<PAGE>
As filed with the Securities and Exchange Commission on October 23, 1997
Registration No. 333-26679-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 7
to
FORM S-1
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)
6799
(Primary Standard Industrial Classification Code Number)
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 FEBRUARY 3, 1998
$923,470,000
EDUCATION LOANS INCORPORATED
STUDENT LOAN ASSET-BACKED CALLABLE NOTES, SERIES 1998-1
CONSISTING OF
$274,900,000 TAX EXEMPT AUCTION RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SENIOR SERIES 1998-1A THROUGH E
$24,055,000 TAX EXEMPT FIXED RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SENIOR SERIES 1998-1F
$107,500,000 TAXABLE AUCTION RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SENIOR SERIES 1998-1G AND H
$424,600,000 TAXABLE LIBOR RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SENIOR SERIES 1998-1I AND J
$33,215,000 TAX EXEMPT FIXED RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SUBORDINATE SERIES 1998-1K
$59,200,000 TAXABLE LIBOR RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SUBORDINATE SERIES 1998-1L
----------
Education Loans Incorporated (formerly known as Student Loan Finance
Corporation), a South Dakota nonprofit corporation (the "Original Issuer"), is
offering $923,470,000 aggregate principal amount of its Student Loan Asset-
Backed Callable Notes, Series 1998-1 (the "Series 1998-1 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 1998-1 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 1998-1 NOTES SHOULD CONSIDER THE
DISCUSSION OF CERTAIN MATERIAL FACTORS SET FORTH UNDER "RISK FACTORS" ON PAGE
32 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 1998-1 Notes will represent limited obligations of the
Corporation, payable solely from the Trust Estate created under the Indenture
and described herein. The Series 1998-1 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 1998-1 Notes other
than the Trust Estate pledged as collateral for the Notes under the Indenture.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING ORIGINAL
PUBLIC FEE (1) ISSUER (2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Exempt Auction Rate Series 1998-1 Senior Notes....... % . % . %
- -----------------------------------------------------------------------------------------------------
Tax Exempt Fixed Rate Series 1998-1 Senior Notes......... % . % . %
- -----------------------------------------------------------------------------------------------------
Taxable Auction Rate Series 1998-1 Senior Notes.......... % . % . %
- -----------------------------------------------------------------------------------------------------
Taxable LIBOR Rate Series 1998-1 Senior Notes............ % . % . %
- -----------------------------------------------------------------------------------------------------
Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes.... % . % . %
- -----------------------------------------------------------------------------------------------------
Taxable LIBOR Rate Series 1998-1 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
$1,830,000.
----------
As a result of the transfer requirements described herein, the Auction Rate
Series 1998-1 Senior Notes will not be freely transferable, which may limit the
liquidity and marketability of Auction Rate Series 1998-1 Senior Notes and
therefore may not yield a Noteholder the best possible price for an Auction
Rate Series 1998-1 Senior Note. The ratings of the Auction Rate Series 1998-1
Senior Notes by the Rating Agencies will not address the market liquidity of
such Notes.
The Series 1998-1 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 1998-1 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 February , 1998.
SALOMON SMITH BARNEY
U.S. BANCORP INVESTMENTS, INC.
DOUGHERTY SUMMIT SECURITIES LLC
MILLER & SCHROEDER FINANCIAL, INC.
NORWEST INVESTMENT SERVICES, INC.
The date of this Prospectus is February , 1998.
<PAGE>
(continued from previous page)
The Series 1998-1 Notes are to be issued in twelve series designated as Tax
Exempt Auction Rate Student Loan Asset-Backed Callable Notes, Senior Series
1998-1A through 1998-1E (the "Tax Exempt Auction Rate Series 1998-1 Senior
Notes"), Tax Exempt Fixed Rate Student Loan Asset-Backed Callable Notes, Senior
Series 1998-1F (the "Tax Exempt Fixed Rate Series 1998-1 Senior Notes"), Taxable
Auction Rate Student Loan Asset-Backed Callable Notes, Senior Series 1998-1G and
1998-1H (the "Taxable Auction Rate Series 1998-1 Senior Notes"), Taxable LIBOR
Rate Student Loan Asset-Backed Callable Notes, Senior Series 1998-1I and 1998-1J
(the "Taxable LIBOR Rate Series 1998-1 Senior Notes"), Tax Exempt Fixed Rate
Student Loan Asset-Backed Callable Notes, Subordinate Series 1998-1K (the "Tax
Exempt Fixed Rate Series 1998-1 Subordinate Notes"), and Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes, Subordinate Series 1998-1L (the
"Taxable LIBOR Rate Series 1998-1 Subordinate Notes"). See "Description of
Series 1998-1 Notes" herein.
The rights of the Holders of Tax Exempt Fixed Rate Student Loan Asset-
Backed Notes, Subordinate Series 1998-1K and Taxable LIBOR Rate Student Loan
Asset-Backed Notes, Subordinate Series 1998-1L to receive payments with respect
to the Notes and to direct remedies upon default will be subordinated to such
rights of the Series 1998-1 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 1998-1 Senior Notes, the Tax Exempt
Fixed Rate Series 1998-1 Senior Notes, the Taxable Auction Rate Series 1998-1
Senior Notes, the Taxable LIBOR Rate Series 1998-1 Senior Notes, the Tax Exempt
Fixed Rate Series 1998-1 Subordinate Notes and the Taxable LIBOR Rate Series
1998-1 Subordinate Notes will be issued in the initial aggregate principal
amounts of $274,900,000, $24,055,000, $107,500,000, $424,600,000, $33,215,000
and $59,200,000, respectively. The Series 1998-1 Notes will be issued pursuant
to an Indenture of Trust dated as of February 1, 1998 (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 1998-1 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 1998-1 Notes are subject to optional and special call for
redemption and prepayment as more fully described herein. See "Description of
Series 1998-1 Notes" herein.
The Tax Exempt Auction Rate Series 1998-1 Senior Notes and the Taxable
Auction Rate Series 1998-1 Senior Notes (collectively, the "Auction Rate Series
1998-1 Senior Notes") will be issued in the series and respective principal
amounts set forth in the table below, and will bear interest at the respective
Initial Interest Rates described
-2- (cover continued on next page)
<PAGE>
(continued from previous page)
herein during the respective Initial Interest Periods, being the periods from
the Date of Issuance to, but not including, the respective Initial Interest Rate
Adjustment Dates set forth in the following table:
<TABLE>
<CAPTION>
Initial Interest
Series Principal Amount Rate Adjustment Dates
----- ---------------- ---------------------
<S> <C> <C>
1998-1A $74,900,000 March 26, 1998
1998-1B 50,000,000 April 2, 1998
1998-1C 50,000,000 April 9, 1998
1998-1D 50,000,000 April 16, 1998
1998-1E 50,000,000 April 23, 1998
1998-1G 53,500,000 March 24, 1998
1998-1H 54,000,000 March 31, 1998
</TABLE>
After the Initial Interest Periods, interest on each series of the Auction Rate
Series 1998-1 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 1998-1 Senior
Notes will be paid on each June 1 and December 1, commencing June 1, 1998.
Interest on the Taxable Auction Rate Series 1998-1 Senior Notes will be paid on
the first Business Day following the expiration of each respective Auction
Period. The Auction Rate Series 1998-1 Senior Notes will mature June 1, 2020.
See "Terms of the Tax Exempt Auction Rate Series 1998-1 Senior Notes" and "Terms
of the Taxable Auction Rate Series 1998-1 Senior Notes."
The purpose of the Auction Procedures is to set the interest rates on the
Auction Rate Series 1998-1 Notes. By purchasing Auction Rate Series 1998-1
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 1998-1 Senior Notes is maintained in book-entry form, to
sell, transfer or otherwise dispose of the Auction Rate Series 1998-1 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 1998-1 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 1998-1 Notes. See "Auction of the Auction Rate
Series 1998-1 Senior Notes" herein.
The Tax Exempt Fixed Rate Series 1998-1 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 $14,270,000 ____%
June 1, 2020 9,785,000 ____
</TABLE>
Interest on the Tax Exempt Fixed Rate Series 1998-1 Senior Notes will be payable
on each June 1 and December 1, commencing June 1, 1998. See "Terms of the Tax
Exempt Fixed Rate Series 1998-1 Senior Notes."
The Taxable LIBOR Rate Series 1998-1 Senior Notes will be issued in the
series and respective principal amounts, and will mature on the respective
dates, set forth in the table below:
-3- (cover continued on next page)
<PAGE>
(continued from previous page)
<TABLE>
<CAPTION>
Series Principal Amount Maturity Date
--------- ---------------- -------------
<S> <C> <C>
1998-1I $185,000,000 June 1, 2002
1998-1J 239,600,000 June 1, 2020
</TABLE>
Interest on the Taxable LIBOR Rate Series 1998-1 Senior Notes will be payable
monthly on the first Business Day of each month, commencing March 2, 1998. The
Taxable LIBOR Rate Series 1998-1 Senior Note Interest Rate with respect to each
series of Taxable LIBOR Rate Series 1998-1 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 1998-1I Notes and the One-Month LIBOR plus
____% per annum with respect to the Series 1998-1J Notes. See "Terms of the
Taxable LIBOR Rate Series 1998-1 Senior Notes."
The Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes will bear
interest at the rate of __% per annum, payable on each June 1 and December 1,
commencing June 1, 1998. The Tax Exempt Fixed Rate Series 1998-1 Subordinate
Notes will mature June 1, 2020. See "Terms of the Tax Exempt Fixed Rate Series
1998-1 Subordinate Notes."
Interest on the Taxable LIBOR Rate Series 1998-1 Subordinate Notes will be
payable monthly on the first Business Day of each month, commencing March 2,
1998. The Taxable LIBOR Rate Series 1998-1 Subordinate Note Interest Rate will
be determined by the Trustee monthly as described herein to equal the One-Month
LIBOR plus __% per annum. The Taxable LIBOR Rate Series 1998-1 Subordinate Notes
will mature June 1, 2020. See "Terms of the Taxable LIBOR Rate Series 1998-1
Subordinate Notes."
Principal payments on Financed Student Loans are not anticipated to be used
to retire principal of the Taxable Auction Rate Series 1998-1 Senior Notes until
all Taxable LIBOR Rate Series 1998-1 Notes have been paid in full, and principal
of the Series 1998-1J Notes will not be paid from principal payments on Financed
Student Loans until the Series 1998-1I 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 1998-1 Senior Notes or with the Series
1998-1 Subordinate Notes or on a subordinate basis to all such Notes. The Series
1998-1 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 1998-1 Notes is not includable
in the gross income of the owners thereof for federal income tax purposes.
Interest on the Tax Exempt Series 1998-1 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 1998-1
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 1998-
1 Note ownership, see "Tax Matters -- Tax Exempt Series 1998-1 Notes."
Neither the Original Issuer nor the Corporation has authorized any offer of
Series 1998-1 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 1998-1 Notes may not lawfully be offered or sold to persons in the United
Kingdom
-4- (cover continued on next page)
<PAGE>
(continued from previous page)
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 1998-1
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 1998-1 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 1998-1 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 1998-1 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 1998-1 Notes that Moody's
Investors Service, Inc. rate the Series 1998-1 Senior Notes "Aaa" and the Series
1998-1 Subordinate Notes at least "A3" and that Fitch IBCA, Inc. rate the Series
1998-1 Senior Notes "AAA" and the Series 1998-1 Subordinate Notes at least "A".
See "Ratings of the Series 1998-1 Notes."
Upon receipt of a request by an investor who has received an electronic
Prospectus from any Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus,
such Underwriter will promptly deliver, or cause to be delivered, without
charge, to such investor a paper copy of the Prospectus.
-5-
<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 1998-1 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 1998-1 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 1998-1 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 1998-1 Notes --
Book-Entry-Only System" herein. In addition, at the request of any beneficial
owner of Series 1998-1 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.
-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 173 of this
Prospectus.
Issuer The Series 1998-1 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
1998-1 Notes, the Original Issuer will issue the Series 1998-1
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 1998-1 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 1998-1 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 1998-1 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 1998-1 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.
As of December 31, 1997, $912,425,000 aggregate
principal amount of the Original Issuer's bonds and
notes were outstanding, bearing interest at rates per
annum between 3.85% and 7.85%, and maturing from August
1, 1998 through August 1, 2020. A portion of the
proceeds of the Series 1998-1 Notes will be used to
refund the entire outstanding principal amount of such
bonds and notes, which have been issued to finance the
Original Issuer's Student Loan program.
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 1998-1 Notes are to be issued in twelve
Offered series, designated as Tax Exempt Auction Rate Student
Loan Asset-Backed Callable Notes, Senior Series 1998-1A
through 1998-1E (the "Tax Exempt Auction Rate Series
1998-1 Senior Notes"), Tax Exempt Fixed Rate Student
Loan Asset-Backed Callable Notes, Senior Series 1998-1F
(the "Tax Exempt Fixed Rate Series 1998-1 Senior
Notes"), Taxable Auction Rate Student Loan Asset-Backed
Callable Notes, Senior Series 1998-1G and 1998-1H (the
"Taxable Auction Rate Series 1998-1 Senior Notes"),
Taxable LIBOR Rate Student Loan Asset-Backed Callable
Notes, Senior Series 1998-1I and 1998-1J (the "Taxable
LIBOR Rate Series 1998-1 Senior Notes"), Tax Exempt
Fixed Rate Student Loan Asset-Backed Callable Notes,
Subordinate Series 1998-1K (the "Tax Exempt Fixed Rate
Series 1998-1 Subordinate Notes"), and Taxable LIBOR
Rate Student Loan Asset-Backed Callable Notes,
Subordinate Series 1998-1L (the "Taxable LIBOR Rate
Series 1998-1 Subordinate Notes"). See "Description of
Series 1998-1 Notes" herein. The original principal
amounts of the Tax Exempt Auction Rate Series 1998-1
Senior Notes, the Tax Exempt Fixed Rate Series 1998-1
Senior Notes, the Taxable Auction Rate Series 1998-1
Senior Notes, the Taxable LIBOR Rate Series 1998-1
Senior Notes, the Tax Exempt Fixed Rate Series 1998-1
Subordinate Notes and the Taxable LIBOR Rate Series
1998-1 Subordinate Notes shall be $274,900,000,
$24,055,000, $107,500,000, $424,600,000, $33,215,000 and
$59,200,000, respectively. The Series 1998-1 Subordinate
Notes are subordinated in certain respects to the Series
1998-1 Senior Notes and any other Senior Obligations, as
more fully described herein. The Series 1998-1 Notes
will be issued pursuant to the Indenture as hereinafter
described.
Risk Factors There are material risks associated with an investment
in the Series 1998-1 Notes. See "Risk Factors". The
material risks include:
. the limited recourse nature of the Series 1998-1
Notes and the limited assets available for their
payment
. the subordination of the Series 1998-1 Subordinate
Notes
-8-
<PAGE>
. the risk that failure to comply with Student Loan
origination and servicing procedures may result in
loss of Guarantee Payments
. the lack of recourse against the Original Issuer for
any failure to comply with Student Loan origination
and servicing procedures
. the risk of changes in law adversely affecting the
Federal Family Education Loan Program and the
Financed Student Loans
. the risk that competition from the Federal Direct
Student Loan Program may result in higher servicing
costs, reduced Student Loan values and higher
prepayments of Financed Student Loans
. the Corporation's right to issue Additional Notes
without the consent of Noteholders
. the risk that the interest rates on Financed Student
Loans may be insufficient to cover the interest on
certain Series 1998-1 Notes due to differences in
indexes or to borrower incentive programs
. risks associated with changing assets in the Trust
Estate and the variability of the actual cash flows
provided by such assets
. the Original Issuer's and Corporation's reliance on
representations of Lenders as to qualification of
Financed Eligible Loans
. the possible inability of Lenders to honor their
repurchase obligations under Student Loan Purchase
Agreements
. the risk that adverse regional economic conditions
could affect geographically concentrated borrowers'
ability to repay Financed Student Loans
. the risk of loss of the tax exemption of interest on
the Tax Exempt Series 1998-1 Notes
. risks associated with the insolvency of the Original
Issuer, SLFC, the Corporation or Lenders
. the risk that failure to comply with the Original
Issuer's Plan for Doing Business may result in a loss
of Special Allowance Payments
. the risk that Guarantee Payments, interest subsidy
payments and Special Allowance Payments with respect
to Financed Student Loans could be offset against
obligations with respect to other Student Loans held
under the same lender number
. the risk of the Trustee's security interest in the
Trust Estate being defeated
. risks associated with the failure to comply with
consumer protection laws
-9-
<PAGE>
. the possibility that Series 1998-1 Noteholders may be
unable to reinvest amounts received from calls for
redemption or prepayments of the Series 1998-1 Notes
except at lower yields
. the possible inability of Guarantee Agencies to make
Guarantee Payments
. the relatively greater risk of prepayment of the
Series 1998-1I Notes and the Series 1998-1J Notes
. the possible insufficiency of Financed Student Loans
and other Trust Estate assets to provide for payment
of all Notes
. risks associated with the acquisition of investment
agreements
. the risk that ratings of the Series 1998-1 Notes may
be reduced
. the limited liquidity of the Series 1998-1 Notes
. risks associated with Swap Agreements that the
Corporation may enter into in the future
. the effect of book-entry registration
Payment of Interest
on Series 1998-1
Notes
Tax Exempt The Tax Exempt Fixed Rate Series 1998-1 Senior Notes
Fixed Rate maturing on the dates set forth below will bear interest
Series 1998-1 at the respective rates per annum set forth below,
Senior Notes payable on each June 1 and December 1, commencing June
1, 1998, 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 1998-1A, 1998-1B, 1998-1C, 1998-1D and 1998-
Auction 1E Notes will bear interest at initial rates of
Rate Series 1998-1 _____%, _____%, _____%, _____%, and _____% per annum,
Senior Notes respectively, to the respective Initial Interest Rate
Adjustment Dates, which will be March 26, 1998 for the
Series 1998-1A Notes, April 2, 1998 for the Series 1998-
1B Notes, April 9, 1998 for the Series 1998-1C Notes,
April 16, 1998 for the Series 1998-1D Notes, and April
23, 1998 for the Series 1998-1E Notes.
After the Initial Interest Period for the Tax Exempt
Auction Rate Series 1998-1 Senior Notes of each series,
each Interest Period will generally consist of 35 days,
subject to adjustment as set forth in "Auction of the
Auction Rate Series 1998-1 Senior Notes - Changes in
Auction Terms - Changes in Auction Period or Periods."
The interest rates for the Tax Exempt Auction Rate
Series 1998-1 Senior Notes will be reset at the Auction
Rates pursuant to the Auction Procedures described in
"Auction of the Auction Rate
-10-
<PAGE>
Series 1998-1 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 1998-1 Senior Notes will
be payable on each June 1 and December 1, commencing
June 1, 1998, to the Holders thereof as of the fifteenth
day of the month preceding the Interest Payment Date.
Taxable Auction The Series 1998-1G and 1998-1H Notes will bear interest
Rate Series 1998-1 at initial rates of _____% and _____% per annum,
Senior Notes respectively, to the respective Initial Interest Rate
Adjustment Dates, which will be March 24, 1998 for the
Series 1998-1G Notes and March 31, 1998 for the Series
1998-1H Notes.
After the Initial Interest Period for the Taxable
Auction Rate Series 1998-1 Senior Notes of each series,
each Interest Period will generally consist of 28 days,
subject to adjustment as set forth in "Auction of the
Auction Rate Series 1998-1 Senior Notes -Changes in
Auction Terms - Changes in Auction Period or Periods".
The interest rates for the Taxable Auction Rate Series
1998-1 Senior Notes will be reset at the Auction Rates
pursuant to the Auction Procedures described in "Auction
of the Auction Rate Series 1998-1 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 1998-1 Senior Notes will be payable
on the first Business Day following the expiration of
each Auction Period for such series, to the Holders
thereof as of the Business Day next preceding each
Auction Date.
Auction The following summarizes certain procedures that will be
Procedures used in determining the interest rates on the Auction
Rate Series 1998-1 Senior Notes. "Auction of the Auction
Rate Series 1998-1 Senior Notes - Auction Procedures"
provides a more detailed description of these
procedures. Prospective investors in the Auction Rate
Series 1998-1 Senior Notes should read carefully the
following summary, along with the more detailed
description in "Auction of the Auction Rate Series 1998-
1 Senior Notes - Changes in Auction Terms -Changes in
Auction Period or Periods."
The interest rate on each series of Auction Rate Series
1998-1 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 1998-1 Senior Notes, or 35 days, in
the case of the Tax Exempt Auction Rate Series 1998-1
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 1998-1 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
1998-1 Senior Notes.
Taxable LIBOR The Taxable LIBOR Rate Series 1998-1 Senior Note
Rate Series 1998-1 Interest Rate with respect to each series of Taxable
Senior Notes LIBOR Rate Series 1998-1 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 1998-1I Notes and the One-Month LIBOR plus ____%
per annum with respect to the Series 1998-1J Notes.
Interest on each series of the Taxable LIBOR Rate Series
1998-1 Senior Notes will be payable monthly on the first
Business Day of each month, commencing March 2, 1998, to
the Holders thereof as of
-11-
<PAGE>
the last Business Day preceding the Interest Payment
Date. See "Terms of the Taxable LIBOR Rate Series 1998-1
Senior Notes."
Tax Exempt Fixed The Series 1998-1K Notes will bear interest at the rate
Rate Series of __% per annum, payable on each June 1 and December 1,
1998-1 commencing June 1, 1998, to the Holders thereof as of
Subordinate the fifteenth day of the month preceding the Interest
Notes Payment Date.
Taxable LIBOR The Taxable LIBOR Rate Series 1998-1 Subordinate Note
Rate Series Interest Rate will be determined by the Trustee monthly
1998-1 as described herein to equal the One-Month LIBOR plus
Subordinate __% per annum. Interest on the Taxable LIBOR Rate Series
Notes 1998-1 Subordinate Notes will be payable monthly on the
first Business Day of each month, commencing March 2,
1998, to the Holders thereof as of the last Business Day
preceding the Interest Payment Date. See "Terms of the
Taxable LIBOR Rate Series 1998-1 Subordinate Notes."
Payment of
Principal on
Series 1998-1
Notes
Stated Maturity The Stated Maturity dates and respective principal
Dates amounts of the Tax Exempt Fixed Rate Series 1998-1
Senior Notes are as follows:
[CAPTION]
<TABLE>
Date Principal Amount
---- ----------------
<S> <C>
June 1, 2010 $ 14,270,000
June 1, 2020 $ 9,785,000
</TABLE>
The Stated Maturity date of the Series 1998-1I Notes is
June 1, 2002.
The Stated Maturity date of all other Series 1998-1
Notes is June 1, 2020.
Optional Call for At the Corporation's option, Auction Rate Series 1998-1
Redemption Senior Notes of any series may be called for redemption
on any Interest Rate Adjustment Date or 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 1998-1 Senior Notes and Tax Exempt Fixed Rate
Series 1998-1 Subordinate Notes may be called for
redemption at any time on and after June 1, 2008, 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:
[CAPTION]
<TABLE>
Redemption Period
(both dates inclusive) Redemption Price
---------------------- ----------------
<S> <C>
June 1, 2008 through May 31, 2009 102%
June 1, 2009 through May 31, 2010 101%
June 1, 2010 and thereafter 100%
</TABLE>
-12-
<PAGE>
Prepayment of Principal of the Taxable LIBOR Rate Series 1998-1 Notes
Taxable LIBOR Rate shall be prepaid on any Interest Payment Date from
Series moneys credited to the Retirement Account as hereinafter
1998-1 Notes 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 1998-1 Notes shall, subject to the
Senior Asset Requirement, be allocated between the
Taxable LIBOR Rate Series 1998-1 Senior Notes and the
Taxable LIBOR Rate Series 1998-1 Subordinate Notes pro
rata. Principal of the Taxable LIBOR Rate Series 1998-1
Senior Notes so allocated to be prepaid shall be applied
to the Series 1998-1I Notes so long as any such Notes
remain Outstanding, and thereafter to the Series 1998-1J
Notes. Within a given series of Taxable LIBOR Rate
Series 1998-1 Notes, the Principal Amount of such series
to be prepaid shall be allocated pro rata to the
reduction of the Principal Amount of all Notes of such
series. The Senior Asset Requirement requires the
maintenance of certain ratios between the Outstanding
Principal Amounts of the Series 1998-1 Senior Notes and
the Series 1998-1 Subordinate Notes and the Value of the
assets of the Trust Estate following calls for
redemption 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 1998-1 Notes -- Senior Asset
Requirement," "Glossary of Certain Defined Terms" and
"Summary of the Indenture -- Call for 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 1998-1 Taxable Acquisition
Account, plus (b) the amount of any Balances theretofore
transferred from the Series 1998-1 Taxable Acquisition
Account to the Retirement Account to redeem Taxable
Auction Rate Series 1998-1 Senior Notes which are called
for redemption as described below under "Call for
Redemption of Auction Rate Series 1998-1 Notes and Fixed
Rate Series 1998-1 Notes from Unused Proceeds," minus
(c) the aggregate amount of interest on Financed Student
Loans credited to the Series 1998-1 Taxable Acquisition
Account which has been capitalized after the Financing
thereof, minus (d) the principal component of the
repurchase price of Student Loans originally Financed
from Balances in Series 1998-1 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
1998-1 Notes, plus (b) the aggregate Principal Amount of
Taxable LIBOR Rate Series 1998-1 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
-13-
<PAGE>
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 1998-1 Notes in amounts related to the amount of
principal payments received with respect to Student
Loans Financed with proceeds of the Taxable Series 1998-
1 Notes in the Acquisition Fund. See "Weighted Average
Life of the Taxable LIBOR Rate Series 1998-1 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 1998-1 Notes, the actual level of prepayments
resulting therefrom cannot be definitively stated. See
"Risk Factors -- Holders of Series 1998-1 Notes Which
are Prepaid or Called for Redemption Due to Accelerated
Payments with respect to Financed Student Loans May Have
to Reinvest Amounts Received From Prepayments or Calls
for Redemption at a Lower Rate of Return" and " --The
Average Life of the Series 1998-1 Notes May Be
Lengthened As a Result of Extension of Payments on the
Financed Student Loans".
Special Call for
Redemption
Call for Redemption Tax Exempt Auction Rate Series 1998-1 Senior Notes of
of Tax Exempt Auction any series, Tax Exempt Fixed Rate Series 1998-1 Senior
Rate Series 1998-1 Notes and Tax Exempt Fixed Rate Series 1998-1
Senior Notes, Tax Subordinate Notes, may, at the Corporation's option, be
Exempt Fixed Rate called for redemption, in whole or in part, at a
Series 1998-1 Senior Redemption Price of 100% of Principal Amount of such
Notes and Tax Exempt Notes to be redeemed, plus accrued interest thereon to
Fixed Rate Series the Redemption Date, on any Interest Rate Adjustment
1998-1 Subordinate Date or regularly scheduled Interest Payment Date for
Notes from Excess such series occurring on or after March 1, 1999, from
Revenues amounts transferred to the Series 1998-1 Tax Exempt
Retirement Sub-Account from the Series 1998-1 Tax Exempt
Surplus Sub-Account and the Series 1998-1 Tax Exempt
Reserve Account. In general, such transfers are intended
to allow the Corporation to call Tax Exempt Auction Rate
Series 1998-1 Senior Notes, Tax Exempt Fixed Rate Series
1998-1 Senior Notes and Tax Exempt Fixed Rate Series
1998-1 Subordinate Notes for redemption to the extent
that revenues allocable to the Tax Exempt Series 1998-1
Notes under the Indenture exceed scheduled debt service
payments on the Tax Exempt Series 1998-1 Notes, payments
on other Indenture Obligations and other expenses
payable under the Indenture. See "Description of Series
1998-1 Notes --Special Call for Redemption-- From Moneys
in the Surplus Account" and "Summary of the Indenture --
Funds and Accounts --Surplus Fund" and " -- Reserve
Fund".
Call for Redemption Taxable Auction Rate Series 1998-1 Senior Notes of any
of Taxable Auction series may, at the Corporation's option, be called for
Rate Series 1998-1 redemption, in whole or in part, at a Redemption Price
Senior Notes from of 100% of Principal Amount of such Notes to be
Excess Revenues redeemed, plus accrued interest thereon to the
Redemption Date, on any regularly scheduled Interest
Payment Date for such series occurring on or after March
1, 1999, from amounts transferred to the Series 1998-1
Taxable Retirement Sub-Account from the Series 1998-1
Taxable Surplus Sub-Account and the Series 1998-1
Taxable Reserve Account. In general, such transfers are
intended to allow the Corporation to call Taxable
Auction Rate Series 1998-1 Senior Notes for redemption
to the extent that revenues under the Indenture
allocable to Taxable Series 1998-1 Notes exceed
scheduled debt service payments on the Taxable Series
1998-1 Notes, prepayments of Taxable LIBOR Rate Series
1998-1 Notes, payments on other Indenture Obligations
and other expenses payable under the Indenture. Such
revenues
-14-
<PAGE>
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 1998-1 Notes -- Special Call for
Redemption -- From Moneys in the Surplus Account" and
"Summary of the Indenture -- Funds and Accounts --
Surplus Fund" and " -- Reserve Fund."
Call for Redemption Taxable Auction Rate Series 1998-1 Senior Notes of any
of Auction Rate series may, at the Corporation's option, be called for
Series 1998-1 redemption, in whole or in part, at a Redemption Price
Senior Notes and of 100% of Principal Amount of such Notes to be
Tax Exempt Fixed redeemed, plus accrued interest to the Redemption Date,
Rate Series 1998-1 on any regularly scheduled Interest Payment Date for
Notes from Unused such series, from proceeds of the Series 1998-1 Notes in
Proceeds the Series 1998-1 Taxable Acquisition Account that have
not been used to acquire Eligible Loans and from amounts
in the Series 1998-1 Taxable Reserve Account. Such
Series 1998-1 Notes shall be so called for redemption on
the regularly scheduled Interest Payment Date for such
series in March 1999 (from proceeds remaining as of
February 1, 1999), unless the Trustee receives certain
certifications from the Corporation. See "Description of
Series 1998-1 Notes -- Special Call for Redemption --
From Unused Proceeds" and "Summary of the Indenture --
Funds and Accounts -- Acquisition Fund" and " -- Reserve
Fund".
Tax Exempt Auction Rate Series 1998-1 Senior Notes of
any series may, at the Corporation's option, be called
for redemption, 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 1998-1 Senior Notes
remain Outstanding) Tax Exempt Fixed Rate Series 1998-1
Notes may, at the Corporation's option, be called for
redemption, 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 1998-1 Notes in the Series 1998-1 Tax Exempt
Acquisition Account that have not been used to acquire
Eligible Loans and from amounts in the Series 1998-1 Tax
Exempt Reserve Account. Such Series 1998-1 Notes shall
be so called for redemption on June 1, 2001 (to the
extent the proceeds remaining in the Series 1998-1 Tax
Exempt Acquisition Account exceed $60,000,000 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 1998-1 Notes --
Special Call for Redemption -- From Unused Proceeds" and
"Summary of the Indenture -- Funds and Accounts --
Acquisition Fund" and " -- Reserve Fund".
Call for Redemption The Series 1998-1 Notes may, at the Corporation's
of Series 1998-1 option, be called for redemption, in whole but not in
Notes upon part, at a Redemption Price of 100% of Principal Amount,
Reduction of plus accrued interest thereon to the Redemption Date, on
Portfolio Balance any date when the remaining aggregate outstanding
principal balance of Student Loans Financed with the
proceeds of the Series 1998-1 Notes is less than 10% of
the amount deposited to the Acquisition Fund on the Date
of Issuance.
Selection of Series If less than all Outstanding Series 1998-1 Notes are to
1998-1 Notes for be called for redemption, the particular series to be
Call for Redemption called for redemption will be determined by the
availability of particular amounts (in the case of
special call for redemption) or the Corporation's
decision to call Notes of such series for redemption
based upon its analysis that such redemption is in the
best interest of the Corporation (in the case of
optional call for redemption). To the extent Series
1998-1 Subordinate Notes are subject to call for
redemption, such Notes will (unless specifically
provided otherwise or unless the Corporation elects
otherwise and provides certain required certifications)
be called for
-15-
<PAGE>
redemption pro rata with Series 1998-1 Senior Notes. If
less than all Outstanding Series 1998-1 Notes of a given
series are to be called for redemption, the particular
Notes to be called for redemption will be determined by
lot. See "Description of Series 1998-1 Notes --
Selection of Series 1998-1 Notes for Call for
Redemption".
Date of Issuance February __, 1998.
Denominations The Tax Exempt Auction Rate Series 1998-1 Senior Notes,
the Taxable Auction Rate Series 1998-1 Senior Notes, the
Taxable LIBOR Rate Series 1998-1 Senior Notes and the
Taxable LIBOR Rate Series 1998-1 Subordinate Notes will
be issued in denominations of $100,000 in original
Principal Amount and any multiple thereof. The Tax
Exempt Fixed Rate Series 1998-1 Senior Notes and the Tax
Exempt Fixed Rate Series 1998-1 Subordinate Notes will
be issued in denominations of $5,000 in original
Principal Amount and any multiple thereof.
