers shall be made,
first, from any cash or Investment Securities included in the Surplus
Account or the Special Redemption and Prepayment Account, in that order,
and, second, from the proceeds of any sale of Student Loans included in the
Surplus Account.
Balances in the Special Redemption and Prepayment Account may also be
transferred to the Acquisition Fund for the acquisition or origination of
Eligible Loans as provided in the Indenture and as further authorized or
limited in a Supplemental Indenture.
Subject to compliance with the provisions of the Indenture described
under "Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above and satisfaction of certain other conditions set forth
in the Indenture, Balances in the Special Redemption and Prepayment Account
(other than any portion thereof to be applied to the mandatory prepayment
of principal of any Notes) may also be transferred to the Note Fund for the
purchase of Notes.
Balances in the Surplus Account may, subject to satisfaction of
certain conditions set forth in the Indenture (including the requirement
that, after taking into account any such payments, the Senior Asset
Requirement will be met) also be applied, as determined by the Corporation
from time to time, to the payment of principal of or interest on Class C
Notes when due or upon the redemption thereof at the option of the
Corporation.
Subject to compliance with the provisions of the Indenture described
under "Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Surplus Account may also be applied to
any one or more of the following purposes at any time as determined by the
Corporation at such time, provided the
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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;
(2) transfer to the Principal Account or the Retirement Account
for the purchase of Senior Notes or Subordinate Notes; or
(3) upon satisfaction of certain conditions set forth in the
Indenture, (a) the acquisition of Student Loans meeting the
requirements of clauses (A) (1) and (2) or (B) of the definition of
"Eligible Loan" (see "Glossary of Certain Defined Terms"); (b) to
reimburse another fund, account or other source of the Corporation for
the previous payment of Costs of Issuance; and (c) for such other
purposes as the Corporation shall determine; provided, however, that
Balances in the Surplus Account shall not be applied to any of the
purposes specified in the preceding clause (3)(b) or (c) or to the
purchase of Student Loans that are not Eligible Loans unless, after
taking into account any such application and excluding, for these
purposes only, from the calculation of Aggregate Value, any Financed
Student Loans which are not Eligible Loans and any moneys reasonably
expected to be needed for transfer to the Rebate Fund or to be used to
pay Costs of Issuance, Note Fees or Administrative Expenses, (i) the
Senior Percentage will not be less than ___% (or such lower percentage
specified in a Corporation certificate delivered to the Trustee which,
if Unenhanced Senior Notes are Outstanding, shall not result in the
lowering or withdrawal of the outstanding rating assigned by any
Rating Agency to any of the Unenhanced Senior Notes Outstanding, or,
if no Unenhanced Senior Notes are Outstanding but Other Senior
Obligations are Outstanding, is acceptable to the Other Senior
Beneficiaries entitled to such Other Senior Obligations), and (ii) the
Subordinate Percentage will not be less than ___% (or such lower
percentage specified in a Corporation certificate delivered to the
Trustee which, if Unenhanced Subordinate Notes are Outstanding, shall
not result in the lowering or withdrawal of the outstanding rating
assigned by any Rating Agency to any of the Unenhanced Subordinate
Notes Outstanding, or, if no Unenhanced Subordinate Notes are
Outstanding but Other Subordinate Obligations are Outstanding, is
acceptable to the Other Subordinate Beneficiaries entitled to such
Other Subordinate Obligations); and provided, further, that Balances
in the Surplus Account may be applied to the purchase of Eligible
Loans as specified in the preceding clause (3)(a) without satisfying
any other condition of this clause (3), to the extent provided in a
Supplemental Indenture (in this regard, the First Supplemental
Indenture does not so provide with respect to the application of
Balances in the Series 1997-1 Tax Exempt and Taxable Surplus Sub-
Accounts).
The Trustee shall use its best efforts to sell Student Loans included
in the Balance of the Surplus Account at the best price available to the
extent necessary to make any transfer or payment therefrom described above.
In addition, the Corporation may, at any time, sell to any purchaser (A)
one or more Eligible Loans Financed with moneys in the Surplus Account at a
price not less than 100% of the Principal Balance thereof plus accrued
noncapitalized interest thereon payable by the Eligible Borrower, or (B)
one or more Student Loans Financed with moneys in the Surplus Account that
are not Eligible Loans at a price not less than the lesser of 100% of the
Principal Balance thereof or the percentage of the Principal Balance
thereof paid to finance such Student Loan plus, in either case, accrued
noncapitalized interest thereon payable by the Eligible Borrower. Student
Loans from time to time held in the Surplus Account may also be purchased
at any time with the proceeds of the Corporation's bonds, notes or other
evidences of indebtedness, at a purchase price equal to 100% of the
Principal Balance of the Student Loans so purchased plus accrued
noncapitalized interest thereon payable by the Eligible Borrower. Any
money received by the Corporation in connection with a sale of Financed
Student Loans pursuant to this paragraph shall be deposited to the credit
of the Surplus Account.
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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, are, contemporaneously with receipt by the Trustee of the
purchase price thereof, including any Eligible Loans to be received in
exchange therefor, no longer pledged to nor serve as security for the
payment of the principal of, premium, if any, or interest on, or any Carry-
Over Amounts (or accrued interest thereon) with respect to the Notes or any
Other Indenture Obligations. The revenues, moneys and securities in the
Rebate Fund and the proceeds thereof are not pledged to, and do not serve
as security for, the payment of the principal of, premium, if any, or
interest on, any Carry-Over Amounts (or accrued interest thereon) with
respect to, or the purchase price of, the Notes or any Other Indenture
Obligations.
The Corporation agrees that it will not create, or permit the creation
of, any pledge, lien, charge or encumbrance upon the Financed Student Loans
or the revenues and other moneys, securities, properties, rights, interests
and evidences of indebtedness pledged under the Indenture, except only as
to a lien subordinate to the lien of the Indenture created by any other
indenture authorizing the issuance of bonds, notes or other evidences of
indebtedness of the Corporation, the proceeds of which have been or will be
used to refund or otherwise retire all or a portion of the Outstanding
Notes or as otherwise provided in or permitted by the Indenture. The
Corporation agrees that it will not issue any bonds or other evidences of
indebtedness, other than the Notes as permitted by the Indenture and other
than Swap Agreements and Credit Enhancement Facilities relating to Notes as
permitted by the Indenture, secured by a pledge of the revenues and other
moneys, securities, properties, rights, interests and evidences of
indebtedness pledged under the Indenture or held aside by the Corporation
or by a fiduciary under the Indenture, creating a lien or charge on such
revenues and other moneys, securities, properties, rights, interests and
evidences of indebtedness equal or superior to the lien of the Indenture;
provided that nothing in the Indenture is intended to prevent the
Corporation from issuing obligations secured by assets and revenues of the
Corporation other than the revenues and other moneys, securities,
properties, rights, interests and evidences of indebtedness pledged in the
Indenture.
Covenants
Certain covenants with the Holders of the Notes and Other
Beneficiaries contained in the Indenture are summarized as follows:
Trustee to Hold Financed Student Loans. The Corporation shall cause
all Financed Student Loans to be endorsed and otherwise conveyed to the
Trustee on behalf of the Corporation in accordance with the provisions of
the applicable Student Loan Purchase Agreement or, in the case of any
origination of Financed Student Loans, shall cause such Student Loans to be
originated in the name of the Trustee. The Trustee shall be the legal
owner of all Financed Student Loans for all purposes of the Higher
Education Act and each Guarantee Program. The Trustee shall so hold such
Financed Student Loans in its capacity as trustee pursuant to the Indenture
and, in such capacity, shall be acting on behalf of the Corporation, as the
beneficial owner of such Student Loans, as well as the Holders of the Notes
and all Other Beneficiaries, as their interests may appear.
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Enforcement and Amendment of Guarantee Agreements. So long as any
Notes or Other Indenture Obligations are Outstanding and Financed Eligible
Loans are Guaranteed by a Guarantee Agency, the Corporation agrees that it
(1) will, from and after the date on which the Trustee on its behalf shall
have entered into the Guarantee Agreement, cause the Trustee to maintain
the same and diligently enforce the Trustee's rights thereunder, (2) will
cause the Trustee to enter into such other similar or supplemental
agreements as shall be required to maintain benefits for all Financed
Student Loans covered thereby, and (3) will not consent to or permit any
rescission of or consent to any amendment to or otherwise take any action
under or in connection with the same which in any manner will materially
adversely affect the rights of the Noteholders or Other Beneficiaries under
the Indenture.
Acquisition, Collection and Assignment of Student Loans. The
Corporation agrees that it will, except as provided with regard to the
Surplus Fund (see "Funds and Accounts -- Surplus Fund" above), cause the
Trustee to originate or acquire only Eligible Loans with moneys in any of
the Funds and (subject to any adjustments referred to in the following
paragraph) shall diligently cause to be collected all principal and
interest payments on all the Financed Student Loans and other sums to which
the Corporation is entitled pursuant to any Student Loan Purchase
Agreement, and all grants, subsidies, donations, insurance payments,
Special Allowance Payments and all defaulted payments Guaranteed by any
Guarantee Agency which relate to such Financed Student Loans. The
Corporation shall also make, or cause to be made by Lenders or Servicers,
every effort to perfect the Corporation's, the Trustee's or such Lender's
or Servicer's claims for payment from the Secretary of Education or a
Guarantee Agency, as soon as possible, of all payments related to such
Financed Student Loans. The Corporation will cause the Trustee to assign
such Financed Student Loans for payment of guarantee or insurance benefits
within the time required under applicable law and regulations. The
Corporation will cause all United States and State statutes, rules and
regulations which apply to the Program and to Financed Student Loans to be
complied with.
Enforcement of Financed Student Loans. The Corporation agrees that it
shall cause to be diligently enforced, and cause to be taken all steps,
actions and proceedings reasonably necessary for the enforcement of, all
terms, covenants and conditions of all Financed Student Loans and
agreements in connection therewith, including the prompt payment of all
principal and interest payments (as such payments may be adjusted to take
into account (i) any discount the Corporation may cause to be made
available to borrowers who make payments on Financed Student Loans through
automatic withdrawals, and (ii) any reduction in the interest payable on
Financed Student Loans provided for in any special program under which such
loans were originated) and all other amounts due the Corporation or the
Trustee thereunder. Nothing in the provisions of the Indenture described
in this paragraph, however, shall be construed to prevent the Corporation
from settling a default or curing a delinquency on any Financed Student
Loan on such terms as shall be required by law. In addition, (1) the
Corporation may cause the Trustee to forgive the indebtedness on all or a
portion of the Financed Student Loans or take such other action as may be
provided in the written opinion of Bond Counsel, as provided in the
Indenture, to the extent necessary to prevent interest on any series of
Tax-Exempt Notes from being includable in the gross income of the owners
thereof for federal income tax purposes, and may cause the Trustee to
forgive the remaining indebtedness on any Financed Student Loan having a
principal balance not in excess of $100 if, in the reasonable judgment of
the Corporation, the cost of collection of the remaining indebtedness of
such Financed Student Loan would exceed such remaining indebtedness, and
(2) the Corporation may cause the Trustee to amend the terms of a Financed
Student Loan to provide for a different rate of interest thereon to the
extent required by law or, if such Financed Student Loan is a Plus or SLS
Loan, to effect a reissuance of such Plus or SLS Loan at a variable rate.
Servicing and Other Agreements. The Corporation may contract with
other Persons to assist it in performing its duties under the Indenture,
and any performance of such duties by a Person so identified to the Trustee
shall be deemed to be action taken by the Corporation. The Corporation
may, and prior to or contemporaneously with the Section 150(d)(3) Transfer
shall, enter into a Servicing Agreement providing for the servicing of the
Financed Student Loans and performance of certain of its other obligations
under the Indenture.
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Administration and Collection of Financed Student Loans. The
Corporation agrees that all Financed Student Loans shall be administered
and collected either by the Corporation or by a Servicer selected by the
Corporation (and, after the Section 150(d)(3) Transfer, shall be so
administered and collected by a Servicer) in a competent, diligent and
orderly fashion and in accordance with all requirements of the Higher
Education Act, the Secretary of Education, the Indenture, the Contract of
Insurance, the Federal Reimbursement Contracts, each Guarantee Program and
each Guarantee Agreement.
Books of Account, Annual Audit. The Corporation agrees that it will
cause to be kept and maintained proper books of account relating to the
Program in which full, true and correct entries will be made, in accordance
with generally accepted accounting principles, of all dealings or
transactions of or in relation to the business and affairs of the
Corporation, and within 120 days after the end of each Fiscal Year will
cause such books of account to be audited by an Accountant. A copy of each
audit report, annual balance sheet and income and expense statement showing
in reasonable detail the financial condition of the Corporation as at the
close of each Fiscal Year, and summarizing in reasonable detail the income
and expenses for such year, including the transactions relating to the
Funds and Accounts, shall be filed promptly with the Trustee and be
available for inspection by any Noteholder or Other Beneficiary.
Punctual Payments. The Corporation agrees that it will duly and
punctually pay, or cause to be paid, the principal of, premium, if any, and
interest on and any Carry-Over Amount (and accrued interest thereon) with
respect to each and every Note and each Other Indenture Obligation from the
revenues and other assets pledged under the Indenture on the dates and at
the places, and in the manner provided, in the Notes and with respect to
each Other Indenture Obligation according to the true intent and meaning
thereof, and the Corporation will faithfully do and perform and at all
times fully observe and keep any and all of its covenants, undertakings,
stipulations and provisions contained in the Notes, the Other Indenture
Obligations and the Indenture.
Monthly Servicing Reports. The Corporation shall prepare, or cause a
Servicer to prepare, a Monthly Servicing Report for each calendar month and
shall furnish, or cause to be furnished, to the Trustee a copy of each such
report within __ Business Days after the end of such calendar month.
Tax Covenant. The Corporation covenants that (a) it will not take or
omit to take any action which may render the interest on any Tax-Exempt
Notes includable in gross income for purposes of federal income taxation,
(b) it will use the proceeds of the Notes and any other funds of the
Corporation in such a manner that the use thereof would not cause the Tax-
Exempt Notes to be "arbitrage bonds" under Section 148 of the Code, and (c)
it will not permit at any time any proceeds of the Notes or any other funds
of the Corporation to be used, directly or indirectly, in a manner which
would result in the inclusion of the interest on any Tax-Exempt Note in
gross income for purposes of federal income taxation otherwise afforded by
the Code.
The First Supplemental Indenture prohibits any obligor on a Student
Loan Financed, in whole or in part, with proceeds of the Tax Exempt Series
1997-1 Notes, or any related party to such obligor, from purchasing any Tax
Exempt Series 1997-1 Notes in an amount related to the amount of such
Student Loan.
Limitation on Administrative Expenses and Note Fees. The Corporation
covenants and agrees that the Administrative Expenses and Note Fees will
not, in any Fiscal Year, exceed those that are reasonable and necessary in
light of all circumstances then existing and will not, in any event, be in
such amounts as will materially adversely affect the ability of the
Corporation to pay or perform, as the case may be, any of its obligations
under the Indenture or the security for any Beneficiaries. The Corporation
further covenants in the First Supplemental Indenture that the Costs of
Issuance, Administrative Expenses and Note Fees to be paid, or reimbursed
to the Corporation, from the Administration Fund will not exceed the
aggregate amount thereof specified in the Closing Cash Flow Projection,
unless the Corporation satisfies certain conditions, including confirmation
from each of the Rating Agencies then rating the Series 1997-1 Notes that
payment or reimbursement of such additional Costs of Issuance,
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Administrative Expenses or Note Fees will not result in a reduction or
withdrawal of the rating of the Series 1997-1 Notes.
Amendment of Student Loan Purchase Agreements. The Corporation shall
notify the Trustee in writing of any proposed amendments to the Student
Loan Purchase Agreements. No such amendment shall become effective unless
and until the Trustee consents in writing thereto, which consent shall not
be given unless the Trustee receives an opinion of Counsel that such
amendment is required by the Higher Education Act or is not to the
prejudice of the Holders of the Notes or Other Beneficiaries.
Amendment of Remarketing Agreements and Depositary Agreements. The
Corporation shall notify the Trustee and any related Credit Facility
Provider in writing of any proposed amendments to any Remarketing Agreement
or Depositary Agreement. No such amendment shall become effective unless
and until (1) the Trustee consents in writing thereto, which consent shall
not be given unless the Trustee receives an opinion of Counsel that such
amendment is required by a Credit Enhancement Facility or the Indenture or
is not to the material prejudice of the Holders of the Notes, and (2) any
related Credit Facility Provider consents in writing thereto, which consent
shall not be unreasonably withheld, provided that no consent of the Credit
Facility Provider shall be required if the Credit Facility Provider
receives an opinion of Counsel that such amendment is required by the
Indenture.
Credit Enhancement Facilities and Swap Agreements. The Corporation
may from time to time enter into or obtain the benefit of any Credit
Enhancement Facilities or Swap Agreements with respect to any Notes of any
series; provided that a Supplemental Indenture is entered into authorizing
the execution and delivery of such agreement. (See "Supplemental
Indentures" below.)
No Supplemental Indenture shall authorize the execution of a Swap
Agreement unless, as of the date the Corporation enters into such Swap
Agreement, the Swap Counterparty has outstanding obligations rated by each
Rating Agency not lower than in its third highest Specific Rating Category
(or each Rating Agency has a comparable other rating with respect to such
Swap Counterparty, such as a comparable rating of claims paying ability or
deposits). No such Swap Agreement shall be designated as a Senior Swap
Agreement unless, as of the date the Corporation enters into such Swap
Agreement, the Senior Asset Requirement will be met and the Trustee shall
have received written confirmation from each Rating Agency that the
execution and delivery of the Swap Agreement will not cause the reduction
or withdrawal of any rating or ratings then applicable to any Outstanding
Unenhanced Notes.
Any Supplemental Indenture authorizing the execution by the
Corporation of a Swap Agreement or Credit Enhancement Facility may include
provisions with respect to the application and use of all amounts to be
paid thereunder. No amounts paid under any such Credit Enhancement
Facility will be part of the Trust Estate except to the extent, if any,
specifically provided in such Supplemental Indenture and no Beneficiary
shall have any rights with respect to any such amounts so paid except as
may be specifically provided in such Supplemental Indenture.