Indenture The Series 1998-1 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 1998-1 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 1998-1 Subordinate Notes and any
Additional Notes secured on a parity with or subordinate
to the Series 1998-1 Subordinate Notes. The Series 1998-
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 1998-1 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 1998-1 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 1998-1
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 1998-1 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. U.S. Bancorp
Investments, Inc., one of the Underwriters of the Series
1998-1 Notes, is a wholly-owned subsidiary of the
Trustee. See "Certain Relationships Among Financing
Participants" herein.
-16-
<PAGE>
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 1998-1 Notes will be applied as
follows:
Deposit to Acquisition Fund:
Series 1998-1 Tax Exempt
Acquisition Account $ 332,170,000
Series 1998-1 Taxable
Acquisition Account 572,820,000
Deposit to Reserve Fund 18,480,000
-------------
Total $ 923,470,000
Approximately $87,070,000 of the proceeds deposited to
the Series 1998-1 Tax Exempt Acquisition Account and
approximately $507,720,000 of the proceeds deposited to
the Series 1998-1 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 1998-1 Notes. The remaining proceeds deposited to
the Series 1998-1 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 1998-1 Notes which are called for
redemption. The remaining proceeds deposited to the
Series 1998-1 Taxable Acquisition Account are expected
to be used to purchase Eligible Loans from lenders or to
originate Eligible Loans on or before February 1, 1999.
At the Corporation's option, or if not expended as of
February 1, 1999, such proceeds may be transferred to
the Retirement Account and used to redeem Taxable
Auction Rate Series 1998-1 Senior Notes which are called
for redemption. See "Description of Series 1998-1
Notes -- Special Call for Redemption -- From Unused
Proceeds" herein.
The Financed Financed Eligible Loans will initially consist solely
Eligible Loans 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.
Based upon outstanding principal balances as of December
31, 1997, approximately 60.2% of the Eligible Loans
expected to be Financed on the Date of Issuance with the
proceeds of the Series 1998-1 Notes are guaranteed by
Education Assistance Corporation ("EAC"), approximately
33.4% of such Eligible Loans are guaranteed by
Pennsylvania Higher Education Assistance Agency
("PHEAA"), and substantially all of the remainder are
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
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Aid Commission also will be a Guarantee Agency for
Eligible Loans to be Financed following the Date of
Issuance. Any other state agency or private nonprofit
institution or organization which administers a
Guarantee Program may also be a Guarantee Agency of
Eligible Loans to be Financed, subject to meeting
certain requirements of the Indenture. See "Description
of the Guarantee Agencies."
The Corporation may in the future acquire or originate
(or cause the Trustee to acquire or originate) Eligible
Loans under the Indenture which are not originated
pursuant to the Federal Family Education Loan Program.
Some Financed Eligible Loans will have been originated
by the Original Issuer or by the Trustee on behalf of
the Corporation. The remainder of the Financed Eligible
Loans will have been originated by independent third
parties and subsequently sold to the Original Issuer
(before the Date of Issuance) or to the Trustee on
behalf of the Corporation (after the Date of Issuance).
The Financed Eligible Loans included in the Trust Estate
will vary from time to time and are required to be
Eligible Loans. Eligible Loans are (A) Student Loans
which: (1) have been or will be made to an Eligible
Borrower for post-secondary education, (2) are
guaranteed by a Guarantee Agency as to at least 98% of
the principal of and accrued interest on such Student
Loans and are covered by Federal Reimbursement Contracts
providing, among other things, for reimbursement to the
Guarantee Agency for losses incurred by it on defaulted
Financed Student Loans insured or guaranteed by the
Guarantee Agency to the extent provided in the Higher
Education Act, (3) are "eligible loans" as defined in
Section 438 of the Higher Education Act for purposes of
receiving Special Allowance Payments (other than
Nonsubsidized Stafford Loans originally financed by the
Original Issuer), and (4) bear interest at rates per
annum not less than or in excess of the applicable rates
of interest provided by the Higher Education Act, or
such lesser rates as may be approved by the Rating
Agencies; or (B) other Student Loans if the Corporation
shall have received the necessary Rating Agency, Bond
Counsel and other approvals. See "Glossary of Certain
Defined Terms." The Corporation expects that most of the
Eligible Loans to be acquired with the proceeds of the
Series 1998-1 Notes will be those described in clause
(A) above. Eligible Loans to be Financed with the
proceeds of the Tax Exempt Series 1998-1 Notes (or from
Balances in the Series 1998-1 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
(except for an immaterial amount of non-Guaranteed Loans
as shown herein under "Characteristics of the Initial
Financed Eligible Loans --Distribution of Financed
Eligible Loans by Guarantee Agency as of December 31,
1997") relate to those described in clause (A). The
Corporation has no current plans to acquire other
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.
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The Federal The Financed Student Loans will initially consist solely
Family of, and are expected at all times to consist primarily
Education Loan of, student loans originated pursuant to the Federal
Program 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 Guarantee Payments
to the Trustee" and " -- Risk That Financial Status of
Guarantee Agencies Will Affect Their Ability to Make
Guarantee Payments".
Student Loan The pool of Financed Student Loans included in the Trust
Portfolio Estate from time to time is sometimes referred to herein
Characteristics as the "Student Loan Portfolio." A description of the
initial Student Loan Portfolio expected to be Financed
with the proceeds of the Series 1998-1 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 1998-1 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
"Characteristics of the Initial Financed Eligible
Loans".
Investment The Corporation expects that the proceeds of the Series
Agreements 1998-1 Notes that are deposited into the Reserve 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 used to acquire 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 1998-1 Notes also
will be used to acquire a series of investment
agreements. Each investment agreement will require the
financial institution to which such amounts are loaned
(each, an "Investment Provider") to repay
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such amounts when requested by the Corporation or the
Trustee (subject to such limitations as may be provided
therein), and to pay interest on such 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 1998-1
Notes.
Servicer and the SLFC shall act as the Servicer and custodian of the
SLFC Servicing Financed Student Loans. See "The Servicer" and "Certain
Agreement Relationships Among Financing Participants".
The Corporation and the Trustee will enter into a
Servicing Agreement, dated as of February 1, 1998 (the
"SLFC Servicing Agreement"), with SLFC. Pursuant to the
SLFC Servicing Agreement, SLFC agrees to provide
services to the Corporation and the Trustee in
connection with the origination and acquisition of
Student Loans to be Financed, and to service the
Financed Student Loans. SLFC is required to perform all
services under the SLFC Servicing Agreement in
compliance with the Higher Education Act, applicable
requirements of the Guarantee Agencies and all other
applicable federal, state and local laws and
regulations. SLFC may perform all or part of its
origination, acquisition, and servicing activities
through a subcontractor (for which SLFC will be
responsible).
SLFC also agrees to perform various administrative and
management activities on behalf of the Corporation,
including duties of the Corporation under the Indenture.
The SLFC Servicing Agreement subjects SLFC to various
obligations relating to audits, examinations and
inspections.
SLFC is required to be paid a monthly fee for the
performance of its functions under the SLFC Servicing
Agreement (from funds available for such purpose under
the Indenture) in an amount each month equal to
0.104167% of the outstanding principal balance of all
Financed Student Loans as of the last day of the
immediately preceding month. Such fee is subject to
adjustment under certain circumstances. See "The SLFC
Servicing Agreement."
Lenders With the exception of certain Consolidation Loans that
have been originated by the Original Issuer and certain
Eligible Loans that may be originated by the Trustee on
behalf of the Corporation, the Student Loans expected to
be Financed have been or will be originated by banks,
savings and loan associations, credit unions and other
financial institutions that qualify as "eligible
lenders" under the Higher Education Act. The Lenders
have sold or will sell the Student Loans to be Financed
to the Original Issuer, or to the Trustee on behalf of
the Corporation, pursuant to Student Loan Purchase
Agreements.
Repurchases and Pursuant to each Student Loan Purchase Agreement, the
Exchanges of Loans Lender will be obligated to repurchase any Financed
Eligible Loan if: (i) any representation or warranty
made or furnished by such Lender in or pursuant to the
Student Loan Purchase Agreement shall prove to have been
materially incorrect as to such Financed Eligible Loan;
(ii) the Department 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
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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.
Funds and Pursuant to the Indenture, there will be established the
Accounts Acquisition Fund, the Revenue Fund, the Note Fund, the
Administration Fund, the Reserve Fund, the Rebate Fund
and the Surplus Fund.
Acquisition Fund The Indenture establishes the Acquisition Fund, within
which will be established a Series 1998-1 Tax Exempt
Acquisition Account and a Series 1998-1 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 1998-1
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 of Notes which are called for redemption
or the 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 1998-1 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 $904,990,000 will be deposited in the Series
1998-1 Tax Exempt and Taxable Acquisition Accounts on
the Date of Issuance of the Series 1998-1 Notes and
approximately $594,790,000 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
1998-1 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
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<PAGE>
Lenders or to originate Eligible Loans on or before
April 15, 2002. Proceeds deposited in the Series 1998-1
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 1998-1 Notes which are called for
redemption.
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 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 which are called for redemption, 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 which are called for redemption,
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 called for
redemption 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.
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<PAGE>
Interest Account The Trustee shall deposit in the Interest Account (i)
that portion of the proceeds from the sale of Financed
Student Loans representing accrued interest and Special
Allowance Payments thereon, (ii) that portion of the
proceeds from the sale of the Corporation's bonds, notes
or other evidences of indebtedness, if any, to be used
to pay interest on the Senior Notes or the Subordinate
Notes, (iii) all Counterparty Swap Payments, (iv) all
payments under any Credit Enhancement Facilities to be
used to pay interest on (or the interest portion of the
purchase price of) the Notes and (v) all amounts
required to be transferred thereto from other Funds and
Accounts, as described below.
To provide for the payment of each installment of
interest which falls due upon Senior Notes or
Subordinate Notes on each regularly scheduled Interest
Payment Date and all Corporation Swap Payments and fees
to a Credit Facility Provider payable on such Interest
Payment Date, the Trustee shall make deposits to the
credit of the Interest Account on each Monthly Payment
Date (less certain credits against such payments). If,
on any Interest Payment Date (including a Redemption
Date or a date that Notes are to be purchased that is
not a regularly scheduled Interest Payment Date), moneys
in the Interest Account are insufficient to pay the
accrued interest due on the Senior Notes and Subordinate
Notes and all Corporation Swap Payments and fees to a
Credit Enhancement Facility Provider payable on such
Interest Payment Date or constituting a portion of the
purchase price of Notes to be so purchased, the Trustee
shall deposit immediately to the credit of the Interest
Account an amount equal to such deficiency by transfer
from the following Funds and Accounts, in the following
order of priority: the Revenue Fund, the Surplus Fund
(other than that portion of the Balance thereof
consisting of Eligible Loans), the Reserve Fund, the
Administration Fund, the Surplus Fund (including any
portion of the Balance thereof consisting of Eligible
Loans), the Retirement Account, the Principal Account
and, as to Senior Notes and Other Senior Obligations
only, the Acquisition Fund (other than that portion of
the Balance thereof consisting of Student Loans);
provided that such transfers in respect of Subordinate
Notes or Other Subordinate Obligations shall be so made
from the Principal Account or the Retirement Account
only if, and to the extent, any amounts to be so
transferred are in excess of the requirements of such
Accounts with respect to Senior Obligations payable
therefrom.
If, as of any regularly scheduled Interest Payment Date,
any Carry-Over Amount (including any accrued interest
thereon) is due and payable with respect to a series of
Notes, as provided in the related Supplemental
Indenture, the Trustee shall transfer to the Interest
Account (to the extent amounts are available therefor in
the Surplus Account, after taking into account all other
amounts payable from the Surplus Fund on such Interest
Payment Date) an amount equal to such Carry-Over Amount
(including any accrued interest thereon) so due and
payable.
Balances in the Interest Account shall be transferred to
the credit of the Rebate Fund to the extent necessary,
after transfers thereto from the Revenue Fund, the
Surplus Fund, the Reserve Fund, the Administration Fund,
the Retirement Account and the Principal Account, to
make any deposit to the credit of the Rebate Fund
required by the Indenture. (See "Rebate Fund" below.)
Apart from transfers to the Rebate Fund and transfers to
the Principal Account as described under "Principal
Account" below, Balances in the Interest Account shall
be applied, first, to the payment of interest on all
Senior Notes, Corporation Swap Payments 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
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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.
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, call of Senior
Notes for redemption 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 call of Subordinate Notes for redemption
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).
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To provide for the payment of principal due on the
Stated Maturity of Senior or Subordinate Serial Notes or
on a Sinking Fund Payment Date for Senior or Subordinate
Term Notes, the Trustee shall make deposits to the
credit of the Principal Account on each Monthly Payment
Date from amounts available therefor in the Revenue Fund
and the other Funds referred to above.
In the event that the Corporation is required to furnish
moneys to the Depositary to purchase Notes on a Purchase
Date or Mandatory Tender Date, the Trustee shall,
subject to the applicable provisions of the related
Supplemental Indenture, immediately deposit to the
credit of the Principal Account moneys sufficient to pay
the purchase price thereof.
Balances in the Principal Account shall be transferred
to the credit of the Rebate Fund to the extent
necessary, after transfers thereto from the Revenue
Fund, the Surplus Fund, the Reserve Fund, the
Administration Fund and the Retirement Account, to make
any required deposit to the credit of the Rebate Fund.
(See "Rebate Fund" below.)
Balances to the credit of the Principal Account shall be
applied in the following order of priority: first, for
transfer to the Rebate Fund; second, to the Interest
Account to the extent required (see "Interest Account"
above) for the payment of interest on Senior Notes and
Other Senior Obligations payable therefrom; third, to
the payment of Senior Notes at their Stated Maturity or
on their Sinking Fund Payment Date and Other Senior
Obligations payable therefrom; fourth, to the payment of
the purchase price of Senior Notes on a Purchase Date or
Mandatory Tender Date; fifth, to the Interest Account to
the extent required (see "Interest Account" above) for
the payment of interest on Subordinate Notes and Other
Subordinate Obligations payable therefrom; sixth, to the
payment of Subordinate Notes at their Stated Maturity
and Other Subordinate Obligations payable therefrom;
seventh, to the payment of the purchase price of
Subordinate Notes on a Purchase Date or Mandatory Tender
Date; and eighth, to the payment of Subordinate Term
Notes on a Sinking Fund Payment Date.
Other Indenture Obligations payable from the Principal
Account would include reimbursement to any Credit
Facility Provider for principal or the purchase price
paid on Senior Notes or Subordinate Notes from amounts
derived from the related Credit Enhancement Facility,
which reimbursement shall have the same priority of
payment from the Principal Account as the principal so
paid.
Balances in the Principal Account may also be applied to
the purchase of Senior Notes or Subordinate Notes. Any
such purchase shall be limited to those Senior Notes or
Subordinate Notes whose Stated Maturity or Sinking Fund
Payment Date is the next succeeding Principal Payment
Date.
Retirement The Trustee shall deposit to the credit of the
Account 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.
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Balances in the Retirement Account shall be transferred
to the credit of the Rebate Fund to the extent
necessary, after transfers thereto from the Revenue
Fund, the Surplus Fund, the Reserve Fund and the
Administration Fund, to make any required deposit to the
Rebate Fund. (See "Rebate Fund" below.) After taking
into account any such required transfers to the Rebate
Fund, Balances in the Retirement Account shall be
transferred to the credit of the Interest Account to the
extent required (see "Interest Account" above) for the
payment of interest on Notes and Other Indenture
Obligations payable therefrom.
Other Indenture Obligations payable from the Retirement
Account will include reimbursement to any Credit
Facility Provider for the Redemption Price paid on
Senior Notes or Subordinate Notes from amounts derived
from the related Credit Enhancement Facility, which
reimbursement shall have the same priority of payment
from the Retirement Account as the Redemption Price so
paid.
Balances in the Retirement Account (other than any
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 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.
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 2% of the aggregate principal amount of all
Notes then Outstanding or $500,000.
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<PAGE>
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 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 call thereof for
redemption 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 which are
called for redemption (including Series 1998-1 Notes as
described under "Description of Series 1998-1 Notes -
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<PAGE>
- Special Call for 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 112%, and (ii) the Subordinate Percentage will be
not less than 102%; provided that such percentages may
be lower upon receipt of certain approvals from each
Rating Agency and, under certain circumstances, consent
of Other Beneficiaries.
Balances in the Special Redemption and Prepayment
Account may be transferred to the credit of the
Retirement Account to redeem Senior Notes or Subordinate
Notes which are called for redemption or to 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
1998-1 Notes has been made in the First Supplemental
Indenture and is described under "Prepayment of Taxable
LIBOR Rate Series 1998-1 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 Revenue in the Funds and Accounts
Student Loan
Revenues and
Investment
Earnings
--------------
Revenue
Fund
--------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------- Note
Rebate and Proceeds
Excess Interest
--------------
Rebate
Fund
-------------- --------------
Acquisition
-------------- Fund
Note --------------
- -------------- Fund
Principal and -------------- Acquire
Interest on Eligible Eligible
Notes Loans Loans
-------------- Note
Reserve Proceeds
Fund
--------------
--------------
- -------------- Administration
Administrative Fund
Expenses --------------
--------------
Surplus
Fund
--------------
- --------------
To Corporation
</TABLE>
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 funds, see "Source of Payment and Security for the
notes -- Description of Flow of Revenues in the Funds" and "Summary of the
Indenture -- Funds and Accounts"
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<PAGE>
Additional Parity The Corporation may, upon complying Notes with the
Notes 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 1998-1 Subordinate Noteholders
to receive payments with respect to the Notes will be
subordinated to such rights of the Series 1998-1 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 1998-1 Senior Noteholders of the full
amount of scheduled payments of principal and interest
due them. Thus, payments of interest and principal on
the Series 1998-1 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 1998-1
Subordinate Notes will not constitute an Event of
Default under the Indenture. Payments of principal and
interest on the Series 1998-1 Subordinate Notes would be
similarly subordinated to Senior Obligations if the
Notes were accelerated because of an Event of Default.
The Series 1998-1 Subordinate Notes are also
subordinated to the Series 1998-1 Senior Notes and any
other Senior Obligations as to the direction of remedies
upon default.
Federal Income In the opinion of Dorsey & Whitney LLP, the Series
Tax Treatment of 1998-1 Notes will be treated as debt of the Original
Series 1998-1 Notes 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 1998-1 Notes will be
required to include in income interest on such Taxable
Series 1998-1 Notes as paid or accrued, in accordance
with their respective accounting methods and the
provisions of the Code. See "Tax Matters -- Federal
Income Tax Consequences".
Exclusion of In the opinion of Dorsey & Whitney LLP, as Bond Counsel,
Interest on Tax under existing laws, regulations, rulings and decisions,
Exempt Series interest on the Tax Exempt Series 1998-1 Notes is not
1998-1 Notes includable in the gross income of the owners thereof for
from Gross Income federal income tax purposes. Interest on the Tax Exempt
Series 1998-1 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 1998-1 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 1998-1 Note
ownership, see "Tax Matters -- Tax Exempt Series 1998-1
Notes".
ERISA The Series 1998-1 Notes are eligible for purchase by or
Considerations 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 1998-1
Notes that the Series 1998-1 Senior Notes each be rated
"AAA" by Fitch IBCA, Inc. and "Aaa" by Moody's Investors
Services, Inc., and that the Series 1998-1 Subordinate
Notes each be rated no less than "A" by Fitch and "A3"
by Moody's. The ratings of each series of Series 1998-1
Notes address the likelihood of the timely payment of
principal and interest on such Series 1998-1 Notes. The
ratings do not address the market liquidity of Series
1998-1 Notes or the likelihood of prepayments of the
Series 1998-1 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 1998-1 Notes of each series initially will be
Notes represented by one or more certificates registered in
the name of Cede & Co., as a nominee of DTC. No person
acquiring an interest in such Notes will be entitled to
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 1998-1 Notes--Book-
Entry-Only System".
-31-
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the following
factors regarding the purchase of the Series 1998-1 Notes.
The Series 1998-1 Notes are Limited Recourse Obligations and Limited Assets of
the Corporation are Available for the Payment of the Series 1998-1 Notes
The Corporation is a special purpose corporation and the Series 1998-1
Notes will represent obligations solely of the Corporation. The Series 1998-1
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 1998-1 Notes other than the Trust Estate pledged as
collateral for the Notes under the Indenture. Moreover, the Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Notes.
Holders of the Series 1998-1 Subordinate Notes are Subordinate in Payment
Priority and as to the Direction of Remedies
Payments of principal of and interest on the Series 1998-1 Subordinate
Notes are subordinated in priority of payment to payments of principal of and
interest on the Series 1998-1 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 1998-1 Subordinate Notes are also subordinated to the
Series 1998-1 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,
a lender must perform certain collection procedures (including numerous
telephone calls and demand letters, skip-
-32-
<PAGE>
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 1998-1 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.
-33-
<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 1998-1
Senior Notes and senior to, on a parity with or subordinate to the Series 1998-1
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 1998-1 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 1998-1 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 1998-1 Notes. See "Additional Notes"
herein.
The Interest Rates on Financed Student Loans and Other Investments May be
Insufficient to Cover Interest on the Series 1998-1 Notes (Other Than Tax Exempt
Fixed Rate Series 1998-1 Senior Notes and Tax Exempt Fixed Rate Series 1998-1
Subordinate Notes) Due to Rate-Index Difference
The interest rates with respect to the Series 1998-1 Notes (other than
the Tax Exempt Fixed Rate Series 1998-1 Senior Notes and the Tax Exempt Fixed
Rate Series 1998-1 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 1998-1 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 1998-1
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
1998-1 Notes, there could be periods of time when the Loan Rates are inadequate
to cover the interest on the Series 1998-1 Notes and expenses required under the
Indenture. Moreover, the Net Loan Rate will be determined as of a date as much
as two months prior to the determination of the rates borne by the variable rate
Taxable Series 1998-1 Notes. Thus, in a period of rapidly rising interest
rates, the Net Loan Rate may not increase as quickly as the variable interest
rates with respect to the Taxable Series 1998-1 Notes. 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 1998-1 Notes, the interest rates with respect
to such Taxable Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Notes in the
Reserve Fund, the Acquisition Fund, the Revenue Fund, the Note Fund and the
Surplus Fund will be used to acquire 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 1998-1 Notes.
Changes in Repayment Terms of Financed Student Loans Pursuant to Incentive
Program.
The Original Issuer currently makes available and the Corporation may
hereafter make available certain incentive programs to borrowers. It cannot be
predicted with certainty how many borrowers will qualify or decide to
participate in these programs. The effect of these incentive programs may be to
reduce the yield on the Financed Student Loans. Reductions in the yield on the
Financed Student Loans resulting from such incentive programs will result in a
reduction of the Net Loan Rate. There is no assurance that the Net Loan Rate
(and thus the interest rate on the Taxable Series 1998-1 Notes) will not be
reduced below the rates that would otherwise be borne by such 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 1998-1 Notes is described
herein under "Characteristics of the Initial Financed Eligible Loans." The
investment agreements which will be acquired on the Date of Issuance with the
remaining proceeds of the Series 1998-1 Notes are described herein under
"Application of Series 1998-1 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 used to acquire such investment agreements (upon
repayment of such amounts 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
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<PAGE>
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. 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 December 31, 1997 (Based on Address as of January 9, 1998)."
Possible Loss of Tax Exemption of the Interest on the Tax Exempt Series 1998-1
Notes
Provisions of the Code impose continuing requirements that must be met
after the issuance of the Tax Exempt Series 1998-1 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 1998-1 Notes to be includable in gross income for such purposes, either
prospectively or retroactively to the date of issuance of the Tax Exempt Series
1998-1 Notes. These requirements include, but are not limited to, provisions
that prescribe that the proceeds of the Tax Exempt Series 1998-1 Notes and
certain other amounts are subject to yield
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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. These provisions limit the return to which the Corporation is entitled
from investments allocable to the Tax Exempt Series 1998-1 Notes (1) in the case
of Student Loans, generally to 2% in excess of the yield on the Tax Exempt
Series 1998-1 Notes, and (2) in the case of other investments, generally to the
yield on the Tax Exempt Series 1998-1 Notes. To the extent such investments are
permitted to, and do, produce a yield in excess of such limitations, such excess
would generally be required to be rebated to the Treasury Department every five
years.
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 1998-1 Notes to be
and remain excludable from gross income. Although the Original Issuer and the
Corporation believe that the issuance of the Series 1998-1 Notes, the
organization of SLFC and the Corporation, and the transfers of assets and
assumptions of obligations described herein under "The Original Issuer" and "The
Corporation" will comply with the requirements of Section 150(d)(3) of the Code,
no determination has been obtained or is expected to be sought from the Internal
Revenue Service with respect to such compliance. Moreover, the Original Issuer
believes that it will be the first entity to make the election provided for in
Section 150(d)(3) of the Code, and no established practices have developed nor
have any regulations or other guidance been published by the Internal Revenue
Service.
It is possible that future action or inaction by the Corporation, SLFC
or the Original Issuer could cause the inclusion of interest on the Tax Exempt
Series 1998-1 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 1998-1 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 1998-1
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
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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 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
1998-1 Notes.
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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 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
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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 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
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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 1998-1 Notes and Tax Exempt Fixed Rate Series
1998-1 Notes May Have to Reinvest Amounts Received From Calls for Redemption
From Unused Proceeds at a Lower Rate of Return
The Corporation expects approximately $245,100,000 of the Series 1998-
1 Note proceeds deposited in the Series 1998-1 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 1998-1 Senior Notes which are called for redemption and, if no Tax
Exempt Auction Rate Series 1998-1 Senior Notes remain Outstanding, Tax Exempt
Fixed Rate Series 1998-1 Notes which are called for redemption. Investors
holding such Tax Exempt Series 1998-1 Notes (particularly Tax Exempt Fixed Rate
Series 1998-1 Notes) which are called for redemption may be unable to reinvest
the proceeds of the redemption at the same yield as the Tax Exempt Series 1998-1
Notes. Also, depending on the price at which investors purchased such Series
1998-1 Notes, their yield may be adversely affected by such early call for
redemption.
The Corporation expects approximately $65,100,000 of the Series 1998-1
Note proceeds deposited in the Series 1998-1 Taxable Acquisition Account to be
used to originate or purchase Eligible Loans on or before February 1, 1999. If
such proceeds are not so used, they may be transferred to the Retirement Account
and used to redeem Taxable Auction Rate Series 1998-1 Senior Notes which are
called for redemption. Investors holding such Taxable Auction Rate Series 1998-1
Senior Notes which are called for redemption may be unable to reinvest the
proceeds of the redemption at the same yield as the Taxable Auction Rate Series
1998-1 Senior Notes. Also, depending on the price at which investors purchased
such Series 1998-1 Notes, their yield may be adversely affected by such early
call for redemption. See "Application of Series 1998-1 Note Proceeds" and
"Description of Series 1998-1 Notes -- Special Call for 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 1998-1 Noteholders. The inability of any Guarantee Agency to meet
its guarantee obligations could reduce the amount available to be paid to the
Series 1998-1 Noteholders.
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Holders of Series 1998-1 Notes Which are Prepaid or Called for Redemption Due to
Accelerated Payments with respect to Financed Student Loans May Have to Reinvest
Amounts Received From Prepayments or Calls for Redemption 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 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 1998-1 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 1998-1 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 1998-1 Notes, the actual level of prepayments resulting
therefrom cannot be definitively stated. Investors holding Taxable LIBOR Rate
Series 1998-1 Notes which are prepaid may be unable to reinvest the proceeds of
the prepayment at the same yield as the Taxable LIBOR Rate Series 1998-1 Notes.
Also, depending on the price at which investors purchased such Series 1998-1
Notes, their yield may be adversely affected by such prepayment.
The Series 1998-1 Notes (other than the Taxable LIBOR Rate Series
1998-1 Notes) are subject to call for redemption from revenues under the
Indenture in excess of required debt service payments and other expenses under
the Indenture and all Series 1998-1 Notes are subject to call for 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 1998-1
Notes which are called for redemption may be unable to reinvest the proceeds of
the redemption at the same yield as the Series 1998-1 Notes they previously
held. Also, depending on the price at which investors purchased such Series
1998-1 Notes, their yield may be adversely affected by such call for redemption.
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Differences in Principal Payments Among Series of Taxable Series 1998-1 Notes
with respect to Receipt of Payments on the Financed Student Loans
The Taxable Auction Rate Series 1998-1 Senior Notes are not expected
to receive any payments of principal from principal payments on Financed Student
Loans until all Taxable LIBOR Rate Series 1998-1 Notes have been paid in full.
Series 1998-1J Notes will receive no payments of principal from such source
until the Series 1998-1I Notes have been paid in full. Therefore, the Series
1998-1I Notes and (as compared to all Taxable Series 1998-1 Notes other than
Series 1998-1I Notes) the Series 1998-1J Notes bear relatively greater risk than
other series of Taxable Series 1998-1 Notes of an increased rate of principal
payments derived from principal payments relating to Financed Student Loans.
The Average Life of the Series 1998-1 Notes May Be Lengthened As a Result of
Extension of Payments on the Financed Student Loans
Principal and interest payments on Financed Student Loans may be
delayed due to: (1) borrowers entering Deferment Periods due to a return to
school or other eligible purposes: (2) forbearance being granted to borrowers;
(3) loans becoming delinquent for periods longer than assumed; (4) actual loan
principal amortization periods which are longer than those expected based upon
the current analysis of the expected Student Loan Portfolio; and (5) the
commencement of principal repayment by borrowers at dates later than those
assumed based upon the current analysis of the Eligible Loans expected to be
Financed. These factors may lengthen the remaining term of the Financed Student
Loans and the average life of the Series 1998-1 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
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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 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."
Use of Series 1998-1 Note Proceeds and Revenues to Acquire Investment Agreements
The proceeds of the Series 1998-1 Notes that are not used to acquire
Financed Student Loans on the Date of Issuance will be used to acquire 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 used to acquire a limited number of investment agreements with
one or more Investment Providers. Each such investment agreement will initially
involve a significant portion of the proceeds of the Series 1998-1 Notes. If
any Investment Provider were unable to repay funds loaned to it 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 1998-1
Notes could be adversely affected.
Change of Ratings of the Series 1998-1 Notes
It is a condition to issuance of the Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Notes.
Limited Liquidity of the Series 1998-1 Notes
The Series 1998-1 Notes will not be listed on any national security
exchange. There is currently no secondary market for the Series 1998-1 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
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in the Series 1998-1 Notes. As a result, investors must be prepared to bear the
risk of holding the Series 1998-1 Notes for so long as the Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Notes or
their nominees. Because of this, unless and until definitive securities are
issued, beneficial owners of the Series 1998-1 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 1998-1 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 1998-1 Notes -- Book-Entry-Only System."
DESCRIPTION OF SERIES 1998-1 NOTES
The Series 1998-1 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 1998-1 Notes
For summaries of the terms of the Series 1998-1 Notes, see "Terms of
the Tax Exempt Auction Rate Series 1998-1 Senior Notes," "Terms of the Tax
Exempt Fixed Rate Series 1998-1 Senior Notes," "Terms of the Taxable Auction
Fixed Rate Series 1998-1 Senior Notes," "Terms of the Taxable LIBOR Rate Series
1998-1 Senior Notes," "Terms of the Tax Exempt Fixed Rate Series 1998-1
Subordinate Notes" and "Terms of the Taxable LIBOR Rate Series 1998-1
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 1998-1 Notes,
payment of principal of and interest on the Series 1998-1 Notes to DTC
Participants, Cedel Participants and Euroclear Participants (as hereinafter
respectively defined) or to purchasers of the Series 1998-1 Notes, confirmation
and transfer of beneficial ownership interests in the Series 1998-1 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.
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DTC will act as securities depository for the Series 1998-1 Notes.
Upon the issuance of the Series 1998-1 Notes, one or more fully registered notes
for each series, in the aggregate principal amount of the Series 1998-1 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 1998-1 Notes, as nominee of DTC,
references herein to the owners or Holders of the Series 1998-1 Notes shall mean
DTC or its nominee, Cede & Co., and shall not mean the Beneficial Owners of the
Series 1998-1 Notes. Noteholders may hold their certificates through DTC (in
the United States) or Cedel or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations that are participants in such
systems.
Cede, as nominee for DTC, will hold the global Notes. Cedel and
Euroclear will hold omnibus positions on behalf of the Cedel Participants and
the Euroclear Participants, respectively, through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositories
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants (the "DTC Participants") deposit with
DTC. DTC also facilitates the settlement among DTC Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in DTC Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
DTC Participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. DTC is owned by a
number of DTC Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a DTC Participant, either directly or
indirectly (the "Indirect Participants"). The Rules applicable to DTC and the
DTC Participants are on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in the ordinary way in accordance with their applicable rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depository; however, such cross-market transactions will
require delivery of instructions to the relevant European international 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.
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Day traders that use Cedel or Euroclear and that purchase the globally
offered Series 1998-1 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 1998-1 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 1998-1 Notes will receive a credit balance in the records of DTC. The
ownership interest of the actual purchaser of each Series 1998-1 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
1998-1 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 1998-1 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 1998-1 Notes,
except in the event participation in the book-entry system is discontinued as
described below.