No Petition
The Trustee, by entering into the Indenture, and each Noteholder, by
accepting a Note, covenants and agrees that it will not at any time
institute against the Corporation, or join in any institution against the
Corporation of, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any United States
Federal or state bankruptcy or similar law in connection with any
obligations relating to the Notes or the Indenture.
Investments
"Investment Securities" shall mean any of the following:
1. Government Obligations;
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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;
3. Obligations issued or guaranteed as to principal and interest
by any of the following: (a) the Government National Mortgage
Association; (b) the Federal National Mortgage Association; or (c) the
Federal Farm Credit Banks, the Federal Intermediate Credit Banks, the
Export-Import Bank of the United States, the Federal Land Banks, the
Student Loan Marketing Association, the Federal Financing Bank, the
Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation or
the Farmers Home Administration, or any agency or instrumentality of
the United States of America which shall be established for the
purpose of acquiring the obligations of any of the foregoing or
otherwise providing financing therefor, provided that any such
obligation described in this clause (c) shall either be rated by Fitch
or, if not rated by Fitch, rated by Moody's, (i) if such obligation
has a term of less than one year, not lower than in its highest
applicable Specific Rating Category, or (ii) if such obligation has a
term of one year or longer, not lower than in its highest applicable
Specific Rating Category;
4. Repurchase agreements or reverse repurchase agreements with
banks (which may include the Trustee or any of its affiliates) which
are members of the Federal Deposit Insurance Corporation or with
government bond dealers insured by the Securities Investor Protection
Corporation, which such agreements are secured by Government
Obligations to a level sufficient to obtain a rating by each Rating
Agency in its highest applicable Specific Rating Category, or with
brokers or dealers whose unsecured long-term debt is rated by each
Rating Agency in its highest applicable Specific Rating Category;
5. Any money market fund, including a qualified regulated
investment company described in I.R.S. Notice 87-22, rated by each
Rating Agency not lower than its highest applicable Specific Rating
Category;
6. Any debt instrument; provided that if such instrument has a
term of less than one year, it is rated by each Rating Agency not
lower than in its highest applicable Specific Rating Category, and if
such instrument has a term of one year or longer, it is rated by each
Rating Agency not lower than in its highest applicable Specific Rating
Category;
7. Any investment agreement which constitutes a general
obligation of an entity whose debt, unsecured securities, deposits or
claims paying ability is rated by each Rating Agency, (a) if such
investment agreement has a term of less than one year, not lower than
in its highest applicable Specific Rating Category, or (b) if such
investment agreement has a term of one year or longer, not lower than
in its highest applicable Specific Rating Category; and
8. Any other investment if the Trustee shall have received
written evidence from each Rating Agency that treating such investment
as an Investment Security will not cause any rating then applicable to
any Outstanding Unenhanced Notes to be lowered or withdrawn or, if no
Unenhanced Notes are then Outstanding but Other Indenture Obligations
are Outstanding, is acceptable to the Other Beneficiaries entitled to
such Other Indenture Obligations, as evidenced in writing to the
trustee by each such Other Beneficiary.
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Reports to Noteholders
The Trustee, in accordance with the Indenture, is required to mail a copy
of each Monthly Servicing Report to each Noteholder of record as of the most
recent Record Date. In addition, beneficial owners of the Notes may receive such
reports, upon written request to the Trustee together with a certification that
they are beneficial owners of the Notes. In the case of the Series 1997-1 Notes,
the Servicer will file a copy of each such report with the Commission on Form 8-
K. However, in accordance with the Exchange Act and the rules and regulations of
the Commission thereunder, the Corporation expects that it's obligation to file
such reports will be terminated after June 30, 1998.
Events of Default
If any of the following events occur, it is an "Event of Default" under the
Indenture:
(A) default in the due and punctual payment of any interest on any
Senior Note; or
(B) default in the due and punctual payment of the principal of, or
premium, if any, on, any Senior Note, whether at the Stated Maturity
thereof, at the date fixed for redemption thereof (including, but not
limited to, Sinking Fund Payment Dates) or otherwise upon the maturity
thereof; or
(C) default by the Corporation in its obligation to purchase any
Senior Note on a Purchase Date or Mandatory Tender Date therefor; or
(D) default in the due and punctual payment of any amount owed by
the Corporation to any Other Senior Beneficiary under a Senior Swap
Agreement or Senior Credit Enhancement Facility; or
(E) if no Senior Obligations are Outstanding, default in the due
and punctual payment of any interest on any Subordinate Note; or
(F) if no Senior Obligations are Outstanding, default in the due
and punctual payment of the principal of, or premium, if any, on, any
Subordinate Note, whether at the Stated Maturity thereof, at the date
fixed for redemption thereof (including, but not limited to, Sinking
Fund Payment Dates) or otherwise upon the maturity thereof; or
(G) if no Senior Obligations are Outstanding, default by the
Corporation in its obligation to purchase any Subordinate Note on a
Purchase Date or Mandatory Tender Date therefor; or
(H) if no Senior Obligations are Outstanding, default in the due and
punctual payment of any amount owed by the Corporation to any Other
Subordinate Beneficiary under a Subordinate Swap Agreement or a Subordinate
Credit Enhancement Facility; or
(I) if no Senior Obligations or Subordinate Obligations are
Outstanding, default in the due and punctual payment of any interest on any
Class C Note; or
(J) if no Senior Obligations or Subordinate Obligations are
Outstanding, default in the due and punctual payment of the principal of,
or premium, if any, on, any Class C Note, whether at the Stated Maturity
thereof, at the date fixed for redemption thereof (including, but not
limited to, Sinking Fund Payment Dates) or otherwise upon the maturity
thereof; or
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(K) default in the performance of any of the Corporation's obligations
with respect to the transmittal of moneys to be credited to the Revenue
Fund, the Rebate Fund, the Acquisition Fund or the Note Fund under the
provisions of the Indenture and such default shall have continued for a
period of 30 days; or
(L) default in the performance or observance of any other of the
covenants, agreements or conditions on the part of the Corporation in the
Indenture or in the Notes contained, and such default shall have continued
for a period of 30 days after written notice thereof, specifying such
default, shall have been given by the Trustee to the Corporation, which may
give such notice in its discretion and shall give such notice at the
written request of the Acting Beneficiaries Upon Default, or by the Holders
of not less than 10% in aggregate Principal Amount of the Outstanding Notes
to the Corporation and the Trustee, provided that, except with respect to
the Corporation's covenants relating to the tax exemption of interest on
any Tax-Exempt Notes, if the default is such that it can be corrected, but
not within such 30 days, it shall not constitute an Event of Default if
corrective action is instituted by the Corporation within such 30 days and
is diligently pursued until the default is corrected; or
(M) certain events of bankruptcy or insolvency of the Corporation.
Remedies
Whenever any Event of Default other than that described in paragraph (L)
under "Events of Default" above shall have occurred and be continuing, the
Trustee may (and, upon the written request of the Acting Beneficiaries Upon
Default, the Trustee shall), by notice in writing delivered to the Corporation,
declare the principal of and interest accrued on all Notes then Outstanding due
and payable.
Whenever any Event of Default described in paragraph (L) under "Events of
Default" above shall have occurred and be continuing, (1) the Trustee may, by
notice in writing delivered to the Corporation, declare the principal of and
interest on all Notes then Outstanding due and payable; and (2) the Trustee
shall, upon the written request of the Acting Beneficiaries Upon Default, by
notice in writing delivered to the Corporation, declare the principal of and
interest on all Notes then Outstanding due and payable.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the Acting Beneficiaries Upon Default, by written notice to the
Corporation and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) There has been paid to or deposited with the Trustee by or for the
account of the Corporation, or provision satisfactory to the Trustee has been
made for the payment of, a sum sufficient to pay:
(A) if Senior Notes or Other Senior Obligations are Outstanding: (i)
all overdue installments of interest on all Senior Notes; (ii) the
principal of (and premium, if any, on) any Senior Notes which have become
due other than by such declaration of acceleration, together with interest
thereon at the rate or rates borne by such Senior Notes; (iii) to the
extent that payment of such interest is lawful, interest upon overdue
installments of interest on the Senior Notes at the rate or rates borne by
such Senior Notes; (iv) all Other Senior Obligations which have become due
other than as a direct result of such declaration of acceleration; (v) all
other sums required to be paid to satisfy the Corporation's obligations
with respect to the transmittal of moneys to be credited to the Revenue
Fund, the Rebate Fund, the Acquisition Fund and the Interest Account under
the provisions of the Indenture; and (vi) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and any
Paying Agents, Deposit Agents, Remarketing Agents, Depositaries, Auction
Agents and Broker-Dealers; or
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(B) if no Senior Obligations are Outstanding, but Subordinate Notes or
Other Subordinate Obligations are Outstanding: (i) all overdue installments
of interest on all Subordinate Notes; (ii) the principal of (and premium,
if any, on) any Subordinate Notes which have become due other than by such
declaration of acceleration, together with interest thereon at the rate or
rates borne by such Subordinate Notes; (iii) to the extent that payment of
such interest is lawful, interest upon overdue installments of interest on
the Subordinate Notes at the rate or rates borne by such Subordinate Notes;
(iv) all Other Subordinate Obligations which have become due other than as
a direct result of such declaration of acceleration; (v) all other sums
required to be paid to satisfy the Corporation's obligations with respect
to the transmittal of moneys to be credited to the Revenue Fund, the Rebate
Fund, the Acquisition Fund and the Interest Account under the provisions of
the Indenture; and (vi) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any Paying Agents,
Deposit Agents, Remarketing Agents, Depositaries, Auction Agents and
Broker-Dealers; or
(C) if no Senior Obligations or Subordinate Obligations are
Outstanding: (i) all overdue installments of interest on all Class C Notes
and all overdue sinking fund installments for the retirement of Class C
Notes; (ii) the principal of (and premium, if any, on) any Class C Notes
which have become due otherwise than by such declaration of acceleration
and interest thereon at the rate or rates borne by such Class C Notes;
(iii) to the extent that payment of such interest is lawful, interest upon
overdue installments of interest on the Class C Notes at the rate or rates
borne by such Class C Notes; (iv) all other sums required to be paid to
satisfy the Corporation's obligations with respect to the transmittal of
moneys to be credited to the Revenue Fund, the Rebate Fund and the
Acquisition Fund under the provisions of the Indenture; and (v) all sums
paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel and any Paying Agents, Deposit Agents, Remarketing
Agents, Depositaries, Auction Agents and Broker-Dealers; and
(2) All Events of Default, other than the nonpayment of the principal of
and interest on Notes or amounts owing to Other Beneficiaries which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indenture.
If an Event of Default has occurred and is continuing, the Trustee may,
subject to applicable law, pursue any available remedy by suit at law or in
equity to enforce the covenants of the Corporation in the Indenture and may
pursue such appropriate judicial proceedings as the Trustee shall deem most
effective to protect and enforce, or aid in the protection and enforcement of,
the covenants and agreements in the Indenture. The Trustee is also authorized to
file proofs of claims in any equity, receivership, insolvency, bankruptcy,
liquidation, readjustment, reorganization or other similar proceedings.
Notwithstanding any other provisions of the Indenture, if an "Event of
Default" (as defined therein) occurs under a Swap Agreement or a Credit
Enhancement Facility and, as a result, the Other Beneficiary that is a party
thereto is entitled to exercise one or more remedies thereunder, such Other
Beneficiary may exercise such remedies, including, without limitation, the
termination of such agreement, as provided therein, in its own discretion;
provided that the exercise of any such remedy does not adversely affect the
legal ability of the Trustee or Acting Beneficiaries Upon Default to exercise
any remedy available under the Indenture.
If an Event of Default has occurred and is continuing, and if it shall have
been requested so to do by the Holders of not less than 25% in aggregate
Principal Amount of all Notes then Outstanding or any Other Beneficiary and
shall have been indemnified as provided in the Indenture, the Trustee is obliged
to exercise such one or more of the rights and powers conferred by the Indenture
as the Trustee, being advised by its counsel, shall deem most expedient in the
interests of the Beneficiaries; provided, however, that the Trustee has the
right to decline to comply with any such request if the Trustee shall be advised
by Counsel that the action so requested may not lawfully be 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.
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The Acting Beneficiaries Upon Default have the right, at any time, by an
instrument or instruments in writing executed and delivered to the Trustee, to
direct the method and place of conducting all proceedings to be taken in
connection with the enforcement of the terms and conditions of the Indenture;
provided that (a) such direction shall not be otherwise than in accordance with
the provisions of law and of the Indenture; (b) the Trustee shall not determine
that the action so directed would be unjustly prejudicial to the Holders of
Notes or Other Beneficiaries not taking part in such direction, other than by
effect of the subordination of any of their interests thereunder; and (c) the
Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction.
Except as may be permitted in a Supplemental Indenture with respect to an
Other Beneficiary, no Holder of any Note or Other Beneficiary shall have any
right to institute any suit, action or proceeding in equity or at law for the
enforcement of the Indenture or for the execution of any trust under the
Indenture or for the appointment of a receiver or any other remedy under the
Indenture unless (1) an Event of Default shall have occurred and be continuing,
(2) the Holders of not less than 25% in aggregate Principal Amount of Notes then
Outstanding or any Other Beneficiary shall have made written request to the
Trustee, (3) such Beneficiary or Beneficiaries shall have offered to the Trustee
indemnity, (4) the Trustee shall have thereafter failed for a period of 60 days
after the receipt of the request and indemnification or refused to exercise the
powers granted in the Indenture or to institute such action, suit or proceeding
in its own name and (5) no direction inconsistent with such written request
shall have been given to the Trustee during such 60-day period by the Holders of
not less than a majority in aggregate Principal Amount of the Notes then
Outstanding or by any Other Beneficiary; provided, however, that,
notwithstanding the foregoing provisions of the Indenture, the Acting
Beneficiaries Upon Default may institute any such suit, action or proceeding in
their own names for the benefit of the Holders of all Outstanding Notes and
Other Beneficiaries under the Indenture.
The Holder of any Note shall have the right, which is absolute and
unconditional, to receive payment of the principal of, premium, if any, and
interest on such Note in accordance with the terms thereof and of the Indenture
and, upon the occurrence of an Event of Default with respect thereto, to
institute suit for the enforcement of any such payment, and such right shall not
be impaired without the consent of such Holder.
The Trustee, unless it has declared the principal of and interest on all
Outstanding Notes immediately due and payable and a judgment or decree for
payment of the money due has been obtained by the Trustee, must waive any Event
of Default and its consequences upon written request of the Acting Beneficiaries
Upon Default; provided, however, that there shall not be waived (a) any Event of
Default arising from the acceleration of the maturity of the Notes, except upon
the rescission and annulment of such declaration as described in the third
paragraph under this caption "Remedies"; (b) any Event of Default in the payment
when due of any amount owed to any Beneficiary (including payment of principal
of or interest on any Note) except with the consent of such Beneficiary or
unless, prior to such waiver, the Corporation has paid or deposited (or caused
to be paid or deposited) with the Trustee a sum sufficient to pay all amounts
owed to such Beneficiary (including to the extent permitted by law, interest
upon overdue installments of interest); (c) any Event of Default arising from
the failure of the Corporation to pay unpaid expenses of the Trustee, its agents
and counsel, and any Authenticating Agent, Paying Agents, Note Registrars,
Deposit Agents, Remarketing Agents, Depositaries, Auction Agents and Broker-
Dealers as required by the Indenture, unless, prior to such waiver, the
Corporation has paid or deposited (or caused to be paid or deposited) with the
Trustee sums required to satisfy such obligations of the Corporation under the
provisions of the Indenture.
Application of Proceeds
All moneys received by the Trustee pursuant to any remedy shall, after
payment of the cost and expenses of the proceedings resulting in the collection
of such moneys and of the expenses, liabilities and advances incurred or made by
the Trustee with respect thereto, be applied as follows:
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(A) Unless the principal of all the Outstanding Notes shall have become
or shall have been declared due and payable, all such moneys shall be applied
as follows:
FIRST, to the payment to the Senior Beneficiaries of all installments
of principal and interest then due on the Senior Notes and all Other Senior
Obligations, and if the amount available shall not be sufficient to pay all
such amounts in full, then to the payment ratably, in proportion to the
amounts due, to the Senior Noteholders and to each Other Senior
Beneficiary, without any discrimination or preference, and the Trustee
shall apply the amount so apportioned to the Senior Noteholders first to
the payment of interest and thereafter to the payment of principal;
SECOND, to the payment to the Subordinate Beneficiaries of all
installments of principal and interest then due on the Subordinate Notes
and all Other Subordinate Obligations, and if the amount available shall
not be sufficient to pay all such amounts in full, then to the payment
ratably, in proportion to the amounts due, without regard to due date, to
the Subordinate Noteholders and to each Other Subordinate Beneficiary,
without any discrimination or preference, and the Trustee shall apply the
amount so apportioned to the Subordinate Noteholders first to the payment
of interest and thereafter to the payment of principal; and
THIRD, to the payment of the Holders of the Class C Notes of all
installments of principal and interest (other than interest on overdue
principal) then due and payable.
(B) If the principal of all Outstanding Notes shall have become due or
shall have been declared due and payable and such declaration has not been
annulled and rescinded under the provisions of the Indenture, all such moneys
shall be applied as follows:
FIRST, to the payment to the Senior Beneficiaries of all principal and
interest then due on the Senior Notes and all Other Senior Obligations,
without preference or priority of principal over interest or of interest
over principal, or of any installment of interest over any other
installment of interest, or of any Senior Beneficiary over any other Senior
Beneficiary, ratably, according to the amounts due, to the Persons entitled
thereto without any discrimination or preference; and
SECOND, to the payment to the Subordinate Beneficiaries of the
principal and interest then due on the Subordinate Notes and all Other
Subordinate Obligations, without preference or priority of principal over
interest or of interest over principal, or of any installment of interest
over any other installment of interest, or of any Subordinate Beneficiary
over any other Subordinate Beneficiary, ratably, according to the amounts
due, to the Persons entitled thereto without any discrimination or
preference, and
THIRD, to the payment of the principal and premium, if any, and
interest then due and unpaid upon the Class C Notes, without preference or
priority of principal over interest or of interest over principal, or of
any installment of interest over any other installment of interest, or of
any Class C Note over any other Class C Note, ratably, according to the
amounts due respectively for principal and interest, and other amounts
owing, to the Persons entitled thereto without any discrimination or
preference.
(C) If the principal of all Outstanding Notes shall have been declared
due and payable and if such declaration shall thereafter have been rescinded
and annulled, then (subject to the provisions described in paragraph (B)
above, in the event that the principal of all the Outstanding Notes shall
later become or be declared due and payable) the money held by the Trustee
under the Indenture shall be applied in accordance with the provisions
described in paragraph (A) above.
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Trustee
Prior to the occurrence of an Event of Default which has not been cured,
the Trustee is required to perform such duties and only such duties as are
specifically set forth in the Indenture. Upon the occurrence and continuation of
an Event of Default, the Trustee shall exercise the rights and powers vested in
it by Indenture, and use the same degree of care and skill in their exercise, as
a prudent man would exercise or use under the circumstances in his own affairs.
Before taking any action under the Indenture, the Trustee may require that
satisfactory indemnity be furnished to it for the reimbursement of all expenses
to which it may be put and to protect it against all liability by reason of any
action so taken, except liability which is adjudicated to have resulted from its
negligence or willful misconduct.
The Trustee may at any time resign upon 60 days' notice to the Corporation
and to the Beneficiaries, such resignation to take effect upon the appointment
of a successor Trustee. The Trustee may be removed at any time by the
Corporation at the request of the Holders of a majority in Principal Amount of
Notes Outstanding, except during the existence of an Event of Default. No such
removal shall be effective until the appointment of a successor Trustee.
Deposit Agents
The Corporation may, in a Supplemental Indenture, appoint one or more
Deposit Agents to hold any part or all of the Revenue Fund, the Acquisition Fund
and/or the Administration Fund. Pursuant to the First Supplemental Indenture,
Norwest Bank of South Dakota, N.A., Sioux Falls, South Dakota, has been
appointed a Deposit Agent for the Revenue Fund. Any Deposit Agent may be removed
at any time by the Corporation by Board Resolution and by instrument signed by
an Authorized Officer of the Corporation filed with such Deposit Agent.
Each Deposit Agent appointed by the Corporation shall be an incorporated
bank having trust powers or trust company organized under the laws of the State,
or a national banking association having trust powers, having its principal
office in the State and having a combined capital and surplus of at least
$5,000,000.
Supplemental Indentures
Supplemental Indentures Not Requiring Consent of Beneficiaries
The Corporation and the Trustee may, from time to time and at any time,
without the consent of, or notice to, any of the Noteholders or any Other
Beneficiary (except to the extent, if any, required pursuant to a Supplemental
Indenture authorizing the issuance of a series of Notes), enter into an
indenture or indentures supplemental to the Indenture as shall not be
inconsistent with the terms and provisions of the Indenture, so as to thereby,
among other things:
(a) cure any ambiguity or formal defect or omission in the Indenture
or in any Supplemental Indenture,
(b) grant to or confer upon the Trustee for the benefit of the
Beneficiaries any additional rights, remedies, powers, authority or
security that may lawfully be granted to or conferred upon the
Beneficiaries or the Trustee,
(c) describe or identify more precisely any part of the Trust Estate
or subject additional revenues, properties or collateral to the lien and
pledge of the Indenture,
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(d) authorize the issuance of a series of Notes, subject to the
requirements of the Indenture (see "Additional Notes" above),
(e) amend the assumptions contained in the definition of "Cash
Flow Projection",
(f) modify the Indenture as required by any Credit Facility
Provider or Swap Counterparty, or otherwise necessary to give effect
to any Credit Enhancement Facility or Swap Agreement, at the time of
issuance of a series of Notes to which such agreements relate;
provided that no such modifications shall be effective (1) if the
consent of any Noteholders would be required therefor under the
proviso described in the next succeeding paragraph and such consent
has not been obtained, or (2) the Trustee shall determine that such
modifications are to the prejudice of any Class C Noteholder, or
(g) make any other change in the Indenture which, in the judgment
of the Trustee, is not to the prejudice of the Trustee or any
Beneficiary.
Supplemental Indentures Requiring Consent of Noteholders
Exclusive of Supplemental Indentures described in the preceding
paragraph, the Trustee, upon receipt of an instrument evidencing the
consent to the below-mentioned Supplemental Indenture by: (i) if they are
affected thereby, the Holders of not less than two-thirds of the aggregate
Principal Amount of the Outstanding Senior Notes not held by the
Corporation or a related person, (ii) if they are affected thereby, the
Holders of not less than two-thirds of the aggregate Principal Amount of
the Outstanding Subordinate Notes not held by the Corporation or a related
person, and (iii) each other Person which must consent to such Supplemental
Indenture as provided in any then outstanding Supplemental Indenture
authorizing the issuance of a series of Notes, shall join with the
Corporation in the execution of such other Supplemental Indenture as shall
be deemed necessary and desirable for the purpose of modifying, altering,
amending, adding to or rescinding, in any particular, any of the terms or
provisions contained in the Indenture; provided, however, that no such
Supplemental Indenture shall permit without the consent of each Beneficiary
which would be affected thereby: (a) an extension of the maturity of the
principal of or the interest on any Note, (b) a reduction in the Principal
Amount, Redemption Price or purchase price of any Note or the rate of
interest thereon, (c) a privilege or priority of any Senior Obligation over
any other Senior Obligation, (d) a privilege or priority of any Subordinate
Obligation over any other Subordinate Obligation, (e) a privilege or
priority of any Class C Note over any other Class C Note, (f) a privilege
of any Senior Notes over any Subordinate Notes or Class C Notes, or of any
Subordinate Notes over any Class C Notes, other than as theretofore
provided in the Indenture, (g) the surrendering of a privilege or a
priority granted by the Indenture if, in the judgment of the Trustee, to
the detriment of another Beneficiary under the Indenture, (h) a reduction
or an increase in the aggregate Principal Amount of the Notes required for
consent to such Supplemental Indenture, (i) the creation of any lien
ranking prior to or on a parity with the lien of the Indenture on the Trust
Estate or any part thereof, except as expressly permitted in the Indenture,
(j) any Beneficiary to be deprived of the lien created on the rights,
title, interest, privileges, revenues, moneys and securities pledged under
the Indenture, (k) the modification of any of the provisions of the
Indenture described in this paragraph, or (l) the modification of any
provision of a Supplemental Indenture which states that it may not be
modified without the consent of the Holders of Notes issued pursuant
thereto or any Notes of the same class or any Beneficiary that has provided
a Credit Enhancement Facility or Swap Agreement of such class.
Rights of Trustee
If, in the opinion of the Trustee, any Supplemental Indenture
adversely affects the rights, duties or immunities of the Trustee under the
Indenture or otherwise, the Trustee may, in its discretion, decline to
execute such Supplemental Indenture. The Trustee is entitled to receive,
and shall be fully protected in relying upon, an opinion of its Counsel as
conclusive evidence that any such Supplemental Indenture conforms to the
requirements of the Indenture.
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Consent of Depositaries, Remarketing Agents, Auction Agents and
Broker-Dealers
So long as any Depositary Agreement, Remarketing Agreement, Auction
Agent Agreement or Broker-Dealer Agreement is in effect, no Supplemental
Indenture which materially adversely affects the rights, duties or
immunities of the Depositary, the Remarketing Agent, the Auction Agent or
the Broker-Dealer, as the case may be, created by the Indenture or the
Depositary Agreement, Remarketing Agreement, Auction Agent Agreement or
Broker-Dealer Agreement, as appropriate, shall become effective unless and
until delivery to the Trustee of a written consent of the Depositary, the
Remarketing Agent, the Auction Agent or the Broker-Dealer, as the case may
be, to such Supplemental Indenture.
Opinion and Rating Agency Approval Required Prior to Execution of
Supplemental Indenture
No Supplemental Indenture shall be executed unless, prior to the
execution thereof: (1) if any Tax-Exempt Notes are Outstanding, the
Corporation shall have provided to the Trustee an opinion of Bond Counsel
to the effect that the execution and delivery of such Supplemental
Indenture will not adversely affect the exclusion from the gross income of
the owners thereof for federal income tax purposes of interest on any such
Tax-Exempt Notes; and (2) the Trustee shall have received written evidence
from each Rating Agency that execution and delivery of such Supplemental
Indenture will not adversely affect any rating or ratings then applicable
to any of the Outstanding Notes.
Discharge of Notes and Indenture
The obligations of the Corporation under the Indenture, and the liens,
pledges, charges, trusts, covenants and agreements of the Corporation
therein made or provided for, shall be fully discharged and satisfied as to
any Note and such Note shall no longer be deemed to be Outstanding
thereunder:
(i) when such Note shall have been canceled, or shall have been
purchased by the Trustee from moneys held by it under the Indenture;
or
(ii) as to any Note not canceled or so purchased, when payment of
the principal of and the applicable redemption premium, if any, on
such Note, plus interest on such principal to the due date thereof,
either (a) shall have been made or caused to be made in accordance
with the terms of the Indenture, or (b) shall have been provided for
by irrevocably depositing with the Trustee exclusively for such
payment, (1) moneys sufficient to make such payment or (2) Government
Obligations maturing as to principal and interest in such amount and
at such times as will ensure the availability of sufficient moneys to
make such payment and, if payment of all then Outstanding Notes is to
be so provided for, all payments required to be made to the United
States Treasury or otherwise with respect to Rebate Amounts and Excess
Earnings, as well as the fees and expenses of the Trustee and any
other fiduciaries under the Indenture.
Notwithstanding the provisions of the Indenture just described, no
Notes shall be defeased unless, after giving effect to the defeasance, the
requirements in the Indenture described under "Redemption, Prepayment or
Purchase of Notes; Senior Asset Requirement" above are met as if such Notes
were to be redeemed on the date such Notes are to be defeased.
Notices to Noteholders
Except as is otherwise provided in the Indenture, any provision in the
Indenture for the mailing of notice or other instrument to Holders of Notes
will be fully complied with if it is mailed by first-class mail, postage
prepaid, to each Holder of Notes outstanding at the address appearing on
the Note Register. In addition, whenever notice is to be mailed under the
Indenture to the Holders of Notes, the Trustee is also, upon request, to
mail a copy of such notice to (1) any Holder of at least $1,000,000 in
aggregate Principal Amount of the Notes (or, in the event
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less than $1,000,000 in aggregate Principal Amount of Notes is outstanding,
the Holder of all outstanding Notes), in addition to the copy mailed to
such Holder's address appearing on the Note Register, at such other address
as such Holder shall specify in writing to the Trustee, and (2) any Person
that is the beneficial owner of a Note, as evidenced to the satisfaction of
the Trustee, at such address as such beneficial owner shall specify in
writing to the Trustee; provided that any defect in or failure to mail any
such notice prescribed by this sentence shall not affect the validity of
any proceedings to be taken (including, without limitation, for the
redemption of Notes) pursuant to such notice.
Rights of Other Beneficiaries
All rights of any Other Beneficiary under the Indenture to consent to
or direct certain remedies, waivers, actions and amendments thereunder
shall cease for so long as such Other Beneficiary is in default of any of
its obligations or agreements under the Swap Agreement or the Credit
Enhancement Facility by reason of which such Person is an Other
Beneficiary.
TAX MATTERS
Tax Exempt Series 1997-1 Notes
In the opinion of Dorsey & Whitney LLP, as Bond Counsel, under laws,
regulations, rulings and decisions in effect on the Date of Issuance of the
Series 1997-1 Notes, interest on the Tax Exempt Series 1997-1 Notes is not
includable in gross income of the owners thereof for federal income tax
purposes. In rendering this opinion, Dorsey & Whitney LLP will rely upon
certifications by officers of the Original Issuer, SLFC and the Corporation
and certain covenants of the Original Issuer, SLFC and the Corporation
contained in the Indenture with respect to certain matters material to the
exemption of interest on the Tax Exempt Series 1997-1 Notes from federal
income taxation, including, without limitation, certifications and
covenants as to the use of the proceeds of the Tax Exempt Series 1997-1
Notes, and will assume that the Original Issuer, SLFC and the Corporation
will comply with applicable requirements of the Code. In the opinion of
Dorsey & Whitney LLP, interest on the Tax Exempt Series 1997-1 Notes is an
item of tax preference which is included in "alternative minimum taxable
income" for purposes of the federal alternative minimum tax under Section
55 of the Code.
Provisions of the Code impose continuing requirements that must be met
after the issuance of the Tax Exempt Series 1997-1 Notes for interest
thereon to be and remain excludable from gross income for federal income
tax purposes. Noncompliance with such requirements may cause the interest
on the Tax Exempt Series 1997-1 Notes to be includable in gross income for
such purposes, either prospectively or retroactively to the date of
issuance of the Tax Exempt Series 1997-1 Notes. These requirements include,
but are not limited to, provisions that prescribe that the proceeds of the
Tax Exempt Series 1997-1 Notes and certain other amounts are subject to
yield and other investment limits and provisions that require that certain
investment earnings be rebated on a periodic basis to the Treasury
Department of the United States.
The Code contains numerous provisions which could affect the federal
tax consequences of owning Tax Exempt Series 1997-1 Notes and receiving
interest thereon. The following is a brief summary of some of the
significant provisions applicable to particular Tax Exempt Series 1997-1
Noteholders, but is not intended to be an exhaustive discussion of
collateral tax consequences arising from ownership of the Tax Exempt Series
1997-1 Notes. Prospective Tax Exempt Series 1997-1 Noteholders should
consult their own tax advisers with respect to the impact of such
provisions on their own tax situations.
Interest on the Tax Exempt Series 1997-1 Notes is includable in "net
investment income" of foreign insurance companies for purposes of Section
842(b) of the Code, and may be included in the income of a foreign
corporation for purposes of the branch profits tax imposed by Section 884
of the Code. Additionally, interest on
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the Tax Exempt Series 1997-1 Notes constitutes "passive investment income"
for purposes of the tax imposed by Section 1375 of the Code on such income
of certain S corporations.
Section 265 of the Code denies a deduction for interest on
indebtedness incurred or continued to purchase or carry the Tax Exempt
Series 1997-1 Notes. Indebtedness may be allocated to the Tax Exempt
Series 1997-1 Notes for this purpose even though not directly traceable to
the purchase of the Tax Exempt Series 1997-1 Notes. The Code also
restricts the deductibility of other expenses allocable to the Tax Exempt
Series 1997-1 Notes. In the case of a financial institution described in
Section 265(b)(5) of the Code, no deduction is allowed under the Code for
that portion of the taxpayer's interest expense which is allocable to
interest on the Tax Exempt Series 1997-1 Notes within the meaning of
Section 265(b). In the case of an insurance company subject to the tax
imposed by Section 831 of the Code, the amount which otherwise would be
taken into account as "losses incurred" under Section 832(b)(5) is reduced
by an amount equal to 15% of the interest on the Tax Exempt Series 1997-1
Notes that is received or accrued during the taxable year.
Interest on the Tax Exempt Series 1997-1 Notes will be included in
calculating "modified adjusted gross income" under Section 86 of the Code
for purposes of determining whether, and the extent to which, a portion of
a taxpayer's "social security benefits" or "tier 1 railroad retirement
benefits" will be included in gross income for federal income tax.
Federal Income Tax Consequences
The following is a summary of the material federal income tax
consequences of the purchase, ownership and disposition of Notes for the
investors described below and is based on the opinions of Dorsey & Whitney
LLP, as tax counsel to the Original Issuer and the Corporation. The
Original Issuer and the Corporation, as successor to the Original Issuer in
respect of the Notes, are hereinafter referred to collectively as the
"Issuer." This summary is based upon the Code and other laws, regulations,
rulings and decisions currently in effect, all of which are subject to
change. The discussion does not deal with all federal tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. In addition, this summary is generally limited to investors
who will hold the Series 1997-1 Notes as "capital assets" (generally,
property held for investment) within the meaning of Section 1221 of the
Code. Investors should consult their own tax advisors to determine the
federal, state, local and other tax consequences of the purchase, ownership
and disposition of the Series 1997-1 Notes of any series. Prospective
investors should note that no rulings have been or will be sought from the
Internal Revenue Service (the "Service") with respect to any of the federal
income tax consequences discussed below, and since there are no cases or
rulings concerning similar transactions, there can be no assurance that the
Service will not take contrary positions.
Characterization of the Trust Estate
In the opinion of Dorsey & Whitney LLP, based upon certain assumptions
and certain representations of the Issuer, 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.
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The amount and timing of items of income and deduction of the Noteholder
may differ if the Series 1997-1 Notes were held to constitute partnership
interests, rather than indebtedness.
If, alternatively, it were determined that this transaction created an
entity other than the Issuer which was classified as a corporation or a
publicly traded partnership taxable as a corporation and was treated as
having sold the assets comprising the Trust Estate, the Trust Estate would
be subject to federal income tax at corporate income tax rates on the
income it derives from the Financed Eligible Loans and other assets, which
would reduce the amounts available for payment to the Noteholders. Cash
payments to the Noteholders generally would be treated as dividends for tax
purposes to the extent of such corporation's earnings and profits. A
similar result would apply if the Noteholders were deemed to have acquired
stock or other equity interests in the Issuer. However, as noted above,
the Issuer has been advised that the Series 1997-1 Notes will be treated as
debt of the Issuer for federal income tax purposes.
Characterization of the Series 1997-1 Notes as Indebtedness
The Issuer and the Noteholders express in the Indenture their intent
that, for applicable tax purposes, the Series 1997-1 Notes will be
indebtedness of the Issuer secured by the Trust Estate. The Issuer and the
Noteholders, by accepting the Series 1997-1 Notes, have agreed to treat the
Series 1997-1 Notes as indebtedness of the Issuer for federal income tax
purposes. The Issuer intends to treat this transaction as a financing
reflecting the Series 1997-1 Notes as its indebtedness for tax and
financial accounting purposes.
In general, the characterization of a transaction as a sale of
property or a secured loan, for federal income tax purposes, is a question
of fact, the resolution of which is based upon the economic substance of
the transaction, rather than its form or the manner in which it is
characterized. While the Service and the courts have set forth several
factors to be taken into account in determining whether the substance of a
transaction is a sale of property or a secured indebtedness, the primary
factor in making this determination is whether the transferee has assumed
the risk of loss or other economic burdens relating to the property and has
obtained the benefits of ownership thereof. Notwithstanding the foregoing,
in some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of
the transaction does not accord with its form.