The Corporation and the Trustee will recognize DTC or its nominee as
the Holder of the Series 1998-1 Notes for all purposes, including notice
purposes. DTC has no knowledge of the actual Beneficial Owners of the Series
1998-1 Notes; DTC's records reflect only the identity of the DTC Participants to
whose accounts such Series 1998-1 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 calls of Series
1998-1 Notes for redemption 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 call for redemption or its
content or effect will not affect the validity of the redemption of the Series
1998-1 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 1998-1 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 1998-1 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
1998-1 Notes will be made to DTC or its nominee, Cede & Co., as Holder of the
Series 1998-1 Notes. DTC's current practice is to credit the accounts of the
DTC Participants on payment dates in accordance with their respective holdings
shown on the records of DTC, unless DTC has reason to believe that it will not
receive payment on that date. Payments by DTC Participants and Indirect
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such DTC Participant or Indirect Participant and not of DTC or
the Corporation, subject to any statutory and regulatory requirements as may be
in effect from time to time. Payment of principal and interest to DTC is the
responsibility of the Corporation and the Trustee, disbursement of such payments
to DTC Participants shall be the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners shall be the responsibility of DTC
Participants and Indirect Participants.
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By purchasing the Auction Rate Series 1998-1 Senior Notes, whether in
an Auction or otherwise, each prospective purchaser of the Auction Rate Series
1998-1 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 1998-1
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 1998-1 Senior Notes is maintained in Book-Entry Form, to sell,
transfer or otherwise dispose of the Auction Rate Series 1998-1 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 1998-1
Senior Notes so transferred, its DTC Participant or Broker-Dealer advises the
Auction Agent of such transfer.
For every transfer of the Series 1998-1 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 1998-1 Notes, the Corporation and the Trustee will be
entitled to treat Cede & Co., or its registered assign, as the absolute owner
thereof for all purposes of the Indenture and any applicable laws,
notwithstanding any notice to the contrary received by the Corporation or the
Trustee, and the Corporation and the Trustee will have no responsibility for
transmitting payments to, communicating with, notifying, or otherwise dealing
with any Beneficial Owners of the Series 1998-1 Notes.
If (i) the Series 1998-1 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 1998-1 Notes of any series or (iii) the Corporation
determines that a system of book-entry transfers for Series 1998-1 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 1998-1 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 1998-1
Notes of such series in authorized denominations and registration thereof in the
Beneficial Owners' or nominees' names, shall become the Holders of such Series
1998-1 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 1998-1 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
1998-1 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
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and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 32 currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in 25
countries generally similar to the arrangements for cross-market transfers with
DTC described above. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office (the "Euroclear Operator" or
"Euroclear"), under contract with Euroclear Clearance System, Societe
Cooperative, a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative. The Cooperative Board establishes policy for the
Euroclear System. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries and may include the underwriters of any Series of Notes.
Indirect access to the Euroclear System is also available to other firms that
maintain a custodial relationship with a Euroclear Participant, either directly
or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of
securities and cash within the Euroclear System, withdrawal of securities and
cash from the Euroclear System, and receipts of payments with respect to
securities in the Euroclear System. All securities in the Euroclear System are
held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
The Euroclear Operator has advised 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 1998-1 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 1998-1 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 1998-1 Notes among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
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Denomination and Payment
The Tax Exempt Auction Rate Series 1998-1 Senior Notes and the Taxable
Series 1998-1 Notes are being issued in denominations of $100,000 in original
Principal Amount and any multiple thereof. The Tax Exempt Fixed Rate Series
1998-1 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 1998-1 Notes,
together with interest payable on the Series 1998-1 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 1998-1 Notes at the
Principal Office of the Trustee, as Paying Agent with respect to the Series
1998-1 Notes, or a duly appointed successor Paying Agent. Interest on each
series of the Series 1998-1 Notes shall be payable on each regularly scheduled
Interest Payment Date with respect to such series, except as otherwise provided
in the Indenture with respect to a Securities Depository, by check or draft
drawn upon the Paying Agent and mailed to the person who is the Holder thereof
as of 5:00 p.m. in the city in which the Principal Office of the Note Registrar
is located on the Regular Record Date for such Interest Payment Date at the
address of such Holder as it appears on the Note Register, or, in the case of
any Series 1998-1 Note the Holder of which is the Holder of Series 1998-1 Notes
in the aggregate Principal Amount of $1,000,000 or more (or, if less than
$1,000,000 in Principal Amount of Series 1998-1 Notes is outstanding, the Holder
of all outstanding Series 1998-1 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 1998-1 Senior Notes or the
Taxable LIBOR Rate Series 1998-1 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 1998-1 Senior Notes or the Tax
Exempt Fixed Rate Series 1998-1 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 1998-1 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 1998-1 Notes shall be made in lawful money of the
United States of America.
Prepayment of Taxable LIBOR Rate Series 1998-1 Notes
Principal of the Taxable LIBOR Rate Series 1998-1 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 1998-1 Notes shall,
subject to the Senior Asset Requirement, be allocated between the Taxable LIBOR
Rate Series 1998-1 Senior Notes and the Taxable LIBOR Rate Series 1998-1
Subordinate Notes pro rata. All such prepayments of principal allocated to the
Taxable LIBOR Rate Series 1998-1 Senior Notes shall be applied to the Series
1998-1I Notes so long as any such Notes remain Outstanding, and thereafter to
the Series 1998-1J Notes.
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Within a given series of Taxable LIBOR Rate Series 1998-1 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 1998-1 Taxable Acquisition Account, plus (b) the amount
of any Balances theretofore transferred from the Series 1998-1 Taxable
Acquisition Account to the Retirement Account to redeem Taxable Auction Rate
Series 1998-1 Senior Notes which are called for redemption as described below
under "Special Call for Redemption -- From Unused Proceeds," less (c) the
aggregate amount of interest on Financed Student Loans credited to the Series
1998-1 Taxable Acquisition Account which has been capitalized after the
Financing thereof, less (d) the principal component of the repurchase price of
Student Loans originally Financed from Balances in Series 1998-1 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 1998-1 Notes,
plus (b) the aggregate Principal Amount of Taxable LIBOR Rate Series 1998-1
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 1998-1 Notes in amounts related
to the amount of principal payments received with respect to Student Loans
Financed with proceeds of the Taxable Series 1998-1 Notes in the Acquisition
Fund. See "Weighted Average Life of the Taxable LIBOR Rate Series 1998-1
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 1998-1 Notes, the actual level of prepayments resulting therefrom cannot
be definitively stated. See "Risk Factors -- Holders of Series 1998-1 Notes
Which are Prepaid or Called for Redemption Due to Accelerated Payments with
respect to Financed Student Loans May Have to Reinvest Amounts Received From
Prepayments or Calls for Redemption at a Lower Rate of Return."
Special Call for Redemption
From Moneys in the Surplus Account
Tax Exempt Auction Rate Series 1998-1 Senior Notes of any series, Tax
Exempt Fixed Rate Series 1998-1 Senior Notes and Tax Exempt Fixed Rate Series
1998-1 Subordinate Notes, may, at the Corporation's option but subject to
compliance with the conditions described under "Senior Asset Requirement" below,
be called for redemption, in whole or in part, and if in part as described under
"Selection of Series 1998-1 Notes for Call 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 March 1, 1999, from amounts transferred to the Series
1998-1 Tax Exempt Retirement Sub-Account from the Series 1998-1 Tax Exempt
Surplus Sub-Account and the Series 1998-1 Tax Exempt Reserve Account. In
general, such transfers are intended to allow the Corporation to call Tax Exempt
Auction Rate Series 1998-1 Senior Notes, Tax Exempt Fixed Rate Series 1998-1
Senior Notes and Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes for
redemption to the extent that revenues allocable to the Tax Exempt Series 1998-1
Notes under the Indenture exceed scheduled debt service payments on the Tax
Exempt Series 1998-1 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".
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Taxable Auction Rate Series 1998-1 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 called for redemption, in whole or in
part, and if in part as described under "Selection of Series 1998-1 Notes for
Call 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 regularly scheduled Interest Payment Date for such
series occurring on or after March 1, 1999, from amounts transferred to the
Series 1998-1 Taxable Retirement Sub-Account from the Series 1998-1 Taxable
Surplus Sub-Account and the Series 1998-1 Taxable Reserve Account. In general,
such transfers are intended to allow the Corporation to call Taxable Auction
Rate Series 1998-1 Senior Notes for redemption to the extent that revenues under
the Indenture allocable to Taxable Series 1998-1 Notes exceed scheduled debt
service payments on the Taxable Series 1998-1 Notes, prepayments of Taxable
LIBOR Rate Series 1998-1 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."
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 in the
Surplus Account for such call for redemption 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 calls for
redemption will occur.
From Unused Proceeds
Subject to compliance with the conditions described under "Senior
Asset Requirement" below, Taxable Auction Rate Series 1998-1 Senior Notes of any
series may, at the Corporation's option, be called for redemption (and shall be
so called for redemption under the circumstances described below), in whole or
in part, and if in part as described under "Selection of Series 1998-1 Notes for
Call for Redemption" below, on any regularly scheduled Interest Payment Date for
such series at a Redemption Price of 100% of Principal Amount of such Notes to
be redeemed, plus accrued interest thereon to the Redemption Date, from proceeds
of the Series 1998-1 Notes in the Series 1998-1 Taxable Acquisition Account that
have not been used to acquire Eligible Loans and from amounts in the Series
1998-1 Taxable Reserve Account. Such Series 1998-1 Notes shall be so called for
redemption on the regularly scheduled Interest Payment Date for such series in
March 1999 (from such proceeds remaining as of February 1, 1999), unless the
Corporation delivers to the Trustee: (i) a Corporation certificate certifying
that, based on a Cash Flow Projection, the failure to so call Series 1998-1
Notes for 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, and (ii) written confirmation from each of
the Rating Agencies then rating the Series 1998-1 Notes to the effect that the
failure to call such Series 1998-1 Notes for redemption will not result in a
reduction or withdrawal of the rating of the Series 1998-1 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 1998-1 Senior Notes of
any series may, at the Corporation's option, be called for redemption (and shall
be so called for redemption under the circumstances described below), in whole
or in part, and if in part as described under "Selection of Series 1998-1 Notes
for Call 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 1998-1 Senior Notes remain Outstanding) Tax Exempt Fixed
Rate Series 1998-1 Notes may, at the Corporation's option, be called for
redemption (and shall be so called for redemption under the circumstances
described below), in whole or in part, and if in part as described under
"Selection of Series 1998-1 Notes for Call for Redemption" below, on any date,
in each case at a Redemption Price of 100% of Principal Amount of such
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Notes to be redeemed, plus accrued interest thereon to the Redemption Date, from
proceeds of the Series 1998-1 Notes in the Series 1998-1 Tax Exempt Acquisition
Account that have not been used to acquire Eligible Loans and from amounts in
the Series 1998-1 Tax Exempt Reserve Account. Such Series 1998-1 Notes shall be
so called for redemption on June 1, 2001 (to the extent the proceeds remaining
in the Series 1998-1 Tax Exempt Acquisition Account exceed $60,000,000 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 call for redemption is not
required pursuant to the Code and that failure to so call Tax Exempt Series
1998-1 Notes for redemption will not adversely affect the tax exempt status of
interest on any Tax Exempt Series 1998-1 Notes for federal income tax purposes,
(ii) a Corporation certificate certifying that, based on a Cash Flow Projection,
the failure to so call Series 1998-1 Notes for 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, and (iii)
written confirmation from each of the Rating Agencies then rating the Series
1998-1 Notes to the effect that the failure to call such Series 1998-1 Notes for
redemption will not result in a reduction or withdrawal of the rating of the
Series 1998-1 Notes. See "Summary of the Indenture -- Funds and Accounts --
Acquisition Fund" and " -- Reserve Fund".
Call for Redemption of Series 1998-1 Notes Upon Reduction of Portfolio Balance
The Series 1998-1 Notes may, at the Corporation's option but subject
to compliance with the conditions described under "Senior Asset Requirement"
below, be called for redemption 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 1998-1 Notes is less than
10% of the amount deposited to the Acquisition Fund on the Date of Issuance.
Optional Call for Redemption
At the Corporation's option but subject to compliance with the
conditions described under "Senior Asset Requirement" below, Auction Rate Series
1998-1 Senior Notes of any series may be called for redemption on any Interest
Rate Adjustment Date or regularly scheduled Interest Payment Date for such
series, in whole or in part, and if in part as described under "Selection of
Series 1998-1 Notes for Call 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 1998-1 Senior Notes and Tax Exempt Series 1998-1 Subordinate Notes
may be called for redemption on June 1, 2008, or on any date thereafter, in
whole or in part, and if in part as described under "Selection of Series 1998-1
Notes for Call 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>
June 1, 2008 through May 31, 2009 102%
June 1, 2009 through May 31, 2010 101%
June 1, 2010 and thereafter 100%
</TABLE>
Notwithstanding the foregoing, no Series 1998-1 Notes shall be so
called for redemption 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
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<PAGE>
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 1998-1 Notes for Call for Redemption
If less than all Outstanding Series 1998-1 Notes are to be called for
redemption, the Principal Amounts of each series of Series 1998-1 Notes to be
called for redemption 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 Call for Redemption" or as described in clause
(2), to the extent Series 1998-1 Subordinate Notes are subject to call for
redemption, that Principal Amount thereof shall be called for redemption which
bears, as nearly as practicable, the same proportion to the Principal Amount of
all Series 1998-1 Notes to be called for redemption as the aggregate Principal
Amount of Outstanding Series 1998-1 Subordinate Notes bears to the aggregate
Principal Amount of all Outstanding Series 1998-1 Notes, or (2) if the Trustee
receives a Corporation certificate certifying that, based on a Cash Flow
Projection, a different proportion of Series 1998-1 Subordinate Notes to be
called for 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, Series 1998-1 Subordinate Notes shall be
called for redemption in such principal amount as is designated by the
Corporation in such certificate. The remaining Series 1998-1 Notes to be called
for redemption on a given Redemption Date shall be selected from the appropriate
series of Series 1998-1 Senior Notes.
If less than all Outstanding Series 1998-1 Senior Notes subject to
call for redemption are to be called for redemption, and more than one series of
Series 1998-1 Senior Notes is so subject, the Principal Amounts of each series
of Series 1998-1 Notes to be called for redemption 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 1998-1 Senior Notes to be called for redemption as the
aggregate Principal Amount of Outstanding Series 1998-1 Senior Notes of such
series bears to the aggregate Principal Amount of all Outstanding Series 1998-1
Senior Notes subject to such call for redemption.
Notwithstanding the foregoing, if Series 1998-1 Subordinate Notes
cannot be called for redemption due to the application of the provisions of the
Indenture described under "Senior Asset Requirement" below, but Series 1998-1
Senior Notes can be called for redemption without violating such provisions, the
particular Series 1998-1 Notes to be called for redemption shall be selected
from the appropriate series of the Series 1998-1 Senior Notes according to the
provisions described above.
If less than all of the Outstanding Series 1998-1 Notes of a given
series are to be called for redemption, the particular Series 1998-1 Notes to be
called for redemption 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 call for redemption of portions of the principal of Series 1998-1
Notes in authorized denominations.
Senior Asset Requirement
No call for redemption or prepayment of any Series 1998-1 Note under
any of the foregoing provisions is to be made unless, after giving effect to the
call for redemption or prepayment: (a) in the case of the call for redemption
or prepayment of Series 1998-1 Senior Notes, either the Senior Asset Requirement
will be met or the Senior Percentage will be greater than it would have been
without such call for redemption or prepayment, and (b) in the case of the call
for redemption or prepayment of Series 1998-1 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 1998-1 Notes to be
called for redemption or as of the date on which moneys are transferred to the
Retirement Account to make any prepayment of Taxable LIBOR Rate Series 1998-1
Notes, as the case may be,
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<PAGE>
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 -- Call
for Redemption, Prepayment or Purchase of Notes; Senior Asset Requirement".
Notice and Effect of Call for Redemption
Notice of call for redemption of the Series 1998-1 Notes shall be
given by first class mail, mailed not less than 15 days (in the case of Auction
Rate Series 1998-1 Senior Notes) or 30 days (in the case of any other Series
1998-1 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 1998-1 Notes
to be called for redemption at the address of such Holder appearing in the Note
Register; but no defect in or failure to give such mailed notice of call for
redemption shall affect the validity of proceedings for the redemption of any
Series 1998-1 Note not affected by such defect or failure. All notices of call
for redemption shall state: (i) the Redemption Date; (ii) the Redemption Price;
(iii) the name, Stated Maturity and CUSIP numbers of the Series 1998-1 Notes to
be called for redemption, the principal amount of Series 1998-1 Notes of each
series to be called for redemption, and, if less than all Outstanding Notes of
such series are to be called for redemption, the identification (and, in the
case of partial redemption, the respective principal amounts) of the Series
1998-1 Notes to be called for redemption; (iv) that, on the Redemption Date, the
Redemption Price of and accrued interest on each such Series 1998-1 Note will
become due and payable and interest thereon shall cease to accrue on and after
such date; (v) the place or places where such Series 1998-1 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 1998-1 Notes are to be
called for redemption by the application of certain specified trust moneys and
for certain specified reasons.
Notice of call for redemption having been given as provided above, the
Series 1998-1 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 1998-1 Notes shall cease to accrue interest.
No such notice shall be required with respect to prepayments of the
Taxable LIBOR Rate Series 1998-1 Notes as described above under "Prepayment of
Taxable LIBOR Rate Series 1998-1 Notes."
APPLICATION OF SERIES 1998-1 NOTE PROCEEDS
The Original Issuer and the Corporation intend to use the proceeds of
the sale of the Series 1998-1 Notes in the following amounts for the following
purposes:
(1) $332,170,000 will be deposited in the Series 1998-1 Tax Exempt
Acquisition Account and used as follows:
(a) approximately $87,070,000 will be used on the Date of
Issuance to refinance approximately $85,760,000 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) $572,820,000 will be deposited in the Series 1998-1 Taxable
Acquisition Account and used as follows:
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(a) approximately $507,720,000 will be used on the Date of
Issuance to refinance approximately $500,870,000 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) $18,480,000 will be deposited in the Reserve Fund.
It is expected that immediately after the deposit of the proceeds of the
Series 1998-1 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 100% of the principal amount of the
Series 1998-1 Notes.
The characteristics as of December 31, 1997 of the Eligible Loans expected
to be Financed on the Date of Issuance with proceeds deposited to the Series
1998-1 Tax Exempt Acquisition Account and to the Series 1998-1 Taxable
Acquisition Account (aggregating approximately $590 million as of that date) are
more particularly described under "Characteristics of the Initial Financed
Eligible 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 1998-1 Notes.
The Corporation expects the remaining proceeds deposited to the Series
1998-1 Tax Exempt Acquisition Account (approximately $245,100,000 or 27% of the
Series 1998-1 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> <C>
1998 $20.6
1999 60.9
2000 62.4
2001 64.0
2002 37.2
</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 1998-1 Senior Notes which are called for redemption
and, if no Tax Exempt Auction Rate Series 1998-1 Senior Notes remain
Outstanding, Tax Exempt Fixed Rate Series 1998-1 Notes which are called for
redemption. See "Description of Series 1998-1 Notes -- Special Call for
Redemption -- From Unused Proceeds" herein. Investors holding such Tax Exempt
Series 1998-1 Notes (particularly Tax Exempt Fixed Rate Series 1998-1 Notes)
which are called for redemption may be unable to reinvest the proceeds of the
redemption at the same yield as the Tax Exempt Series 1998-1 Notes. Also,
depending on the price at which investors purchased such Series 1998-1 Notes,
their yield may be adversely affected by such early call for redemption.
The Corporation expects the remaining proceeds deposited to the Series
1998-1 Taxable Acquisition Account (approximately $65,100,000 or 7% of the
Series 1998-1 Note proceeds) to be used to purchase Eligible Loans from Lenders
or to originate Eligible Loans on or before February 1, 1999. At the
Corporation's option, or if not expended as of February 1, 1999, such proceeds
may be transferred to the Retirement Account and used to redeem Taxable Auction
Rate Series 1998-1 Senior Notes which are called for redemption. See
"Description of Series 1998-1 Notes -- Special Call for Redemption -- From
Unused Proceeds" herein. Investors holding such Taxable Auction Rate Series
1998-1 Senior Notes which are called for redemption may be unable to reinvest
the
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proceeds of the redemption at the same yield as the Taxable Auction Rate Series
1998-1 Senior Notes. Also, depending on the price at which investors purchased
such Series 1998-1 Notes, their yield may be adversely affected by such early
call for 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 1998-1
Notes not used to acquire Eligible Loans on the Date of Issuance, and Balances
in the Reserve Fund, are expected to be used to acquire one or more investment
agreements meeting the requirements of the Indenture. Each investment agreement
will require the Investment Provider (a financial institution to which such
proceeds are loaned) 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 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 Financed Eligible Loans), will be sufficient to meet principal and
interest payments on the Series 1998-1 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 1998-1 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 1998-1 Notes, and it is not expected
that any such revenues will be available to pay the Series 1998-1 Notes.
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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
1998-1 Senior Notes; as Subordinate Notes on a parity basis with the Series
1998-1 Subordinate Notes; or as Class C Notes on a subordinate basis to the
Senior Notes and the Subordinate Notes. In addition, the Corporation may enter
into Swap Agreements and may obtain Credit Enhancement Facilities from one or
more Credit Facility Providers. The Corporation's obligations under the Swap
Agreements, and its obligations to pay the premiums or fees of Credit Facility
Providers and, if applicable, to reimburse payments made under Credit
Enhancement Facilities, may be parity obligations with the Senior Notes (such
Other Senior Obligations, together with the Senior Notes, being referred to
herein as Senior Obligations) or parity obligations with the Subordinate Notes
(such Other Subordinate Obligations, together with the Subordinate Notes, being
referred to herein as Subordinate Obligations). The Senior Obligations, the
Subordinate Obligations, and any Class C Notes are referred to herein as
"Indenture Obligations". See "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 1998-1 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 1998-1 Notes and it is not expected
that any Credit Enhancement Facility which may be obtained would be for the
benefit of the Series 1998-1 Notes.
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The Indenture also permits the Corporation to issue Class C Notes from time
to time upon satisfaction of the conditions specified therein. See "Summary of
the Indenture -- Additional Notes".
Priorities
The Series 1998-1 Senior Notes (and any other Senior Obligations) are
entitled to payment and certain other priorities over the Series 1998-1
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 1998-1
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".
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 which are
called for redemption, 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 which are called
for redemption, 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 which are called for
redemption on a Sinking Fund Payment Date), the Special Redemption and
Prepayment Account and the Surplus Account. In
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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 call thereof
for redemption 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 which
are called for redemption (including Series 1998-1 Notes as described under
"Description of Series 1998-1 Notes -- Special Call for 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 112%, and (ii)
the Subordinate Percentage will be not less than 102%; 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
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loan program provided for by the Higher Education Act. The Original Issuer has
received an Internal Revenue Service determination that, based on its original
organization and purposes, it is a tax-exempt organization under Section
501(c)(3) of the Code.
As required by Section 150(d) of the Code, the Original Issuer's Articles
of Incorporation provide that the Original Issuer is organized exclusively for
the purpose of acquiring student loan notes incurred under the Higher Education
Act, and that income of the Original Issuer may be used only for: (i) the
payment of expenses and debt service on bonds or notes issued by the Original
Issuer or the creation of reserves for such purposes; (ii) the acquisition of
additional student loan notes; or (iii) payment to the United States. In
connection with an election under Section 150(d)(3) of the Code to terminate its
status as a corporation described in Section 150(d), the Original Issuer will
enter into an agreement with Student Loan Finance Corporation, a newly organized
South Dakota corporation and wholly-owned subsidiary of the Original Issuer
("SLFC"), pursuant to which the Original Issuer will transfer all of its student
loans (including its rights in Financed Student Loans), student loan acquisition
and servicing operations and physical facilities, together with certain other
assets (including the Original Issuer's interest in the other assets comprising
the Trust Estate), to SLFC and SLFC will assume all of the Original Issuer's
obligations with respect to the Notes, the Indenture, the Trust Estate and all
related contracts. See "The Servicer" herein. The Original Issuer will
transfer such assets without recourse, and will be released from all obligations
under the Indenture or otherwise with respect to the Notes. Concurrently with
such transfer, the Original Issuer will amend its articles of incorporation to
amend its corporate purpose and change its name to Great Plains Education
Foundation, Inc. Under Section 150(d)(3) of the Code, the Original Issuer must
continue to be an organization described in Section 501(c)(3) of the Code. No
determination has been received from the Internal Revenue Service as to the
Original Issuer's qualification as an organization described in Section
501(c)(3) of the Code after the amendment of its articles of incorporation.
Immediately upon such transfer, SLFC will transfer all its 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 December 31, 1997, the Original Issuer had a staff of 88
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
December 31, 1997, the Original Issuer owned and was
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servicing student loans to approximately 91,600 borrowers representing
approximately $590 million outstanding principal amount of student loans. As of
such date, the Original Issuer also was servicing student loans held by other
lenders representing less than $3 million outstanding principal amount.
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 $2.25 billion aggregate principal amount of bonds and notes, of
which $912,425,000 principal amount were outstanding as of December 31, 1997.
All of such outstanding bonds and notes will be refunded with a portion of the
proceeds of the Series 1998-1 Notes. After the transfer of the assets described
above to SLFC, the Original Issuer expects to participate in various aspects of
the student loan business, but cease its participation in the Federal Family
Education Loan Program.
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 1998-1 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.
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 Principal Amount
-------------------------------------------------------------------------
Status June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- ----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
31 to 60 days $16,237,073 $17,765,179 $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>
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<TABLE>
<CAPTION>
Percent of Outstanding Principal - Repayment Deferment,
Forbearance and Claim Status Loans Only
Delinquency -----------------------------------------------------------------------------
Status June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- ----------- ------------- ------------- ------------- ------------- -------------
<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
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
Delinquency -----------------------------------------------------------------------------
Status June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- ----------- ------------- ------------- ------------- ------------- -------------
<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%
=== === === === ===
</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
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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.
Other write-offs arise if a claim is rejected by the Guarantee Agency, and
the Original Issuer determines that the reason for the rejection cannot be
cured, that the Lender from which the loan was acquired cannot or should not be
required to repurchase the loan, and that the loan is otherwise not collectible.
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.
Original Issuer's Student Loan Portfolio Principal Losses
For Each of the Years Ended June 30, 1993 Through 1997
<TABLE>
<CAPTION>
Principal Amounts
------------------------------------------------
2% Claim Other Principal Total
Losses on 98% Write-Offs, Net Principal
For the Fiscal Year Ended: Guaranteed Loans of Recoveries Losses
- -------------------------- ------------------ ---------------- ----------
<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
</TABLE>
<TABLE>
<CAPTION>
Percentage (Annualized) of Principal Losses to
End-of-Period Portfolio Balances
-------------------------------------------------
2% Claim Other Principal Total
Losses on 98% Write-Offs, Net Principal
For the Fiscal Year Ended: Guaranteed Loans of Recoveries Losses
- -------------------------- ---------------- --------------- ---------
<S> <C> <C> <C>
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.
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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 1998-1 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 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.
Financed Eligible Loan Program
The Corporation will, upon the Section 150(d)(3) Transfer and the
assumption of the Original Issuer's obligations under the Indenture, become
responsible for the acquisition or origination of Eligible Loans to be Financed
with proceeds of the Series 1998-1 Notes deposited to the credit of the
Acquisition Fund. In this regard, as of December 31, 1997, the Corporation has
entered into Student Loan Purchase Agreements with approximately 95 Lenders
providing for the purchase of approximately $194 million in principal amount of
Eligible Loans from moneys available therefor in the Series 1998-1 Tax Exempt
Acquisition Account and Student Loan Purchase Agreements (which do not provide
for the purchase of a stated principal amount of Eligible Loans) with
approximately 85 Lenders providing for the purchase of Eligible Loans from
moneys available therefor in the Series 1998-1 Taxable Acquisition Account. As
further described under "Description of Financed Eligible Loan Program --
Background of the Original Issuer's Program", the Original Issuer has
historically entered into comparable agreements with Lenders (including
substantially all of the Lenders with which the Corporation has current
agreements) pursuant to which the Original Issuer has purchased over $1.29
billion in Student Loans from proceeds of its bonds and notes in the same manner
as the Corporation intends to purchase Eligible Loans from proceeds of the
Series 1998-1 Notes. Thus, the Corporation anticipates that it will be able to
apply all, or substantially all, of the proceeds of the Series 1998-1 Notes to
the acquisition or origination of Eligible Loans. See "Description of Financed
Eligible Loan Program". However, there is no assurance that the Corporation
will be able to so apply such proceeds.
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 1998-1 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 1998-1
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
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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 73 Director
Manley B. Feinstein 70 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 1998-1
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.
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 has been a Director of the Corporation since its
formation in May 1997. 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
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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 February 1, 1998 (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 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
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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.
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.
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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; preparing
and submitting to the Trustee the Monthly Servicing Reports required to be
delivered to the Noteholders pursuant to the Indenture; and determining and
notifying the Trustee and Auction Agent of the Net Loan Rate. 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 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.
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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;
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
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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. SLFC also agrees to continue
performing its obligations under the Servicing Agreement until a successor
Servicer has been appointed.
DESCRIPTION OF FINANCED ELIGIBLE LOAN PROGRAM
Background of Original Issuer's Program
The Original Issuer was organized as a secondary market for student loans
for lenders throughout the State of South Dakota, including banks, savings and
loan associations and credit unions. The Original Issuer began operating a
secondary market program in 1979 and financed its initial acquisitions of
student loans through the issuance of its student loan revenue bonds. The
Original Issuer has ongoing contact with, and holds numerous workshop meetings
in various locations in the State and surrounding States which are attended by,
approximately 250 financial and educational institutions. SLFC will undertake
similar activities to make the financial and education communities aware of its
activities and objectives.
The following table lists the approximate aggregate outstanding principal
balances of all Student Loans acquired by the Original Issuer from the proceeds
of its tax exempt student loan revenue bond issues during each of the last six
fiscal years and during the six months ended December 31, 1997. These Student
Loans have been made to Eligible Borrowers for the post-secondary education of
(a) residents of the State attending post-secondary schools located within or
without the State, or (b) residents of a state other than the State attending
post-secondary schools located within the State (sometimes referred to herein as
"In-State Loans"). The Code requires that proceeds of tax exempt debt
obligations issued by the Original Issuer generally be used only to acquire In-
State Loans.
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<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
1998 (six months ended 12/31/97).. 39,123,000
</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 and for the six months ended December 31, 1997.
<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
1998 (six months ended 12/31/97).... 31,492,000
</TABLE>
Description of Eligible Loans to be Financed
It is expected that a portion of the proceeds of the Series 1998-1 Notes
deposited in the Acquisition Fund will be used to refinance the Original
Issuer's portfolio of approximately $586,630,000 aggregate principal amount of
student loans. Certain characteristics of such portfolio as of December 31, 1997
are set forth below under "Characteristics of the Initial Financed Eligible
Loans." Based on outstanding principal amounts as of December 31, 1997,
approximately 47% 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 1998-1 Notes
deposited in (i) the Series 1998-1 Tax Exempt Acquisition Account will be used
to acquire or originate approximately $241,070,000 additional aggregate
principal amount of Eligible Loans that are In-State Loans on or before April
15, 2002 and (ii) the Series 1998-1 Taxable Acquisition Account will be used to
acquire or originate approximately $64,110,000 additional aggregate principal
amount of Eligible Loans that are not In-State Loans on or before February 1,
1999. See "Application of Series 1998-1 Note Proceeds."
Although the Higher Education Act contains certain provisions that may
decrease the principal amount of Eligible Loans made by Lenders, the Corporation
does not expect that such provisions will affect its ability to spend the
proceeds of the Series 1998-1 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
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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 1998-1 Notes proceeds and Balances in the
Series 1998-1 Tax Exempt and Taxable Surplus Sub-Accounts to redeem Series 1998-
1 Notes which are called for redemption. See "Description of Series 1998-1
Notes -- Special Call for 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 1998-1 Tax Exempt Acquisition
Account and the Series 1998-1 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 1998-1 Tax Exempt Acquisition Account
(together with the Series 1998-1 Tax Exempt Surplus Sub-Account) to the greater
of (a) $49,000,000, or (b) 20% of the aggregate of the amounts applied from such
Accounts, after the Date of Issuance, to the acquisition or origination of all
Student Loans; and (ii) the Series 1998-1 Taxable Acquisition Account (together
with the Series 1998-1 Taxable Surplus Sub-Account) to the greater of (a)
$26,000,000, or (b) 40% of the aggregate of the amounts applied from such
Accounts, after the Date of Issuance, to the acquisition or origination of all
Student Loans. The First Supplemental Indenture also limits the aggregate
amount of Eligible Loans for which the first disbursement is made on or after
July 1, 1998, other than Consolidation Loans, that may be Financed after the
Date of Issuance from the Series 1998-1 Tax Exempt Acquisition Account, the
Series 1998-1 Tax Exempt Surplus Sub-Account, the Series 1998-1 Taxable
Acquisition Account and the Series 1998-1 Taxable Surplus Sub-Account to
$5,000,000. Additionally, the First Supplemental Indenture limits the aggregate
amount of Financed Eligible Loans that may be subject to certain forms of
interest rate reduction features to Borrowers. In all these cases, 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 1998-1
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
approximately 500 Lenders for the purchase of Eligible Loans to be refinanced
with the proceeds of the Series 1998-1 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 has entered 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 1998-1 Notes and expects to enter
into additional Student Loan Purchase Agreements for the purchase of additional
Eligible Loans by the Trustee from Balances in the Series 1998-1 Tax Exempt and
Taxable Surplus Sub-Accounts (collectively, the "Corporation Student Loan
Purchase Agreements").