The Issuer believes that it has retained the preponderance of the
primary benefits and burdens associated with Financed Eligible Loans and
other assets comprising the Trust Estate and should, thus, be treated as
the owner of such assets for federal income tax purposes. If, however, the
Service were to successfully assert that this transaction should be treated
as a sale of the Trust Estate assets, the Service could further assert that
the entity created pursuant to the Indenture, as the owner of the Trust
Estate for federal income tax purposes, should be deemed engaged in a
business and, therefore, characterized as an association taxable as a
corporation.
Taxation of Interest Income of Noteholders
In the opinion of Dorsey & Whitney LLP, payments of interest with
regard to the Taxable Series 1997-1 Notes will be includable as ordinary
income when received or accrued by the Holders thereof in accordance with
their respective methods of tax accounting and applicable provisions of the
Code. It is anticipated that the Taxable Series 1997-1 Notes will not be
issued with "original issue discount". There can be no assurance, however,
that the Service would not assert that the interest payable with respect to
the Series 1997-1 Subordinate Notes may not be qualified stated interest
because such payments are not unconditional and that the Series 1997-1
Subordinate Notes are issued with original issue discount.
Payments of interest received with respect to the Taxable Series 1997-
1 Notes may also constitute "investment income" for purposes of certain
limitations of the Code concerning the deductibility of investment interest
expense. Potential Holders should consult their own tax advisors
concerning the treatment of interest payments with regard to the Taxable
Series 1997-1 Notes.
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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 payments of interest with
respect to the Series 1997-1 Notes. As noted above, the Issuer believes,
based on the advice of counsel, that it will retain ownership of the Trust
Estate assets for federal income tax purposes. In the event the Indenture
is deemed to create a pass-through entity as the owner of the Trust Estate
assets for federal income tax purposes instead of the Issuer (assuming such
entity is not, as a result, taxed as an association), the owners of the
Series 1997-1 Notes could be required to accrue payments of interest more
rapidly than otherwise would be required.
Backup Withholding
Certain purchasers may be subject to backup withholding at the rate of
31% with respect to interest paid with respect to the Taxable Series 1997-1
Notes if the purchasers, upon issuance, fail to supply the Trustee or their
brokers with their taxpayer identification numbers, furnish incorrect
taxpayer identification numbers, fail to report interest, dividends or
other "reportable payments" (as deemed in the Code) properly, or, under
certain circumstances, fail to provide the Trustee with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding. Information returns will be sent annually to the Service and
to each purchaser setting forth the amount of interest paid with respect to
the Taxable Series 1997-1 Notes and the amount of tax withheld thereon.
The Issuer makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Series 1997-1 Notes under the tax
laws of any state, locality or foreign jurisdiction. Investors considering
an investment in the Series 1997-1 Notes should consult their own tax
advisors regarding such tax consequences.
Certain U.S. Federal Income Tax Documentation Requirements
A Beneficial Owner of Series 1997-1 Notes holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
United States) will be subject to the 30% U.S. withholding tax (or, in
certain cases, the 31% backup withholding tax) that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such Beneficial Owner and the United States entity required to
withhold tax complies with applicable certification requirements and (ii)
such Beneficial Owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial Owners of
Series 1997-1 Notes that are non-U.S. Persons can obtain a complete
exemption from the United States withholding tax and the backup withholding
tax by filing a signed Form W-8 (Certificate of Foreign Status). If the
information shown in Form W-8 changes, a new form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-United States corporation or
bank with a United States branch, for which the interest income in
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effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the United States withholding tax and
the backup withholding tax by filing Form 4224 (Exemption from Withholding
of Tax on Income Effectively Connected with the Conduct of a Trade or
Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Beneficial Owners of
Series 1997-1 Notes residing in a country that has a tax treaty with the
United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) with respect to United States withholding tax and an
exemption from the backup withholding tax by filing Form 1001 (Ownership,
Exemption or Reduced Rate Note). If the treaty provides only for a reduced
rate, the United States withholding tax will be imposed at that rate unless
the filer alternatively files Form W-8. Form 1001 may be filed by the
Beneficial Owner of the Series 1997-1 Note or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons generally are not
subject to the United States withholding and can obtain a complete
exemption from the backup withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Beneficial Owner of
a Series 1997-1 Note (or in the case of a Form 1001 or a Form 4224 filer,
its agent) files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly
on the books of the clearing agency). Form W-8 and Form 1001 are effective
for three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate the
income of which is includable in gross income for United States tax
purposes, regardless of its source, or (iv) a trust if a court within the
United States is able to exercise primary jurisdiction over the
administration of the trust and one or more United States fiduciaries have
the authority to control all substantial decisions of the trust. This
summary does not deal with all aspects of United States federal income tax
withholding that may be relevant to foreign holders of the globally offered
Series 1997-1 Notes. Investors are advised to consult their own tax
advisers for specific tax advice concerning their holding and disposing of
the globally offered Series 1997-1 Notes.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans"). Section 4975 of the Code imposes essentially the same
prohibited transaction restrictions on tax-qualified retirement plans
described in Section 401(a) of the Code ("Qualified Retirement Plans") and
on Individual Retirement Accounts ("IRAs") described in Section 408(b) of
the Code (collectively, "Tax-Favored Plans"). Certain employee benefit
plans, such as governmental plans (as defined in Section 3(32) of ERISA),
and, if no election has been made under Section 410(d) of the Code, church
plans (as defined in Section 3(33) of ERISA), are not subject to ERISA
requirements. Accordingly, assets of such plans may be invested in Series
1997-1 Notes without regard to the ERISA considerations described below,
subject to the provisions of applicable federal and state law. Any such
plan which is a Qualified Retirement Plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in the Code.
In addition to the imposition of general fiduciary requirements,
including those of investment prudence and diversification and the
requirement that a plan's investment be made in accordance with the
documents governing the plan, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of ERISA Plans
and Tax-Favored Plans and entities whose underlying assets include plan
assets by reason of ERISA Plans or Tax-Favored Plans investing in such
entities (collectively, "Benefit Plans") and persons who have certain
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specified relationships to the Benefit Plans ("Parties in Interest" or
"Disqualified Persons"), unless a statutory or administrative exemption is
available. Certain Parties in Interest (or Disqualified Persons) that
participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed pursuant to Section 502(i) of ERISA (or Section 4975 of
the Code) unless a statutory or administrative exemption is available.
Certain transactions involving the purchase, holding or transfer of
the Series 1997-1 Notes might be deemed to constitute prohibited
transactions under ERISA and the Code if assets of the Original Issuer or
the Corporation were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan
Assets Regulation"), the assets of the Original Issuer or the Corporation
would be treated as plan assets of a Benefit Plan for the purposes of ERISA
and the Code only if the Benefit Plan acquires an "equity interest" in the
Original Issuer or the Corporation and none of the exceptions contained in
the Plan Assets Regulation is applicable. An equity interest is defined
under the Plan Assets Regulation as an interest in an entity other than an
instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Although there can be no
assurances in this regard, it appears that the Series 1997-1 Notes should
be treated as debt without substantial equity features for purposes of the
Plan Assets Regulation. However, without regard to whether the Series
1997-1 Notes are treated as an equity interest for such purposes, the
acquisition or holding of Series 1997-1 Notes by or on behalf of a Benefit
Plan could be considered to give rise to a prohibited transaction if the
Original Issuer, the Corporation or the Trustee, or any of their respective
affiliates, is or becomes a party in interest or a disqualified person with
respect to such Benefit Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
Included among these exemptions are: Prohibited Transaction Class
Exemption ("PTCE") 96-23, regarding transactions effected by "in-house
asset managers"; PTCE 90-1, regarding investments by insurance company
pooled separate accounts; PTCE 95-60, regarding transactions effected by
"insurance company general account"; PTCE 91-38, regarding investments by
bank collective investment funds; and PTCE 84-14, regarding transactions
effected by "qualified professional assets managers."
Any ERISA Plan fiduciary considering whether to purchase Series 1997-1
Notes on behalf of an ERISA Plan should consult with its counsel regarding
the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment and the
availability of any of the exemptions referred to above. Persons
responsible for investing the assets of Tax-Favored Plans that are not
ERISA Plans should seek similar counsel with respect to the prohibited
transaction provisions of the Code.
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS
As described under "The Original Issuer", "The Servicer" and "The
Corporation", the Corporation will be a wholly-owned subsidiary of SLFC,
which in turn will initially be a wholly-owned subsidiary of the Original
Issuer. There is no assurance that the Original Issuer will continue to
own all or any of the stock of SLFC. The Original Issuer will have no
obligations with respect to the Notes or the Indenture after the transfers
described under "The Original Issuer" and "The Corporation." Except for
its obligations under the SLFC Servicing Agreement, SLFC will have no
obligations with respect to the Notes or the Indenture. The Corporation
will have no full-time employees, but will initially contract with SLFC to
perform the Corporation's obligations under the Indenture.
The boards of directors of the Original Issuer, the Corporation and
SLFC presently consist of the same four persons, and two of those persons
also are members of the boards of directors of EAC and EASCI.
The Trustee is also the trustee for the Original Issuer's outstanding
student loan revenue bond and student loan asset-backed note issues, which
will be refunded by the Series 1997-1 Notes. The Trustee has in the past
entered into student loan purchase agreements with the Original Issuer,
including Student Loan Purchase Agreements pursuant to which the Original
Issuer acquired as of ____________, 1997, approximately $__________
principal amount of Eligible Loans which will be Financed under the
Indenture. The Corporation expects that the Trustee
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will enter into Student Loan Purchase Agreements providing for the sale of
a substantial amount of additional Eligible Loans. The Original Issuer
also has obtained (and the Corporation may in the future obtain) financial
services from the Trustee and related entities.
Foley & Lardner, counsel to the Underwriters, has from time to
time represented, and is currently representing, the Original Issuer in
connection with various matters (including matters relating to its transfer
of assets to SLFC). In addition, Foley & Lardner has from time to time
represented, and is currently representing, EAC in connection with various
matters.
For a discussion of certain relationships between Underwriters or
affiliates of Underwriters and the Original Issuer or the Corporation, see
"Plan of Distribution".
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement for the sale of the Series 1997-1 Notes, dated __________, 1997
(the "Underwriting Agreement"), the Original Issuer has agreed to sell and
the Underwriters have jointly and severally (subject to the limitations
discussed below) agreed to purchase all (but not less than all) of the
Series 1997-1 Notes. The obligation of FBS Investment Services, Inc. to
purchase the Series 1997-1 Notes is limited to such principal amount of the
Series 1997-1 Notes as does not exceed 10% of the capital stock actually
paid in and unimpaired and 10% of the unimpaired surplus funds of First
Bank National Association, which is the commercial bank which owns FBS
Investment Services, Inc. as described below.
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.
Each Underwriter has represented and agreed that it has not offered or
sold, and will not offer or sell Series 1997-1 Notes to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted, and will not result in an offer to the public in
the United Kingdom within the meaning of the U.K. Regulations.
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FBS Investment Services, Inc. is a wholly-owned subsidiary of First
Bank National Association, which is the Trustee. Norwest Investment
Services, Inc. is an affiliate of Norwest Bank of South Dakota, N.A., which
will act as a deposit agent for the receipt of certain funds credited to
the Revenue Fund. Smith Barney Inc. and FBS Investment Services, Inc. have
provided to the Original Issuer from time to time, and may provide to the
Corporation in the future, investment or commercial banking services, for
which such Underwriters have received or will receive customary fees and
commissions. First Bank National Association and banks that are affiliates
of Norwest Investment Services, Inc. have in the past entered into student
loan purchase agreements with the Original Issuer. The Corporation expects
that such banks will enter into Student Loan Purchase Agreements providing
for the sale of a substantial amount of additional Eligible Loans.
LEGAL MATTERS
Certain legal matters, including certain income tax matters, will be
passed upon for the Original Issuer and the Corporation by Dorsey & Whitney
LLP, Minneapolis, Minnesota, Bond Counsel and special counsel for the
Original Issuer and the Corporation. Certain legal matters will be passed
upon for the Underwriters by Foley & Lardner, Milwaukee, Wisconsin.
EXPERTS
The balance sheet of the Corporation as of August 31, 1997, has been
included herein and in the registration statement in reliance upon the
report of Eide Helmeke PLLP, Aberdeen, South Dakota, independent certified
public accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Series 1997-1 Notes that the
Series 1997-1 Senior Notes each be rated "AAA" by Fitch Investors Service,
L.P. and "Aaa" by Moody's Investors Services, Inc., and that the Series
1997-1 Subordinate Notes be rated no less than "A" by Fitch Investors
Service, L.P. and "A" by Moody's Investors Services, Inc. The Original
Issuer has applied for ratings of the Series 1997-1 Notes from Moody's
Investors Services, Inc. and Fitch Investors Service, L.P. No application
was made to any other rating agency for the purpose of obtaining additional
ratings of the Series 1997-1 Notes.
Any ratings, if assigned, reflect only the view of the Rating Agency.
Any explanation of the significance of the ratings may be obtained only
from the Rating Agency. The Original Issuer and the Corporation furnished
to the Rating Agencies certain information and materials, some of which may
not have been included in this Prospectus, relating to the Series 1997-1
Notes, the Original Issuer and the Corporation. Generally, rating agencies
base their ratings on such information and materials and on investigation,
studies and assumptions made by the rating agencies. There can be no
assurance that ratings when assigned will continue for any given period of
time or that they will not be lowered or withdrawn entirely by a Rating
Agency if in its judgment circumstances so warrant. If ratings are
assigned, any such downward change in or withdrawal of a rating may have an
adverse effect on the marketability or market price of the Series 1997-1
Notes.
Fitch Investors Service, L.P. has stated that its ratings on Series
1997-1 Notes do not address: (a) the market liquidity of the Series 1997-1
Notes or (b) any Carry-Over Amount that may accrue with respect to the
Taxable Series 1997-1 Notes.
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The Corporation expects to furnish to each Rating Agency information
and materials that it may request. However, the Corporation assumes no
obligation to furnish requested information and materials, and may issue
additional obligations for which a rating is not requested. Failure to
furnish requested information and materials, or the issuance of debt for
which a rating is not requested, may result in the suspension or withdrawal
of a Rating Agency's ratings on the Series 1997-1 Notes.
A securities rating addresses the likelihood of the receipt by Holders
of the Series 1997-1 Notes of payments of principal and interest from
assets in the Trust Estate. The rating takes into consideration the
characteristics of the Financed Eligible Loans, and the structural, legal
and tax aspects associated with the Series 1997-1 Notes. A securities
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
agency. Each securities rating should be evaluated independently of
similar ratings on different securities.
GLOSSARY OF CERTAIN DEFINED TERMS
In addition to the terms defined elsewhere in this Prospectus, the
following terms shall have the following respective meanings. Any term
used with an initial capital letter but not defined herein shall have the
meaning given such term in the Indenture.
"'AA' Composite Commercial Paper Rate" shall mean, with respect to a
series of Tax Exempt Series 1997-1 Senior Notes, (i) the interest
equivalent of the 30-day rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P, or the equivalent of
such rating by S&P, as such 30-day rate is made available on a discount
basis or otherwise by the Federal Reserve Bank of New York for the Business
Day immediately preceding such date of determination, or (ii) if the
Federal Reserve Bank of New York does not make available any such rate,
then the arithmetic average of the interest equivalent of the 30-day rate
on commercial paper placed on behalf of such issuers, as quoted to the
Auction Agent on a discount basis or otherwise by the Commercial Paper
Dealers, as of the close of business on the Business Day immediately
preceding the date of determination. If, at the time quotations are
required, any Commercial Paper Dealer does not quote a commercial paper
rate required to determine the "`AA' Composite Commercial Paper Rate," or
if less than three Commercial Paper Dealers are then serving as such for
any reason, the "`AA' Composite Commercial Paper Rate" shall be determined
on the basis of such quotation or quotations furnished by the Commercial
Paper Dealer or Commercial Paper Dealers then serving as such and providing
a quotation. For purposes of this definition, the "interest equivalent" of
a rate stated on a discount basis (a "discount rate") for commercial paper
of a given day's maturity shall be equal 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.
"Account" shall mean any of the accounts created within the Funds
established by the Indenture.
"Accountant" shall mean Eide Helmeke PLLP, Certified Public
Accountants, Aberdeen, South Dakota, or any other registered or certified
public accountant or firm of such accountants selected and paid by the
Corporation, who is Independent and not under the domination of the
Corporation, but who may be regularly retained to make annual or similar
audits of the books or records of the Corporation.
"Acting Beneficiaries Upon Default" shall mean:
(a) at any time that any Senior Obligations are Outstanding:
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(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
"Summary of the Indenture -- Events of Default"): (x) the Holders of a
majority in aggregate Principal Amount of Senior Notes Outstanding; or
(y) (unless the Trustee shall, in its sole discretion, determine that
acceleration of the maturity of the Outstanding Notes is not in the
overall interest of the Senior Beneficiaries) any Other Senior
Beneficiary;
(ii) with respect to directing the Trustee to accelerate the
maturity of the Outstanding Notes as a result of an Event of Default
described in paragraph (L) under "Summary of the Indenture -- Events
of Default": (x) the Holders of 100% in aggregate Principal Amount of
Senior Notes Outstanding; or (y) (unless the Trustee shall, in its
sole discretion, determine that acceleration of the maturity of the
Outstanding Notes is not in the overall interest of the Senior
Beneficiaries) all Other Senior Beneficiaries;
(iii) with respect to requesting the Trustee to exercise one
or more of the rights and powers conferred by the Indenture, directing
the method and place of conducting proceedings to be taken in
connection with the enforcement of the terms and conditions of the
Indenture and requiring the Trustee to waive Events of Default: (x)
the Holders of a majority in aggregate Principal Amount of the Senior
Notes Outstanding, unless the Trustee shall have received or shall
thereafter receive conflicting requests or directions from one or more
Other Senior Beneficiaries; or (y) any Other Senior Beneficiary,
unless the Trustee shall, in its sole discretion, determine that the
requested action is not in the overall interest of the Senior
Beneficiaries or shall have received or shall thereafter receive
conflicting requests or directions from one or more Other Senior
Beneficiaries or the Holders of a majority in aggregate Principal
Amount of the Senior Notes Outstanding; and
(iv) with respect to all other matters under the Indenture,
the Holders of a majority in aggregate Principal Amount of Senior
Notes Outstanding or any Other Senior Beneficiary;
(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
"Summary of the Indenture -- Events of Default" below): (x) the
Holders of a majority in aggregate Principal Amount of Subordinate
Notes Outstanding; or (y) (unless the Trustee shall, in its sole
discretion, determine that acceleration of the maturity of the
Outstanding Notes is not in the overall interest of the Subordinate
Beneficiaries) any Other Subordinate Beneficiary;
(ii) with respect to directing the Trustee to accelerate the
maturity of the Outstanding Notes as a result of an Event of Default
described in paragraph (L) under "Summary of the Indenture -- Events
of Default": (x) the Holders of 100% in aggregate Principal Amount of
Subordinate Notes Outstanding; or (y) (unless the Trustee shall, in
its sole discretion, determine
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that acceleration of the maturity of the Outstanding Notes is not in
the overall interest of the Subordinate Beneficiaries) all Other
Subordinate Beneficiaries;
(iii) with respect to requesting the Trustee to exercise one
or more of the rights and powers conferred by the Indenture, directing
the method and place of conducting proceedings to be taken in
connection with the enforcement of the terms and conditions of the
Indenture and requiring the Trustee to waive Events of Default, (x)
the Holders of a majority in aggregate Principal Amount of the
Subordinate Notes Outstanding, unless the Trustee shall have received
or shall thereafter receive conflicting requests or directions from
one or more Other Subordinate Beneficiaries; or (y) any Other
Subordinate Beneficiary, unless the Trustee shall, in its sole
discretion, determine that the requested action is not in the overall
interest of the Subordinate Beneficiaries or shall have received or
shall thereafter receive conflicting requests or directions from one
or more Other Subordinate Beneficiaries or the Holders of a majority
in aggregate Principal Amount of the Subordinate Notes Outstanding;
and
(iv) with respect to all other matters under the Indenture,
the Holders of a majority in aggregate Principal Amount of Subordinate
Notes Outstanding or any Other Subordinate Beneficiary; and
(c) at any time that no Senior Obligations are Outstanding and no
Subordinate Obligations are Outstanding, the Holders of a majority in
aggregate Principal Amount of Class C Notes Outstanding.
"Additional Notes" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Administrative Cost and Note Fee Rate" shall mean a rate per annum equal
to the sum of (i) __%, (ii) the Auction Agent Fee Rate (initially __%, but
subject to change in accordance with the provisions of the Auction Agent
Agreement), and (iii) the Broker-Dealer Fee Rate (initially __%, but subject to
change in accordance with the provisions of the Auction Agent Agreement).
"Administrative Expenses" shall mean the Corporation's actual expenses,
excluding Note Fees but including Servicing Fees and any other expenses of the
Corporation incurred in connection with the servicing of Financed Student Loans,
of carrying out and administering its powers, duties and functions under (1) its
articles of incorporation, its bylaws, the Student Loan Purchase Agreements, any
Servicing Agreement, the Contract of Insurance, the Guarantee Agreements, the
Program, the Higher Education Act or any requirement of the laws of the United
States or the Statutes with respect to the Program, as such powers, duties and
functions relate to Financed Student Loans, (2) any Swap Agreements and any
Credit Enhancement Facilities (other than any amounts payable thereunder which
constitute Other Indenture Obligations), (3) any Remarketing Agreement,
Depositary Agreement, Auction Agent Agreement or Broker-Dealer Agreement, and
(4) the Indenture. Such expenses may include, without limiting the generality of
the foregoing, salaries, supplies, utilities, mailing, labor, materials, office
rent, maintenance, furnishings, equipment, machinery, telephones, travel
expenses, insurance premiums, and legal, accounting, management, consulting and
banking services and expenses, and payments for pension, retirement, health and
hospitalization and life and disability insurance benefits; but shall not
include (i) debt service on the Notes or any other bonds, notes or other
evidences of indebtedness of the Corporation, (ii) amounts payable under any
Other Indenture Obligations or (iii) Costs of Issuance or the fees, costs or
expenses of the Corporation with respect to any other bonds, notes or
indebtedness of the Corporation.
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"After-Tax Equivalent" shall mean, with respect to a series of Tax
Exempt Series 1997-1 Senior Notes, the interest rate per annum equal to the
product of (i) 1.00 minus the Statutory Corporate Tax Rate and (ii) the
"AA" Composite Commercial Paper Rate.
"Aggregate Value" shall mean on any calculation date the sum of the
Values of all assets of the Trust Estate, less moneys in any Fund or
Account which the Corporation is then entitled to receive for deposit into
the Rebate Fund but has not yet removed from the Trust Estate, and less any
funds to be used to pay Costs of Issuance unless, under the provisions of a
Supplemental Indenture, such funds are not to be applied to the payment of
Costs of Issuance to the extent the Senior Asset Requirement would not be
met after such payment.
"All Hold Rate" shall mean (i) with respect to a series of Tax Exempt
Auction Rate Series 1997-1 Senior Notes, the interest rate per annum equal
to 85% (as such percentage may be adjusted pursuant to the provisions of
the First Supplemental Indenture described under "Auction of the Auction
Rate Series 1997-1 Senior Notes -- Changes in Auction Terms -- Changes in
Percentages Used in Determining All Hold Rate, Maximum Auction Rate and
Non-Payment Rate with respect to the Tax Exempt Auction Rate Series 1997-1
Senior Notes") of the lesser of (a) the After-Tax Equivalent and (b) the
Index; provided that in no event shall the All Hold Rate be greater than
the Maximum Auction Rate, and (ii) with respect to a series of Taxable
Auction Rate Series 1997-1 Senior Notes, One-Month LIBOR less __%.
"Applicable Percentage" shall mean, with respect to a series of Tax
Exempt Auction Rate Series 1997-1 Senior Notes, the percentage determined
(as such percentage may be adjusted pursuant to the provisions of the First
Supplemental Indenture described under "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.
"Assistance Fund" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Auction" shall mean the implementation of the Auction Procedures on
an Auction Date.
"Auction Agent" shall mean (i) with respect to the Auction Rate Series
1997-1 Senior Notes, Bankers Trust Company, 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
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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 Tax
Exempt Auction Rate Series 1997-1 Senior Notes, the Auction Agent Agreement
(Tax Exempt Auction Rate Series 1997-1 Notes), dated as of July 1, 1997,
among the Corporation, the Trustee and Bankers Trust Company, 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, (ii) with respect to the
Taxable Auction Rate Series 1997-1 Senior Notes, the Auction Agent
Agreement (Taxable Auction Rate Series 1997-1 Notes), dated as of July 1,
1997, among the Corporation, the Trustee and Bankers Trust Company, 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 (iii) with respect to
any other series of Notes, an agreement among an Auction Agent, the Trustee
and the Corporation setting forth the rights and obligations of the Auction
Agent acting in such capacity with respect to such Notes under the
Indenture and the related Supplemental Indenture, including any supplement
thereto or amendment thereof entered into in accordance with the provisions
thereof.
"Auction Date" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Auction Period" shall mean the Interest Period applicable to the
Auction Rate Series 1997-1 Senior Notes, which Auction Period (after the
Initial Interest Period for each such series) initially shall consist
generally of 35 days (in the case of Tax Exempt Auction Rate Series 1997-1
Senior Notes) or 28 days (in the case of Taxable Auction Rate Series 1997-1
Senior Notes), as the same may be adjusted pursuant to the provisions of
the First Supplemental Indenture described under "Auction of the Auction
Rate Series 1997-1 Senior Notes -- Changes in Auction Terms -- Changes in
Auction Period or Periods".
"Auction Period Adjustment" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Auction Procedures" shall mean the procedures described under
"Auction of the Auction Rate Series 1997-1 Senior Notes" by which the
Auction Rate is determined with respect to the Auction Rate Series 1997-1
Senior Notes.
"Auction Rate" shall mean the rate of interest per annum that results
from implementation of the Auction Procedures and is determined with
respect to each series of Auction Rate Series 1997-1 Senior Notes as
described under "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 Interest
Rate for such series shall equal the Non-Payment Rate; and provided,
further, that such Auction Rate Series 1997-1 Senior Note Interest 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.
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"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.
"Authenticating Agent," when used with respect to a series of Notes,
shall mean any bank or trust company appointed for the purpose of
receiving, authenticating and delivering Notes of that series in connection
with transfers, exchanges and registrations as provided in the Indenture.
"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 of Directors.
"Available Auction Rate Series 1997-1 Senior Notes" shall have the
meaning assigned thereto on page [__] of this Prospectus.
"Balance", when used with reference to any Account or Fund, shall mean
the aggregate sum of all assets standing to the credit of such Account or
Fund, including, without limitation, Investment Securities computed at the
Value of Investment Securities; Notes purchased with moneys standing to the
credit of such Fund or Account computed at the Principal Amount of such
Notes; Financed Student Loans computed at the Principal Balance thereof;
and lawful money of the United States; provided, however, that (1) the
Balance of the Interest Account shall not include amounts standing to the
credit thereof which are being held therein for (A) the payment of past due
and unpaid interest on Notes, or (B) the payment of interest on Notes that
are deemed no longer Outstanding as a result of the defeasance thereof, and
(2) the Balances of the Principal Account and the Retirement Account shall
not include amounts standing to the credit thereof which are being held
therein for the payment of principal of or premium, if any, on Notes which
are deemed no longer Outstanding in accordance with the provisions of the
Indenture.
"Beneficial Owner" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Beneficiaries" shall mean, collectively, all Senior Beneficiaries,
all Subordinate Beneficiaries and all Holders of any Outstanding Class C
Notes.
"Benefit Plans" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Bid" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Bid Auction Rate" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Bid Orders" shall have the meaning assigned thereto on page [ ] of
this Prospectus.
"Bidder" shall have the meaning assigned thereto on page [__] of this
Prospectus.
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"Board Resolution" shall mean a copy of a resolution certified by the
secretary or an assistant secretary of the Corporation to have been duly
adopted by the Board of Directors of the Corporation and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
"Bond Counsel" shall mean any Counsel of nationally recognized
standing in the field of law relating to municipal bonds.
"Book-Entry Form" or "Book-Entry System" shall mean a form or system
under which (i) the beneficial right to principal and interest may be
transferred only through a book entry, (ii) physical securities in
registered form are issued only to a Securities Depository or its nominee
as registered holder, with the securities "immobilized" to the custody of
the Securities Depository, and (iii) the book entry is the record that
identifies the owners of beneficial interests in that principal and
interest.
"Broker-Dealer" shall mean (i) with respect to the Auction Rate Series
1997-1 Senior Notes, Smith Barney Inc. or any other broker or dealer (each
as defined in the Exchange Act), commercial bank or other entity permitted
by law to perform the functions required of a Broker-Dealer set forth in
the Auction Procedures with respect to the Auction Rate Series 1997-1
Senior Notes that (a) is a Participant (or an affiliate of a Participant),
(b) has been appointed as such by the Corporation pursuant to the
provisions of the First Supplemental Indenture and (c) has entered into a
Broker-Dealer Agreement that is in effect on the date of reference, and
(ii) with respect to any other series of Notes, any broker or dealer (each
as defined in the Exchange Act), commercial bank or other entity permitted
by law to perform the functions required of a broker-dealer set forth in
the auction procedures relating to such Notes, designated as such with
respect to such Notes pursuant to the provisions of a Supplemental
Indenture, and its successor or successors, and any broker or dealer,
commercial bank or other entity at any time substituted in its place
pursuant to such Supplemental Indenture.
"Broker-Dealer Agreement" shall mean (i) with respect to the Tax
Exempt Auction Rate Series 1997-1 Senior Notes, the Broker-Dealer Agreement
(Tax Exempt Auction Rate Series 1997-1 Notes), dated as of July 1, 1997,
between Smith Barney Inc., as Broker-Dealer, and Bankers Trust Company, as
Auction Agent, 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 Tax Exempt Auction Rate Series 1997-1 Senior
Notes, including any supplement thereto or amendment thereof entered into
in accordance with the provisions thereof, (ii) with respect to the Taxable
Auction Rate Series 1997-1 Senior Notes, the Broker-Dealer Agreement
(Taxable Auction Rate Series 1997-1 Notes), dated as of July 1, 1997,
between Smith Barney Inc., as Broker-Dealer, and Bankers Trust Company, as
Auction Agent, 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 Taxable Auction Rate Series 1997-1 Senior
Notes, including any supplement thereto or amendment thereof entered into
in accordance with the provisions thereof, and (iii) 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 "Summary of
the Indenture -- Covenants -- Limitations on Administrative Expenses and
Note Fees"), an amount of Administrative Expenses budgeted by the
Corporation for such Fiscal Year, as evidenced by a Board Resolution
adopted prior to the commencement of such Fiscal Year; provided that such
Budgeted Administrative Expenses shall not exceed (and, in the absence of a
Board Resolution with respect thereto, shall be assumed to be equal to) the
amount of Administrative Expenses permitted to be paid, or reimbursed to
the Corporation, from the Administration Fund pursuant to any Supplemental
Indenture providing for the issuance of a series of Notes.
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"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.
"Buyer's Broker-Dealer" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Carry-Over Amount" shall mean (i) with respect to a Taxable Auction
Rate Series 1997-1 Senior Note, the excess, if any, of (a) the amount of
interest on such Note that would have accrued with respect to the related
Interest Period at the Auction Rate over (b) the amount of interest on such
Note actually accrued with respect to such Interest Period based on the Net
Loan Rate, together with the unpaid portion of any such excess from prior
Interest Periods, (ii) with respect to a Taxable LIBOR Rate Series 1997-1
Note, the excess, if any, of (a) the amount of interest on such Note that
would have accrued with respect to the related Interest Period at the
Taxable LIBOR Rate Series 1997-1 Note Interest Rate over (b) the amount of
interest on such Note actually accrued with respect to such Interest Period
based on the Net Loan Rate, together with the unpaid portion of any such
excess from prior Interest Periods, and (iii) if and to the extent
specifically provided for as such in a Supplemental Indenture with respect
any other series of Variable Rate Notes, the amount, if any, by which (a)
the interest payable on such series with respect to a given interest period
is exceeded by (b) the interest that otherwise would have been payable with
respect to such interest period but for a limitation on the interest rate
for such interest period based upon the anticipated return on Financed
Student Loans, together with the unpaid portion of any such excess from
prior interest periods. To the extent required by a Supplemental Indenture
providing for any Carry-Over Amount (including, in the case of the Taxable
Auction Rate Series 1997-1 Senior Notes and the Taxable LIBOR Rate Series
1997-1 Notes, the First Supplemental Indenture), interest will accrue on
such Carry-Over Amount until paid. Any reference to "principal" or
"interest" in the Indenture and in the related Notes shall not include,
within the meanings of such words, any Carry-Over Amount or any interest
accrued on any Carry-Over Amount.
"Cash Flow Projection" shall mean a projection as to future revenues
and cash flow through the final Stated Maturity of the Outstanding Notes
based upon existing facts and, to the extent not so based, upon assumptions
accepted by each Rating Agency (including, without limitation, assumptions
relating to variable rates of interest under Swap Agreements and any Notes)
and the following assumptions: (1) a thirty-day lag in receipt of borrower
payments, and a sixty-day lag in receipt of federal payments, with respect
to Financed Student Loans; (2) no prepayments of principal of Financed
Student Loans; (3) bond-equivalent rates of 91-day or 52-week U.S. Treasury
bills (for purposes of determining returns on Financed Student Loans that
are based upon such rates or averages thereof) equal to known rates (or
averages) for such time as they are known, and thereafter equal to ___% per
annum; and (4) a reinvestment rate of ___% per annum. The foregoing
assumptions may, pursuant to a Supplemental Indenture (see "Supplemental
Indentures" below), be replaced with or supplemented by such other
reasonable assumptions as will not result in the withdrawal or reduction of
the then-current rating of any of the Outstanding Unenhanced Notes, as
evidenced by written confirmation to that effect from each Rating Agency
or, if no Unenhanced Notes are then Outstanding but Other Indenture
Obligations are Outstanding, such other assumptions as are acceptable to
the Other Beneficiaries entitled to such Other Indenture Obligations, as
evidenced in writing to the Trustee by each such Other Beneficiary.
"Cede & Co." shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Cedel" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Cedel Participants" shall have the meaning assigned thereto on page
[__] of this Prospectus.
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"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.
"Claims Rate" shall have the meaning assigned thereto on page [ ] of
this Prospectus.
"Class C Notes" shall mean any Notes designated in a Supplemental
Indenture as Class C Notes, which are secured under the Indenture on a
basis subordinate to any Senior Obligations and any Subordinate
Obligations.
"Closing Cash Flow Projection" shall mean the Cash Flow Projection
delivered in conjunction with the issuance of the Series 1997-1 Notes.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealer" shall mean Smith Barney Inc., its successors
and assigns, and any other commercial paper dealer appointed pursuant to
the provisions of the First Supplemental Indenture described under "Auction
of the Auction Rate Series 1997-1 Senior Notes -- Auction Procedures --
General".
"Commission" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Commonwealth" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Consolidation Loan" shall mean a Student Loan made pursuant to
Section 428C of the Higher Education Act.
"Contract of Insurance" shall mean the Contract of Federal Loan
Insurance, dated January 28, 1981, entered into between the Trustee and the
Secretary of Education, and any other document evidencing the eligibility
of the Trustee to receive payments of principal and interest from the
Secretary of Education with respect to Insured Loans Financed hereunder
(or, in the event a co-trustee has been appointed pursuant to the
Indenture, such Contract of Federal Loan Insurance and other documentation
relating to such co-trustee), and any amendment thereof which is hereafter
entered into.
"Cooperative" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Corporation" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Corporation Student Loan Purchase Agreements" shall have the meaning
assigned thereto on page [__] of this Prospectus.
"Corporation Swap Payment" shall mean a payment due to a Swap
Counterparty from the Corporation pursuant to the applicable Swap Agreement
(including, but not limited to, payments in respect of any early
termination of such Swap Agreement).