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As of December 31, 1997, approximately $99 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
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subsidy payments and Special Allowance Payments may be adversely affected. If a
Guarantee Agency fails to meet such standards, that Guarantee Agency's ability
to realize the benefits of federal reinsurance payments may be adversely
affected.
CHARACTERISTICS OF THE INITIAL
FINANCED ELIGIBLE LOANS
This section sets forth tables describing certain characteristics, as of
December 31, 1997, of the Eligible Loans expected to be Financed on the Date of
Issuance of the Series 1998-1 Notes. The Corporation expects that the Eligible
Loans to be Financed on the Date of Issuance will also include approximately
$8.2 million principal amount of Eligible Loans originated or purchased by or on
behalf of the Original Issuer between December 31, 1997 and the Date of
Issuance, and that the characteristics of the Eligible Loans reflected in such
tables will vary due to the continued amortization of such Eligible Loans
between such date and the Date of Issuance. Although the statistical
distribution of the characteristics of the Financed Eligible Loans as of the
Date of Issuance will vary somewhat from the statistical distribution of such
characteristics shown below, the Corporation does not believe that such
characteristics will differ materially.
Composition of the Student Loan Portfolio as of December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Aggregate Outstanding Principal Balance............. $589,514,175
Number of Borrowers................................. 91,564
Average Outstanding Principal Balance Per Borrower.. $ 6,438
Number of Loans (Promissory Notes).................. 271,023
Average Outstanding Principal Balance Per Loan...... $ 2,175
Repayment Status Loans:
Weighted Average Remaining Term (Months)....... 103
Weighted Average Payments Received (Months).... 26
Weighted Average Interest Rate...................... 8.26%
</TABLE>
Distribution of the Financed Eligible Loans by Loan Type as of December 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
---------- --------- ------------ -----------------
<S> <C> <C> <C>
Stafford - Subsidized 214,946 $375,054,479 63.6%
Stafford - Unsubsidized* 27,323 65,941,225 11.2
Stafford - Nonsubsidized* 3,306 5,304,369 0.9
PLUS 10,867 25,430,529 4.3
SLS 7,250 18,551,432 3.2
Consolidation 7,331 99,232,141 16.8
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
- ----------------
*Nonsubsidized Stafford loans are ineligible for interest subsidy payments and
Special Allowance Payment; Unsubsidized Stafford loans are eligible for Special
Allowance Payments but are ineligible for interest subsidy payments.
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<PAGE>
Distribution of the Financed Eligible Loans by Interest Rate as of December 31,
1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Range** Loans Balance Balance
- ---------------------- --------- ------------ -----------------
<S> <C> <C> <C>
Less Than 7.00% 80 $ 356,680 0.1%
7.00% to 7.49% 10,313 15,111,514 2.6
7.50% to 7.99% 16,723 42,698,123 7.2
8.00% to 8.49% 210,603 416,284,894 70.6
8.50% to 8.99% 10,938 31,575,123 5.4
9.00% to 9.49% 22,232 82,229,016 13.9
9.50% or greater 134 1,258,825 0.2
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
_______________________
**Determined using the interest rates applicable to the Financed
Student Loans as of December 31, 1997. Because certain of the Financed Student
Loans bear interest at variable rates per annum, there can be no assurance that
such rates will remain applicable to the Financed Student Loans at any time
after December 31, 1997. See "Description of the Federal Family Education Loan
Program."
Distribution of the Financed Eligible Loans by School Types as of December 31,
1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Loans Balance Balance
- --------------- --------- ------------ -----------------
<S> <C> <C> <C>
Under 4 Year 44,364 $ 74,324,197 12.6%
4 and 5 Year 198,427 379,725,178 64.4
Proprietary 19,109 31,861,440 5.4
Consolidation 7,331 99,232,141 16.8
Other/Unknown 1,792 4,371,219 0.8
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
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<PAGE>
Distribution of the Financed Eligible Loans by
Borrower Payment Status as of December 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Borrower Payment Status Loans Balance Balance
----------------------- --------- ----------- ----------------
<S> <C> <C> <C>
School 15,582 $ 38,582,428 6.5%
Grace 4,753 12,256,512 2.1
Repayment:
First Year Repayment 45,877 135,763,424 23.0
Second Year Repayment 34,355 96,224,499 16.3
Third Year Repayment 33,063 83,281,874 14.1
Fourth Year Repayment and
thereafter 98,274 123,072,847 20.9
Deferment 26,686 67,607,690 11.5
Forbearance 10,176 28,294,819 4.8
Claims 2,257 4,430,082 0.8
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by
Guarantee Status as of December 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Guarantee Status Loans Balance Balance
- ------------------ --------- ------------ -----------------
<S> <C> <C> <C>
Guaranteed 100% 164,235 $258,613,557 43.8%
Guaranteed 98% 105,881 330,592,281 56.1
Non-Guaranteed 907 308,337 0.1
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
Distribution of the Financed Eligible Loans by Guarantee Agency as of December
31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Guarantee Agencies Loans Balance Balance
- ------------------- --------- ------------ -----------------
<S> <C> <C> <C>
EAC 143,508 $354,690,204 60.2%
PHEAA 107,052 197,147,922 33.4
Other Guarantee Agencies 19,556 37,367,712 6.3
Non-Guaranteed 907 308,337 0.1
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
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<PAGE>
Distribution of the Financed Eligible Loans by Range of Principal Balance
as of December 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans by
Number of Principal Outstanding
Principal Balance Range Borrowers Balance Balance
----------------------- --------- ------------ -------------------
<S> <C> <C> <C>
Less than $1,000 10,931 $ 5,637,387 1.0%
$1,000-$1,999 12,536 18,777,938 3.2
$2,000-$2,999 13,406 33,442,176 5.7
$3,000-$3,999 8,744 30,477,686 5.2
$4,000-$4,999 7,150 32,046,657 5.4
$5,000-$5,999 6,183 33,755,164 5.7
$6,000-$6,999 4,996 32,222,065 5.5
$7,000-$7,999 3,631 27,165,195 4.6
$8,000-$8,999 3,082 26,158,156 4.4
$9,000-$9,999 2,608 24,745,869 4.2
$10,000-$10,999 2,326 24,387,544 4.1
$11,000-$11,999 2,071 23,772,733 4.0
$12,000-$12,999 1,637 20,450,489 3.5
$13,000-$13,999 1,548 20,875,133 3.5
$14,000-$14,999 1,372 19,863,761 3.4
$15,000 or greater 9,343 215,736,222 36.6
------ ------------ -----
Total 91,564 $589,514,175 100.0%
====== ============ =====
</TABLE>
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<PAGE>
Distribution of Repayment Status Financed Eligible Loans by Remaining Term
As of December 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent By
Number Principal Outstanding
Remaining Term Of Loans Balance Balance
- ------------------- -------- ------------ ------------
<S> <C> <C> <C>
1 to 12 Months 14,628 $ 3,659,054 0.8%
13 to 24 Months 15,818 8,622,626 2.0
25 to 36 Months 16,921 14,387,027 3.3
37 to 48 Months 17,961 20,005,976 4.6
49 to 60 Months 18,751 25,590,440 5.8
61 to 72 Months 19,275 31,495,246 7.2
73 to 84 Months 17,697 35,972,249 8.2
85 to 96 Months 26,703 61,962,408 14.1
97 to 108 Months 27,526 72,608,386 16.6
109 to 120 Months 31,487 91,136,094 20.8
121 to 180 Months 3,582 38,572,149 8.8
181 to 240 Months 1,046 26,207,596 6.0
241 to 300 Months 136 5,797,604 1.3
Over 300 Months 38 2,325,789 0.5
------- ------------ -----
Total 211,569 $438,342,644 100.0%
======= ============ =====
</TABLE>
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<PAGE>
Distribution of Financed Eligible Loans by Borrowers' Address
As of December 31, 1997 (Based on Address as of January 9, 1998)
<TABLE>
<CAPTION>
Outstanding Percent By
Number Principal Outstanding
State of Borrowers' Address Of Loans Balance Balance
- ----------------------------- -------- ------------ ------------
<S> <C> <C> <C>
South Dakota 112,233 $239,229,526 40.6%
Minnesota 54,110 115,810,153 19.6
North Dakota 24,248 50,226,464 8.5
Iowa 8,065 18,612,166 3.2
Nebraska 5,828 12,661,034 2.1
Colorado 5,292 11,631,645 2.0
Washington 4,955 10,393,248 1.8
Texas 4,170 9,766,035 1.7
California 4,460 9,752,014 1.7
Oregon 4,497 9,168,878 1.6
Wisconsin 3,205 7,740,080 1.3
Illinois 2,953 7,236,560 1.2
Arizona 3,417 7,129,734 1.2
Alaska 2,334 6,643,301 1.1
Idaho 2,873 6,084,089 1.0
Others Less Than 1% Each 28,383 67,429,248 11.4
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</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,
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<PAGE>
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 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.
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<PAGE>
Eligibility
General. A student is eligible for loans made under the Federal
Family Education Loan Program only if he or she: (i) has been accepted for
enrollment or is enrolled in good standing at an eligible institution of higher
education (which term includes certain vocational schools), (ii) is carrying or
planning to carry at least one-half the normal full-time workload for the course
of study the student is pursuing as determined by the institution (which, in the
case of a loan to cover the cost of a period of enrollment beginning on or after
July 1, 1987, must either lead to a recognized educational credential or be
necessary for enrollment in a course of study that leads to such a credential),
(iii) has agreed to notify promptly the holder of the loan concerning any change
of address, (iv) (if presently enrolled) is maintaining satisfactory progress in
the course of study he or she is pursuing, (v) does not owe a refund on, and is
not (except as specifically permitted under the Higher Education Act) in default
under, any loan or grant made under the Higher Education Act, (vi) has filed
with the eligible institution a statement of educational purpose, (vii) meets
certain citizenship requirements, and (viii) (except in the case of a graduate
or professional student) has received a preliminary determination of eligibility
or ineligibility for a Pell Grant.
Stafford Loans. Stafford Loans generally are made only to student
borrowers who meet certain needs tests. The educational institution must
provide the lender with a statement evidencing a determination of need for a
loan, and the amount of such need, calculated by subtracting from the estimated
cost of attendance the sum of the expected family contribution with respect to
the student plus the estimated financial assistance available to such student.
The amounts of the expected family contribution, estimated available financial
assistance, and estimated costs of attendance are to be computed in accordance
with standards set forth in the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the
requirements set forth under "General" above is eligible for an Unsubsidized
Stafford Loan without regard to need. Unsubsidized Stafford Loans were not
available before October 1, 1992.
Plus Loans. Plus Loans are made only to borrowers who are parents
(and, under certain circumstances, spouses of remarried parents) of dependent
undergraduate students. For Plus Loans made on or after July 1, 1993, the
parent borrower must not have an adverse credit history (as determined pursuant
to criteria established by the Department of Education). Prior to the 1986
Amendments, the Higher Education Act did not distinguish between Plus Loans and
SLS Loans. Student borrowers were eligible for Plus Loans; however, parents of
graduate and professional students were ineligible.
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.
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<PAGE>
Interest Rates
The Higher Education Act establishes maximum interest rates for each
of the various types of loans. These rates vary not only among loan types, but
also within loan types depending upon when the loan was made or when the
borrower first obtained a loan under the Federal Family Education Loan Program.
The Higher Education Act allows lesser rates of interest to be charged. Many
Lenders have offered repayment incentives or other programs that involve reduced
interest rates on certain loans made under the Federal Family Education Loan
Program.
Stafford Loans. For a Stafford Loan made prior to July 1, 1994, the
applicable interest rate for a borrower who, on the date the promissory note was
signed, did not have an outstanding balance on a previous loan which was made,
insured or guaranteed under the Federal Family Education Loan Program (a "New
Borrower"):
(a) is 7% per annum for a loan covering a period of instruction beginning
before January 1, 1981;
(b) is 9% per annum for a loan covering a period of instruction beginning
on or after January 1, 1981, but before September 13, 1983;
(c) is 8% per annum for a loan covering a period of instruction beginning
on or after September 13, 1983, but before July 1, 1988;
(d) for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, is 8% per annum for
the period from the disbursement of the loan to the date which is four
years after the loan enters repayment, and thereafter shall be
adjusted annually, and for any 12-month period commencing on a July 1
shall be equal to the bond equivalent rate of 91-day U.S. Treasury
bills auctioned at the final auction prior to the preceding June 1,
plus 3.25% per annum (but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be adjusted
annually, and for any 12-month period commencing on a July 1 shall be
equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus
3.1% per annum (but not to exceed 9% per annum).
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
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<PAGE>
to a borrower who has a loan described in clause (d) above or
(C) a Stafford Loan for which the first disbursement was made
prior to December 20, 1993 to a borrower whose previous loans do
not include a Stafford Loan or an Unsubsidized Stafford Loan;
(iii) 9% per annum in the case of a (A) Stafford Loan made to a
borrower who has a loan described in clauses (b) or (e) above or
(B) a Stafford Loan for which the first disbursement was made on
or after December 20, 1993 to a borrower whose previous loans do
not include a Stafford Loan or an Unsubsidized Stafford Loan;
and
(iv) 10% per annum in the case of a Stafford Loan which has been in
repayment for four years or more and which was made to a
borrower who has a loan described in clause (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994,
regardless of whether the borrower is a New Borrower or a Repeat Borrower, is
the rate described in clause (g) above, except that such rate shall not exceed
8.25% per annum. For any Stafford Loan made on or after July 1, 1995, the
interest rate is further reduced prior to the time the loan enters repayment and
during any Deferment Periods (as such term is defined below under "Repayment").
During such periods, the formula described in clause (g) above is applied,
except that 2.5% is substituted for 3.1%, and the rate shall not exceed 8.25%
per annum.
For loans made on or after July 1, 1998, the applicable rate will continue
to be adjusted annually, but for any 12-month period commencing on a July 1 will
be equal to the bond equivalent rate of securities with a comparable maturity
(as established by the Secretary of Education), plus 1% per annum, but not to
exceed 8.25% per annum. There can be no assurance that the interest rate
provisions for such loans will not be further amended, either before or after
the rate described herein becomes effective.
Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to
the same interest rate provisions as Stafford Loans.
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
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<PAGE>
1 will be equal to the bond equivalent rate of securities with a comparable
maturity (as established by the Secretary of Education), plus 2.1% per annum,
but not to exceed 9% per annum.
If requested by the borrower, an eligible lender may consolidate SLS or
Plus Loans of the same borrower held by the lender under a single repayment
schedule. The repayment period for each included loan shall be based on the
commencement of repayment of the most recent loan. The consolidated loan shall
bear interest at a rate equal to the weighted average of the rates of the
included loans. Such a consolidation shall not be treated as the making of a new
loan. In addition, at the request of the borrower, a lender may refinance an
existing fixed rate SLS or Plus Loan (including an SLS or Plus Loan held by a
different lender who has refused so to refinance such loan) at a variable
interest rate. In such a case, proceeds of the new loan are used to discharge
the original loan.
SLS Loans. The applicable interest rates on SLS Loans made prior to
October 1, 1992 are identical to the applicable interest rates on Plus Loans
made at the same time. For SLS Loans made on or after October 1, 1992, the
applicable interest rate is the same as the applicable interest rate on Plus
Loans, except that the ceiling is 11% per annum instead of 10% per annum.
Consolidation Loans. A Consolidation Loan made prior to July 1, 1994 bears
interest at a rate equal to the weighted average of the interest rates on the
loans retired, rounded to the nearest whole percent, but not less than 9% per
annum. Except as described in the next sentence, 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 Consolidation Loan for which the
application is received by an eligible lender on or after November 13, 1997 and
before October 1, 1998, the interest rate 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 8.25% per
annum. Notwithstanding these general interest rates, the portion, if any, of a
Consolidation Loan that repaid a loan made under the federal health education
assistance loan program may have a different interest 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. Additional limits are described below.
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.
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<PAGE>
Under the 1993 Amendments, at the same time that SLS Loans were eliminated,
the loan limits for Unsubsidized Stafford Loans to independent students, or
dependent students whose parents cannot borrow a Plus Loan, were increased by
amounts equal to the prior SLS Loan limits (as described below under "SLS
Loans").
Prior to the enactment of the 1992 Amendments, an undergraduate student who
had not successfully completed the first and second year of a program of
undergraduate education could borrow Stafford Loans in amounts up to $2,625 in
an academic year. An undergraduate student who had successfully completed such
first and second year, but who had not successfully completed the remainder of a
program of undergraduate education could borrow up to $4,000 per academic year.
The maximum for graduate and professional students was $7,500 per academic year.
The maximum aggregate amount of Stafford Loans which a borrower could have
outstanding (including that portion of a Consolidation Loan used to repay such
loans) was $17,250. The maximum aggregate amount for a graduate or professional
student, including loans for undergraduate education, was $54,750. Prior to the
enactment of the 1986 Amendments, the annual limits were generally lower.
Plus Loans. For Plus Loans made on or after July 1, 1993, the amounts of
Plus Loans are limited only by the student's unmet need. Prior to that time
Plus Loans were subject to limits similar to those to which SLS Loans were then
subject (see "SLS Loans" below), applied with respect to each student on behalf
of whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and
second year of a program of undergraduate education could borrow an SLS Loan in
an amount of up to $4,000. A student who had successfully completed such first
and second year, but who had not successfully completed the remainder of a
program of undergraduate education could borrow up to $5,000 per year. Graduate
and professional students could borrow up to $10,000 per year. SLS Loans were
subject to an aggregate maximum of $23,000 ($73,000 for graduate and
professional students). Prior to the 1992 Amendments, SLS Loans were available
in amounts of $4,000 per academic year, up to a $20,000 aggregate maximum. Prior
to the 1986 Amendments, a graduate or professional student could borrow $3,000
of SLS Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year minus
the amount of all other Federal Family Education Loan Program loans to such
student for such academic year, up to a maximum amount of all Federal Family
Education Loan Program loans to that student of $12,500. The 1989 Amendments
limited the amount of SLS Loans for students enrolled in programs of less than
an academic year in length (similar to the limits described above under
"Stafford Loans"), and such limits were continued by the 1992 Amendments.
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
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minimum repayment period to five years. Borrowers are entitled to accelerate,
without penalty, the repayment of all or any part of the loan.
In addition, the 1992 Amendments required lenders of Consolidation Loans to
establish graduated or income-sensitive repayment schedules and required lenders
of Stafford and SLS Loans to offer borrowers the option of repaying in
accordance with graduated or income-sensitive repayment schedules. The Original
Issuer has implemented (and SLFC will implement) graduated repayment schedules
and income-sensitive repayment schedules. Use of income-sensitive repayment
schedules may extend the ten-year maximum term for up to five years. In
addition, if the repayment schedule on a loan that has been converted to a
variable interest rate does not provide for adjustments to the amount of the
monthly installment payments, the ten-year maximum term may be extended for up
to three years.
No principal repayments need be made during certain periods of deferment
prescribed by the Higher Education Act ("Deferment Periods"). For loans to a
borrower who first obtained a loan which was disbursed before July 1, 1993,
deferments are available (i) during a period not exceeding three years while the
borrower is a member of the Armed Forces, an officer in the Commissioned Corps
of the Public Health Service or, with respect to a borrower who first obtained a
student loan disbursed on or after July 1, 1987, or a student loan to cover the
cost of instruction for a period of enrollment beginning on or after July 1,
1987, an active duty member of the National Oceanic and Atmospheric
Administration Corps, (ii) during a period not in excess of three years while
the borrower is a volunteer under the Peace Corps Act, (iii) during a period not
in excess of three years while the borrower is a full-time volunteer under the
Domestic Volunteer Act of 1973, (iv) during a period not exceeding three years
while the borrower is in service, comparable to the service referred to in
clauses (ii) and (iii), as a full-time volunteer for an organization which is
exempt from taxation under Section 501(c)(3) of the Code, (v) during a period
not exceeding two years while the borrower is serving an internship, the
successful completion of which is required to receive professional recognition
required to begin professional practice or service, or a qualified internship or
residency program, (vi) during a period not exceeding three years while the
borrower is temporarily totally disabled, as established by sworn affidavit of a
qualified physician, or while the borrower is unable to secure employment by
reason of the care required by a dependent who is so disabled, (vii) during a
period not to exceed twenty-four months while the borrower is seeking and unable
to find full-time employment, (viii) during any period that the borrower is
pursuing a full-time course of study at an eligible institution (or, with
respect to a borrower who first obtained a student loan disbursed on or after
July 1, 1987, or a student loan to cover the cost of instruction for a period of
enrollment beginning on or after July 1, 1987, is pursuing at least a half-time
course of study for 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
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whose behalf the parent borrowed) were available to Plus Loan borrowers, and
only the Deferment Periods described above in clauses (vi), (vii) and (viii)
were available to Consolidation Loan borrowers. Prior to the 1986 Amendments,
Plus Loan borrowers were not entitled to Deferment Periods. Deferment Periods
extend the ten year maximum term.
The Higher Education Act also provides for periods of forbearance during
which the borrower, in case of temporary financial hardship, may defer any
payments. A borrower is entitled to forbearance for a period not to exceed
three years while the borrower's debt burden under Title IV of the Higher
Education Act (which includes the Federal Family Education Loan Program) equals
or exceeds 20% of the borrower's gross income, and also is entitled to
forbearance while he or she is serving in a qualifying medical or dental
internship program or in a "national service position" under the National and
Community Service Trust Act of 1993. In addition, mandatory administrative
forbearances are provided when exceptional circumstances such as a local or
national emergency or military mobilization exist; or when the geographical area
in which the borrower or endorser resides has been designated a disaster area by
the President of the United States or Mexico, the Prime Minister of Canada, or
by the governor of a state. In other circumstances, forbearance is at the
lender's option. Such forbearance also extends the ten year maximum term.
As described under "Contracts with Guarantee Agencies -- Federal Interest
Subsidy Payments" below, the Secretary of Education makes interest payments on
behalf of the borrower of certain eligible loans while the borrower is in school
and during Grace and Deferment Periods. Interest that accrues during periods of
forbearance and, if the loan is not eligible for interest subsidy payments,
while the borrower is in school and during the Grace and Deferment Periods, may
be paid monthly or quarterly or capitalized (added to the principal balance) not
more frequently than quarterly.
Disbursement
Loans made under the Federal Family Education Loan Program (except
Consolidation Loans) generally must be disbursed in two or more installments,
none of which may exceed 50% of the total principal amount of the loan.
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.
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Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan
made on or after October 1, 1993 is required to pay to the Secretary of
Education a monthly fee equal to .0875% (1.05% per annum) of the principal
amount of, and accrued interest on, such Consolidation Loan.
Loan Guarantees
Under the Federal Family Education Loan Program, Guarantee Agencies are
required to guarantee the payment of not less than 100% of the principal amount
of loans made prior to October 1, 1993 and covered by their respective guarantee
programs. For a description of the requirements for loans to be covered by such
guarantees, see "Description of the Guarantee Agencies". The 1993 Amendments
reduced the minimum percentage of the principal amount of loans which a
Guarantee Agency must pay to 98%, effective with respect to loans made on or
after October 1, 1993. The Department of Education has taken the position that
a Guarantee Agency may not pay more than 98% of the principal amount of and
accrued interest on such a loan. Under certain circumstances, guarantees may be
assumed by the Secretary of Education or another Guarantee Agency. See
"Contracts with Guarantee Agencies" below.
Contracts with Guarantee Agencies
Under the Federal Family Education Loan Program, the Secretary of Education
is authorized to enter into guaranty and interest subsidy agreements with
Guarantee Agencies. The Federal Family Education Loan Program provides for
reimbursements to Guarantee Agencies for default claims paid by Guarantee
Agencies, support payments to Guarantee Agencies for administrative and other
expenses, advances for a Guarantee Agency's reserve funds, and interest subsidy
payments and Special Allowance Payments to the holders of qualifying student
loans made pursuant to the Federal Family Education Loan Program.
The 1992 Amendments gave the Secretary of Education certain oversight
powers over Guarantee Agencies. Guarantee Agencies are required to maintain
their reserves at certain levels based on the amount of outstanding loans that
they have guaranteed. If a Guarantee Agency falls below the required level in
two consecutive years, or its claims rate exceeds 9% in any year, or if the
Secretary determines that the agency's administrative or financial 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".
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Under the Higher Education Act and the Federal Reimbursement Contracts, the
Secretary of Education currently agrees to reimburse a Guarantee Agency for the
amounts expended by the Guarantee Agency in the discharge of its guarantee
obligation (i.e., the unpaid principal balance of and accrued interest on loans
guaranteed by the Guarantee Agency, which loans are referred to herein as
"guaranteed loans") as a result of the default of the borrower. With respect to
loans made prior to October 1, 1993, the Secretary currently agrees to reimburse
the Guarantee Agency for up to 100% of the amounts so expended. The 1993
Amendments provide for reimbursement of a maximum of 98% of the amount expended
with respect to guaranteed loans made on or after October 1, 1993. Depending on
the claims rate experience of a Guarantee Agency, such 100% (or 98%)
reimbursement may be reduced as discussed in the formula described below. The
Secretary of Education also agrees to repay 100% of the unpaid principal plus
applicable accrued interest expended by a Guarantee Agency in discharging its
guarantee obligation as a result of the bankruptcy, death, or total and
permanent disability of a borrower (or in the case of a Plus Loan, the death of
the student on behalf of whom the loan was borrowed), or in certain
circumstances, as a result of school closures, which reimbursements are not to
be included in the calculations of the Guarantee Agency's Claims Rate experience
for the purpose of federal reimbursement under the Federal Reimbursement
Contracts.
The formula for computing the percentage of federal reimbursement under the
Federal Reimbursement Contracts is not accumulated over a period of years but is
measured by the amount of federal reimbursement payments in any one federal
fiscal year as a percentage of the original principal amount of loans under the
Federal Family Education Loan Program guaranteed by the Guarantee Agency and in
repayment at the end of the preceding fiscal year. Under the formula, federal
reimbursement payments to a Guarantee Agency in any one fiscal year not
exceeding 5% of the original principal amount of loans in repayment at the end
of the preceding fiscal year are to be paid by the Secretary of Education at
100% (or 98% for loans made on or after October 1, 1993). Beginning at any time
during any fiscal year that federal reimbursement payments exceed 5%, and until
such time as they may exceed 9%, of the original principal amount of loans in
repayment at the end of the preceding fiscal year, then reimbursement payments
on claims submitted during that period are to be paid at 90% (or 88% for loans
made on or after October 1, 1993). Beginning at any time during any fiscal year
that federal reimbursement payments exceed 9% of the original principal amount
of loans in repayment at the end of the preceding fiscal year, then such
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
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will not recover any amounts subsequently collected by the federal government
which are attributable to that portion of the defaulted loan for which the
Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, the Secretary of Education
is authorized to enter into an agreement with a Guarantee Agency pursuant to
which the Guarantee Agency shall sell defaulted loans that are eligible for
rehabilitation to an eligible lender. The Guarantee Agency shall repay the
Secretary of Education an amount equal to 81.5% of the then current principal
balance of such loan, multiplied by the reimbursement percentage in effect at
the time the loan was reimbursed. The amount of such repayment shall be deducted
from the amount of federal reimbursement payments for the fiscal year in which
such repayment occurs, for purposes of determining the reimbursement rate for
that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency must
have received consecutive payments for 12 months of amounts owed on such loan.
Upon rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred
(except that a borrower's loan may only be rehabilitated once).
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans must be
made by an eligible lender under the applicable Guarantee Agency's Guarantee
Program, which must meet requirements prescribed by the rules and regulations
promulgated under the Higher Education Act, including the borrower eligibility,
loan amount, disbursement, interest rate, repayment period and guarantee fee
provisions described herein and the other requirements set forth in Section
428(b) of the Higher Education Act.
Under the Higher Education Act, a guaranteed loan must be delinquent for
180 days if it is repayable in monthly installments or 240 days if it is payable
in less frequent installments before a lender may obtain payment on a guarantee
from the Guarantee Agency. The Guarantee Agency must pay the lender for the
defaulted loan prior to submitting a claim to the Secretary of Education for
reimbursement. The Guarantee Agency must submit a reimbursement claim to the
Secretary of Education within 45 days after it has paid the lender's default
claim. As a prerequisite to entitlement to payment on the guarantee by the
Guarantee Agency, and in turn payment of reimbursement by the Secretary of
Education, the lender must have exercised reasonable care and diligence in
making, servicing and collecting the Guaranteed Loan.
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, except that Consolidation Loans for which the application is
received by an eligible lender on or after November 13, 1997 and before October
1, 1998, are eligible for interest subsidy payments on that portion of the
Consolidation Loan that repays Stafford Loans or similar subsidized loans made
under the direct loan program. 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
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borrower eligibility, loan amount, disbursement, interest rate, repayment period
and guarantee fee provisions described herein and the other requirements set
forth in Section 428(b) of the Higher Education Act.
The Secretary of Education makes interest subsidy payments quarterly on
behalf of the borrower to the holder of a guaranteed loan in a total amount
equal to the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any Deferment Period.
A borrower may elect to forego interest subsidy payments, in which case the
borrower is required to make interest payments.
Federal Administrative Expense Allowances
Prior to the adoption of the 1993 Amendments, each Guarantee Agency was
entitled to receive from the Secretary of Education an administrative cost
allowance equal to 1% of the total principal amount of the loans (other than
Consolidation Loans) guaranteed by the Guarantee Agency in any fiscal year, for
the purposes of administrative costs of pre-claims assistance for default
prevention and collection of defaulted guaranteed loans, administrative costs of
promoting commercial lender participation, administrative costs of monitoring
the enrollment and repayment status of students, and for other such costs
related to the Guarantee Agency's Guarantee Program. The 1993 Amendments
repealed such entitlement, effective October 1, 1993. The 1993 Amendments,
however, authorized payments for transition support (including administrative
costs) to Guarantee Agencies, in connection with the transition to direct
lending. See "Direct Loans" below. Budget legislation adopted since that time
has provided for the payment to Guarantee Agencies of an administrative expense
allowance equal to 0.85% of the agency's annual new guarantee volume. The 1997
Amendments provide for payment of such an administrative expense allowance
through the fiscal year ending September 30, 2002. However, after the fiscal
year ending September 30, 1997, such amounts are subject to decreasing aggregate
limits. There are no assurances as to the level of such payments that can be
made within such aggregate limits, or 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
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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 portion, if
any, of a Consolidation Loan that repaid a loan made under the federal health
education assistance loan program may be ineligible for Special Allowance
Payments.
Section 438(b)(2) of the Higher Education Act provides that the quarterly
rate of Special Allowance Payments paid to holders of loans which were made or
purchased with funds obtained by the holder from the issuance of certain
obligations, the income from which is exempt from taxation under the Code (as
well as with funds obtained by the holder from certain earnings related thereto)
shall be one-half the quarterly rate of the special allowance established under
the formula described above (without giving effect to the changes in such
formula enacted by the 1986 Amendments, the 1987 Amendments, the 1992 Amendments
and the 1993 Amendments). Such reduced rate, however, shall not be less than:
(a) for loans disbursed before October 1, 1992, 2.5% per annum in the case of
loans for which the applicable interest rate is 7% per annum, 1.5% per annum in
the case of loans for which the applicable interest rate is 8% per annum, or
0.5% per annum in the case of loans for which the applicable rate is 9% per
annum; and (b) for loans disbursed on or after October 1, 1992, the difference
between 9.5% per annum and the applicable interest rate on the loan. The effect
of these provisions is to provide a minimum rate of return (i.e., combined
interest and Special Allowance Payments) of 9.5% per annum on 7%, 8% and 9%
Stafford Loans, on Consolidation Loans, and on Stafford and Unsubsidized
Stafford Loans that bear interest at a rate that is adjusted annually and that
were made on or after October 1, 1992 . However, Plus and SLS Loans do not have
such an assured rate of return because Special Allowance Payments are made on
such loans only if the interest rate ceiling on such loans operates to limit the
applicable interest rate. In addition, variable rate loans made before October
1, 1992 will not have such an assured minimum rate of return. The "rebate" fee
payable with respect to Consolidation Loans (as described above under "Loan
Terms -- Fees -- Rebate Fee on Consolidation Loans") also has the effect of
reducing the rate of return on Consolidation Loans made on or after October 1,
1993. The special provisions described above for holders of loans made or
purchased with funds obtained from the issuance of certain obligations, the
income from which is exempt from taxation, applies only to such obligations
issued on or before September 30, 1993, and obligations issued to refund such
obligations.
The Balanced Budget and Deficit Control Act of 1985, as amended (known as
the "Gramm-Rudman Law") requires the President to issue a sequester order for
any federal fiscal year in which the projected budget exceeds the target for
that year. A sequester order for any fiscal year would apply to loans made on
or after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the 91-day T-
Bill Rate plus 3.0% (for loans with a special allowance formula of the 91-day T-
Bill Rate plus 3.1%).
For the Trustee to be eligible to receive Special Allowance Payments with
respect to any loans which were made or purchased with funds obtained by the
issuance of obligations, the income from which is exempt from taxation under the
Code (such as the Tax Exempt Series 1998-1 Notes), the Original Issuer may not
engage in any pattern or practice which results in a denial of a borrower's
access to loans under the Higher Education Act because of the borrower's race,
sex, color, religion, national origin, age, handicap status, income, attendance
at a particular eligible institution within the area served by the Original
Issuer, length of the borrower's educational program, or the borrower's academic
year in school.
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The Higher Education Act also provides that no special allowance may be
paid for such loans unless the Original Issuer submitted to the Governor of the
State a plan for doing business, for approval by the Governor after consultation
with EAC. Such plan is required to contain provisions designed to assure that:
(1) no eligible lender in the area served by the Original Issuer will
be excluded from participation in the program of the Original Issuer and
that all eligible lenders may participate in the program on the same terms
and conditions if eligible lenders are going to participate in the program;
(2) no director or staff member of the Original Issuer who receives
compensation from the Original Issuer may own stock in, or receive
compensation from any agency that would contract to service and collect the
loans of the Original Issuer;
(3) the Original Issuer will not purchase student loans from
participating lenders at a premium amounting to more than 1% of the unpaid
principal amount borrowed plus accrued interest to the date of acquisition,
but the Original Issuer may pay reasonable loan transfer fees;
(4) the Original Issuer will, within the limit of funds available and
subject to applicable State and federal law, make loans to, or purchase
loans incurred by, all eligible students who are residents of or who attend
an eligible institution within the area served by the Original Issuer;
(5) the Original Issuer has a plan under which it will pursue the
development of new lender participation in a continuing program of benefits
to students together with assurances of existing lender commitments to the
program; and
(6) there will be an annual audit of the Original Issuer by a
certified public accounting firm which will include review of compliance by
the Original Issuer with the provisions of the plan.
The Governor of the State has approved the Original Issuer's most recent
Plan for Doing Business. Because the Original Issuer expects to terminate its
participation in the Federal Family Education Loan Program, the Original Issuer
will no longer be capable of carrying out certain provisions of such plan for
doing business. The Original Issuer, SLFC, and the Corporation will each
covenant to comply with the provisions of such plan for doing business that
apply to their respective operations.
The Department of Education's regulations impose various sanctions on
holders of such loans for failure to comply with the plan for doing business and
such regulations, including, without limitation, withholding or seeking
reimbursement of Special Allowance Payments.
The Higher Education Act provides that if Special Allowance Payments or
interest subsidy payments have not been made within 30 days after the Secretary
of Education receives an accurate, timely and complete request therefor, the
special allowance payable to such holder shall be increased by an amount equal
to the daily interest accruing on the special allowance and interest subsidy
payments due the holder.
Special Allowance Payments and interest subsidy payments are reduced by the
amount which the lender is authorized or required to charge as an origination
fee, as described above under "Loan Terms -- Fees -- Origination Fee". In
addition, the amount of the lender origination fee described above under "Loan
Terms -- Fees -- Lender Origination Fees" is collected by offset to Special
Allowance Payments and interest subsidy payments.
Federal Student Loan Insurance Fund
The Higher Education Act authorizes the establishment of a Student Loan
Insurance Fund by the Federal government for making the federal insurance and
the federal reimbursement payments on defaulted student loans to Guarantee
Agencies. If moneys in the fund are insufficient to make the federal payments
on defaults of such
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loans, the Secretary of Education is authorized, to the extent provided in
advance by appropriation acts, to issue to the Secretary of the Treasury
obligations containing terms and conditions prescribed by the Secretary of
Education and approved by the Secretary of the Treasury, bearing interest at a
rate determined by the Secretary of the Treasury. The Secretary of the Treasury
is authorized and directed by the Higher Education Act to purchase such
obligations.
Direct Loans
The 1993 Amendments authorized a program of "direct loans", to be
originated by schools with funds provided by the Secretary of Education. Under
the direct loan program, the Secretary of Education is directed to enter into
agreements with schools, or origination agents in lieu of schools, to disburse
loans with funds provided by the Secretary. Participation in the program by
schools is voluntary. The goals set forth in the 1993 Amendments call for the
direct loan program to constitute 5% of the total volume of loans made under the
Federal Family Education Loan Program and the direct loan program for academic
year 1994-1995, 40% for academic year 1995-1996, 50% for academic years 1996-
1997 and 1997-1998 and 60% for academic year 1998-1999. No provision is made for
the size of the direct loan program thereafter. Based upon information released
by the General Accounting Office, participation by schools in the direct loan
program has not been sufficient to meet the goals for the 1995-1996 or 1996-1997
academic years.
The loan terms are generally the same under the direct loan program as
under the Federal Family Education Loan Program, though more flexible repayment
provisions are available under the direct loan program. At the discretion of the
Secretary of Education, students attending schools that participate in the
direct loan program (and their parents) may still be eligible for participation
in the Federal Family Education Loan Program, though no borrower could obtain
loans under both programs.
It is difficult to predict the impact of the direct lending program. There
is no way to accurately predict the number of schools that will participate in
future years, or, if the Secretary authorizes students attending participating
schools to continue to be eligible for Federal Family Education Loan Program
loans, how many students will seek loans under the direct loan program instead
of the Federal Family Education Loan Program. In addition, it is impossible to
predict whether future legislation will eliminate, limit or expand the direct
loan program or the Federal Family Education Loan Program.
DESCRIPTION OF THE GUARANTEE AGENCIES
General
The Indenture permits the Financing of Eligible Loans guaranteed by various
Guarantee Agencies. The Corporation expects that of the Eligible Loans to be
Financed on the Date of Issuance with the proceeds of the Series 1998-1 Notes,
approximately 60.2% will be guaranteed by Education Assistance Corporation
("EAC"), approximately 33.4% 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.
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The Corporation expects that the percentage of Financed Eligible Loans
guaranteed by EAC will increase over time, while the percentage guaranteed by
PHEAA will decrease. However, actual amounts guaranteed by these Guarantee
Agencies may vary from the Corporation's expectations. Proceeds of Additional
Notes issued on a parity basis under the Indenture, moreover, may be used to
finance Eligible Loans guaranteed by these or other Guarantee Agencies in
amounts unrelated to the expected amount of loans guaranteed by a particular
Guarantee Agency that is Financed with the proceeds of the Series 1998-1 Notes.
(Any Additional Notes will not be issued and sold under the Registration
Statement filed with respect to the Series 1998-1 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; however,
lenders are strongly encouraged not to file a claim until the loan is at least
210 days delinquent. The default claim package must include all information and
documentation required under the Federal Family Education Loan Program
regulations and the Guarantee Agency's policies and procedures. Under the
Guarantee Agencies' current procedures, assuming that the default claim package
complies with the Guarantee Agency's loan procedures manual or regulations, the
Guarantee Agency pays the lender for a default claim within 90 days of the
lender's filing the claim with the Guarantee Agency. The Guarantee Agency will
pay the lender interest accrued on the loan for up to 360 days after
delinquency. The Guarantee Agency must file a reimbursement claim with the
Department of Education within 45 days after the Guarantee Agency has paid the
lender for the default claim.
In general, a Guarantee Agency's Guarantee Fund has been funded principally
by administrative cost allowances paid by the Secretary of Education, guarantee
fees paid by lenders (the cost of which may be passed on to borrowers),
investment income on moneys in the Guarantee Fund, and a portion of the moneys
collected from borrowers on Guaranteed Loans that have been reimbursed by the
Secretary of Education to cover the Guarantee Agency's administrative expenses.
Various changes to the Higher Education Act have adversely affected the
receipt of revenues by the Guarantee Agencies and their ability to maintain
their Guarantee Funds at previous levels, and may adversely affect their ability
to meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the reduction and
possible elimination of administrative expense allowances from the Secretary of
Education; the reduction in supplemental preclaims assistance payments from the
Secretary of Education; and the reduction in retention by a Guarantee Agency of
collections on defaulted loans from 30% to 27%. Additionally, the adequacy of a
Guarantee Agency's Guarantee Fund to meet its guarantee obligations with respect
to existing student loans depends, in significant part, on its ability to
collect revenues generated by new loan guarantees. The Federal Direct Student
Loan Program may adversely affect the volume of new loan guarantees. 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
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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 made the determinations, and advised
the Guarantee Agencies, 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 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 (an "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
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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".
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 57 persons, plus part time help employed on a periodic basis.
From January 16, 1979 through September 30, 1997, EAC had guaranteed
approximately $1,170,594,000 principal amount of loans under the Higher
Education Act, of which EAC estimates that approximately $573,861,000 aggregate
unpaid principal amount was outstanding as of September 30, 1997. As of
September 30, 1997, EAC had total assets of approximately $17,294,000, total
liabilities of approximately $8,767,000, total deferred revenue of approximately
$5,382,000 and retained earnings of approximately $3,145,000. The Secretary of
Education has advised EAC that, pursuant to the 1997 Amendments, EAC must pay
$5,903,366 to the Secretary of Education on September 1, 2002 (and make annual
restricted account deposits toward such payment beginning
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in fiscal year 1998 of approximately $1,181,000). EAC's liabilities as of
September 30, 1997 include the entire amount ($5,903,666) that will be required
to be paid to the Secretary of Education under the 1997 Amendments. See
"General" above. 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
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, 1997,
EASCI provided services to 138 lenders for a portfolio of approximately
$226,625,000 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 2,200 employees. Its principal office is located in
Harrisburg, Pennsylvania, with six regional offices located throughout
Pennsylvania and additional offices located in California, West Virginia and
Delaware.
PHEAA's activities are subject to audit by the Commonwealth's Department of
the Auditor General, and PHEAA is required to make an annual report to the
Governor of the Commonwealth and the legislature showing its condition at the
end of the Commonwealth's fiscal year.
PHEAA will provide a copy of its most recent annual report upon receipt of
a written request directed to Pennsylvania Higher Education Assistance Agency,
1200 North 7th Street, Harrisburg, Pennsylvania 17102-1444, Attention: Timothy
A. Guenther, Senior Vice President and Chief Financial Officer.
The PHEAA Act created an educational loan assistance fund within the State
Treasury (the "Educational Loan Assistance Fund"). The PHEAA Act provides that
this fund is a continuing fund in which may be deposited moneys received from
repayments of principal on loans from the fund and payments of interest and
other fees and charges with respect to loans made pursuant to the PHEAA Act,
insurance premiums and charges assessed and collected by PHEAA on loans made
from the fund, appropriations made to the fund by the legislature, proceeds of
the sale of notes, bonds or other indebtedness to the extent and in the manner
provided by resolution of PHEAA's
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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, 1997, the Assistance Fund had total assets of approximately
$789 million, total liabilities of approximately $551 million, and retained
earnings of approximately $237 million. PHEAA estimates that the portion of its
retained earnings that would be treated as its Guarantee Fund under the Higher
Education Act would be approximately $196 million. The Secretary of Education
has advised PHEAA that, pursuant to the 1997 Amendments, PHEAA must pay $116.2
million to the Secretary of Education on September 1, 2002 (and make annual
restricted account deposits toward such payment beginning in fiscal year 1998 of
approximately $23.24 million). PHEAA's liabilities as of June 30, 1997 do not
include the amount that will be required to be paid to the Secretary of
Education under the 1997 Amendments. See "General" above. The PHEAA Bond Fund
had total assets of approximately $1.65 billion, total liabilities of
approximately $1.55 billion and retained earnings of approximately $52 million
as of June 30, 1997.
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.
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PHEAA began guaranteeing student loans in 1964. As of June 30, 1997, PHEAA
had guaranteed a total of approximately $20.0 billion principal amount of
student loans under the Higher Education Act. Of that amount, PHEAA estimates
that approximately $13.3 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 $49 million as of June 30, 1997.
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 June 30, 1997, under PHEAA's full-servicing program, it
serviced approximately 1,145,000 accounts with a principal balance of
approximately $11.3 billion for more than 320 customers; and under its remote
servicing operation, it serviced approximately 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 25% of servicing revenues for the 12 months ended June 30, 1997.
For the year then ended, one other customer accounted for approximately 17% of
servicing revenues. PHEAA's management expects gross servicing revenues to
continue to increase.
PHEAA's current servicing agreements have contractual terms at inception
ranging from three years to life of the loan. Under PHEAA's servicing
agreements, PHEAA generally has agreed to reimburse customers for any claims,
losses, liabilities or expenses which arise out of or relate to PHEAA's acts or
omissions with respect to services provided under such agreements where the
final determination of PHEAA's liability is established by an arbitrator, by a
court of law of competent jurisdiction, or by way of settlement. PHEAA must rely
on moneys in the Assistance Fund to cover expenditures necessary to meet its
contractual obligations under the servicing agreements, including any potential
liabilities. PHEAA has developed a new servicing system in consultation with the
consulting firm Deloitte & Touche, IBM and servicing clients. Conversion to the
new system began in the second quarter of 1995 and is ongoing.
PHEAA acts as an originator and secondary market for various types of
student loans, including loans it has guaranteed under the Higher Education Act,
loans insured by the United States Department of Health and Human Services under
the Health Education Assistance Loan Program, and loans which are insured by
PHEAA without any form of federal reinsurance. PHEAA has financed most of its
acquisitions and originations of student loans through the issuance of student
loan revenue bonds. PHEAA has, however, used moneys in the Assistance Fund to
finance student loans. As of June 30, 1997, the Assistance Fund contained the
following approximate outstanding principal amounts of student loans which are
not otherwise pledged to secure PHEAA's financings: $20.0 million of student
loans which are not insured or reinsured; $33.0 million of student loans
guaranteed by PHEAA under the Higher Education Act which are reinsured
(approximately $22.5 million of which were Consolidation Loans); and $5.6
million of health education assistance loans which are federally insured. Of
those amounts, $1.3 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
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<PAGE>
unavailable to meet PHEAA's guarantee obligations. As of such date,
approximately $154.4 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 $2.2 billion as of June 30, 1997. 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 6% 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 and FY94-FY96 Federal Student Loan Programs Data Book
(the "DOE Data Books"). Information for EAC and PHEAA relating to the federal
fiscal year ended September 30, 1997 was obtained from EAC and PHEAA,
respectively. 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. Such approximate amounts for EAC and PHEAA for the federal fiscal
year ended September 30, 1997 were $173.6 million and $2,208.6 million,
respectively.
<TABLE>
<CAPTION>
Stafford, Unsubsidized Stafford, SLS, PLUS and
Consolidated Loans Guaranteed*
Dollars in Millions
Federal
Fiscal
Year EAC PHEAA All Guarantors
------- ------- -------- --------------
<S> <C> <C> <C>
1992 $ 66.7 $1,410.4 $16,114.0
1993 85.7 1,857.1 19,356.6
1994 120.3 2,003.4 25,070.4
1995 142.8 2,221.5 24,213.0
1996 128.2 2,227.7 23,831.3
</TABLE>
- ----------
* The information set forth in the table above has been obtained from EAC,
PHEAA and, as to All Guarantors, the DOE Data Books.
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<PAGE>
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 of 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. 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 resulted in EAC's cumulative cash reserve being reduced by
this amount. EAC's cumulative cash reserves and reserve ratio as of September
30, 1997 were $12.8 million and 1.8%, and PHEAA's cumulative cash reserves and
reserve ratio as of September 30, 1997 were $189.3 million and 1.4%.
<TABLE>
<CAPTION>
EAC* PHEAA*
-------------------- --------------------- National
Cumulative Cumulative Average
Federal Cash Reserve Cash Reserve Reserve
Fiscal 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 1.6
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 Books (with respect to
fiscal years 1992, 1993, 1994 and 1995) and from the Department of
Education (with respect to fiscal year 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.
Cumulative Recovery Rates. A Guarantee Agency's cumulative recovery
rate is determined by dividing the cumulative aggregate amount recovered from
borrowers by such Guarantee Agency by the cumulative aggregate amount of default
claims paid by such Guarantee Agency as of the end of the applicable federal
fiscal year. The table below sets forth the cumulative recovery rates for EAC
and PHEAA and the national average cumulative recovery rates for all guarantors
as of the end of the five federal fiscal years 1992 through 1996. EAC's and
PHEAA's cumulative recovery rates for the federal fiscal year ended September
30, 1997 were 44.82% and 54.83%, respectively. The Original Issuer's management
does not believe that cumulative recovery rates provide an accurate indication
of a guarantor's financial health.
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<PAGE>
<TABLE>
<CAPTION>
Cumulative Recovery Rate*
Federal -------------------------------------
Fiscal Year EAC PHEAA National Average
------------- ------ ------ -----------------
<S> <C> <C> <C>
1992 29.86% 46.5% 35.09%
1993 34.94 48.2 37.97
1994 40.20 52.90 42.19
1995 41.26 53.29 47.36
1996 43.12 55.04 52.59
</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.
Loan Loss Reserve. The DOE Data Books do 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. EAC's and PHEAA's Claims Rates for the federal fiscal
year ended September 30, 1997 were 1.30% and 1.92%, respectively.
<TABLE>
<CAPTION>
Claims Rate*
Federal ----------------------------------
Fiscal Year EAC PHEAA National 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 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 1998-1 SENIOR NOTES
Generally
The Tax Exempt Auction Rate Series 1998-1 Senior Notes will be dated as of
the date of their initial issuance and, subject to call for redemption pursuant
to the provisions referred to below, will mature on June 1,
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<PAGE>
2020. The Tax Exempt Auction Rate Series 1998-1 Senior Notes will bear interest,
payable on each June 1 and December 1, commencing June 1, 1998, at rates
determined as described below under "Interest Rate on the Tax Exempt Auction
Rate Series 1998-1 Senior Notes". The Tax Exempt Auction Rate Series 1998-1
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 1998-1
Senior Notes. Individual purchases of the Tax Exempt Auction Rate Series 1998-1
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
1998-1 Senior Notes will not receive certificates representing their interest in
the Tax Exempt Auction Rate Series 1998-1 Senior Notes purchased. See
"Description of Series 1998-1 Notes - Book-Entry-Only System".
Interest Rate on the Tax Exempt Auction Rate Series 1998-1 Senior Notes
The Initial Interest Rate Adjustment Dates for the Tax Exempt Auction Rate
Series 1998-1 Senior Notes will be as follows:
<TABLE>
<CAPTION>
Initial Interest Rate
Series Adjustment Date
------- ---------------------
<S> <C>
1998-1A March 26, 1998
1998-1B April 2, 1998
1998-1C April 9, 1998
1998-1D April 16, 1998
1998-1E April 23, 1998
</TABLE>
During the Initial Interest Period, each series of the Tax Exempt Auction Rate
Series 1998-1 Senior Notes will bear interest at the Auction Rate Series 1998-1
Senior Note Initial Interest Rate for such series. Thereafter, the Tax Exempt
Auction Rate Series 1998-1 Senior Notes of each series will bear interest at an
Auction Rate Series 1998-1 Senior Note Interest Rate based on an Auction Period
generally consisting of 35 days, subject to adjustment as described in "Auction
of the Auction Rate Series 1998-1 Senior Notes -- Changes in Auction Terms --
Changes in Auction Period or Periods". In no event will the Auction Rate Series
1998-1 Senior Note Interest Rate exceed the applicable Auction Rate Series 1998-
1 Senior Note Interest Rate Limitation of 14% per annum.
For each series of the Tax Exempt Auction Rate Series 1998-1 Senior Notes
during the Initial Interest Period and each Auction Period thereafter, interest
at the Auction Rate Series 1998-1 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
1998-1 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 1998-1 Senior Note Interest Rate to be borne by
each series of the Tax Exempt Auction Rate Series 1998-1 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 Thursday following the
expiration of the immediately preceding Auction Period and terminate on and
include the Wednesday immediately preceding the Thursday 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 1998-1 Senior Notes, such Auction Period will commence on the Initial
Interest Rate Adjustment Date for such series. The Auction Rate Series 1998-1
Senior Note Interest Rate on each series of the Tax Exempt Auction Rate Series
1998-1 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 1998-1 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 1998-1 Senior Notes for any reason,
then the Auction Rate Series 1998-1 Senior Note Interest Rate on such series for
the next succeeding Auction Period will be the Maximum Auction Rate.
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<PAGE>
Notwithstanding the foregoing:
(A) if the ownership of a series of Tax Exempt Auction Rate Series
1998-1 Senior Notes is no longer maintained in book-entry form, the Auction
Rate Series 1998-1 Senior Note Interest Rate on the Tax Exempt Auction Rate
Series 1998-1 Senior Notes of such series for any Interest Period
commencing after the delivery of certificates representing the Tax Exempt
Auction Rate Series 1998-1 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 1998-1 Senior Notes, the Auction Rate Series
1998-1 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 1998-1 Senior Note Interest Rate (unless
the Auction Rate Series 1998-1 Senior Note Interest Rate is the Non-Payment
Rate) applicable to each series of the Tax Exempt Auction Rate Series 1998-1
Senior Notes. The Trustee is to notify the Holders of Tax Exempt Auction Rate
Series 1998-1 Senior Notes of the Auction Rate Series 1998-1 Senior Note
Interest Rate applicable to each such series of Tax Exempt Auction Rate Series
1998-1 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 1998-1 Senior Note Interest Rate with respect
to a series of Tax Exempt Auction Rate Series 1998-1 Senior Notes, or if, for
any reason, such manner of determination is held to be invalid or unenforceable,
the Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes exceed the amount
permitted by applicable law. If the applicable law is ever judicially
interpreted so as to render usurious any amount called for under the Tax Exempt
Auction Rate Series 1998-1 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 1998-1 Senior Notes of such series, or
if the call for redemption or acceleration of the maturity of the Tax Exempt
Auction Rate Series 1998-1 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
1998-1 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 1998-1 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 1998-1 Senior Notes of such series shall be
credited on the principal balance of the Tax Exempt Auction Rate Series 1998-1
Senior Notes of such series (or, if the Tax Exempt Auction Rate Series 1998-1
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 1998-1 Senior Notes of such series and related documents shall
automatically
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<PAGE>
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
1998-1 Senior Notes of such series and under the related documents.
Call for Redemption of Tax Exempt Auction Rate Series 1998-1 Senior Notes
The Tax Exempt Auction Rate Series 1998-1 Senior Notes will be subject
to call for redemption as described in this Prospectus under the captions
"Description of Series 1991-1 Notes -- Special Call for Redemption" and
"-- Optional Call for Redemption."
TERMS OF THE TAX EXEMPT FIXED RATE
SERIES 1998-1 SENIOR NOTES
The Tax Exempt Fixed Rate Series 1998-1 Senior Notes will be dated as of
February 1, 1998 and, subject to call for redemption pursuant to the 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 $14,270,000 ____%
June 1, 2020 9,785,000 ____
</TABLE>
Interest on the Tax Exempt Series 1998-1 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 June 1, 1998. The Tax Exempt Series 1998-1 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 1998-1 Senior
Notes. Individual purchases of the Tax Exempt Series 1998-1 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 1998-1 Senior Notes will not
receive certificates representing their interest in the Tax-Exempt Series 1998-1
Senior Notes purchased. See "Description of the Series 1998-1 Notes - Book-
Entry-Only System."
The Tax Exempt Fixed Rate Series 1998-1 Senior Notes will be subject
to call for redemption as described in this Prospectus under the captions
"Description of the Series 1998-1 Notes -- Special Call for Redemption" and
"-- Optional Call for Redemption."
TERMS OF THE TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTES
Generally
The Taxable Auction Rate Series 1998-1 Senior Notes will be dated as of the
date of their initial issuance and, subject to the tender provisions set forth
below and to call for redemption pursuant to the provisions referred to below,
will mature on June 1, 2020. The Taxable Auction Rate Series 1998-1 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 1998-1 Senior Notes." The Taxable
Auction Rate Series 1998-1 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 1998-1 Senior Notes. Individual purchases of the Taxable
Auction Rate Series 1998-1 Senior Notes will be made in book-entry form only in
the principal amount of $100,000 or multiples thereof. Purchasers of the
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<PAGE>
Taxable Auction Rate Series 1998-1 Senior Notes will not receive certificates
representing their interest in the Taxable Auction Rate Series 1998-1 Senior
Notes purchased. See "Description of Series 1998-1 Notes - Book-Entry-Only
System".
Interest Rate on the Taxable Auction Rate Series 1998-1 Senior Notes
The Initial Interest Rate Adjustment Date for the Taxable Auction Rate
Series 1998-1 Senior Notes will be as follows:
Initial Interest Rate
Series Adjustment Date
- --------- ---------------------
1998-1G March 24, 1998
1998-1H March 31, 1998
During the Initial Interest Period, each series of the Taxable Auction Rate
Series 1998-1 Senior Notes will bear interest at the Auction Rate Series 1998-1
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 1998-1 Senior Notes", the Taxable Auction Rate Series 1998-1 Senior
Notes will bear interest at an Auction Rate Series 1998-1 Senior Note Interest
Rate based on an Auction Period generally consisting of 28 days, subject to
adjustment as described in "Auction of the Auction Rate Series 1998-1 Senior
Notes -- Changes in Auction Terms -- Changes in Auction Period or Periods". In
no event will the Series 1998-1 Senior Note Interest Rate exceed the applicable
Auction Rate Series 1998-1 Senior Note Interest Rate Limitation of 18% per
annum.
Interest on each series of the Taxable Auction Rate Series 1998-1 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 1998-1 Senior Notes
during the Initial Interest Period and each Auction Period thereafter, interest
at the Auction Rate Series 1998-1 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 1998-1 Senior Note Interest Rate to be borne by
each series of the Taxable Auction Rate Series 1998-1 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 first day following the
expiration of the immediately preceding Auction Period and terminate on and
include the day immediately preceding the second Business Day 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 1998-1 Senior Notes, such Auction Period will commence on
the Initial Interest Rate Adjustment Date for such series. The Auction Rate
Series 1998-1 Senior Note Interest Rate on each series of the Taxable Auction
Rate Series 1998-1 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 1998-1
Senior Notes"; provided that if, on any Interest Rate Determination Date, an
Auction is not held with respect to a series of the Taxable Auction Rate Series
1998-1 Senior Notes for any reason, then the Auction Rate Series 1998-1 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 1998-1 Senior
Note Interest Rate Limitation of 18%).
Notwithstanding the foregoing:
(A) if the ownership of a series of the Taxable Auction Rate Series
1998-1 Senior Notes is no longer maintained in book-entry form, the Auction
Rate Series 1998-1 Senior Note Interest Rate on the Taxable Auction Rate
Series 1998-1 Senior Notes of such series for any Interest Period
commencing after
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<PAGE>
the delivery of certificates representing the Taxable Auction Rate Series
1998-1 Senior Notes of such series will equal the lesser of (i) the Maximum
Auction Rate and (ii) the Net Loan Rate; or
(B) if a Payment Default has occurred with respect to a series of the
Taxable Auction Rate Series 1998-1 Senior Notes, the Auction Rate Series
1998-1 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 1998-1 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 1998-1 Senior Note Interest Rate (unless
the Auction Rate Series 1998-1 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 1998-1 Senior Note Interest Rate,
applicable to each series of the Taxable Auction Rate Series 1998-1 Senior
Notes. The Trustee is to notify the Holders of Taxable Auction Rate Series
1998-1 Senior Notes of the Auction Rate Series 1998-1 Senior Note Interest Rate
applicable to each such series of Taxable Auction Rate Series 1998-1 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 1998-1 Senior Note Interest Rate with respect
to a series of Taxable Auction Rate Series 1998-1 Senior Notes, or, if for any
reason, such manner of determination is held to be invalid or unenforceable, the
Auction Rate Series 1998-1 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 1998-1 Senior Notes) will be the Net Loan Rate for
such next succeeding Auction Period. The Net Loan Rate with respect to each
Interest Period commencing in a given month shall be determined by or on behalf
of the Corporation and written notice thereof given to the Auction Agent at the
time the Monthly Servicing Report for the second preceding month is distributed.
If the Corporation fails or refuses to determine such Net Loan Rate, the Net
Loan Rate for any such Interest Period shall be the most recently determined Net
Loan Rate.
Carry-Over Amounts on the Taxable Auction Rate Series 1998-1 Senior Notes
If the Auction Rate for a series of the Taxable Auction Rate Series 1998-1
Senior Notes is greater than the Net Loan Rate, then the Auction Rate Series
1998-1 Senior Note Interest Rate applicable to such series for that Interest
Period will be the Net Loan Rate. If the Auction Rate Series 1998-1 Senior Note
Interest Rate for a series of Taxable Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1 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
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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 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior
Note), (i) the Carry-Over Amount (and interest accrued thereon) shall be paid by
the Trustee on such Taxable Auction Rate Series 1998-1 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 1998-1 Senior Notes shall be paid by the Trustee on
Outstanding Taxable Auction Rate Series 1998-1 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 1998-1 Senior Note which is unpaid as of an Interest
Payment Date, which Taxable Auction Rate Series 1998-1 Senior Note is to be
called for redemption 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 1998-1 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 Auction Rate Series 1998-1 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 1998-1 Senior Note of the Carry-Over Amount remaining unpaid on such
Taxable Auction Rate Series 1998-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount for a series of
the Taxable Auction Rate Series 1998-1 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 1998-1 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 1998-1 SENIOR NOTE NOT PAYABLE ON ANY REDEMPTION
DATE WITH RESPECT TO SUCH TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTE WILL BE
FORFEITED UPON THE REDEMPTION (WHETHER PURSUANT TO
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OPTIONAL CALL FOR REDEMPTION OR SPECIAL CALL FOR REDEMPTION) OR AT MATURITY OF
SUCH TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTE, OR ON SUCH EARLIER INTEREST
PAYMENT DATE, IF ANY, ON WHICH SUCH TAXABLE AUCTION RATE SERIES 1998-1 SENIOR
NOTE CEASES TO BE OUTSTANDING UNDER THE FIRST SUPPLEMENTAL INDENTURE. FITCH'S
RATING ON THE TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTES WILL NOT APPLY TO
ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE TAXABLE AUCTION RATE SERIES 1998-1
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 1998-1 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 1998-1 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 1998-1 Senior Notes of such series, or if
the call for redemption or acceleration of the maturity of the Taxable Auction
Rate Series 1998-1 Senior Notes of such series results in payment to or receipt
by the Holder or any former Holder of the Taxable Auction Rate Series 1998-1
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 1998-1 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 1998-1 Senior Notes of such series shall be credited on the
principal balance of the Taxable Auction Rate Series 1998-1 Senior Notes of such
series (or, if the Taxable Auction Rate Series 1998-1 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 1998-1
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 1998-1 Senior
Notes of such series and under the related documents.
Call for Redemption of the Taxable Auction Rate Series 1998-1 Senior Notes
The Taxable Auction Rate Series 1998-1 Senior Notes will be subject to call
for redemption as described in this Prospectus under the captions "Description
of Series 1998-1 Notes -- Special Call for Redemption" and "--Optional Call for
Redemption."
TERMS OF THE TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTES
Generally
The Taxable LIBOR Rate Series 1998-1 Senior Notes will be dated as of the
date of their initial issuance and, subject to call for redemption and
prepayment pursuant to the provisions referred below, will mature on the dates
set forth in the table below:
Notes Date
- ---------------------- ------------
Series 1998-1I Notes June 1, 2002
Series 1998-1J Notes June 1, 2020
The Taxable LIBOR Rate Series 1998-1 Senior Notes will bear interest, payable on
the first Business Day of each month, commencing March 2, 1998, at rates
determined as described below under "Interest Rate on the Taxable
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LIBOR Rate Series 1998-1 Senior Notes." The Taxable Series 1998-1 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 1998-1
Senior Notes. Individual purchases of the Taxable LIBOR Rate Series 1998-1
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 1998-1
Senior Notes will not receive certificates representing their interest in the
Taxable LIBOR Rate Series 1998-1 Senior Notes purchased. See "Description of
the Series 1998-1 Notes - Book-Entry-Only System."
Interest Rate on the Taxable LIBOR Rate Series 1998-1 Senior Notes
During the Initial Interest Period for the Taxable LIBOR Rate Series 1998-1
Senior Notes, being the period from the date of delivery through March 1, 1998,
the Taxable LIBOR Rate Series 1998-1 Senior Notes of each series will bear
interest at the Initial Interest Rate for such series. The Taxable LIBOR Rate
Series 1998-1 Senior Note Interest Rate for each Interest Period after the
Initial Interest Period will be the Taxable LIBOR Rate Series 1998-1 Senior Note
LIBOR-Based Rate based upon One-Month LIBOR plus the Taxable LIBOR Rate Series
1998-1 Senior Note Spread, determined and subject to certain limitations as
hereinafter described.
Interest on the Taxable LIBOR Rate Series 1998-1 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
Business Day of each calendar month, commencing March 2, 1998) prior to the
maturity thereof and at the maturity thereof. The interest payable on each
Interest Payment Date for the Taxable LIBOR Rate Series 1998-1 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 Business 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
1998-1 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 1998-1 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
1998-1 Senior Note Spread of ___% per annum (in the case of the Series 1998-1I
Notes or ___% per annum (in the case of the Series 1998-1J Notes), as the case
may be (which is herein referred to as the "Taxable LIBOR Rate Series 1998-1
Senior Note LIBOR-Based Rate"), and (ii) the Net Loan Rate determined with
respect to such Interest Period. 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 Period
shall be determined by or on behalf of the Corporation and written notice
thereof given to the Trustee together with the Monthly Servicing Report for the
second preceding calendar month. See "Carry-Over Amounts on the Taxable LIBOR
Rate Series 1998-1 Senior Notes" below.