"Corporation Trusts" shall have the meaning assigned thereto on page
[__] of this Prospectus.
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"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 "Summary of the Indenture --
Supplemental Indentures"), with respect to Notes of one or more series, an
insurance policy insuring, or a letter of credit or surety bond providing a
direct or indirect source of funds for, the timely payment of principal of
and interest on such Notes (but not necessarily principal due upon
acceleration thereof), or any or all of the credit facilities,
reimbursement agreements, standby purchase agreements and the like
pertaining to Notes issued with a tender right granted to or tender
obligation imposed on the Holder thereof.
"Credit Facility Provider" shall mean, if and to the extent provided
for in a Supplemental Indenture (see "Summary of the Indenture --
Supplemental Indentures"), any institution or institutions engaged by the
Corporation pursuant to a Credit Enhancement Facility to provide credit
enhancement or liquidity for the payment of the principal of and interest
on, or for the Corporation's obligation to repurchase or redeem, Notes of
one or more series.
"Date of Issuance" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Debt Service" shall mean, as of any particular date and with respect
to any particular period, the aggregate of the moneys to be paid or set
aside on such date or during such period for the payment (or retirement) of
the principal of, premium, if any, and interest on Notes, after giving
effect to any Corporation Swap Payments and Counterparty Swap Payments.
"Deemed Tendered" shall mean, with respect to any Note, a Note deemed
tendered in accordance with the provisions of the Supplemental Indenture
providing for the issuance thereof.
"Defaulted Interest" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Deferment Periods" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Demand Note" shall mean a Note required to be purchased by or on
behalf of the Corporation, at the option of the Holder thereof, upon
receipt of a purchase demand.
"Department of Education" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Deposit Agent" shall mean any bank or banking association having
trust powers or trust company designated as such pursuant to the Indenture
and its successor or successors and any other bank or banking association
having trust powers or trust company at any time substituted in its place
pursuant to the Indenture.
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"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.
"Depositories" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Disqualified Person" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"DOE Data Book" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"DTC" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"DTC Participant" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"EAC" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"EASCI" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Educational Loan Assistance Fund" shall have the meaning assigned
thereto on page [__] of this Prospectus.
"Eligible Borrower" shall mean a borrower who is eligible under the
Higher Education Act to be the obligor of a loan for financing a program of
post-secondary education, including a borrower who is eligible under the
Higher Education Act to be an obligor of a Plus Loan.
"Eligible Carry-Over Make-Up Amount" shall mean, (i) with respect to
each Interest Period relating to a series of Taxable Auction Rate Series
1997-1 Senior Notes as to which, as of the first day of such Interest
Period, there is any unpaid Carry-Over Amount, an amount equal to the
lesser of (a) interest computed on the principal balance of such series in
respect of such Interest Period at a per annum rate equal to the excess, if
any, of the Net Loan Rate over the applicable 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 Auction Rate
Series 1997-1 Senior Note Interest Rate, in the case of a series of Taxable
Auction Rate Series 1997-1 Senior Notes, or (2) the Taxable LIBOR Rate
Series 1997-1 Interest Rate, in the case of a series of Taxable LIBOR Rate
Series 1997-1 Notes.
"Eligible Loan" shall mean: (A) a Student Loan which: (1) has been or
will be made to an Eligible Borrower for post-secondary education; (2) is
Guaranteed by a Guarantee Agency to the extent of not less than ninety-
eight percent (98%) of the principal thereof and all accrued interest
thereon; (3) is an "eligible loan" as
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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.
"Euroclear" shall have the meaning assigned thereto on page [ ] of this
Prospectus.
"Euroclear Operator" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Euroclear Participants" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Event of Default" shall have the meaning assigned thereto on page [ ] of
this Prospectus.
"Excess Earnings" shall mean, with respect to the Tax Exempt Series 1997-1
Notes and any other series of Tax-Exempt Notes, the amount, if any, which, if
applied to reduce the yield on all Student Loans Financed, in whole or in part,
with amounts allocated to such Notes, would be necessary to reduce such yield to
the yield on such Notes plus such additional spread as would not cause such
Notes to be "arbitrage bonds" under Section 148 of the Code.
"ERISA" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"ERISA Plans" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Exchange Act" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Existing Holders" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"FDIC" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Federal Direct Student Loan Program" means the program for providing
Student Loans established under Title IV, Part C of the Higher Education Act.
"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
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from the lien of the Indenture and sold, as permitted in the Indenture, to any
purchaser, including a trustee for the holders of the Corporation's bonds, notes
or other evidences of indebtedness.
"First Supplemental Indenture" shall mean the First Supplemental Indenture
of Trust, dated as of July 1, 1997, between the Corporation and the Trustee,
setting forth the terms of the Series 1997-1 Notes.
"Fiscal Year" shall mean the fiscal year of the Corporation as established
from time to time.
"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.
"Grace Periods" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Gramm-Rudman Law" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Guarantee" or "Guaranteed" shall mean, with respect to a Student Loan, the
insurance or guarantee by a Guarantee Agency, to the extent provided in the
Higher Education Act, of the principal of and accrued interest on such Student
Loan, and the coverage of such Student Loan by one or more Federal Reimbursement
Contracts providing, among other things, for reimbursement to the Guarantee
Agency for losses incurred by it on defaulted Financed Student Loans insured or
guaranteed by the Guarantee Agency to the extent provided in the Higher
Education Act.
"Guarantee Agency" shall mean (1) Education Assistance Corporation, and its
successors and assigns, including, without limitation, the Secretary of
Education, (2) Pennsylvania Higher Education Assistance Agency, and its
successors and assigns, including, without limitation, the Secretary of
Education, (3) United Student Aid Funds, Inc., and its successors and assigns,
including, without limitation, the Secretary of Education, (4) Student Loans of
North Dakota 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, (8) Iowa College Aid Commission, and its successors and assigns,
including, without limitation, the Secretary of Education, (9) Missouri
Coordinating Board for Higher Education, and its successors and assigns,
including, without limitation, the Secretary of Education, (10) Illinois Student
Aid Commission, and its successors and assigns, including, without limitation,
the Secretary of Education, or (11) 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 Indenture Obligations are Outstanding,
consent of each Other Beneficiary holding such Outstanding Other Indenture
Obligations, as evidenced in writing to the Trustee by each such Other
Beneficiary.
"Guarantee Agreements" shall mean (1) that certain Lender Agreement for
Guarantee of Student Loans With Federal Reinsurance, dated February 17, 1993,
between the Trustee and Education Assistance Corporation, (2) that Lender
Agreement for Guarantee of Student Loans With Federal Reinsurance, dated April
14, 1988, between the Trustee and Pennsylvania Higher Education Assistance
Agency, (3) that certain Agreement to Guarantee Loans, dated October 4, 1988,
between the Trustee and United Student Aid Funds, Inc., (4) that certain Lender
Participation Agreement for Insurance, dated January 12, 1989, between the
Trustee and the North Dakota
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Guaranteed Student Loan Program, (5) that certain Lender Agreement for Guarantee
of Student Loans With Federal Reinsurance, dated September 11, 1992, between the
Trustee and Northstar Guarantee Inc., (6) that certain Student Loan Guaranty,
dated September 11, 1992, between the Trustee and Great Lakes Higher Education
Corporation, (7) that certain Agreement for Payment on Guarantee of Student
Loans With Federal Reinsurance, dated November 21, 1995, between the Trustee and
Educational Credit Management Corporation (formerly known as Transitional
Guaranty Agency, Inc.) and, (8) any other agreement between a Guarantee Agency
and the Trustee providing for the insurance or guarantee by such Guarantee
Agency, to the extent provided in the Higher Education Act, of the principal of
and accrued interest on Student Loans acquired by the Trustee from time to time,
including any supplement thereto or amendment thereof entered into in accordance
with the provisions thereof and of the Indenture.
"Guarantee Fund" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Guarantee Payments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Guarantee Program" shall mean a Guarantee Agency's student loan insurance
program pursuant to which such Guarantee Agency guarantees or insures Student
Loans.
"Guaranteed Loan" shall mean a Student Loan which is Guaranteed.
"Higher Education Act" shall mean the Higher Education Act of 1965, as
amended or supplemented from time to time, and all regulations promulgated
thereunder.
"Hold Order" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Holder", when used with respect to a Note, shall mean the Person in whose
name such Note is registered in the Note Register maintained by the Trustee.
"Independent", when used with respect to any specified Person, shall mean
such a Person who (i) is in fact independent; (ii) does not have any direct
financial interest or any material indirect financial interest in the
Corporation, other than the payment to be received under a contract for services
to be performed by such Person; and (iii) is not connected with the Corporation
as an official, officer, employee, promoter, underwriter, trustee, partner,
affiliate, subsidiary, director or Person performing similar functions.
"Indenture" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Indenture Obligations" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"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
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provided above, a comparable substitute index selected by the Market Agent with
the approval of an Authorized Officer of the Corporation may be used.
"Indirect Participants" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Initial Auction Dates" (i) when used with respect to the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, shall mean the dates set forth as such
on page [ ] of this Prospectus, and (ii) when used with respect to the Taxable
Auction Rate Series 1997-1 Senior Notes, shall mean the dates set forth as such
on page [ ] of this Prospectus.
"Insolvency Laws" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Initial Interest Period" shall mean, as to a series of Auction Rate Series
1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1 Notes, the period
commencing on the date of issuance thereof and continuing through the day
immediately preceding the Initial Interest Rate Adjustment Date for such series.
"Initial Interest Rate Adjustment Date" shall mean (i) with respect to the
Series 1997-1A Notes, ________, 1997, (ii) with respect to the Series 1997-1B
Notes, ________, 1997, (iii) with respect to the Series 1997-1C Notes, ________,
1997, (iv) with respect to the Series 1997-1D Notes, ______, 1997, (v) with
respect to the Series 1997-1E Notes, ______, 1997, (vi) with respect to the
Series 1997-1G Notes, ______, 1997, (vii) with respect to the Series 1997-1H
Notes, ______, 1997, (viii) with respect to the Series 1997-1I Notes, ______,
1997, (ix) with respect to the Series 1997-1J Notes, ______, 1997, and (x) with
respect to the Series 1997-1L Notes, ________, 1997.
"In-State Loans" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Interest Payment Date" shall mean each regularly scheduled interest
payment date on the Notes which, except in the case of any series of Variable
Rate Notes (as to which such dates shall be specified in the Supplemental
Indenture providing for the issuance thereof), shall be each June 1 and December
1 or, with respect to the payment of interest upon redemption or acceleration of
a Note, purchase of a Note by the Trustee on a Mandatory Tender Date (to the
extent such Mandatory Tender Date is designated as an Interest Payment Date in
the related Supplemental Indenture) or the payment of Defaulted Interest, such
dates on which such interest is payable under the Indenture. The regularly
scheduled interest payment dates on the Series 1997-1 Notes shall be (i) with
respect to a series of Taxable Auction Rate Series 1997-1 Senior Notes, the
Business Day immediately following the expiration of the Initial Interest Period
for such series and each related Auction Period thereafter, (ii) with respect to
a series of Taxable LIBOR Rate Series 1997-1 Notes, the first day of each
calendar month, commencing ____________, 1997, and (iii) with respect to the Tax
Exempt Series 1997-1 Notes, each June 1 and December 1, commencing December 1,
1997.
"Interest Period" shall mean, with respect to a series of Auction Rate
Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1 Notes, the
Initial Interest Period and each period commencing on an Interest Rate
Adjustment Date for such series and ending on the last day before (i) the next
Interest Rate Adjustment Date for such series or (ii) the Stated Maturity of
such series, as applicable.
"Interest Rate Adjustment Date" shall mean the date on which the interest
rate on a series of Auction Rate Series 1997-1 Senior Notes or Taxable LIBOR
Rate Series 1997-1 Notes is effective, which (i) with respect to a series of
Auction Rate Series 1997-1 Senior Notes, shall be the date of commencement of
each Auction Period, and (ii) with respect to a series of Taxable LIBOR Rate
Series 1997-1 Notes, shall be each Interest Payment Date.
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"Interest Rate Determination Date" shall mean (i) with respect to a series
of Auction Rate Series 1997-1 Senior Notes, the Auction Date, or, if no Auction
Date is applicable to such series, the Business Day immediately preceding the
date of commencement of an Auction Period, and (ii) with respect to a series of
Taxable LIBOR Rate Series 1997-1 Notes, the second Business Day immediately
preceding the date of commencement of an Interest Period (other than the Initial
Interest Period).
"Interest Subsidy Agreements" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Interest Subsidy Payments" shall mean interest payments on certain student
loans authorized to be made by the Secretary of Education by Section 428(a) of
the Higher Education Act.
"Investment Provider" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Investment Securities" shall have the meaning assigned thereto on page [ ]
of this Prospectus.
"IRAs" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Issuer" shall have the meaning assigned thereto on page [ ] of this
Prospectus.
"Lender" shall mean any "eligible lender" (as defined in the Higher
Education Act) permitted to participate as a seller of Student Loans to the
Corporation under the Program and which has received an eligible lender
designation from a Guarantee Agency.
"Loan Rates" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Mandatory Tender Date" shall mean, with respect to any Note, a date on
which such Note is required to be tendered for purchase by or on behalf of the
Corporation in accordance with the provisions in the Supplemental Indenture
providing for the issuance thereof.
"Market Agent" shall mean Smith Barney Inc., New York, New York, in such
capacity under the First Supplemental Indenture, or any successor to it in such
capacity.
"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.
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"Monthly Payment Date" shall mean the 12th day of each calendar month (or,
if such 12th day is not a Business Day, the next preceding Business Day);
provided that any transfers to be made from the Revenue Fund on a Monthly
Payment Date shall, as to amounts therein constituting payments in respect of
Financed Student Loans, include only such payments as have been deposited in the
Revenue Fund as of the last day of the preceding calendar month.
"Monthly Servicing Report" shall mean the monthly report prepared by the
Corporation or the Servicer in accordance with the Indenture.
"Moody's" shall mean Moody's Investors Service, Inc., its successors
and their assigns, and, if such corporation shall no longer perform the
functions of a securities rating agency, a successor designated by the
Trustee at the direction of the Corporation.
"Net Loan Rate" shall mean, with respect to a series of Taxable Auction
Rate Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1 Notes, the
rate of interest per annum (rounded to the next highest .01%) equal to (i) the
Ninety-one Day United States Treasury Bill Rate plus ____% less (ii) the
Administrative Cost and Note Fee Rate.
"New Borrower" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"1933 Act" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"1980 Amendments" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"1981 Amendments" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"1986 Amendments" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"1987 Amendments" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"1987 Budget Amendments" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"1989 Amendments" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"1992 Amendments" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"1993 Amendments" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"1993 Technical Amendments" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"91-day T-Bill Rate" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Ninety-one Day United States Treasury Bill Rate" shall mean, for purposes
of computing the Net Loan Rate with respect to a series of Taxable Auction Rate
Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1 Notes, that rate
of interest per annum equal to the average of the Bond Equivalent Yields-91-Day
T-Bill on the 91-day United States Treasury Bills sold at auction thereof during
the four week-period that immediately preceded the Interest Rate Adjustment Date
with respect to which such Net Loan Rate is being computed.
"Non-Payment Rate" shall mean (i) with respect to a series of Tax Exempt
Auction Rate Series 1997-1 Senior Notes, the interest rate per annum equal to
the lesser of (a) 265% (as such percentage may be adjusted pursuant to the
provisions of the First Supplemental Indenture described under "Auction of the
Auction Rate Series
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1997-1 Senior Notes -- Changes in Auction Terms -- Changes in Percentages
Used in Determining All Hold Rate, Maximum Auction Rate and Non-Payment
Rate with respect to the Tax Exempt Auction Rate Series 1997-1 Senior
Notes") of the Index and (b) ___%, and (ii) with respect to a series of
Taxable Auction Rate Series 1997-1 Senior Notes, the lesser of (a) One-
Month LIBOR plus 1.50% and (b) 18%.
"Note Fees" shall mean the fees, costs and expenses, excluding Costs
of Issuance, of the Trustee and any Paying Agents, Authenticating Agent,
Remarketing Agents, Depositaries, Auction Agents, Broker-Dealers, Deposit
Agents, Bond Counsel, Note Registrar or Accountants incurred by the
Corporation in carrying out and administering its powers, duties and
functions under (1) its articles of incorporation, its bylaws, the Student
Loan Purchase Agreements, any Servicing Agreement, the Contract 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.
"Noteholder" shall mean the Holder of a Note.
"Notes" shall mean the Series 1997-1 Notes and any additional notes
hereafter issued under the Indenture.
"One-Month LIBOR" shall mean, with respect to a series of Taxable
Auction Rate Series 1997-1 Senior Notes or Taxable LIBOR Rate Series 1997-1
Notes, the rate of interest per annum equal to the rate per annum at which
United States dollar deposits having a maturity of one month are offered to
prime banks in the London interbank market which appear on the Reuters
Screen LIBOR Page as of approximately 11:00 a.m., London time, on the
applicable Interest Rate Determination Date. If at least two such
quotations appear, One-Month LIBOR will be the arithmetic mean (rounded
upwards, if necessary, to the nearest .01%) of such offered rates. If
fewer than two such quotes appear, One-Month LIBOR will be determined at
approximately 11:00 a.m., London time, on the applicable Interest Rate
Determination Date on the basis of the rate at which deposits in United
States dollars having a maturity of one month are offered to prime banks in
the London interbank market by four major banks in the London interbank
market selected by (i) the Auction Agent after consultation with the
Trustee or (ii) the Trustee, as applicable, and in a principal amount of
not less than U.S. $1,000,000 and that is representative for a single
transaction in such market at such time. The Auction Agent or the Trustee,
as applicable, will request the principal London office of each such bank
to provide a quotation of its rate. If at least two quotations are
provided, One-Month LIBOR will be the arithmetic mean (rounded upwards, if
necessary, to the nearest .01%) of such offered rates. If fewer than two
quotations are provided, One-Month LIBOR will be the arithmetic mean
(rounded upwards, if necessary, to the nearest .01%) of the rates quoted at
approximately 11:00 a.m., New York City time, on the applicable Interest
Rate Determination Date by three major banks in New York, New York,
selected by (x) the Auction Agent after consultation with the Trustee or
(y) the Trustee, as applicable, for loans in United States dollars to
leading European banks having a maturity of one month and in a principal
amount equal to an amount of not less than U.S. $1,000,000 and that is
representative for a single transaction in such market at such time;
provided, however, that if the banks selected as aforesaid are not quoting
as mentioned in this sentence, One-Month LIBOR will be the One-Month LIBOR
in effect for the immediately preceding Interest Period.
"Original Issuer" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Original Issuer Student Loan Purchase Agreements" shall have the
meaning assigned thereto on page [__] of this Prospectus.
"Order" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Other Beneficiary" shall mean an Other Senior Beneficiary or an Other
Subordinate Beneficiary.
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"Other Indenture Obligations" shall mean, collectively, the Other Senior
Obligations and Other Subordinate Obligations.
"Other Senior Beneficiary" shall mean a Person who is a Senior Beneficiary
other than as a result of ownership of Senior Notes.
"Other Senior Obligations" shall mean the Corporation's obligations to pay
any amounts under any Senior Swap Agreements and any Senior Credit Enhancement
Facilities.
"Other Subordinate Beneficiary" shall mean a Person who is a Subordinate
Beneficiary other than as a result of ownership of Subordinate Notes.
"Other Subordinate Obligations" shall mean the Corporation's obligations to
pay any amounts under any Subordinate Swap Agreements and any Subordinate Credit
Enhancement Facilities.
"Outstanding" shall mean (i) when used with respect to Notes, all Notes
other than (a) any Notes deemed no longer Outstanding as a result of the
purchase, payment or defeasance thereof as described under "Summary of the
Indenture -- Discharge of Notes and the Indenture", (b) any Notes surrendered
for transfer or exchange for which another Note has been issued under the
Indenture, (c) with respect to any request, demand, authorization, direction,
notice, consent or waiver under the Indenture, Notes owned by the Corporation to
the extent the Trustee knows that such Notes are so owned, or (d) any Notes
Deemed Tendered, and (ii) when used with respect to Other Indenture Obligations,
all Other Indenture Obligations which have become, or may in the future become,
due and payable and which have not been paid or otherwise satisfied.
"Participant" shall mean a member of, or participant in, the Securities
Depository.
"Parties in Interest" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Paying Agent" shall mean the Trustee and any other commercial bank
designated pursuant to the Indenture, as a place at which principal of, premium,
if any, or interest on any Note is payable.
"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.
"PHEAA" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"PHEAA Act" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"PHEAA Bond Fund" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Plan Assets Regulation" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Plan for Doing Business" shall mean the plan adopted by the Original
Issuer as required by Section 438(e) of the Higher Education Act.
"Pledged Funds and Accounts" shall have the meaning assigned thereto
on page [__] of this Prospectus.
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"Pledged Revenues" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Plus Loan" shall mean a Student Loan made pursuant to Section 428B of the
Higher Education Act.
"Potential Bid Orders" shall have the meaning assigned thereto on page [ ]
of this Prospectus.
"Potential Holders" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Prepayment Date", when used with respect to any Note, a portion of the
Principal Amount of which is to be paid prior to its Stated Maturity, shall mean
the date fixed for such prepayment by or pursuant to the Indenture.
"Principal Amount", when used with respect to a Note, shall mean the
original principal amount of such Note less all payments previously made to
the Holder thereof in respect of principal.
"Principal Balance", when used with respect to a Student Loan, shall mean
the unpaid principal amount thereof (including any unpaid capitalized interest
thereon that is authorized to be capitalized under the Higher Education Act for
purposes of Special Allowance Payments, federal interest subsidy payments, a
borrower's liability to a lender and the amount of the lender's loss on a
guarantee or insurance claim) as of a given date.
"Principal Office" shall mean (i) when used with respect to the Trustee,
the principal corporate trust office of the Trustee, and (ii) when used with
respect to a Paying Agent (other than the Trustee), an Authenticating Agent, the
Note Registrar, a Depositary, a Remarketing Agent, an Auction Agent or a Broker-
Dealer, such office designated in writing to the Trustee and the Corporation as
the location of its principal office for the performance of its duties as Paying
Agent, Authenticating Agent, Note Registrar, Depositary, Remarketing Agent,
Auction Agent or Broker-Dealer, as the case may be, under the Indenture.
"Principal Payment Date" shall mean the Stated Maturity of principal of any
Serial Note and the Sinking Fund Payment Date for any Term Note, which, unless
otherwise specified with respect to any series of Variable Rate Notes in the
Supplemental Indenture providing for the issuance thereof, shall occur on a June
1 or a December 1.
"Program" shall mean the program to be administered by the Original Issuer
(or, after the Section 150(d)(3) Transfer, the Servicer) for the purchase of
Student Loans from Lenders or origination of Student Loans in order to increase
the supply of moneys available for new Student Loans, thereby assisting students
in obtaining a post-secondary school education.
"PSA" shall mean the Public Securities Association, its successors and
assigns.
"PSA Index" shall mean, with respect to a series of the Tax Exempt
Auction Rate Series 1997-1 Senior Notes, a rate determined on the basis of
the seven-day high grade market index of tax-exempt variable rate demand
obligations, as produced by Municipal Market Data and published or made
available by the PSA or any Person acting in cooperation with or under the
sponsorship of PSA and acceptable to the Market Agent.
"PTCE" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Purchase Date" shall mean, with respect to a Demand Note, the date
specified in a purchase demand (provided that such date is prior to any
applicable conversion date and is not less than the required number of
calendar days after receipt of such purchase demand by the Depositary) as
the date on which the Holder of the Demand Note identified in such purchase
demand is demanding purchase of such Note, or a specified portion
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thereof, in accordance with the applicable provisions of the related
Supplemental Indenture, or the next preceding or succeeding Business Day, as
provided for in such Supplemental Indenture, if such date is not a Business Day.
"Qualified Retirement Plans" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Rating Agency" shall mean any rating agency that shall have an outstanding
rating on any of the Notes pursuant to request by the Corporation.
"Rating Category" shall mean one of the general rating categories of a
Rating Agency, without regard to any refinement or gradation of such rating
category by a numerical modifier or otherwise.
"Rebate Amount" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Redemption Date," when used with respect to any Note to be redeemed, shall
mean the date fixed for such redemption by or pursuant to the Indenture.
"Redemption Price," when used with respect to any Note to be redeemed,
means the price at which it is to be redeemed pursuant to the Indenture.
"Regular Record Date" shall mean, with respect to an Interest Payment Date
for any series of Notes the record date for the payment of interest established
by the Indenture and the Supplemental Indenture pursuant to which such series of
Notes was issued.
"Refunded Obligations" shall have the meaning assigned thereto on page [ ]
of this Prospectus.
"Remarketing Agent" shall mean, with respect to any series of Notes, any
securities dealer designated as such with respect to such Notes pursuant to the
provisions of the Indenture and its successor or successors and any securities
dealer at any time substituted in its place pursuant to the Indenture.
"Remarketing Agreement" shall mean an agreement between a Remarketing Agent
and the Corporation setting forth the rights and obligations of the Remarketing
Agent acting in such capacity under the Indenture, including any supplement
thereto or amendment thereof entered into in accordance with the provisions
thereof.
"Repeat Borrower" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Reserve Fund Requirement" shall mean, at any time, an amount equal to the
greater of (1) 2.00% of the aggregate Principal Amount of Senior Notes and
Subordinate Notes then Outstanding, and (2) $500,000; or, as determined upon the
issuance of any Senior Notes or any Subordinate Notes, such lesser or greater
amount as will not cause any Rating Agency to lower or withdraw any rating on
any Outstanding Unenhanced Notes, as confirmed in writing to the Trustee by each
Rating Agency, or, if no Unenhanced Notes are then Outstanding but Other
Indenture Obligations are Outstanding and the Reserve Fund Requirement is to be
reduced, such lesser amount as is acceptable to the Other Beneficiaries entitled
to such Other Indenture Obligations, as evidenced in writing to the Trustee by
each such Other Beneficiary. In calculating the Reserve Fund Requirement, all
Notes to be defeased by a series of refunding Notes shall be deemed not
Outstanding as of the date of calculation.
"Reuters Screen LIBOR Page" shall mean the display designated as page
"LIBOR" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBOR page for the purposes of displaying London interbank offered
rates of major banks).
"Sallie Mae" shall have the meaning assigned thereto on page [__] of this
Prospectus.
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"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.
"Section 150(d)(3) Transfer" shall mean the transfer of all of the right,
title and interest in and to the Trust Estate from the Original Issuer to SLFC,
and from SLFC to the Corporation, together with the assumption by the
Corporation of all of the obligations and liabilities of the Original Issuer
under the Indenture and under the Notes and any Other Indenture Obligations, all
in accordance with Section 150(d)(3) of the Code.
"Securities Depository" shall mean The Depository Trust Company, New York,
New York, as depository of the Series 1997-1 Notes, and its successors and
assigns, or, if (i) the then-existing Securities Depository resigns from its
functions as depository of the Series 1997-1 Notes or (ii) the Corporation
discontinues use of the Securities Depository pursuant to the provisions of the
First Supplemental Indenture, then any other securities depository which agrees
to follow the procedures required to be followed by a securities depository in
connection with the Series 1997-1 Notes and which is selected by the Corporation
with the consent of the Trustee.
"Sell Order" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Seller's Broker-Dealer" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Senior Asset Requirement" shall mean, as of the date of determination,
that:
(a) the Senior Percentage is at least equal to 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
(b) the Subordinate Percentage is at least equal to 100% (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.
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"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.
"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 Excess Earnings Sub-Account" means the Sub-Account of that
name created within the Excess Earnings Account under the Indenture.
"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 Redeemable 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 Redeemable 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 Redeemable 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 Redeemable 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 Redeemable 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 Redeemable Notes, Senior Series 1997-1F, issued under
the Indenture.
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"Series 1997-1G Notes" shall mean the Corporation's Taxable Auction Rate
Student Loan Asset-Backed Redeemable 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 Redeemable 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 Redeemable Notes, Senior Series 1997-1I, issued under
the Indenture.
"Series 1997-1J Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Redeemable 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 Redeemable 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 Redeemable Notes, Subordinate Series 1997-1L, issued
under the Indenture.
"Series 1997-1 Tax Exempt Acquisition Account" means the Account of that
name created within the Acquisition Fund under the Indenture.
"Series 1997-1 Tax Exempt Reserve Account" means the Account of that name
created within the Reserve Fund under the Indenture.
"Series 1997-1 Tax Exempt Retirement Sub-Account" means the Sub-Account of
that name created within the Retirement Account under the Indenture.
"Series 1997-1 Tax Exempt Surplus Sub-Account" means the Sub-Account of
that name created within the Surplus Account under the Indenture.
"Series 1997-1 Taxable Acquisition Account" means the Account of that
name created within the Acquisition Fund under the Indenture.
"Series 1997-1 Taxable Reserve Account" means the Account of that name
created within the Reserve Fund under the Indenture.
"Series 1997-1 Taxable Retirement Sub-Account" means the Sub-Account
of that name created within the Retirement Account under the Indenture.
"Series 1997-1 Taxable Surplus Sub-Account" means the Sub-Account of
that name created within the Surplus Account under the Indenture.
"Service" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Servicer" shall mean SLFC and any other organization with which the
Corporation and the Trustee have entered into a Servicing Agreement, subject to
confirmation of ratings on any Outstanding Unenhanced Notes or, if no Unenhanced
Notes are then Outstanding but Other Indenture Obligations are Outstanding,
consent of each Other Beneficiary entitled to such Other Indenture Obligations.
"Servicing Agreement" shall mean the SLFC Servicing Agreement, and any
other agreement among the Corporation, the Trustee and a Servicer under which
the Servicer agrees to act as the Corporation's and/or the
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Trustee's agent or provides services or facilities (including, without
limitation, computer hardware or software) in connection with the administration
and collection of Financed Student Loans in accordance with the Indenture.
"Servicing Fees" shall mean any fees payable by the Corporation to a
Servicer in respect of Financed Student Loans pursuant to the provisions of a
Servicing Agreement.
"Sinking Fund Payment Date" shall mean the date on which any Term Note is
to be called for redemption pursuant to the sinking fund redemption provisions
of the Supplemental Indenture providing for the issuance thereof, or, if not so
redeemed, the Stated Maturity thereof.
"SLFC" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"SLFC Servicing Agreement" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"SLS Loan" shall mean a Student Loan made pursuant to former Section 428A
of the Higher Education Act.
"Special Allowance Payments" shall mean special allowance payments
authorized to be made by the Secretary of Education by Section 438 of the Higher
Education Act, or similar allowances authorized from time to time by federal law
or regulation.
"Special Prepayment Amount" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Special Redemption and Prepayment Account Requirement" (i) with respect to
the Taxable LIBOR Rate Series 1997-1 Notes, shall mean an amount equal to the
Special Prepayment Amount, and (ii) with respect to any other series of Notes,
shall mean the amount described in the Supplemental Indenture providing for the
issuance thereof.
"Specific Rating Category" shall mean a specific rating category of a
Rating Agency, taking into account any refinement or gradation of a Rating
Category by a numerical or other qualifier. For so long as any of the Notes are
rated by Moody's: (a) references to the highest applicable Specific Rating
Category shall be, with respect to obligations or investments having a term of
less than one year, to a rating of "P-1" (or such rating as Moody's shall advise
the Trustee is comparable to "P-1" under any revised rating schedule), and with
respect to obligations or investments having a term of one year or longer, to a
rating of "Aaa" (or such rating as Moody's shall advise the Trustee is
comparable to "Aaa" under any revised rating schedule); and (b) references to
the third highest applicable Specific Rating Category shall be, with respect to
obligations or investments having a term of one year or longer, to a rating of
"Aa2" (or such rating as Moody's shall advise the Trustee is comparable to "Aa2"
under any revised rating schedule). For so long as any of the Notes are rated by
Fitch: (a) references to the highest applicable Specific Rating Category shall
be, with respect to obligations or investments having a term of less than one
year, to a rating of "F-1+" (or, if Fitch revises its rating schedule from time
to time, such rating as Fitch shall advise the Trustee in writing is comparable
to "F-1+" under such revised rating schedule), and with respect to obligations
or investments having a term of one year or longer, to a rating of "AAA" (or, if
Fitch revises its rating schedule from time to time, such rating as Fitch shall
advise the Trustee in writing is comparable to "AAA" under such revised rating
schedule); and (b) references to the third highest applicable Specific Rating
Category shall be, with respect to obligations or investments having a term of
one year or longer, to a rating of "AA" (or, if Fitch revises its rating
schedule from time to time, such rating as Fitch shall advise the Trustee in
writing is comparable to "AA" under such revised rating schedule).
"Stafford Loan" shall mean a Student Loan made pursuant to Section 428 of
the Higher Education Act.
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"Stated Maturity," when used with respect to any Note or any
installment of interest thereon, shall mean the date specified in such Note
as the fixed date on which principal of such Note or such installment of
interest is due and payable.
"Statutory Corporate Tax Rate" shall mean, with respect to a series of
Tax Exempt Auction Rate Series 1997-1 Senior Notes, the highest tax bracket
(expressed in decimals) applicable at the time of determination of the
After-Tax Equivalent on the income tax of any corporation, as set forth in
Section 11 of the Code or any successor section, without regard to any
minimum additional tax provision. The "Statutory Corporate Tax Rate", as
of _________, 1997, is .35.
"Student Loan" shall mean a loan to a borrower for post-secondary
education.
"Student Loan Portfolio" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Student Loan Purchase Agreements" shall mean all agreements between
the Original Issuer or the Corporation and a Lender providing for the sale
by such Lender to the Corporation or the Trustee on behalf of the
Corporation (or to the Original Issuer prior to the Date of Issuance) of
Student Loans Financed or to be Financed under the Indenture and
substantially in the forms which are on file with the Trustee, including
amendments thereto made in accordance with the Indenture.
"Sub-Account" shall mean any subaccount of an Account created by a
Supplemental Indenture.
"Submission Deadline" shall have the meaning assigned thereto on page
[ ] of this Prospectus.
"Submitted Bid" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Submitted Hold Order" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Submitted Orders" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Submitted Sell Order" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Subordinate Beneficiaries" shall mean (i) the Holders of any
Outstanding Subordinate Notes, and (ii) any Subordinate Credit Facility
Provider and any Subordinate Swap Counterparty entitled to any Other
Subordinate Obligations then Outstanding.
"Subordinate Credit Enhancement Facility" shall mean a Credit
Enhancement Facility designated as a Subordinate Credit Enhancement
Facility in the Supplemental Indenture pursuant to which such Credit
Enhancement Facility is furnished by the Corporation.
"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.
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"Subordinate Percentage" shall mean, as of the date of determination,
the percentage resulting by dividing the Aggregate Value by the sum of (i)
the aggregate Principal Amount of Outstanding Senior Notes and Subordinate
Notes plus accrued interest thereon, (ii) accrued Corporation Swap Payments
and (iii) other payments accrued and owing by the Corporation on Other
Indenture Obligations.
"Subordinate Swap Agreement" shall mean a Swap Agreement designated as
a Subordinate Swap Agreement in the Supplemental Indenture pursuant to
which such Swap Agreement is furnished by the Corporation.
"Subordinate Swap Counterparty" shall mean any Person who provides a
Subordinate Swap Agreement.
"Sufficient Bids" shall have the meaning assigned thereto on page [__]
of this Prospectus.
"Supplemental Indenture" shall mean any amendment of or supplement to
the Indenture made in accordance with the provisions thereof. (See
"Summary of the Indenture -- Supplemental Indentures".)
"Swap Agreement" shall mean, collectively, (a) an interest rate
exchange agreement between the Corporation and a Swap Counterparty, as
originally executed and as amended or supplemented, or other interest rate
hedge agreement between the Corporation and a Swap Counterparty, as
originally executed and as amended or supplemented, in each case approved
by each Rating Agency, for the purpose of converting, in whole or in part,
(i) the Corporation's fixed interest rate liability on all or a portion of
any Notes to a variable rate liability, (ii) the Corporation's variable
rate liability on all or a portion of the Notes to a fixed rate liability,
or (iii) the Corporation's variable rate liability on all or a portion of
the Notes to a different variable rate liability, and (b) any guarantee of
the Swap Counterparty's obligations under such interest rate exchange
agreement.