In the event that the Trustee no longer determines, or fails to determine,
when required, the Taxable LIBOR Rate Series 1998-1 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 1998-1 Senior Note LIBOR-Based Rate for the related
Interest Period shall be the Net Loan Rate as determined with respect to such
Interest Period. If the Corporation shall fail or refuse to determine such Net
Loan Rate, the Net Loan Rate for such Interest Period shall be the most recently
determined Net Loan Rate.
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Carry-Over Amounts on the Taxable LIBOR Rate Series 1998-1 Senior Notes
If the Taxable LIBOR Rate Series 1998-1 Senior Note LIBOR-Based Rate
determined with respect to a given Interest Period is greater than the Net Loan
Rate, then the Taxable LIBOR Rate Series 1998-1 Senior Note Interest Rate for
such Interest Period will be the Net Loan Rate. If the Taxable LIBOR Rate
Series 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Note), (i) the Carry-
Over Amount (and interest accrued thereon) shall be paid by the Trustee on such
Taxable LIBOR Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes shall be paid by the Trustee on Outstanding
Taxable LIBOR Rate Series 1998-1 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 Rate Series 1998-1 Senior Note which is unpaid as
of an Interest Payment Date, which Taxable LIBOR Rate Series 1998-1 Senior Note
is to be called for redemption 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 1998-1 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
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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 1998-1 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 1998-1 Senior Note of the Carry-Over Amount remaining unpaid
on such Taxable LIBOR Rate Series 1998-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount (or any interest
accrued thereon) for the Taxable LIBOR Rate Series 1998-1 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 1998-1 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 1998-1 SENIOR NOTE NOT PAYABLE ON ANY REDEMPTION DATE WITH RESPECT
TO SUCH TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTE WILL BE FORFEITED UPON THE
REDEMPTION OR AT MATURITY OF SUCH TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTE,
OR ON SUCH EARLIER INTEREST PAYMENT DATE, IF ANY, ON WHICH SUCH TAXABLE LIBOR
RATE SERIES 1998-1 SENIOR NOTE CEASES TO BE OUTSTANDING UNDER THE FIRST
SUPPLEMENTAL INDENTURE. FITCH'S RATING ON THE TAXABLE LIBOR RATE SERIES 1998-1
SENIOR NOTES WILL NOT APPLY TO ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE
TAXABLE LIBOR RATE SERIES 1998-1 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 1998-1 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 1998-1
Senior Notes or related documents or otherwise contracted for, charged,
reserved, taken or received in connection with the Taxable LIBOR Rate Series
1998-1 Senior Notes, or if the call for redemption or acceleration of the
maturity of the Taxable LIBOR Rate Series 1998-1 Senior Notes results in payment
to or receipt by the Holder or any former Holder of the Taxable LIBOR Rate
Series 1998-1 Senior Notes of any interest in excess of that permitted by
applicable law, then, notwithstanding any provision of the Taxable LIBOR Rate
Series 1998-1 Senior Notes or related documents to the contrary, all excess
amounts theretofore paid or received with respect to the Taxable LIBOR Rate
Series 1998-1 Senior Notes shall be credited on the principal balance of the
Taxable LIBOR Rate Series 1998-1 Senior Notes (or, if the Taxable LIBOR Rate
Series 1998-1 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 1998-1 Senior Notes and related documents shall automatically and
immediately be deemed reformed and the amounts thereafter collectible thereunder
reduced, without the necessity of the execution of any new document, so as to
comply with the applicable law, but so as to permit the recovery of the fullest
amount otherwise called for under the Taxable LIBOR Rate Series 1998-1 Senior
Notes and under the related documents.
Call for Redemption and Prepayment of Taxable Taxable LIBOR Rate Series 1998-1
Senior Notes
The Taxable Taxable LIBOR Rate Series 1998-1 Senior Notes will be subject
to call for redemption and prepayment as described in this Prospectus under the
caption "Description of Series 1998-1 Notes -- Prepayment of Taxable LIBOR Rate
Series 1998-1 Notes" and "-- Special Call for Redemption -- Call for Redemption
of Series 1998-1 Notes Upon Reduction of Portfolio Balance."
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TERMS OF THE TAX EXEMPT FIXED RATE SERIES 1998-1 SUBORDINATE NOTES
The Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes will be
dated as of February 1, 1998 and, subject to call for redemption pursuant to
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 1998-1 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 June 1, 1998.
The Tax Exempt Fixed Rate Series 1998-1 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 1998-1 Subordinate Notes.
Individual purchases of the Tax Exempt Series 1998-1 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 1998-1 Subordinate Notes will not
receive certificates representing their interest in the Tax-Exempt Series 1998-1
Subordinate Notes purchased. See "Description of the Series 1998-1 Notes --
Book-Entry-Only System."
The Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes will be
subject to call for redemption as described in this Prospectus under the
captions "Description of the Series 1998-1 Notes -- Special Call for Redemption"
and "-- Optional Call for Redemption."
TERMS OF THE TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE NOTES
Generally
The Taxable LIBOR Rate Series 1998-1 Subordinate Notes will be dated
as of the date of their initial issuance and, subject to call for redemption and
prepayment pursuant to the provisions referred below, will mature on June 1,
2020. The Taxable LIBOR Rate Series 1998-1 Subordinate Notes will bear
interest, payable on the first Business Day of each month, commencing March 2,
1998, at rates determined as described below under "Interest Rate on the Taxable
LIBOR Rate Series 1998-1 Subordinate Notes." The Taxable Series 1998-1
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 1998-1 Subordinate Notes. Individual purchases of the Taxable LIBOR
Rate Series 1998-1 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 1998-1 Subordinate Notes will not receive certificates
representing their interest in the Taxable LIBOR Rate Series 1998-1 Subordinate
Notes purchased. See "Description of the Series 1998-1 Notes - Book-Entry-Only
System."
Interest Rate on the Taxable LIBOR Rate Series 1998-1 Subordinate Notes
During the Initial Interest Period for the Taxable LIBOR Rate Series
1998-1 Subordinate Notes, being the period from the date of delivery through
March 1, 1998, the Taxable LIBOR Rate Series 1998-1 Subordinate Notes will bear
interest at the Initial Interest Rate for such series. The Taxable LIBOR Rate
Series 1998-1 Subordinate Note Interest Rate for each Interest Period after the
Initial Interest Period for the Taxable LIBOR Rate Series 1998-1 Subordinate
Notes will be the Taxable LIBOR Rate Series 1998-1 Subordinate Note LIBOR-Based
Rate based upon One-Month LIBOR plus the Taxable LIBOR Rate Series 1998-1
Subordinate Note Spread, determined and subject to certain limitations as
hereinafter described.
Interest on the Taxable LIBOR Rate Series 1998-1 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 Business Day of each calendar month, commencing March 2, 1998) prior
to the maturity thereof and at the maturity thereof. The interest payable on
each Interest Payment Date for the Taxable LIBOR Rate Series 1998-1 Subordinate
Notes shall
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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 Business 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 1998-1 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 1998-1
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 1998-1
Subordinate Note Spread of ____% per annum (which is herein referred to as the
"Taxable LIBOR Rate Series 1998-1 Subordinate Note LIBOR-Based Rate"), and (ii)
the Net Loan Rate determined with respect to such Interest Period. 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 Period shall be determined by or on behalf of the
Corporation and written notice thereof given to the Trustee together with the
Monthly Servicing Report for the second preceding calendar month. See "Carry-
Over Amounts on the Taxable LIBOR Rate Series 1998-1 Subordinate Notes" below.
In the event that the Trustee no longer determines, or fails to
determine, when required, the Taxable LIBOR Rate Series 1998-1 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 1998-1 Subordinate Note LIBOR-Based
Rate for the related Interest Period shall be the Net Loan Rate as determined
with respect to such Interest Period. If the Corporation shall fail or refuse
to determine such Net Loan Rate, the Net Loan Rate for such Interest Period
shall be the most recently determined Net Loan Rate.
Carry-Over Amounts on the Taxable LIBOR Rate Series 1998-1 Subordinate Notes
If the Taxable LIBOR Rate Series 1998-1 Subordinate Notes LIBOR-Based
Rate determined with respect to a given Interest Period is greater than the Net
Loan Rate, then the Taxable LIBOR Rate Series 1998-1 Subordinate Note Interest
Rate for such Interest Period will be the Net Loan Rate. If the Taxable LIBOR
Rate Series 1998-1 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 1998-1 Subordinate Notes for such
Interest Period. Each such Carry-Over Amount shall bear interest calculated at
a rate equal to the Taxable LIBOR Rate Series 1998-1 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 1998-1 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 1998-1
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 1998-1
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
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Taxable LIBOR Rate Series 1998-1 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 1998-1 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 1998-1 Subordinate Note), (i) the
Carry-Over Amount (and interest accrued thereon) shall be paid by the Trustee on
such Taxable LIBOR Rate Series 1998-1 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 1998-1 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 1998-1 Subordinate Notes shall be paid by the Trustee on
Outstanding Taxable LIBOR Rate Series 1998-1 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 1998-1
Subordinate Note which is unpaid as of an Interest Payment Date, which Taxable
LIBOR Rate Series 1998-1 Subordinate Note is to be called for redemption 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 1998-1 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 1998-1 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 1998-1 Subordinate Note of the
Carry-Over Amount remaining unpaid on such Taxable LIBOR Rate Series 1998-1
Subordinate Note.
The Interest Payment Date on which any Carry-Over Amount (or any
interest accrued thereon) for the Taxable LIBOR Rate Series 1998-1 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 1998-1 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 1998-1 SUBORDINATE NOTE NOT PAYABLE ON ANY
REDEMPTION DATE WITH RESPECT TO SUCH TAXABLE LIBOR RATE SERIES 1998-1
SUBORDINATE NOTE WILL BE FORFEITED UPON THE REDEMPTION OR AT MATURITY OF SUCH
TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE NOTE, OR ON SUCH EARLIER INTEREST
PAYMENT DATE, IF ANY, ON WHICH SUCH TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE
NOTE CEASES TO BE OUTSTANDING UNDER THE FIRST SUPPLEMENTAL INDENTURE. FITCH'S
RATING ON THE TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE NOTES WILL NOT APPLY
TO ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE TAXABLE LIBOR RATE SERIES 1998-1
SUBORDINATE NOTES.
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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 1998-1 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 1998-1 Subordinate Notes or related documents or otherwise
contracted for, charged, reserved, taken or received in connection with the
Taxable LIBOR Rate Series 1998-1 Subordinate Notes, or if the call for
redemption or acceleration of the maturity of the Taxable LIBOR Rate Series
1998-1 Subordinate Notes results in payment to or receipt by the Holder or any
former Holder of the Taxable LIBOR Rate Series 1998-1 Subordinate Notes of any
interest in excess of that permitted by applicable law, then, notwithstanding
any provision of the Taxable LIBOR Rate Series 1998-1 Subordinate Notes or
related documents to the contrary, all excess amounts theretofore paid or
received with respect to the Taxable LIBOR Rate Series 1998-1 Subordinate Notes
shall be credited on the principal balance of the Taxable LIBOR Rate Series
1998-1 Subordinate Notes (or, if the Taxable LIBOR Rate Series 1998-1
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
1998-1 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 1998-1
Subordinate Notes and under the related documents.
Call for Redemption and Prepayment of the Taxable LIBOR Rate Series 1998-1
Subordinate Notes
The Taxable LIBOR Rate Series 1998-1 Subordinate Notes will be subject
to call for redemption and prepayment as described in this Prospectus under the
caption "Description of Series 1998-1 Notes -- Prepayment of Taxable LIBOR Rate
Series 1998-1 Notes" and "-- Special Call for Redemption -- Call for Redemption
of Series 1998-1 Notes Upon Reduction of Portfolio Balance."
WEIGHTED AVERAGE LIFE OF THE
TAXABLE LIBOR RATE SERIES 1998-1 NOTES
The following information is given solely to illustrate the effect of
prepayments on the Financed Student Loans held in the Series 1998-1 Taxable
Acquisition Account on the weighted average life of the Taxable LIBOR Rate
Series 1998-1 Notes under the assumptions stated below and is not a prediction
of the prepayment rate that might actually be experienced by the Financed
Student Loans held in the Series 1998-1 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 1998-1 Notes will be primarily a function of the rate at which
payments are made on the Financed Student Loans held in the Series 1998-1
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
1998-1 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 1998-1 Taxable Acquisition Account are received in
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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 1998-1 Taxable Acquisition Account is
$500,870,000; (iii) payments are made on the Taxable LIBOR Rate Series 1998-1
Notes on the 1st day of each month commencing March 1, 1998; and (iv) the
Taxable LIBOR Rate Series 1998-1 Notes are issued on February 19, 1998. No
representation is made that these assumptions will be correct, including the
assumption that the Financed Student Loans held in the Series 1998-1 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 1998-1 Notes Which are
Prepaid or Called for Redemption Due to Accelerated Payments with respect to
Financed Student Loans May Have to Reinvest Amounts Received From Prepayments or
Calls for Redemption at a Lower Rate of Return," and "-- The Average Life of the
Series 1998-1 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 1998-1 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 1998-1 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 1998-1I Notes....... 2.09 1.75 1.58 1.44 1.26
Senior Series 1998-1J Notes....... 7.14 6.34 5.88 5.48 4.93
Subordinate Series 1998-1L Notes.. 4.94 4.34 4.01 3.72 3.34
</TABLE>
AUCTION OF THE AUCTION RATE SERIES 1998-1 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 1998-1 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 1998-1 Senior Notes.
Immediately following this summary is a more detailed description of these
procedures. Prospective investors in the Auction Rate Series 1998-1 Senior
Notes should read carefully the following summary, along with the more detailed
description.
The interest rate on each series of Auction Rate Series 1998-1 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 1998-1 Senior Notes, or 35 days, in the case of Tax Exempt Auction Rate
Series 1998-1 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 1998-1 Senior
Notes such investors wish
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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 1998-1
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 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Notes) is willing to accept in order to buy
a specified principal amount of Auction Rate Series 1998-1 Senior
Notes.
If an existing investor does not submit orders with respect to all its
Auction Rate Series 1998-1 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 1998-1 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
1998-1 Senior Notes.
<TABLE>
<CAPTION>
(a) Assumptions:
<S> <C> <C>
1. Denominations (Units) = $100,000
2. Interest Period = 28 days
3. Principal Amount Outstanding = $50 Million (500 Units)
</TABLE>
(b) Summary of All Orders Received for the Auction
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<PAGE>
<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 1998-1 Senior Notes, the Maximum
Auction Rate, or (ii) in the case of the Taxable Auction Rate Series 1998-1
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 1998-1 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 1998-1 Senior Notes,
the Maximum Auction Rate, or (ii) in the case of the Taxable Auction Rate Series
1998-1 Senior Notes, the lesser of the Net Loan Rate and the Maximum Auction
Rate. Also, if all the Auction Rate Series 1998-1 Senior
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Notes are subject to Hold Orders (i.e., each Holder of Auction Rate Series 1998-
1 Senior Notes wishes to continue holding its Auction Rate Series 1998-1 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
1998-1 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 1998-1 Senior
Notes, the least of the Maximum Auction Rate, the Net Loan Rate and the All Hold
Rate.
Neither the Original Issuer nor the Corporation will be involved in
directing the Auction Agent in conducting an Auction.
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 1998-1 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 1998-1 Senior Notes (or, in the case of an Existing Holder,
an additional principal amount of the Auction Rate Series 1998-1 Senior Notes).
See "Broker-Dealer" below.
By purchasing the Auction Rate Series 1998-1 Senior Notes, whether in an
Auction or otherwise, each prospective purchaser of the Auction Rate Series
1998-1 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 1998-1 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 1998-1 Senior Notes is maintained in Book-Entry Form, to
sell, transfer or otherwise dispose of the Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Notes specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Auction Rate Series 1998-1 Senior Note Interest Rate, determined as described
herein.
The principal amount of the Auction Rate Series 1998-1 Senior Notes
purchased or sold may be subject to proration procedures on the Auction Date.
Each purchase or sale of the Auction Rate Series 1998-1 Senior Notes on the
Auction Date will be made for settlement on the first day of the Interest Period
immediately following such Auction Date at a price equal to 100% of the
principal amount thereof plus, unless such day is an Interest Payment Date,
accrued interest thereon to but not including such day. The Auction Agent is
entitled to rely upon the terms of any Order submitted to it by a Broker-Dealer.
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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 1998-1 Senior
Notes. The Trustee and the Corporation will enter into the initial Auction
Agent Agreement relating to Tax Exempt Auction Rate Series 1998-1 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 1998-1 Senior Notes. The Trustee and the
Corporation will enter into the initial Auction Agent Agreement relating to
Taxable Auction Rate Series 1998-1 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
1998-1 Senior Notes of all series then Outstanding, and, if by such Holders, by
an instrument signed by such Holders or their attorneys and filed with the
Auction Agent, the Corporation and the Trustee upon at least 90 days' notice.
Neither resignation nor removal of the Auction Agent pursuant to the preceding
two sentences shall be effective unless and until a substitute Auction Agent has
been appointed and has accepted such appointment. If required by the
Corporation, a substitute Auction Agent Agreement shall be entered into with a
substitute Auction Agent. Notwithstanding the foregoing, the Auction Agent may
terminate the Auction Agent Agreement if, within 25 days after notifying the
Trustee and the Corporation in writing that it has not received payment of any
Auction Agent fee due it in accordance with the terms of the Auction Agent
Agreement, the Auction Agent does not receive such payment.
If the Auction Agent shall resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of an
Authorized Officer of the Corporation, shall use its best efforts to appoint a
substitute Auction Agent.
The Auction Agent is acting as agent for the Corporation in connection with
Auctions. In the absence of bad faith, negligent failure to act or negligence
on its part, the Auction Agent shall not be liable for any action taken,
suffered or omitted or any error of judgment made by it in the performance of
its duties under the Auction Agent Agreement and shall not be liable for any
error of judgment made in good faith unless the Auction Agent shall have been
negligent in ascertaining (or failing to ascertain) the pertinent facts.
The Corporation will pay the Auction Agent the Auction Agent fee on each
Interest Payment Date and will reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of the Auction Agent Agreement or
the Broker-Dealer Agreements (including the reasonable compensation and the
expenses and disbursements of its agents and counsel). Such amounts are payable
from the Administration Fund. The Corporation will indemnify and hold harmless
the Auction Agent for and against any loss, liability or expense incurred
without negligence or bad faith on the Auction Agent's part, arising out of or
in connection with the acceptance or administration of its agency under the
Auction Agent Agreement and the Broker-Dealer Agreements, including the
reasonable costs and expenses (including the reasonable fees and expenses of its
counsel) of defending itself against any such claim or liability in connection
with its exercise or performance of any of its respective duties thereunder and
of enforcing this indemnification provision; provided that the Corporation will
not indemnify the Auction Agent as described in this paragraph for any fees and
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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 1998-1 Senior Notes and the Taxable
Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes will be held on
each Auction Date, except as described under Appendices Terms of the Tax Exempt
Auction Rate Series 1998-1 Senior Notes -- Interest Rate on the Tax Exempt
Auction Rate Series 1998-1 Senior Notes" and "Terms of the Taxable Auction Rate
Series 1998-1 Senior Notes -- Interest Rate on the Taxable Auction Rate Series
1998-1 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 1998-1 Senior Notes. "Auction Date" means,
initially, with respect to the Series 1998-1A Notes, March 25, 1998, with
respect to the Series 1998-1B Notes, April 1, 1998, with respect to the Series
1998-1C Notes, April 8, 1998, with respect to the Series 1998-1D Notes, April
15, 1998, with respect to the Series 1998-1E Notes, April 22, 1998, with respect
to the Series 1998-1G Notes, March 23, 1998, and with respect to the Series
1998-1H Notes, March 30, 1998, and, thereafter, with respect to each such series
of Auction Rate Series 1998-1 Senior Notes, the Business Day immediately
preceding the first day of each related Auction Period, other than: (i) any
Interest Period commencing after the ownership of such series is no longer
maintained in Book-Entry Form; (ii) any Interest Period commencing after the
occurrence and during the continuance of a Payment Default; or (iii) any Auction
Period commencing less than two Business Days after the cure of a Payment
Default. Notwithstanding the foregoing, the Auction Date for one or more
Auction Periods may be changed as described below under "Changes in Auction
Terms".
The Auction Agent will calculate the Maximum Auction Rate and the All Hold
Rate on each Auction Date. The Corporation (or the Servicer on behalf of the
Corporation) will calculate the Net Loan Rate monthly. If the ownership of the
Auction Rate Series 1998-1 Senior Notes is no longer maintained in Book-Entry
Form, the Trustee will calculate the Maximum Auction Rate on the Business Day
immediately preceding the first day of each Interest Period commencing after
delivery of the Auction Rate Series 1998-1 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
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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 1998-1 Senior
Notes, the One-Month LIBOR or the Three-Month LIBOR, as applicable, and (ii)
with respect to the Tax Exempt Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior
Notes is maintained in Book-Entry Form, an Existing Holder may sell, transfer or
otherwise dispose of Auction Rate Series 1998-1 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 1:00 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 1998-1 Senior Notes
may submit to a Broker-Dealer by telephone or otherwise information as to:
(i) the principal amount of Outstanding Auction Rate Series 1998-1 Senior
Notes, if any, held by such Existing Holder which such Existing Holder
desires to continue to hold without regard to the Auction Rate Series 1998-
1 Senior Note Interest Rate for the next succeeding Auction Period (a "Hold
Order"); (ii) the principal amount of Outstanding Auction Rate Series 1998-
1 Senior Notes, if any, which such Existing Holder offers to sell if the
Auction Rate Series 1998-1 Senior Note Interest Rate for the next
succeeding Auction Period will be less than the rate per annum specified by
such Existing
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Holder (a "Bid"); and/or (iii) the principal amount of Outstanding Auction
Rate Series 1998-1 Senior Notes, if any, held by such Existing Holder which
such Existing Holder offers to sell without regard to the Auction Rate
Series 1998-1 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 1998-1 Senior Notes
which each such Potential Holder offers to purchase, if the Auction Rate
Series 1998-1 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 1998-1 Senior Notes specified in such Bid if the Auction Rate Series
1998-1 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 1998-1 Senior Notes to be determined as described below in
"Acceptance and Rejection of Orders", if the Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Notes specified in such Sell Order
or (ii) such principal amount or a lesser principal amount of Outstanding
Auction Rate Series 1998-1 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 1998-1 Senior Notes specified in such Bid if the Auction Rate Series
1998-1 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 1998-1 Senior Notes as described below in "Acceptance and
Rejection of Orders", if the Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes, if any, subject to any Hold Order
placed by such Existing Holder; (b) the principal amount of Auction Rate Series
1998-1 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 1998-1 Senior Notes, if any, subject to any Sell Order placed by such
Existing Holder; and (iv) to the extent such Bidder is a Potential Holder, the
rate specified in such Potential Holder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest .001%.
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If an Order or Orders covering all Outstanding Auction Rate Series 1998-1
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 1998-1 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
1998-1 Senior Notes then held by such Existing Holder. An Existing Holder that
offers to purchase additional Auction Rate Series 1998-1 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 1998-1 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 1998-1
Senior Notes held by such Existing Holder, and if the aggregate principal
amount of Auction Rate Series 1998-1 Senior Notes subject to such Hold
Orders exceeds the aggregate principal amount of Auction Rate Series 1998-1
Senior Notes held by such Existing Holder, the aggregate principal amount
of Auction Rate Series 1998-1 Senior Notes subject to each such Hold Order
will be reduced pro rata so that the aggregate principal amount of Auction
Rate Series 1998-1 Senior Notes subject to all such Hold Orders equals the
aggregate principal amount of Outstanding Auction Rate Series 1998-1 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 1998-1
Senior Notes held by such Existing Holder over the aggregate principal
amount of Auction Rate Series 1998-1 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 1998-1
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 1998-1 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 1998-1 Senior Notes held by such Existing Holder over the aggregate
principal amount of Auction Rate Series 1998-1 Senior Notes subject to
valid Hold Orders and valid Bids as referred to above.
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If more than one Bid for Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Notes over the sum of the aggregate principal
amount of Outstanding Auction Rate Series 1998-1 Senior Notes subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Auction Rate Series 1998-1 Senior Notes"); and
(b) from such Submitted Orders whether the aggregate principal amount
of Outstanding Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Notes which, when added to
the aggregate principal amount of Outstanding Auction Rate Series 1998-1
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 1998-1, Senior Notes.
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Determination of Auction Rate and Auction Rate Series 1998-1 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 Maximum Auction Rate
and the All Hold Rate and the components thereof on the Auction Date and, based
on such determinations and the Net Loan Rate determined by the Corporation or
the Servicer, 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 1998-1 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 1998-1 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
1998-1 Senior Note Interest Rate, which rate will be (i) in the case of the
Taxable Auction Rate Series 1998-1 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 1998-1 Senior Notes, the Auction Rate. In no event shall the Auction
Rate Series 1998-1 Senior Note Interest Rate exceed the Auction Rate Series
1998-1 Senior Note Interest Rate Limitation, which, in the case of the Taxable
Auction Rate Series 1998-1 Senior Notes, will be 18% per annum, and, in the case
of the Tax Exempt Auction Rate Series 1998-1 Senior Notes, will be 14% per
annum.
Acceptance and Rejection of Orders
Existing Holders will continue to hold the principal amount of Auction Rate
Series 1998-1 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 1998-1 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 1998-1 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
1998-1 Senior Notes, if the Auction Rate and the Net Loan Rate are both) greater
than the Auction Rate Series 1998-1 Senior Note Interest Rate Limitation, the
Auction Rate Series 1998-1 Senior Note Interest Rate will be equal to the
Auction Rate Series 1998-1 Senior Note Interest Rate Limitation. If, in the
case of the Taxable Auction Rate Series 1998-1 Senior Notes, the Net Loan Rate
is less than the Auction Rate, the Auction Rate Series 1998-1 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 1998-1 Senior Notes are subject to Submitted Hold Orders),
the Auction Rate Series 1998-1 Senior Note Interest Rate will be (i) in the case
of the Taxable Auction Rate Series 1998-1 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 1998-1 Senior Notes, the Maximum Auction Rate. In
any of the cases described above in this paragraph, Submitted Orders will be
accepted or rejected and the Auction Agent will take such other action as
described below under "Insufficient Bids".
Sufficient Bids. If Sufficient Bids have been made (and, in the case
of the Taxable Auction Rate Series 1998-1 Senior Notes, the Net Loan Rate
is equal to or greater than the Bid
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Auction Rate) (in which case the Auction Rate Series 1998-1 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 1998-1 Senior Note Interest Rate
will be accepted, thus requiring each such Existing Holder to sell the
aggregate principal amount of Auction Rate Series 1998-1 Senior Notes
subject to such Submitted Bids;
(b) Existing Holders' Submitted Bids specifying any rate that is
lower than the Auction Rate Series 1998-1 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 1998-1
Senior Notes subject to such Submitted Bids;
(c) Potential Holders' Submitted Bids specifying any rate that is
lower than the Auction Rate Series 1998-1 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 1998-1 Senior Note Interest Rate will
be rejected, thus entitling such Existing Holder to continue to hold
the aggregate principal amount of Auction Rate Series 1998-1 Senior
Notes subject to such Submitted Bid, unless the aggregate principal
amount of Auction Rate Series 1998-1 Senior Notes subject to such
Submitted Bids will be greater than the principal amount of Auction
Rate Series 1998-1 Senior Notes (the "remaining principal amount")
equal to the excess of the Available Auction Rate Series 1998-1 Senior
Notes over the aggregate principal amount of Auction Rate Series 1998-
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 1998-1 Senior Notes subject to such Submitted Bid, but only in
an amount equal to the aggregate principal amount of Auction Rate
Series 1998-1 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 1998-1 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 1998-1 Senior Notes subject to such
Submitted Bids made by all such Existing Holders that specified a rate
equal to the Auction Rate Series 1998-1 Senior Note Interest Rate; and
(e) Each Potential Holder's Submitted Bid specifying a rate that is
equal to the Auction Rate Series 1998-1 Senior Note Interest Rate will
be accepted, but only in an amount equal to the principal amount of
Auction Rate Series 1998-1 Senior Notes obtained by multiplying the
excess of the aggregate principal amount of Available Auction Rate
Series 1998-1 Senior Notes over the aggregate principal amount of
Auction Rate Series 1998-1 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 1998-1 Senior Notes subject to such
Submitted Bid and the denominator of which will be the sum of the
principal amount of Outstanding Auction Rate Series 1998-1 Senior
Notes subject to Submitted Bids
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made by all such Potential Holders that specified a rate equal to the
Auction Rate Series 1998-1 Senior Note Interest Rate.
Insufficient Bids. If Sufficient Bids have not been made (other than
because all of the Outstanding Auction Rate Series 1998-1 Senior Notes are
subject to Submitted Hold Orders), or if the Auction Rate Series 1998-1
Senior Note Interest Rate Limitation applies (or if, in the case of the
Taxable Auction Rate Series 1998-1 Senior Notes, the Net Loan Rate is less
than the Bid Auction Rate, in which case the Auction Rate Series 1998-1
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 1998-1 Senior Note
Interest Rate will be rejected, thus entitling such Existing Holders
to continue to hold the aggregate principal amount of Auction Rate
Series 1998-1 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 1998-1 Senior Note
Interest Rate will be accepted, and (ii) specifying any rate that is
higher than the Auction Rate Series 1998-1 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 1998-1 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 1998-1
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 1998-1 Senior Notes obtained by
multiplying the aggregate principal amount of Auction Rate Series
1998-1 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
1998-1 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 1998-1 Senior Notes subject to all such Submitted Bids and
Submitted Sell Orders.
All Hold Orders. If all Outstanding Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes to be purchased or sold by any
Existing Holder or Potential Holder so that the principal amount of Auction
Rate Series 1998-1 Senior Notes purchased or sold by each Existing Holder
or Potential Holder will be equal to an Authorized Denomination. If, as a
result of the procedures described above regarding Sufficient Bids, any
Potential Holder would be entitled or required to purchase less than a
principal amount
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of Auction Rate Series 1998-1 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 1998-1 Senior
Notes for purchase among Potential Holders so that only Auction Rate Series
1998-1 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 1998-1 Senior
Notes.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Auction Rate Series 1998-1 Senior Notes to be
purchased and the aggregate principal amount of Auction Rate Series 1998-1
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 1998-1 Senior Notes to be sold differs from such aggregate
principal amount of Auction Rate Series 1998-1 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 1998-1 Senior Notes.
Any calculation by the Auction Agent (or the Trustee, if applicable) of the
Auction Rate Series 1998-1 Senior Note Interest Rate, Maximum Auction Rate, One-
Month LIBOR, Three-Month LIBOR, All Hold Rate and Non-Payment Rate, and any
calculation by the Corporation or the Servicer of the Net Loan 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 1998-1 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 1998-1 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 1998-1 Senior Note Interest Rate
is the Maximum Auction Rate (or, in the case of the Taxable Auction Rate Series
1998-1 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 1998-1 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 1998-1 Senior Notes
as a result of the Auction and advise each Bidder purchasing or selling Auction
Rate Series 1998-1 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 1998-1 Senior Notes or to deliver such Auction Rate Series 1998-1
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 1998-1 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 1998-1
Senior Notes delivered as necessary to effect the purchases and sales of Auction
Rate Series 1998-1 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 1998-1 Senior Notes in
an Auction fails to deliver such Auction Rate Series 1998-1 Senior Notes, the
Broker-Dealer of any person that was to have purchased Auction Rate Series 1998-
1 Senior Notes in such Auction may deliver to such person a principal amount of
Auction Rate Series 1998-1 Senior Notes that is less than the principal amount
of Auction Rate Series 1998-1 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 1998-1 Senior Notes to be
delivered will be determined by such Broker-Dealer. Delivery of such lesser
principal amount of Auction Rate Series 1998-1 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 1998-1 Senior Notes or to pay for the
Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1
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 1998-1 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 1998-1 Senior Notes that
such Auction Period Adjustment will not adversely affect its ratings then
applicable to any of the Auction Rate Series 1998-1 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 1998-1 Senior Notes) or 28 days (in the case
of the Taxable Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Note Interest
Rate applicable for the next Auction Period will be (i) with respect to the
Taxable Auction Rate Series 1998-1 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 1998-1 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
1998-1 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 1998-1 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 1998-1
Senior Note bearing interest at the All Hold Rate, a Tax Exempt Auction Rate
Series 1998-1 Senior Note bearing interest at the Maximum Auction Rate and a Tax
Exempt Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Notes that such proposed adjustment will not adversely
affect its ratings then applicable to any of the Tax Exempt Auction Rate Series
1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Notes. No such change in the Auction Date
shall be effective with respect to the Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes". These Settlement Procedures
apply separately to each series of Auction Rate Series 1998-1 Senior Notes.
(a) Not later than 3:00 p.m., New York City time, if the Auction Rate
Series 1998-1 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 1998-1 Senior Note Interest Rate is the Maximum Auction Rate (or in the
case of the Taxable Auction Rate Series 1998-1 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 1998-1 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 1998-1 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 1998-1
Senior Notes, if any, to be purchased by such Potential Holder;
(v) if the aggregate principal amount of Auction Rate Series 1998-1
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 1998-1 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 1998-1 Senior Notes and the principal amount of
Auction Rate Series 1998-1 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 1998-1
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 1998-1 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 1998-1 Senior Notes and the principal amount
of Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes) against receipt of such Auction Rate Series
1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1
Senior Notes to be purchased pursuant to paragraph (b)(ii) above against
receipt of such Auction Rate Series 1998-1 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 1998-1 Senior Notes
in an Auction fails to deliver such Auction Rate Series 1998-1 Senior Notes (by
authorized book-entry), a Broker-Dear may deliver to the Potential Holder on
behalf of which it submitted a Bid that was accepted a principal amount of
Auction Rate Series 1998-1 Senior Notes that is less than the principal amount
of Auction Rate Series 1998-1 Senior Notes that otherwise was to be purchased by
such Potential Holder. In such event, the principal amount of Auction Rate
Series 1998-1 Senior Notes to be so delivered will be determined solely by such
Broker-Dealer. Delivery of such lesser principal amount of Auction Rate Series
1998-1 Senior Notes will constitute good delivery. Notwithstanding the foregoing
terms of this paragraph (f), any delivery or nondelivery of Auction Rate Series
1998-1 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 1998-1 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 Education Loans Incorporated,
Attention: President, 105 First Avenue Southwest, Aberdeen, South Dakota 57401.
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 1998-1 Notes, pledges the Financed Student Loans
and the revenues related thereto and establishes the various Accounts in the
Funds related to the Series 1998-1 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 subject to
prepayment or call for redemption 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 1998-1 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 1998-1 Subordinate Notes) are equally
and ratably secured under the Indenture with any Other Subordinate Obligations.
The Subordinate Obligations have payment and certain other priorities over the
Class C Notes. (See "Source of Payment and Security for the Notes -- Priorities"
in this Prospectus.) The Senior Notes and the Subordinate Notes are each payable
from the Note Fund and are secured by the Reserve Fund. The Class C Notes are
payable solely from the Surplus Fund.
The Corporation may at any time issue a series of Notes as described under
"Additional Notes" above, either as Senior Notes, Subordinate Notes or Class C
Notes. (Any Additional Notes will not be offered or sold pursuant to this
Prospectus.) In connection with any such Senior Notes or Subordinate Notes, the
Corporation may enter into a Swap Agreement or Credit Enhancement Facility as it
deems in its best interest, subject to the provisions described in the next
succeeding paragraphs, and the Swap Counterparty or the Credit Enhancement
Provider may become a Senior Beneficiary or a Subordinate Beneficiary, as herein
described.
The Corporation may enter into a Swap Agreement only if the Swap
Counterparty has outstanding obligations rated by each Rating Agency not lower
that in its third highest Specific Rating Category (or each Rating Agency has a
comparable other rating with respect to such Swap Counterparty, such as a
comparable rating of claims paying ability or deposits). No Swap Agreement shall
be designated as a Senior Swap Agreement unless, as of the date the Corporation
enters into such Swap Agreement, the Senior Asset Requirement will be met and
the Trustee shall have received written confirmation from each Rating Agency
that the execution and delivery of the
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Swap Agreement will not cause the reduction or withdrawal of any rating or
ratings then applicable to any Outstanding Unenhanced Notes.
Call for Redemption, Prepayment or Purchase of Notes; Senior Asset Requirement
No call for 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 call
for 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 called for redemption prepaid or
purchased, either (A) after giving effect to such call for redemption,
prepayment or purchase, the Senior Asset Requirement will be met, or (B)
(i) prior to such call for redemption, prepayment or purchase, the Senior
Asset Requirement is not being met, (ii) no Subordinate Notes or Class C
Notes will be called for redemption on the Redemption Date, prepaid on the
Prepayment Date or purchased on the purchase date for the Senior Notes then
proposed to be called for redemption, prepaid or purchased, and (iii) after
giving effect to such call for redemption, prepayment or purchase, the
Senior Percentage will be greater than it would have been without such call
for redemption, prepayment or purchase;
2. if Subordinate Notes are to be called for redemption, prepaid or
purchased, after giving effect to such call for redemption, prepayment or
purchase, the Senior Asset Requirement will be met; and
3. if Class C Notes are to be called for redemption, prepaid or
purchased, after giving effect to such call for 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 called for redemption 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 called for redemption,
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 call Notes for redemption or to prepay Notes 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 of Notes which are called for
redemption or the 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 1998-1 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 call of Senior Notes for 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 call of Senior Notes for redemption
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 call of Subordinate Notes for redemption 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 call of Subordinate Term Notes for
redemption on the next Sinking Fund Payment Date therefor; eleventh, to the
credit of the Special Redemption and Prepayment Account, to the extent
necessary to increase the Balance thereof to the Special Redemption and
Prepayment Account Requirement with respect to each series of Notes; and
twelfth, any remainder to the credit of the Surplus Account.
Income Account. On each Monthly Payment Date and on any other date on which
the Balance in the Note Fund is not sufficient to pay all amounts payable
therefrom on such date, the Trustee shall, after transferring all amounts
received in the Repayment Account pursuant to the preceding paragraph, from the
moneys received since the preceding Monthly Payment Date in the Income Account,
(1) to the extent amounts in the Repayment Account were not sufficient therefor,
make any periodic rebate fee payments required to be made to the Secretary of
Education in connection with Financed Student Loans, and (2) transfer the
remainder of such moneys as follows:
First, to the credit of the Rebate Fund, to the extent necessary to
cure any deficiency therein as provided in the Indenture; second, to the
credit of the Interest Account, to the extent necessary to increase the
Balance thereof to the amount required on such Monthly Payment Date or such
other date pursuant to the Indenture for the payment of interest on Senior
Notes or Other Senior Obligations payable therefrom; third, to the credit
of the Principal Account, to the extent
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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
call of Senior Notes for 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 call of
Senior Notes for redemption 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 call of
Subordinate Notes for redemption from the Retirement Account or payment of
Other Subordinate Obligations payable therefrom; ninth, to the credit of
the Administration Fund, to 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 call of Subordinate Term Notes for redemption on the next Sinking Fund
Payment Date therefor; twelfth, to the credit of the Special Redemption and
Prepayment Account, to the extent necessary to increase the Balance thereof
to the Special Redemption and Prepayment Account Requirement with respect
to each series of Notes; and thirteenth, any remainder to the credit of the
Surplus Account.
Note Fund
The Indenture establishes a Note Fund, which is comprised of three
Accounts: the Interest Account, the Principal Account and the Retirement
Account. The Note Fund shall be used only for the payment when due of principal
of, premium, if any, and interest on the Senior Notes and the Subordinate Notes,
the purchase price of Senior Notes and Subordinate Notes to be purchased on a
Purchase Date or Mandatory Tender Date in accordance with the Indenture, Other
Indenture Obligations and Carry-Over Amounts (including any accrued interest
thereon) and to make transfers to the credit of the Rebate Fund. The principal
of and interest on the Class C Notes are payable from the Surplus Fund.
Interest Account. The Trustee shall deposit in the Interest Account (i)
that portion of the proceeds from the sale of Financed Student Loans
representing accrued interest and Special Allowance Payments thereon, (ii) that
portion of the proceeds from the sale of the Corporation's bonds, notes or other
evidences of indebtedness, if any, to be used to pay interest on the Senior
Notes or the Subordinate Notes, (iii) all Counterparty Swap Payments, (iv) all
payments under any Credit Enhancement Facilities to be used to pay interest on
(or the interest portion of the purchase price of) the Notes and (v) all amounts
required to be transferred thereto from the Funds and Accounts specified in the
last sentence of the following paragraph. The moneys in the Interest Account
shall be invested in Investment Securities as described under "Investments"
below, and any earnings on or income from such investments shall be deposited in
the Revenue Fund.
To provide for the payment of each installment of interest which falls due
upon Senior Notes or Subordinate Notes on each regularly scheduled Interest
Payment Date and all Corporation Swap Payments and fees to a Credit Facility
Provider payable on such Interest Payment Date, the Trustee shall make deposits
to the credit of the Interest Account on each Monthly Payment Date (less certain
credits against such payments). If, on any Interest Payment
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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; third, to
the payment of all Carry-Over Amounts (including any accrued interest thereon)
due and payable on all series of Senior 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 Senior Noteholders and to be paid from the Interest
Account; and fourth, to the payment of all Carry-Over Amounts (including any
accrued interest thereon) due and payable on all series of Subordinate 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 Subordinate
Noteholders and to be paid from the Interest Account.
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Other Indenture Obligations payable from the Interest Account will include
reimbursement to any Credit Facility Provider for interest paid on Senior Notes
or Subordinate Notes from amounts derived from the related Credit Enhancement
Facility, which reimbursement shall have the same priority of payment from the
Interest Account as the interest so paid.
Principal Account. The Trustee shall deposit to the credit of the
Principal Account: (i) that portion of the proceeds from the sale of Financed
Student Loans representing principal thereof, (ii) that portion of the proceeds
from the sale of the Corporation's bonds, notes or other evidences of
indebtedness, if any, to be used to pay principal of the Senior Notes and the
Subordinate Notes, (iii) all payments under any Credit Enhancement Facilities to
be used to pay principal of Senior Notes or Subordinate Notes or the purchase
price of Senior Notes or Subordinate Notes to be purchased on a Purchase Date or
Mandatory Tender Date, and (iv) all amounts required to be transferred thereto
from the following Funds, in the following order of priority: (1) in the case
of payment of principal of Notes at Stated Maturity, redemption of Senior Notes
called for redemption 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 called for redemption 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 of Subordinate Term Notes which are called for redemption or the
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
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Fund and the Retirement Account, to make any required deposit to the credit of
the Rebate Fund. (See "Rebate Fund" below.)
Balances to the credit of the Principal Account shall be applied in the
following order of priority: first, to the extent required by the immediately
preceding paragraph, for transfer to the Rebate Fund; second, to the Interest
Account to the extent required (see "Interest Account" above) for the payment of
interest on Senior Notes and Other Senior Obligations payable therefrom; third,
to the payment of Senior Notes at their Stated Maturity or on their Sinking Fund
Payment Date and Other Senior Obligations payable therefrom; fourth, to the
payment of the purchase price of Senior Notes on a Purchase Date or Mandatory
Tender Date; fifth, to the Interest Account to the extent required (see
"Interest Account" above) for the payment of interest on Subordinate Notes and
Other Subordinate Obligations payable therefrom; sixth, to the payment of
Subordinate Notes at their Stated Maturity and Other Subordinate Obligations
payable therefrom; seventh, to the payment of the purchase price of Subordinate
Notes on a Purchase Date or Mandatory Tender Date; and eighth, to the payment of
Subordinate Term Notes on a Sinking Fund Payment Date.
Other Indenture Obligations payable from the Principal Account will include
reimbursement to any Credit Facility Provider for principal or the purchase
price paid on Senior Notes or Subordinate Notes from amounts derived from the
related Credit Enhancement Facility, which reimbursement shall have the same
priority of payment from the Principal Account as the principal so paid.
Subject to compliance with the provisions of the Indenture described under
"Call for 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.
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Subject to compliance with the provisions of the Indenture described under
"Call for Redemption, Prepayment or Purchase of Notes; Senior Asset Requirement"
above, Balances in the Retirement Account (other than any portion thereof to be
applied to the mandatory prepayment of principal of any Notes) may also be
applied to the purchase of Senior Notes or Subordinate Notes at a purchase price
(including any brokerage or other charges) not to exceed the Principal Amount
thereof plus accrued interest plus any then applicable redemption premium, as
determined by the Corporation at such time; provided the Trustee shall have
first certified that no deficiencies exist at such time in the Note Fund or the
Rebate Fund.
The moneys in the Retirement Account shall be invested in Investment
Securities as described under "Investments" below, and any earnings on or income
from such investment shall be deposited in the Revenue Fund.
Administration Fund
With respect to each series of Notes, the Trustee shall, upon delivery
thereof and from the proceeds thereof, credit to the Administration Fund
established under the Indenture the amount, if any, specified in the
Supplemental Indenture providing for the issuance of such series of Notes. The
Trustee shall also credit to the Administration Fund all amounts transferred
thereto from the Revenue Fund and the Surplus Account. Amounts in the
Administration Fund shall 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.
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If on any Monthly Payment Date the Balance in the Reserve Fund is less than
the Reserve Fund Requirement, the Trustee shall transfer and credit thereto an
amount equal to the deficiency from moneys available therefor in the following
Funds and Accounts in the following order of priority: the Repayment Account,
the Income Account and the Surplus Fund; provided that any such transfer from
the Surplus Fund shall only be made to the extent that portion of the Balance
thereof not consisting of Eligible Loans is sufficient therefor.
The Balance in the Reserve Fund shall be used and applied solely for (i)
transfers to the Rebate Fund to the extent necessary, after transfers thereto
from the Revenue Fund and the Surplus Fund (other than that portion of the
Balance thereof consisting of Eligible Loans), to make any required deposit to
the Rebate Fund (see "Rebate Fund" below), and (ii) after such transfer, if any,
to be made pursuant to the preceding clause (i) has been taken 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 called for redemption 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.
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Moneys in the Rebate Account shall be paid by the Trustee to the United
States at such times and in such amounts as are necessary to comply with the
rebate provisions of Section 148 of the Code with respect to each series of Tax-
Exempt Notes. In addition, upon receipt by the Trustee of a certification of the
Corporation that certain amounts in the Rebate Account are not subject to rebate
and an opinion of Bond Counsel to the effect that failure to rebate such amounts
will not cause interest on any series of Tax-Exempt Notes to become includable
in gross income of the owners thereof for federal income tax purposes under
either existing laws, regulations, rulings and decisions or any then pending
federal legislation, the Trustee shall transfer any such amounts to the credit
of the Revenue Fund. Moneys in the Rebate Account are not available for transfer
to any Fund or Account under the Indenture, except the Revenue Fund under the
circumstances described above, and shall be applied solely to meet the
Corporation's rebate obligations.
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 1998-1 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 1998-1 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 1998-1 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 1998-1 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.
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Surplus Fund
The Indenture establishes a Surplus Fund, which is comprised of two
Accounts: the Special Redemption and Prepayment Account and the Surplus Account.
The Trustee shall deposit to the credit of the Surplus Fund Balances in the
Revenue Fund not required for deposit to any other Fund or Account. Deposits to
the Surplus Fund from the Revenue Fund shall be credited to the Special
Redemption and Prepayment Account to the extent the Balance thereof is less than
the Special Redemption and Prepayment Account Requirement for each series of
Notes, and otherwise to the Surplus Account.
Balances in the Surplus Fund shall be applied to the following purposes in
the following order of priority: first, to remedy deficiencies in the Rebate
Fund (after transfers thereto from the Revenue Fund); second, to remedy
deficiencies in the Interest Account (after transfers thereto from the Revenue
Fund) for the payment of interest on Senior Notes or Other Senior Obligations
payable therefrom; third, to remedy deficiencies in the Principal Account (after
transfers thereto from the Revenue Fund) for the call of Senior Notes for
redemption or the 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 call of Senior Notes for redemption 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 call of Subordinate Notes for redemption 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 call of
Subordinate Term Notes for redemption on a Sinking Fund Payment Date; eleventh,
to make transfers to the credit of the Retirement Account to redeem Senior Notes
or Subordinate Notes which are called for redemption or to prepay Senior 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
"Call for 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.
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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 call
for redemption thereof at the option of the Corporation.
Subject to compliance with the provisions of the Indenture described under
"Call for Redemption, Prepayment or Purchase of Notes; Senior Asset Requirement"
above, Balances in the Surplus Account may also be applied to any one or more of
the following purposes at any time as determined by the Corporation at such
time, provided the Trustee shall have first certified that no deficiencies exist
at such time in the Note Fund, the Rebate Fund, the Reserve Fund or the Special
Redemption and Prepayment Account:
(1) transfer to the Retirement Account for the redemption of Senior
Notes or Subordinate Notes called for redemption;
(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 112% (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
102% (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 1998-1
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,
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in either case, accrued noncapitalized interest thereon payable by the Eligible
Borrower. Student Loans from time to time held in the Surplus Account may also
be purchased at any time with the proceeds of the Corporation's bonds, notes or
other evidences of indebtedness, at a purchase price equal to 100% of the
Principal Balance of the Student Loans so purchased plus accrued noncapitalized
interest thereon payable by the Eligible Borrower. Any money received by the
Corporation in connection with a sale of Financed Student Loans pursuant to this
paragraph shall be deposited to the credit of the Surplus Account.
Pending transfers from the Surplus Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below, and
any earnings on or income from such investments shall be deposited in the
Revenue Fund.
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:
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Trustee to Hold Financed Student Loans. The Corporation shall cause all
Financed Student Loans to be endorsed and otherwise conveyed to the Trustee on
behalf of the Corporation in accordance with the provisions of the applicable
Student Loan Purchase Agreement or, in the case of any origination of Financed
Student Loans, shall cause such Student Loans to be originated in the name of
the Trustee. The Trustee shall be the legal owner of all Financed Student Loans
for all purposes of the Higher Education Act and each Guarantee Program. The
Trustee shall so hold such Financed Student Loans in its capacity as trustee
pursuant to the Indenture and, in such capacity, shall be acting on behalf of
the Corporation, as the beneficial owner of such Student Loans, as well as the
Holders of the Notes and all Other Beneficiaries, as their interests may appear.
Enforcement and Amendment of Guarantee Agreements. So long as any Notes or
Other Indenture Obligations are Outstanding and Financed Eligible Loans are
Guaranteed by a Guarantee Agency, the Corporation agrees that it (1) will, from
and after the date on which the Trustee on its behalf shall have entered into
the Guarantee Agreement, cause the Trustee to maintain the same and diligently
enforce the Trustee's rights thereunder, (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.
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Servicing and Other Agreements. The Corporation may contract with other
Persons to assist it in performing its duties under the Indenture, and any
performance of such duties by a Person so identified to the Trustee shall be
deemed to be action taken by the Corporation. The Corporation may, and prior to
or contemporaneously with the Section 150(d)(3) Transfer shall, enter into a
Servicing Agreement providing for the servicing of the Financed Student Loans
and performance of certain of its other obligations under the Indenture.
Administration and Collection of Financed Student Loans. The Corporation
agrees that all Financed Student Loans shall be administered and collected
either by the Corporation or by a Servicer selected by the Corporation (and,
after the Section 150(d)(3) Transfer, shall be so administered and collected by
a Servicer) in a competent, diligent and orderly fashion and in accordance with
all requirements of the Higher Education Act, the Secretary of 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 by the 25th day of the next calendar month (or the next succeeding
Business Day if such 25th day is not a Business Day).
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 1998-1
Notes, or any related party to such obligor, from purchasing any Tax Exempt
Series 1998-1 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
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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 1998-1 Notes that payment or reimbursement of such additional Costs
of Issuance, Administrative Expenses or Note Fees will not result in a reduction
or withdrawal of the rating of the Series 1998-1 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.
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Investments
"Investment Securities" shall mean any of the following:
1. Government Obligations;
2. Interest-bearing time or demand deposits, certificates of deposit
or other similar banking arrangements with any bank, trust company,
national banking association or other depositary institution (including the
Trustee or any of its affiliates), provided that, at the time of deposit or
purchase, if the investment is for a period exceeding one year, such
depository institution shall have long-term unsecured debt rated by each
Rating Agency not lower than in its highest applicable Specific Rating
Category or if the investment is for a period of less than one year, such
depository institution shall have short-term unsecured debt rated by each
Rating Agency not lower than its highest applicable Specific Rating
Category;
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
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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.
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 1998-1
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
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(J) if no Senior Obligations or Subordinate Obligations are
Outstanding, default in the due and punctual payment of the principal of,
or premium, if any, on, any Class C Note, whether at the Stated Maturity
thereof, at the date fixed for redemption thereof (including, but not
limited to, Sinking Fund Payment Dates) or otherwise upon the maturity
thereof; or
(K) default in the performance of any of the Corporation's obligations
with respect to the transmittal of moneys to be credited to the Revenue
Fund, the Rebate Fund, the Acquisition Fund or the Note Fund under the
provisions of the Indenture and such default shall have continued for a
period of 30 days; or
(L) default in the performance or observance of any other of the
covenants, agreements or conditions on the part of the Corporation in the
Indenture or in the Notes contained, and such default shall have continued
for a period of 30 days after written notice thereof, specifying such
default, shall have been given by the Trustee to the Corporation, which may
give such notice in its discretion and shall give such notice at the
written request of the Acting Beneficiaries Upon Default, or by the Holders
of not less than 10% in aggregate Principal Amount of the Outstanding Notes
to the Corporation and the Trustee, provided that, except with respect to
the Corporation's covenants relating to the tax exemption of interest on
any Tax-Exempt Notes, if the default is such that it can be corrected, but
not within such 30 days, it shall not constitute an Event of 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
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Account under the provisions of the Indenture; and (vi) all sums paid or
advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel and any Paying Agents, Deposit Agents, Remarketing
Agents, Depositaries, Auction Agents and Broker-Dealers; or
(B) if no Senior Obligations are Outstanding, but Subordinate Notes or
Other Subordinate Obligations are Outstanding: (i) all overdue
installments of interest on all Subordinate Notes; (ii) the principal of
(and premium, if any, on) any Subordinate Notes which have become due other
than by such declaration of acceleration, together with interest thereon at
the rate or rates borne by such Subordinate Notes; (iii) to the extent that
payment of such interest is lawful, interest upon overdue installments of
interest on the Subordinate Notes at the rate or rates borne by such
Subordinate Notes; (iv) all Other Subordinate Obligations which have become
due other than as a direct result of such declaration of acceleration; (v)
all other sums required to be paid to satisfy the Corporation's obligations
with respect to the transmittal of moneys to be credited to the Revenue
Fund, the Rebate Fund, the Acquisition Fund and the Interest Account under
the provisions of the Indenture; and (vi) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
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
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of the rights and powers conferred by the Indenture as the Trustee, being
advised by its counsel, shall deem most expedient in the interests of the
Beneficiaries; provided, however, that the Trustee has the right to decline to
comply with any such request if the Trustee shall be advised by Counsel that the
action so requested may not lawfully be taken or if the Trustee receives, before
exercising such right or power, contrary instructions from the Holders of not
less than a majority in aggregate Principal Amount of the Notes then Outstanding
or from any Other Beneficiary.
The Acting Beneficiaries Upon Default have the right, at any time, by an
instrument or instruments in writing executed and delivered to the Trustee, to
direct the method and place of conducting all proceedings to be taken in
connection with the enforcement of the terms and conditions of the Indenture;
provided that (a) such direction shall not be otherwise than in accordance with
the provisions of law and of the Indenture; (b) the Trustee shall not determine
that the action so directed would be unjustly prejudicial to the Holders of
Notes or Other Beneficiaries not taking part in such direction, other than by
effect of the subordination of any of their interests thereunder; and (c) the
Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction.
Except as may be permitted in a Supplemental Indenture with respect to an
Other Beneficiary, no Holder of any Note or Other Beneficiary shall have any
right to institute any suit, action or proceeding in equity or at law for the
enforcement of the Indenture or for the execution of any trust under the
Indenture or for the appointment of a receiver or any other remedy under the
Indenture unless (1) an Event of Default shall have occurred and be continuing,
(2) the Holders of not less than 25% in aggregate Principal Amount of Notes then
Outstanding or any Other Beneficiary shall have made written request to the
Trustee, (3) such Beneficiary or Beneficiaries shall have offered to the Trustee
indemnity, (4) the Trustee shall have thereafter failed for a period of 60 days
after the receipt of the request and indemnification or refused to exercise the
powers granted in the Indenture or to institute such action, suit or proceeding
in its own name and (5) no direction inconsistent with such written request
shall have been given to the Trustee during such 60-day period by the Holders of
not less than a majority in aggregate Principal Amount of the Notes then
Outstanding or by any Other Beneficiary; provided, however, that,
notwithstanding the foregoing provisions of the Indenture, the Acting
Beneficiaries Upon Default may institute any such suit, action or proceeding in
their own names 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.
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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:
(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.
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(C) If the principal of all Outstanding Notes shall have been declared
due and payable and if such declaration shall thereafter have been rescinded
and annulled, then (subject to the provisions described in paragraph (B)
above, in the event that the principal of all the Outstanding Notes shall
later become or be declared due and payable) the money held by the Trustee
under the Indenture shall be applied in accordance with the provisions
described in paragraph (A) above.
Trustee
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,
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(b) grant to or confer upon the Trustee for the benefit of the
Beneficiaries any additional rights, remedies, powers, authority or
security that may lawfully be granted to or conferred upon the
Beneficiaries or the Trustee,
(c) describe or identify more precisely any part of the Trust Estate
or subject additional revenues, properties or collateral to the lien and
pledge of the Indenture,
(d) 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.
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Rights of Trustee
If, in the opinion of the Trustee, any Supplemental Indenture adversely
affects the rights, duties or immunities of the Trustee under the Indenture or
otherwise, the Trustee may, in its discretion, decline to execute such
Supplemental Indenture. The Trustee is entitled to receive, and shall be fully
protected in relying upon, an opinion of its Counsel as conclusive evidence that
any such Supplemental Indenture conforms to the requirements of the Indenture.
Consent of Depositaries, Remarketing Agents, Auction Agents and Broker-
Dealers
So long as any Depositary Agreement, Remarketing Agreement, Auction Agent
Agreement or Broker-Dealer Agreement is in effect, no Supplemental Indenture
which materially adversely affects the rights, duties or immunities of the
Depositary, the Remarketing Agent, the Auction Agent or the Broker-Dealer, as
the case may be, created by the Indenture or the Depositary Agreement,
Remarketing Agreement, Auction Agent Agreement or Broker-Dealer Agreement, as
appropriate, shall become effective unless and until delivery to the Trustee of
a written consent of the Depositary, the Remarketing Agent, the Auction Agent or
the Broker-Dealer, as the case may be, to such Supplemental Indenture.
Opinion and Rating Agency Approval Required Prior to Execution of
Supplemental Indenture
No Supplemental Indenture shall be executed unless, prior to the execution
thereof: (1) if any Tax-Exempt Notes are Outstanding, the Corporation shall have
provided to the Trustee an opinion of Bond Counsel to the effect that the
execution and delivery of such Supplemental Indenture will not adversely affect
the exclusion from the gross income of the owners thereof for federal income tax
purposes of interest on any such Tax-Exempt Notes; and (2) the Trustee shall
have received written evidence from each Rating Agency that execution and
delivery of such Supplemental Indenture will not adversely affect any rating or
ratings then applicable to any of the Outstanding Notes.
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 "Call for Redemption, Prepayment
or Purchase of Notes; Senior Asset Requirement" above are met as if such Notes
were to be called for redemption on the date such Notes are to be defeased.
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Notices to Noteholders
Except as is otherwise provided in the Indenture, any provision in the
Indenture for the mailing of notice or other instrument to Holders of Notes will
be fully complied with if it is mailed by first-class mail, postage prepaid, to
each Holder of Notes outstanding at the address appearing on the Note Register.
In addition, whenever notice is to be mailed under the Indenture to the Holders
of Notes, the Trustee is also, upon request, to mail a copy of such notice to
(1) any Holder of at least $1,000,000 in aggregate Principal Amount of the Notes
(or, in the event less than $1,000,000 in aggregate Principal Amount of Notes is
outstanding, the Holder of all outstanding Notes), in addition to the copy
mailed to such Holder's address appearing on the Note Register, at such other
address as such Holder shall specify in writing to the Trustee, and (2) any
Person that is the beneficial owner of a Note, as evidenced to the satisfaction
of the Trustee, at such address as such beneficial owner shall specify in
writing to the Trustee; provided that any defect in or failure to mail any such
notice prescribed by this sentence shall not affect the validity of any
proceedings to be taken (including, without limitation, for the call of Notes
for redemption) 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 1998-1 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 1998-1 Notes, interest on the Tax Exempt Series 1998-1 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 1998-1 Notes from federal income taxation,
including, without limitation, certifications and covenants as to the use of the
proceeds of the Tax Exempt Series 1998-1 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 1998-1 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 1998-1 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 1998-1 Notes to be includable in gross income for such purposes, either
prospectively or retroactively to the date of issuance of the Tax Exempt Series
1998-1 Notes. These requirements include, but are not limited to, provisions
that prescribe that the proceeds of the Tax Exempt Series 1998-1 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 1998-1 Notes and receiving interest
thereon. The following is a brief summary of some of the significant provisions
applicable to particular Tax Exempt Series 1998-1 Noteholders, but is not
intended to be an exhaustive discussion of collateral tax consequences arising
from ownership of the Tax Exempt Series 1998-1 Notes.
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Prospective Tax Exempt Series 1998-1 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 1998-1 Notes is includable in "net
investment income" of foreign insurance companies for purposes of Section 842(b)
of the Code, and may be included in the income of a foreign corporation for
purposes of the branch profits tax imposed by Section 884 of the Code.
Additionally, interest on the Tax Exempt Series 1998-1 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 1998-1 Notes.
Indebtedness may be allocated to the Tax Exempt Series 1998-1 Notes for this
purpose even though not directly traceable to the purchase of the Tax Exempt
Series 1998-1 Notes. The Code also restricts the deductibility of other
expenses allocable to the Tax Exempt Series 1998-1 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 1998-1 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 1998-1 Notes that
is received or accrued during the taxable year.
Interest on the Tax Exempt Series 1998-1 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 1998-1 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 1998-1 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 1998-1 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.
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If, instead of treating the transaction as creating secured debt in the
form of the Series 1998-1 Notes issued by the Issuer as a corporate entity, the
transaction were treated as creating a partnership among the Noteholders, the
Servicer and the Issuer, which has purchased the underlying Trust Estate assets,
the resulting partnership would not be subject to federal income tax. Rather,
the Servicer, the Issuer and each Noteholder would be taxed individually on
their respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deduction
of the Noteholder may differ if the Series 1998-1 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
1998-1 Notes will be treated as debt of the Issuer for federal income tax
purposes.
Characterization of the Series 1998-1 Notes as Indebtedness
The Issuer and the Noteholders express in the Indenture their intent that,
for applicable tax purposes, the Series 1998-1 Notes will be indebtedness of the
Issuer secured by the Trust Estate. The Issuer and the Noteholders, by
accepting the Series 1998-1 Notes, have agreed to treat the Series 1998-1 Notes
as indebtedness of the Issuer for federal income tax purposes. The Issuer
intends to treat this transaction as a financing reflecting the Series 1998-1
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 1998-1 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 1998-1 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 1998-1
Subordinate Notes may not be qualified stated interest because such payments are
not unconditional and that the Series 1998-1 Subordinate Notes are issued with
original issue discount.
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Payments of interest received with respect to the Taxable Series 1998-1
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 1998-1 Notes.
A purchaser who buys a Series 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 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 1998-1 Notes under the tax laws
of any state, locality or foreign jurisdiction. Investors considering an
investment in the Series 1998-1 Notes should consult their own tax advisors
regarding such tax consequences.
Certain U.S. Federal Income Tax Documentation Requirements
A Beneficial Owner of Series 1998-1 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
1998-1 Notes that are non-U.S. Persons can obtain a complete exemption from the
United States withholding tax and the backup withholding tax
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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 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 1998-1 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 1998-1 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 1998-1 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.
New Withholding Rules in 1999. Effective January 1, 1999, any foreign
investor that seeks the protection of an income tax treaty with respect to the
imposition of United States withholding tax will generally be required to obtain
a taxpayer identification number ("TIN") from the Service in advance and provide
verification that such investor is entitled to the protection of the relevant
income tax treaty. Foreign tax-exempt investors will generally be required to
provide verification of their tax-exempt status. Foreign investors are urged to
consult with their tax advisors with respect to these new withholding rules.
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 1998-1 Notes. Investors are advised to consult their own tax advisers for
specific tax advice concerning their holding and disposing of the globally
offered Series 1998-1 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
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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 1998-1
Notes without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan which is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in the Code.
In addition to the imposition of general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
plan's investment be made in accordance with the documents governing the plan,
Section 406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving assets of ERISA Plans and Tax-Favored Plans and entities
whose underlying assets include plan assets by reason of ERISA Plans or Tax-
Favored Plans investing in such entities (collectively, "Benefit Plans") and
persons who have certain specified relationships to the Benefit Plans ("Parties
in Interest" or "Disqualified Persons"), unless a statutory or administrative
exemption is available. Certain Parties in Interest (or Disqualified Persons)
that participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed pursuant to Section 502(i) of ERISA (or Section 4975 of the
Code) unless a statutory or administrative exemption is available.
Certain transactions involving the purchase, holding or transfer of the
Series 1998-1 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 1998-1 Notes should be
treated as debt without substantial equity features for purposes of the Plan
Assets Regulation. However, without regard to whether the Series 1998-1 Notes
are treated as an equity interest for such purposes, the acquisition or holding
of Series 1998-1 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 1998-1
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,
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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 1998-1 Notes. The Trustee and its affiliates have in
the past entered into student loan purchase agreements with the Original Issuer,
including Student Loan Purchase Agreements pursuant to which the Original Issuer
acquired as of December 31, 1997, approximately $144 million outstanding
principal amount of Eligible Loans which will be Financed under the Indenture.
The Corporation expects that the Trustee will enter into Student Loan Purchase
Agreements providing for the sale of a substantial amount of additional Eligible
Loans. The Original Issuer also has obtained (and the Corporation may in the
future obtain) financial services from the Trustee and related entities.
Foley & Lardner, counsel to the Underwriters, has from time to time
represented, and is currently representing, the Original Issuer in connection
with various matters (including matters relating to its transfer of assets to
SLFC). In addition, Foley & Lardner has from time to time represented, and is
currently representing, EAC in connection with various matters.
For a discussion of certain relationships between Underwriters or
affiliates of Underwriters and the Original Issuer or the Corporation, see "Plan
of Distribution".
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
for the sale of the Series 1998-1 Notes, dated February __, 1998 (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 1998-1
Notes. The obligation of U.S. Bancorp Investments, Inc. to purchase the Series
1998-1 Notes is limited to such principal amount of the Series 1998-1 Notes as
does not exceed 10% of the capital stock actually paid in and unimpaired and 10%
of the unimpaired surplus funds of U.S. Bank National Association (also doing
business as First Bank National Association), which is the commercial bank which
owns U.S. Bancorp Investments, Inc. as described below.
The Original Issuer has been advised by the Underwriters that the
Underwriters propose initially to offer the Series 1998-1 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 1998-1 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 1998-1 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
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concession from a syndicate member when the Series 1998-1 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 1998-1
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 1998-1 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.
U.S. Bancorp Investments, Inc. is a wholly-owned subsidiary of U.S. Bank
National Association (also doing business as 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. Salomon Smith Barney and
U.S. Bancorp Investments, 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 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 January 27, 1998, 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 1998-1 Notes that the
Series 1998-1 Senior Notes each be rated "AAA" by Fitch IBCA, Inc. and "Aaa" by
Moody's Investors Services, Inc., and that the Series 1998-1 Subordinate Notes
be rated no less than "A" by Fitch IBCA, Inc. and "A3" by Moody's Investors
Services, Inc. The Original Issuer has applied for ratings of the Series 1998-
1 Notes from Moody's Investors Services, Inc.and Fitch IBCA, Inc. No
application was made to any other rating agency for the purpose of obtaining
additional ratings of the Series 1998-1 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 1998-1 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
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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 1998-1 Notes.
Fitch IBCA, Inc. has stated that its ratings on Series 1998-1 Notes do not
address: (a) the market liquidity of the Series 1998-1 Notes or (b) any Carry-
Over Amount that may accrue with respect to the Taxable Series 1998-1 Notes.
The Corporation expects to furnish to each Rating Agency information and
materials that it may request. However, the Corporation assumes no obligation to
furnish requested information and materials, and may issue additional
obligations for which a rating is not requested. Failure to furnish requested
information and materials, or the issuance of debt for which a rating is not
requested, may result in the suspension or withdrawal of a Rating Agency's
ratings on the Series 1998-1 Notes.
A securities rating addresses the likelihood of the receipt by Holders of
the Series 1998-1 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 1998-1 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 1998-1 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,
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who is Independent and not under the domination of the Corporation, but who may
be regularly retained to make annual or similar audits of the books or records
of the Corporation.
"Acting Beneficiaries Upon Default" shall mean:
(a) at any time that any Senior Obligations are Outstanding:
(i) with respect to directing the Trustee to accelerate the
maturity of Outstanding Notes as a result of an Event of Default
(other than an Event of Default described in paragraph (L) under
"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;
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(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 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 4 of
this Prospectus.
"Administrative Cost and Note Fee Rate" shall mean a rate per annum equal
to the sum of (i) 1.275%, (ii) the Auction Agent fee rate (initially 0.025%, but
subject to change in accordance with the provisions of the Auction Agent
Agreement), and (iii) the Broker-Dealer fee rate (initially 0.25%, 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
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Other Indenture Obligations or (iii) Costs of Issuance or the fees, costs or
expenses of the Corporation with respect to any other bonds, notes or
indebtedness of the Corporation.
"After-Tax Equivalent" shall mean, with respect to a series of Tax Exempt
Series 1998-1 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 1998-1 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 1998-
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 1998-1 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 1998-1 Senior Notes,
One-Month LIBOR less .20%.
"Applicable Percentage" shall mean, with respect to a series of Tax Exempt
Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes") based on the ratings of Moody's
and Fitch of the Series 1998-1 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 1998-1 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 1998-1 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 100 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
1998-1 Senior Notes, Bankers Trust Company, as the initial Auction Agent under
the initial Auction Agent Agreement, unless and until a substitute
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Auction Agent Agreement becomes effective, after which "Auction Agent" shall
mean the substitute Auction Agent, and (ii) with respect to any other series of
Notes, any bank, national banking association or trust company designated as
such with respect to such Notes pursuant to the provisions of a Supplemental
Indenture, and its successor or successors, and any bank, national banking
association or trust company at any time substituted in its place pursuant to
such Supplemental Indenture.
"Auction Agent Agreement" shall mean (i) with respect to the Tax Exempt
Auction Rate Series 1998-1 Senior Notes, the Auction Agent Agreement (Tax Exempt
Auction Rate Series 1998-1 Notes), dated as of February 1, 1998, 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 1998-1
Senior Notes, the Auction Agent Agreement (Taxable Auction Rate Series 1998-1
Notes), dated as of February 1, 1998, 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 124 of this
Prospectus.
"Auction Period" shall mean the Interest Period applicable to the Auction
Rate Series 1998-1 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 1998-1 Senior Notes) or 28
days (in the case of Taxable Auction Rate Series 1998-1 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 1998-1 Senior
Notes -- Changes in Auction Terms -- Changes in Auction Period or Periods".
"Auction Period Adjustment" shall have the meaning assigned thereto on page
133 of this Prospectus.
"Auction Procedures" shall mean the procedures described under "Auction of
the Auction Rate Series 1998-1 Senior Notes" by which the Auction Rate is
determined with respect to the Auction Rate Series 1998-1 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 1998-1 Senior Notes as described under "Auction of
the Auction Rate Series 1998-1 Senior Notes".
"Auction Rate Series 1998-1 Senior Note Interest Rate" shall mean the rate
of interest per annum borne by a series of Auction Rate Series 1998-1 Senior
Notes during the Initial Interest Period for such series and each Interest
Period thereafter, including, without limitation, the Auction Rate Series 1998-1
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
1998-1 Senior Note Interest Rate for such series shall equal the Non-Payment
Rate; and provided, further, that such Auction Rate Series 1998-1 Senior Note
Interest Rate shall in no event exceed the Auction Rate Series 1998-1 Senior
Note Interest Rate Limitation.
"Auction Rate Series 1998-1 Senior Note Initial Interest Rate" shall mean
the interest rate to be borne by a series of Auction Rate Series 1998-1 Senior
Notes for the Initial Interest Period therefor, as set forth in the First
Supplemental Indenture.
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"Auction Rate Series 1998-1 Senior Note Interest Rate Limitation" shall
mean a rate per annum equal to 14%, in the case of the Tax Exempt Auction Rate
Series 1998-1 Senior Notes, or 18%, in the case of the Taxable Auction Rate
Series 1998-1 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 1998-1 Senior Notes.
"Auction Rate Series 1998-1 Senior Notes" shall mean, collectively, the Tax
Exempt Auction Rate Series 1998-1 Senior Notes and the Taxable Auction Rate
Series 1998-1 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 1998-1 Notes and the Taxable LIBOR Rate Series 1998-1 Notes, $100,000 and
any multiple thereof, and (ii) with respect to the Tax Exempt Fixed Rate Series
1998-1 Senior Notes and the Tax Exempt Fixed Rate Series 1998-1 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 1998-1 Senior Notes" shall have the meaning
assigned thereto on page 128 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 47 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 170 of this
Prospectus.
"Bid" shall have the meaning assigned thereto on page 126 of this
Prospectus.
"Bid Auction Rate" shall have the meaning assigned thereto on page 128 of
this Prospectus.
"Bid Orders" shall have the meaning assigned thereto on page 120 of this
Prospectus.
"Bidder" shall have the meaning assigned thereto on page 126 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
1998-1 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 1998-1 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 1998-1 Senior Notes, the Broker-Dealer Agreement (Tax Exempt
Auction Rate Series 1998-1 Notes), dated as of February 1, 1998, 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 1998-1 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 1998-1 Senior Notes, the Broker-
Dealer Agreement (Taxable Auction Rate Series 1998-1 Notes), dated as of
February 1, 1998, 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 1998-1 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 136
of this Prospectus.
"Carry-Over Amount" shall mean (i) with respect to a Taxable Auction Rate
Series 1998-1 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 1998-1 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 1998-1 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
1998-1 Senior Notes and the Taxable LIBOR Rate Series 1998-1 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 6 of this
Prospectus.
"Cedel" shall have the meaning assigned thereto on page 48 of this
Prospectus.
"Cedel Participants" shall have the meaning assigned thereto on page 48 of
this Prospectus.
"Change of Tax Law" shall mean, with respect to the Tax Exempt Auction Rate
Series 1998-1 Senior Notes, any amendment to the Code or other statute enacted
by the Congress of the United States, or any temporary,
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proposed or final regulation promulgated by the United States Treasury, after
the date of issuance of the Tax Exempt Auction Rate Series 1998-1 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 1998-1
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 98 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 1998-1 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 1998-1 Senior Notes -- Auction Procedures -- General".
"Commission" shall have the meaning assigned thereto on page 6 of this
Prospectus.
"Commonwealth" shall have the meaning assigned thereto on page 99 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 49 of this
Prospectus.
"Corporation" shall have the meaning assigned thereto on pages 1 and 7 of
this Prospectus.
"Corporation Student Loan Purchase Agreements" shall have the meaning
assigned thereto on page 74 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 39 of
this Prospectus.
"Costs of Issuance" shall mean all items of expense directly or indirectly
payable by or reimbursable to the Corporation and related to the authorization,
sale and issuance of a series of Notes, including, but not limited to, printing
costs, costs of preparation and reproduction of documents, filing fees, initial
fees and charges of the Trustee, any Authenticating Agent, any Deposit Agent,
any Remarketing Agent, any Depositary, any Auction Agent
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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 16 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 50 of
this Prospectus.
"Deferment Periods" shall have the meaning assigned thereto on page 87 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
19 of this Prospectus.
"Deposit Agent" shall mean any bank or banking association having trust
powers or trust company designated as such pursuant to the Indenture and its
successor or successors and any other bank or banking association having trust
powers or trust company at any time substituted in its place pursuant to the
Indenture.
"Depositary" shall mean, with respect to any series of Notes, any
commercial bank or banking association having trust powers or trust company
designated as such with respect to such Notes pursuant to the provisions of the
Indenture and its successor or successors and any other commercial bank or
banking association having trust powers or trust company at any time substituted
in its place pursuant to the Indenture.
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"Depositary Agreement" shall mean an agreement among a Depositary, the
Trustee, the Corporation, any Remarketing Agent and/or any related Credit
Facility Provider setting forth the rights and obligations of the Depositary
acting in such capacity under the Indenture, including any supplement thereto or
amendment thereof entered into in accordance with the provisions thereof.
"Depositories" shall have the meaning assigned thereto on page 46 of this
Prospectus.
"Disqualified Person" shall have the meaning assigned thereto on page 170
of this Prospectus.
"DOE Data Books" shall have the meaning assigned thereto on page 102 of
this Prospectus.
"DTC" shall have the meaning assigned thereto on page 6 of this Prospectus.
"DTC Participant" shall have the meaning assigned thereto on page 46 of
this Prospectus.
"EAC" shall have the meaning assigned thereto on pages 17 and 95 of this
Prospectus.
"EASCI" shall have the meaning assigned thereto on page 99 of this
Prospectus.
"Educational Loan Assistance Fund" shall have the meaning assigned thereto
on page 99 of this Prospectus.
"Effective Interest Rate" shall mean, with respect to any Financed Student
Loan, the interest rate per annum borne by such Financed Student Loan after
giving effect to all applicable interest subsidy payments, Special Allowance
Payments, rebate fees on Consolidation Loans and reductions pursuant to borrower
incentives. For this purpose, the Special Allowance Payment rate shall be
computed based upon the average of the bond equivalent rates of 91-day United
States Treasury Bills auctioned during that portion of the then current calendar
quarter which ends on the date as of which the Effective Interest Rate is
determined.
"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 1998-1
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 1998-1 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 1998-1 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 1998-1 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 1998-1 Senior Note Interest Rate,
in the case of a series of Taxable Auction Rate Series 1998-1 Senior Notes, or
(2) the Taxable LIBOR Rate Series 1998-1 Interest Rate, in the case of a series
of Taxable LIBOR Rate Series 1998-1 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 49 of this
Prospectus.
"Euroclear Operator" shall have the meaning assigned thereto on page 49 of
this Prospectus.
"Euroclear Participants" shall have the meaning assigned thereto on page 48
of this Prospectus.
"Event of Default" shall have the meaning assigned thereto on page 157 of
this Prospectus.
"Excess Earnings" shall mean, with respect to the Tax Exempt Series 1998-1
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 169 of this
Prospectus.
"ERISA Plans" shall have the meaning assigned thereto on page 169 of this
Prospectus.
"Exchange Act" shall have the meaning assigned thereto on page 6 of this
Prospectus.
"Existing Holders" shall have the meaning assigned thereto on page 122 of
this Prospectus.
"FDIC" shall have the meaning assigned thereto on page 40 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 Family Education Loan Program" means the program for providing
Student Loans established under Title IV, Part B 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.
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"Financed", when used with respect to Student Loans or Eligible Loans,
shall mean Student Loans or Eligible Loans, as the case may be, acquired by the
Corporation with moneys in the Acquisition Fund or the Surplus Account, any
Eligible Loans received in exchange for Financed Student Loans upon the sale
thereof or substitution therefor in accordance with the Indenture and any other
Student Loans deemed to be "Financed" with moneys in the Acquisition Fund and
the Surplus Account pursuant to the Indenture, but does not include Student
Loans released from the lien of the Indenture and sold, as permitted in the
Indenture, to any purchaser, including a trustee for the holders of the
Corporation's bonds, notes or other evidences of indebtedness.
"First Supplemental Indenture" shall mean the First Supplemental Indenture
of Trust, dated as of February 1, 1998, between the Corporation and the Trustee,
setting forth the terms of the Series 1998-1 Notes.
"Fiscal Year" shall mean the fiscal year of the Corporation as established
from time to time.
"Fitch" shall mean Fitch IBCA, Inc., 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 86 of this
Prospectus.
"Gramm-Rudman Law" shall have the meaning assigned thereto on page 93 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, (11) California Student Aid Commission, and its
successors and assigns, including, without limitation, the Secretary of
Education, or (12) 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.
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"Guarantee Agreements" shall mean (1) that certain Lender Agreement for
Guarantee of Student Loans With Federal Reinsurance, dated July 3, 1997, and
that certain Certificate of Comprehensive Insurance, dated September 12, 1997,
between the Trustee and Education Assistance Corporation, (2) that Lender
Agreement for Guarantee of Student Loans With Federal Reinsurance, dated
February 28, 1994, between the Trustee and Pennsylvania Higher Education
Assistance Agency, (3) that certain Agreement to Guarantee Loans, dated July 11,
1997, between the Trustee and United Student Aid Funds, Inc., (4) that certain
Lender Participation Agreement for Insurance, dated July 8, 1997, between the
Trustee and Student Loans of North Dakota, (5) that certain Lender Agreement for
Guarantee of Student Loans With Federal Reinsurance, dated July 15, 1997,
between the Trustee and Northstar Guarantee Inc., (6) that certain Student Loan
Guaranty, dated July 15, 1997, between the Trustee and Great Lakes Higher
Education Corporation, (7) that certain Agreement for Payment on Guarantee of
Student Loans With Federal Reinsurance, dated December 15, 1994, between the
Trustee and Educational Credit Management Corporation (formerly known as
Transitional Guaranty Agency, Inc.), (8) that certain Holder Agreement, dated
July 16, 1997, between the Trustee and Illinois Student Assistance Commission,
(9) that certain Agreement to Guarantee Loans, dated July 15, 1997, and that
certain Agreement to Guarantee PLUS/SLS Loans, dated July 15, 1997, between the
Trustee and Iowa College Aid Commission, (10) that certain Agreement to
Guarantee Loans made by a Commercial Lender, dated July 10, 1997, that certain
Agreement to Guarantee CLAS Program Loans made by a Commercial Lender, dated
July 10, 1997, and that certain Consolidation Loan Program Lender Participation
Agreement, dated July 6, 1997, Addendum to Consolidation Loan Program Lender
Participation Agreement, dated as of June 30, 1997, and Certificate of
Comprehensive Insurance, dated July 17, 1997, between the Trustee and California
Student Aid Commission, (11) that certain Agreement to Guarantee Stafford Loans
Federal PLUS Loans Federal SLS Loans, dated July 15, 1997 between the Trustee
and Missouri Coordinating Board for Higher Education, and (12) 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
originated or 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 96 of this
Prospectus.
"Guarantee Payments" shall have the meaning assigned thereto on page 33 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 pages 120 and 125
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 2 of this
Prospectus.
"Indenture Obligations" shall have the meaning assigned thereto on page 58
of this Prospectus.
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"Index" shall mean, with respect to a series of Tax Exempt Auction Rate
Series 1998-1 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 1998-1 Senior Notes, bear interest not subject to the
alternative minimum tax, and are rated no lower than "Aa" by Moody's or "AA" by
Fitch. If the Index cannot be determined as provided above, a comparable
substitute index selected by the Market Agent with the approval of an Authorized
Officer of the Corporation may be used.
"Indirect Participants" shall have the meaning assigned thereto on page 46
of this Prospectus.
"Insolvency Laws" shall have the meaning assigned thereto on page 37 of
this Prospectus.
"Initial Interest Period" shall mean, as to a series of Auction Rate Series
1998-1 Senior Notes or Taxable LIBOR Rate Series 1998-1 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 1998-1A Notes, March 26, 1998, (ii) with respect to the Series 1998-1B
Notes, April 2, 1998, (iii) with respect to the Series 1998-1C Notes, April 9,
1998, (iv) with respect to the Series 1998-1D Notes, April 16, 1998, (v) with
respect to the Series 1998-1E Notes, April 23, 1998, (vi) with respect to the
Series 1998-1G Notes, March 24, 1998, (vii) with respect to the Series 1998-1H
Notes, March 31, 1998 and (viii) with respect to the Taxable LIBOR Rate Series
1998-1 Notes, March 2, 1998.
"In-State Loans" shall have the meaning assigned thereto on page 71 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 call for 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 1998-1 Notes shall be
(i) with respect to a series of Taxable Auction Rate Series 1998-1 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 1998-1 Notes, the first
Business Day of each calendar month, commencing March 2, 1998, and (iii) with
respect to the Tax Exempt Series 1998-1 Notes, each June 1 and December 1,
commencing June 1, 1998.
"Interest Period" shall mean, with respect to a series of Auction Rate
Series 1998-1 Senior Notes or Taxable LIBOR Rate Series 1998-1 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.
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"Interest Rate Adjustment Date" shall mean the date on which the interest
rate on a series of Auction Rate Series 1998-1 Senior Notes or Taxable LIBOR
Rate Series 1998-1 Notes is effective, which (i) with respect to a series of
Auction Rate Series 1998-1 Senior Notes, shall be the date of commencement of
each Auction Period, and (ii) with respect to a series of Taxable LIBOR Rate
Series 1998-1 Notes, shall be each Interest Payment Date.
"Interest Rate Determination Date" shall mean (i) with respect to a series
of Auction Rate Series 1998-1 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 1998-1 Notes, the second Business Day immediately
preceding the date of commencement of an Interest Period (other than the Initial
Interest Period).
"Interest Subsidy Agreement" shall have the meaning assigned thereto on
page 97 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 19 of
this Prospectus.
"Investment Securities" shall have the meaning assigned thereto on page 156
of this Prospectus.
"IRAs" shall have the meaning assigned thereto on page 169 of this
Prospectus.
"Issuer" shall have the meaning assigned thereto on page 166 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 34 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 1998-1 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) 14%, (ii)
with respect to a series of Taxable Auction Rate Series 1998-1 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
1998-1 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 1998-1 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
1998-1 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 1998-1 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 1998-1 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
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Fitch to the Taxable Auction Rate Series 1998-1 Senior Notes is less than "A").
For purposes of the Auction Agent and the Auction Procedures, the ratings
referred to in this definition shall be the last ratings of which the Auction
Agent shall have been given notice pursuant to the Auction Agent Agreement.
"Monthly Payment Date" shall mean the 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 any Interest Period for a
series of Taxable Auction Rate Series 1998-1 Senior Notes or Taxable LIBOR Rate
Series 1998-1 Notes commencing during a given month, the rate of interest per
annum (rounded to the next highest .01%) equal to (i) the weighted average
Effective Interest Rate of Student Loans in the Series 1998-1 Taxable
Acquisition Account, determined as of the last day of the second preceding
month, less (ii) the Administrative Cost and Note Fee Rate.
"New Borrower" shall have the meaning assigned thereto on page 83 of this
Prospectus.
"1933 Act" shall have the meaning assigned thereto on page 6 of this
Prospectus.
"1980 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1981 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1986 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1987 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1989 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1992 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1993 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1993 Technical Amendments" shall have the meaning assigned thereto on page
81 of this Prospectus.
"1997 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"91-day T-Bill Rate" shall have the meaning assigned thereto on page 92 of
this Prospectus.
"Non-Payment Rate" shall mean (i) with respect to a series of Tax Exempt
Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior
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Notes") of the Index and (b) 14%, and (ii) with respect to a series of Taxable
Auction Rate Series 1998-1 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 1998-1 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 1998-1 Senior Notes or Taxable LIBOR Rate Series 1998-1 Notes and
any Interest Rate Determination Date, the rate of interest per annum equal to
the London interbank offered rate for deposits in United States dollars having a
maturity of one month (commencing on such Interest Rate Determination Date)
which appears on Telerate Page 3750 as of 11:00 a.m., London time, on such
Interest Rate Determination Date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined by reference to the Reuters
Screen LIBOR Page. If such rate does not appear on Telerate Page 3750 or the
Reuters Screen LIBOR Page, One-Month LIBOR for such Interest Rate Determination
Date will be determined on the basis of the rates at which deposits in United
States dollars having a maturity of one month and in a principal amount of not
less than U.S. $1,000,000 are offered at approximately 11:00 a.m., London time,
on such Interest Rate Determination Date to prime banks in the London interbank
market by the Reference Banks. The Auction Agent or the Trustee, as applicable,
will request the principal London office of each of the Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
One-Month LIBOR for that Interest Rate Determination Date will be the arithmetic
mean (rounded upwards, if necessary, to the nearest .01%) of such quotations. If
fewer than two such quotations are provided, One-Month LIBOR for that Interest
Rate Determination Date 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 such Interest Rate Determination Date by three major
banks in New York, New York, selected by the Auction Agent after consultation
with the Trustee, or by 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 of not less than U.S. $1,000,000; 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 pages 1 and 7
of this Prospectus.
"Original Issuer Student Loan Purchase Agreements" shall have the meaning
assigned thereto on page 73 of this Prospectus.
"Order" shall have the meaning assigned thereto on page 126 of this
Prospectus.
"Other Beneficiary" shall mean an Other Senior Beneficiary or an Other
Subordinate Beneficiary.
"Other Indenture Obligations" shall mean, collectively, the Other Senior
Obligations and Other Subordinate Obligations.
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"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 170
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 1998-1 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 pages 17 and 95 of this
Prospectus.
"PHEAA Act" shall have the meaning assigned thereto on page 99 of this
Prospectus.
"PHEAA Bond Fund" shall have the meaning assigned thereto on page 100 of
this Prospectus.
"Plan Assets Regulation" shall have the meaning assigned thereto on page
170 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 57 of this Prospectus.
"Pledged Revenues" shall have the meaning assigned thereto on page 57 of
this Prospectus.
"Plus Loan" shall mean a Student Loan made pursuant to Section 428B of the
Higher Education Act.
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"Potential Bid Orders" shall have the meaning assigned thereto on page 120
of this Prospectus.
"Potential Holders" shall have the meaning assigned thereto on page 122 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 1998-1 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 170 of this
Prospectus.
"Purchase Date" shall mean, with respect to a Demand Note, the date
specified in a purchase demand (provided that such date is prior to any
applicable conversion date and is not less than the required number of calendar
days after receipt of such purchase demand by the Depositary) as the date on
which the Holder of the Demand Note identified in such purchase demand is
demanding purchase of such Note, or a specified portion thereof, in accordance
with the applicable provisions of the related Supplemental Indenture, or the
next preceding or succeeding Business Day, as provided for in such Supplemental
Indenture, if such date is not a Business Day.
"Qualified Retirement Plans" shall have the meaning assigned thereto on
page 169 of this Prospectus.
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"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 pages 27 and 60
of this Prospectus.
"Redemption Date," when used with respect to any Note called for
redemption, shall mean the date fixed for such redemption by or pursuant to the
Indenture.
"Redemption Price," when used with respect to any Note called for
redemption, means the price at which it is to be redeemed pursuant to the
Indenture.
"Reference Banks" shall mean four leading banks, selected by the Auction
Agent, after consultation with the Trustee, or by the Trustee, as applicable,
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market and having an established place of business in London.
"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 149
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 83 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" will be 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 101 of this
Prospectus.
"S&P" shall mean Standard & Poor's, a division of McGraw-Hill Inc., its
successors and assigns.
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"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 1998-1 Notes, and its successors and
assigns, or, if (i) the then-existing Securities Depository resigns from its
functions as depository of the Series 1998-1 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 1998-1 Notes and which is selected by the Corporation
with the consent of the Trustee.
"Sell Order" shall have the meaning assigned thereto on page 126 of this
Prospectus.
"Seller's Broker-Dealer" shall have the meaning assigned thereto on page
135 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.
"Senior Credit Facility Provider" shall mean any Person who provides a
Senior Credit Enhancement Facility.
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"Senior Notes" shall mean the Series 1998-1 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 1998-1 Excess Earnings Sub-Account" means the Sub-Account of that
name created within the Excess Earnings Account under the Indenture.
"Series 1998-1 Notes" shall mean, collectively, the Series 1998-1 Senior
Notes and the Series 1998-1 Subordinate Notes.
"Series 1998-1 Senior Notes" shall mean, collectively, the Series 1998-1A
Notes, the Series 1998-1B Notes, the Series 1998-1C Notes, the Series 1998-1D
Notes, the Series 1998-1E Notes, the Series 1998-1F Notes, the Series 1998-1G
Notes, the Series 1998-1H Notes, the Series 1998-1I Notes and the Series 1998-1J
Notes.
"Series 1998-1 Subordinate Notes" shall mean, collectively, the Series
1998-1K Notes and the Series 1998-1L Notes.
"Series 1998-1A Notes" shall mean the Corporation's Tax Exempt Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1A, issued under
the Indenture.
"Series 1998-1B Notes" shall mean the Corporation's Tax Exempt Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1B, issued under
the Indenture.
"Series 1998-1C Notes" shall mean the Corporation's Tax Exempt Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1C, issued under
the Indenture.
"Series 1998-1D Notes" shall mean the Corporation's Tax Exempt Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1D, issued under
the Indenture.
"Series 1998-1E Notes" shall mean the Corporation's Tax Exempt Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1E, issued under
the Indenture.
"Series 1998-1F Notes" shall mean the Corporation's Tax Exempt Fixed Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1F, issued under
the Indenture.
"Series 1998-1G Notes" shall mean the Corporation's Taxable Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1G, issued under
the Indenture.
"Series 1998-1H Notes" shall mean the Corporation's Taxable Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1H, issued under
the Indenture.
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"Series 1998-1I Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1I, issued under
the Indenture.
"Series 1998-1J Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1J, issued under
the Indenture.
"Series 1998-1K Notes" shall mean the Corporation's Tax Exempt Fixed Rate
Student Loan Asset-Backed Callable Notes, Subordinate Series 1998-1K, issued
under the Indenture.
"Series 1998-1L Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes, Subordinate Series 1998-1L, issued
under the Indenture.
"Series 1998-1 Tax Exempt Acquisition Account" means the Account of that
name created within the Acquisition Fund under the Indenture.
"Series 1998-1 Tax Exempt Reserve Account" means the Account of that name
created within the Reserve Fund under the Indenture.
"Series 1998-1 Tax Exempt Retirement Sub-Account" means the Sub-Account of
that name created within the Retirement Account under the Indenture.
"Series 1998-1 Tax Exempt Surplus Sub-Account" means the Sub-Account of
that name created within the Surplus Account under the Indenture.
"Series 1998-1 Taxable Acquisition Account" means the Account of that name
created within the Acquisition Fund under the Indenture.
"Series 1998-1 Taxable Reserve Account" means the Account of that name
created within the Reserve Fund under the Indenture.
"Series 1998-1 Taxable Retirement Sub-Account" means the Sub-Account of
that name created within the Retirement Account under the Indenture.
"Series 1998-1 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 167 of this
Prospectus.
"Servicer" shall mean SLFC and any other organization with which the
Corporation and the Trustee have entered into a Servicing Agreement, subject to
confirmation of ratings on any Outstanding Unenhanced Notes or, if no Unenhanced
Notes are then Outstanding but Other Indenture Obligations are Outstanding,
consent of each Other Beneficiary entitled to such Other Indenture Obligations.
"Servicing Agreement" shall mean the SLFC Servicing Agreement, and any
other agreement among the Corporation, the Trustee and a Servicer under which
the Servicer agrees to act as the Corporation's and/or the Trustee's agent or
provides services or facilities (including, without limitation, computer
hardware or software) in connection with the administration and collection of
Financed Student Loans in accordance with the Indenture.
"Servicing Fees" shall mean any fees payable by the Corporation to a
Servicer in respect of Financed Student Loans pursuant to the provisions of a
Servicing Agreement.
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"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
called for redemption, the Stated Maturity thereof.
"SLFC" shall have the meaning assigned thereto on pages 2 and 7 of this
Prospectus.
"SLFC Servicing Agreement" shall have the meaning assigned thereto on pages
20 and 67 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
51 of this Prospectus.
"Special Redemption and Prepayment Account Requirement" (i) with respect to
the Taxable LIBOR Rate Series 1998-1 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.
"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 1998-1 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
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section, without regard to any minimum additional tax provision. The "Statutory
Corporate Tax Rate", as of February 1, 1998 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 19
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 125
of this Prospectus.
"Submitted Bid" shall have the meaning assigned thereto on page 128 of this
Prospectus.
"Submitted Hold Order" shall have the meaning assigned thereto on page 128
of this Prospectus.
"Submitted Orders" shall have the meaning assigned thereto on page 128 of
this Prospectus.
"Submitted Sell Order" shall have the meaning assigned thereto on page 128
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 1998-1 Subordinate Notes and any
other Notes designated in a Supplemental Indenture as Subordinate Notes, which
are secured under the Indenture on a basis subordinate to any Senior
Obligations, on a parity with other Subordinate Obligations and on a basis
senior to any Class C Notes.
"Subordinate Obligations" shall mean, collectively, the Subordinate Notes
and the Other Subordinate Obligations.
"Subordinate Percentage" shall mean, as of the date of determination, the
percentage resulting by dividing the Aggregate Value by the sum of (i) the
aggregate Principal Amount of Outstanding Senior Notes and Subordinate Notes
plus accrued interest thereon, (ii) accrued Corporation Swap Payments and (iii)
other payments accrued and owing by the Corporation on Other Indenture
Obligations.
"Subordinate Swap Agreement" shall mean a Swap Agreement designated as a
Subordinate Swap Agreement in the Supplemental Indenture pursuant to which such
Swap Agreement is furnished by the Corporation.
"Subordinate Swap Counterparty" shall mean any Person who provides a
Subordinate Swap Agreement.
-198-
<PAGE>
"Sufficient Bids" shall have the meaning assigned thereto on page 128 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 1998-1 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 1998-1 Senior Notes" shall mean,
collectively, the Series 1998-1A Notes, the Series 1998-1B Notes, the Series
1998-1C Notes, the Series 1998-D Notes and the Series 1998-E Notes.
"Tax Exempt Fixed Rate Series 1998-1 Notes" shall mean, collectively, the
Tax Exempt Fixed Rate Series 1998-1 Senior Notes and the Tax Exempt Fixed Rate
Series 1998-1 Subordinate Notes.
"Tax Exempt Fixed Rate Series 1998-1 Senior Notes" shall mean the Series
1998-1F Notes.
"Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes" shall mean the
Series 1998-1K Notes.
"Tax-Favored Plans" shall have the meaning assigned thereto on page 169 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 1998-1 Senior Notes" shall mean, collectively,
the Series 1998-1G Notes and the Series 1998-1H Notes.
"Taxable LIBOR Rate Series 1998-1 Notes" shall mean, collectively, the
Taxable LIBOR Rate Series 1998-1 Senior Notes and the Taxable LIBOR Rate Series
1998-1 Subordinate Notes.
"Taxable LIBOR Rate Series 1998-1 Senior Note Initial Interest Rate" shall
mean the interest rate to be borne by a series of Taxable LIBOR Rate Series
1998-1 Senior Notes for the Initial Interest Period therefor, as set forth in
the First Supplemental Indenture.
"Taxable LIBOR Rate Series 1998-1 Senior Note Interest Rate" shall mean the
rate of interest per annum borne by a series of Taxable LIBOR Rate Series 1998-1
Senior Notes, which, during the Initial Interest Period for such series, shall
be the Taxable LIBOR Rate Series 1998-1 