"Swap Counterparty" shall mean any Person with whom the Corporation
shall, from time to time, enter into a Swap Agreement.
"Tax-Exempt Notes" shall mean the Tax Exempt Series 1997-1 Notes and
each other series of Notes that is issued with the intent that interest
thereon be excludable from gross income for purposes of federal income
taxation, as evidenced by an opinion of Bond Counsel to that effect
delivered upon issuance of such series of Notes.
"Tax Exempt Auction Rate Series 1997-1 Senior Notes" shall mean,
collectively, the Series 1997-1A Notes, the Series 1997-1B Notes, the
Series 1997-1C Notes, the Series 1997-D Notes and the Series 1997-E Notes.
"Tax Exempt Fixed Rate Series 1997-1 Notes" shall mean, collectively,
the Tax Exempt Fixed Rate Series 1997-1 Senior Notes and the Tax Exempt
Fixed Rate Series 1997-1 Subordinate Notes.
"Tax Exempt Fixed Rate Series 1997-1 Senior Notes" shall mean the
Series 1997-1F Notes.
"Tax Exempt Fixed Rate Series 1997-1 Subordinate Notes" shall mean the
Series 1997-1K Notes.
"Tax-Favored Plans" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"Tax Matters Certificate" shall mean, with respect to a series of Tax-
Exempt Notes, the applicable Original Issuer or Corporation certificate or
certificates relating to arbitrage and other tax matters delivered in
connection with the issuance of such series of Notes, as the same may be
amended or supplemented in accordance with its or their terms.
"Taxable Auction Rate Series 1997-1 Senior Notes" shall mean,
collectively, the Series 1997-1G Notes and the Series 1997-1H Notes.
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"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
the lesser of (i) One-Month LIBOR plus the Taxable LIBOR Rate Series 1997-1
Senior Note Spread, or (ii) the Net Loan Rate.
"Taxable LIBOR Rate Series 1997-1 Senior Note LIBOR-Based Rate" shall
have the meaning assigned thereto on page [__] of this Prospectus.
"Taxable LIBOR Rate Series 1997-1 Senior Note Spread" shall mean ___%
per annum, with respect to the Series 1997-1I Notes, and ___% per annum,
with respect to the Series 1997-1J Notes.
"Taxable LIBOR Rate Series 1997-1 Senior Notes" shall mean,
collectively, the Series 1997-1I Notes and the Series 1997-1J Notes.
"Taxable LIBOR Rate Series 1997-1 Subordinate Note Initial Interest
Rate" shall mean the interest rate to be borne by the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes for the Initial Interest Period therefor,
as set forth in the First Supplemental Indenture.
"Taxable LIBOR Rate Series 1997-1 Subordinate Note Interest Rate"
shall mean the rate of interest per annum borne by the Taxable LIBOR Rate
Series 1997-1 Subordinate Notes, which, during the Initial Interest Period
for such series, shall be the Taxable LIBOR Rate Series 1997-1 Subordinate
Note Initial Interest Rate, and during each Interest Period thereafter,
shall be the lesser of (i) One-Month LIBOR plus the Taxable LIBOR Rate
Series 1997-1 Subordinate Note Spread or (ii) the Net Loan Rate.
"Taxable LIBOR Rate Series 1997-1 Subordinate Note LIBOR-Based Rate"
shall have the meaning assigned thereto on page [__] of this Prospectus.
"Taxable LIBOR Rate Series 1997-1 Subordinate Note Spread" shall mean
___% per annum.
"Taxable LIBOR Rate Series 1997-1 Subordinate Notes" shall mean the
Series 1997-1L Notes.
"Taxable Series 1997-1 Notes" shall mean the Taxable Auction Rate
Series 1997-1 Senior Notes and the Taxable LIBOR Rate Series 1997-1 Notes.
"Terms and Conditions" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"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
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on the basis of the rate at which deposits in United States dollars having
a maturity of three months are offered to prime banks in the London
interbank market by four major banks in the London interbank market
selected by (i) the Auction Agent after consultation with the Trustee or
(ii) the Trustee, as applicable, and in a principal amount of not less than
U.S. $1,000,000 and that is representative for a single transaction in such
market at such time. The Auction Agent or the Trustee, as applicable, will
request the principal London office of each of such banks to provide a
quotation of its rate. If at least two quotations are provided, Three-
Month LIBOR will be the arithmetic mean (rounded upwards, if necessary, to
the nearest .01%) of such offered rates. If fewer than two quotations are
provided, Three-Month LIBOR will be the arithmetic mean (rounded upwards,
if necessary, to the nearest .01%) of the rates quoted at approximately
11:00 a.m., New York City time on the applicable Interest Rate
Determination Date by three major banks in New York, New York, selected by
(x) the Auction Agent after consultation with the Trustee or (y) the
Trustee, as applicable, for loans in United States dollars to leading
European banks having a maturity of three months and in a principal amount
equal to an amount of not less than U.S. $1,000,000 and that is
representative for a single transaction in such market at such time;
provided, however, that if the banks selected as aforesaid are not quoting
as mentioned in this sentence, Three-Month LIBOR will be the Three-Month
LIBOR in effect for the immediately preceding Interest Period.
"Trust Estate" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Trust Funds" shall mean, in the aggregate, all of the Funds and
Accounts.
"Trustee" shall have the meaning assigned thereto on page [__] of this
Prospectus.
"Underwriters" shall mean Smith Barney Inc., FBS Investment Services,
Inc., Dougherty Dawkins LLC, Miller & Schroeder Financial, Inc. and Norwest
Investment Services, Inc.
"Underwriting Agreement" shall have the meaning assigned thereto on
page [__] of this Prospectus.
"Unenhanced" shall mean, with respect to a Senior Note or a
Subordinate Note, that the payment of the principal of and interest on such
Note is not secured by a Credit Enhancement Facility.
"Unsubsidized Stafford Loan" shall mean a Student Loan made pursuant
to Section 428H of the Higher Education Act.
"U.K. Regulations" shall have the meaning assigned thereto on page
[__] of this Prospectus.
"U.S. Person" shall have the meaning assigned thereto on page [__] of
this Prospectus.
"Value" shall mean, on any calculation date when required under the
Indenture, the value of the Trust Estate calculated by the Corporation in
accordance with the following:
(1) with respect to any Eligible Loan, the Principal Balance
thereof, plus any unamortized premiums, accrued interest and Special
Allowance Payments thereon;
(2) with respect to any funds of the Corporation on deposit in
any commercial bank or as to any banker's acceptance or repurchase
agreement or investment agreement, the amount thereof plus accrued
interest thereon;
(3) with respect to any Investment Securities of an investment
company, the bid price of the shares as reported by the investment
company;
-197-
<PAGE>
(4) as to other investments (i) the bid price published by a
nationally recognized pricing service, or (ii) if the bid and asked
prices thereof are published on a regular basis in The Wall Street
Journal (or, if not there, then in The New York Times), the average of
the bid and asked prices for such investments so published on or most
recently prior to such time of determination, in each case plus
accrued interest thereon;
(5) as to investments the bid prices of which are not published
by a nationally recognized pricing service and the bid and asked
prices of which are not published on a regular basis in The Wall
Street Journal or The New York Times, the lower of the bid prices at
such time of determination for such investments by any two nationally
recognized government securities dealers (selected by the Corporation
in its absolute discretion) at the time making a market in such
investments, plus accrued interest thereon; and
(6) any accrued but unpaid Swap Counterparty Payments under a
Swap Agreement, unless the Swap Counterparty is in default of its
obligations thereunder.
"Value of Investment Securities" shall mean (i) as to demand bank
deposits, bank time deposits which may be withdrawn without penalty by the
depositor upon 14 days' or less notice and Investment Securities which
mature not more than six months from the date of computation, the amount of
such deposits and the par value of such Investment Securities, and (ii) as
to Investment Securities, other than demand bank deposits and bank time
deposits described in clause (i), which mature more than six months after
the date of computation, the par value thereof or, if purchased at more or
less than par, the cost thereof adjusted to reflect the amortization or
premium or discount, as the case may be, paid upon their purchase. The
computation made under this paragraph shall included accrued interest.
"Variable Rate Notes" shall mean Notes whose interest rate is not
fixed but varies on a periodic basis as specified in the Supplemental
Indenture providing for the issuance thereof.
-198-
<PAGE>
EDUCATION LOANS INCORPORATED
(a wholly-owned subsidiary of
Student Loan Finance Corporation)
BALANCE SHEET
AS OF AUGUST 31, 1997
(With Independent Auditor's Report)
<PAGE>
CONTENTS
--------
Item Page
- ---- ----
Independent Auditor's Report.............................................. F-3
Balance Sheet............................................................. F-4
Notes to Balance Sheet.................................................... F-5
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors
Education Loans Incorporated
Aberdeen, South Dakota
We have audited the accompanying balance sheet of Education Loans
Incorporated (a Delaware corporation and wholly-owned subsidiary of Student
Loan Finance Corporation, a South Dakota corporation) as of August 31,
1997. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly the
financial position of Education Loans Incorporated as of August 31, 1997 in
conformity with generally accepted accounting principles.
Eide Helmeke PLLP
September 2, 1997
Aberdeen, South Dakota
F-3
<PAGE>
EDUCATION LOANS INCORPORATED
(a wholly-owned subsidiary of Student Loan Finance Corporation)
BALANCE SHEET
AUGUST 31, 1997
================================================================================
ASSETS
CASH $ 100
-----
Total assets $ 100
=====
STOCKHOLDERS' EQUITY
COMMON STOCK, par value $.01;
100 shares authorized, issued and outstanding $ 1
ADDITIONAL PAID-IN CAPITAL 99
-----
Total stockholders' equity $ 100
=====
See Notes to Balance Sheet
F-4
<PAGE>
EDUCATION LOANS INCORPORATED
(a wholly-owned subsidiary of Student Loan Finance Corporation)
NOTES TO BALANCE SHEET
AUGUST 31, 1997
================================================================================
NOTE 1 - ORGANIZATION
Education Loans Incorporated (the "Corporation"), a Delaware corporation
and wholly-owned subsidiary of Student Loan Finance Corporation ("SLFC"),
was incorporated in the State of Delaware on May 7, 1997 and has had no
operations from that date to August 31, 1997. The Company has established
its fiscal year-end to be June 30.
The Corporation was organized to engage exclusively in the following
business and financial activities: (i) to receive the assets and assume
the liabilities transferred to it in connection with the election by
Education Loans Incorporated, a South Dakota nonprofit corporation, under
Section 150(d)(3) of the Internal Revenue Code; (ii) to originate or
acquire Student Loans; (iii) to enter into certain agreements relating to
Student Loans; (iv) to issue bonds, notes, asset-backed certificates or other
securities payable solely from Student Loans and other assets pledged to the
payment thereof; and (v) to engage in acts incidental to and necessary, suitable
or convenient for the accomplishment of the foregoing purposes and permitted
under Delaware law.
As of the date of incorporation, Student Loan Finance Corporation, a newly
organized South Dakota corporation, subscribed for all 100 shares of the
Corporation's common stock for a total cash consideration of $100. As of
August 31, 1997, the Corporation had received a total of $100 for which it
had issued 100 shares of its $0.01 par value common stock and had credited
$1 to the common stock account and credited $99 to the additional paid-in
capital account.
# # # # #
F-5
<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
Page
----
AVAILABLE INFORMATION......................................... 6
REPORTS TO NOTEHOLDERS........................................ 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............... 6
PROSPECTUS SUMMARY............................................ 7
RISK FACTORS.................................................. 31
DESCRIPTION OF SERIES 1997-1 NOTES............................ 44
APPLICATION OF SERIES 1997-1 NOTE PROCEEDS.................... 54
SOURCE OF PAYMENT AND SECURITY FOR THE NOTES.................. 56
THE ORIGINAL ISSUER........................................... 59
THE SERVICER.................................................. 60
THE CORPORATION............................................... 63
THE SLFC SERVICING AGREEMENT.................................. 65
DESCRIPTION OF FINANCED ELIGIBLE LOAN PROGRAM................. 69
CHARACTERISTICS OF THE INITIAL FINANCED ELIGIBLE LOANS........ 73
DESCRIPTION OF FEDERAL FAMILY EDUCATION LOAN PROGRAM.......... 77
DESCRIPTION OF THE GUARANTEE AGENCIES......................... 92
TERMS OF THE TAX EXEMPT AUCTION RATE
SERIES 1997-1 SENIOR NOTES.................................... 101
TERMS OF THE TAX EXEMPT FIXED RATE
SERIES 1997-1 SENIOR NOTES.................................... 103
TERMS OF THE TAXABLE AUCTION RATE
SERIES 1997-1 SENIOR NOTES.................................... 104
TERMS OF THE TAXABLE LIBOR RATE
SERIES 1997-1 SENIOR NOTES.................................... 108
TERMS OF THE TAX EXEMPT FIXED RATE
SERIES 1997-1 SUBORDINATE NOTES............................... 111
TERMS OF THE TAXABLE LIBOR RATE
SERIES 1997-1 SUBORDINATE NOTES............................... 111
WEIGHTED AVERAGE LIFE OF THE TAXABLE
LIBOR RATE SERIES 1997-1 NOTES................................ 114
AUCTION OF THE AUCTION RATE
SERIES 1997-1 SENIOR NOTES.................................... 116
SETTLEMENT PROCEDURES FOR AUCTION RATE
SERIES 1997-1 SENIOR NOTES.................................... 131
SUMMARY OF THE INDENTURE...................................... 134
TAX MATTERS................................................... 161
ERISA CONSIDERATIONS.......................................... 165
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS............ 166
PLAN OF DISTRIBUTION.......................................... 167
LEGAL MATTERS................................................. 168
EXPERTS....................................................... 168
RATINGS....................................................... 168
GLOSSARY OF CERTAIN DEFINED TERMS............................. 169
AUDITED BALANCE SHEET......................................... F-1
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 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 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 (Taxable Auction Rate Series
1997-1 Notes)*
4.4 Form of Auction Agent Agreement (Tax Exempt Auction Rate
Series 1997-1 Notes)*
4.5 Form of Broker-Dealer Agreement (Taxable Auction Rate Series
1997-1 Notes)*
4.6 Form of Broker-Dealer Agreement (Tax Exempt Auction Rate
Series 1997-1 Notes)*
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 (Taxable)*
10.3 Form of Student Loan Purchase Agreement (Tax Exempt)*
10.4 Guarantee Agreement with Education Assistance Corporation
dated ____________.++
10.5 Guarantee Agreement with Pennsylvania Higher Education
Assistance Agency dated ____________.++
10.6 [Other Guarantee Agreements]++
23.1 Consents of Dorsey & Whitney LLP (included in Exhibits 5.1,
8.1, 99.1 and 99.2)
23.2 Consent of Eide Helmeke PLLP
24.1b Powers of Attorney+
25.1 Statement of Eligibility of Trustee (Form T-1)*
27.1 Financial Data Schedule
99.1 Opinion of Dorsey & Whitney LLP as to "true sale" matters++
99.2 Opinion of Dorsey & Whitney LLP as to nonconsolidation++
----------------
* Incorporated by reference to a similarly numbered exhibit filed or
to be filed by the registrant's co-registrant, Education Loans
Incorporated, a South Dakota nonprofit corporation, on this Form S-
3 registration statement.
+ Previously filed.
++ 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 annual report pursuant to
section 13(a) or section 15(d) of the Securities and Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
<PAGE>
(d) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
EDUCATION LOANS INCORPORATED,
A Delaware Corporation
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Aberdeen, State of South Dakota on September 2, 1997.
EDUCATION LOANS INCORPORATED
By: /s/ A. Norgrin Sanderson
--------------------------
A. Norgrin Sanderson
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ A. Norgrin Sanderson President, Treasurer September 2, 1997
- ------------------------ and Chairman of the Board
A. Norgrin Sanderson (principal executive officer,
principal financial and accounting officer)
____________*____________ Director September 2, 1997
V. G. Stoia
____________*____________ Director September 2, 1997
Manley B. Feinstein
____________*____________ Director September 2, 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 Delaware Corporation
Number Exhibit
- ------ -------
1.1 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 (Taxable Auction Rate Series 1997-1
Notes)+
4.4 Form of Auction Agent Agreement (Tax Exempt Auction Rate Series 1997-1
Notes)+
4.5 Form of Broker-Dealer Agreement (Taxable Auction Rate Series 1997-1
Notes)+
4.6 Form of Broker-Dealer Agreement (Tax Exempt Auction Rate Series 1997-1
Notes)+
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 (Taxable)+
10.3 Form of Student Loan Purchase Agreement (Tax Exempt)+
10.4 Guarantee Agreement with Education Assistance Corporation dated
____________.*
10.5 Guarantee Agreement with Pennsylvania Higher Education Assistance
Agency dated ____________.*
10.6 [Other Guarantee Agreements]*
23.1 Consents of Dorsey & Whitney LLP (included in Exhibits 5.1, 8.1, 99.1
and 99.2)
23.2 Consent of Eide Helmeke PLLP
24.1b Powers of Attorney+
25.1 Statement of Eligibility of Trustee (Form T-1)+
27.1 Financial Data Schedule
99.1 Opinion of Dorsey & Whitney LLP as to "true sale" matters*
99.2 Opinion of Dorsey & Whitney LLP as to nonconsolidation*
- ---------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report
dated September 2, 1997, on the balance sheet of Education Loans Incorporated, a
newly organized Delaware corporation (the "Corporation"), in Amendment No. 3 to
the Prospectus and Registration Statement of the Corporation (SEC File No. 333-
26679-01) relating to the issuance of its Student Loan Asset-Backed Notes Series
1997-1 and to the reference to our firm under the heading "Experts" in such
Prospectus and Registration Statement.
EIDE HELMEKE PLLP
September 2, 1997
Aberdeen, South Dakota
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001038833
<NAME> Education Loans Incorporated (Delaware)
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 100
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 100
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 100
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 99
<TOTAL-LIABILITY-AND-EQUITY> 100
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
Note: The company is a newly organized, wholly-owned subsidiary. It has had no
operations. The financial statement consists of a balance sheet at August
31, 1997.
</FN>
</TABLE>
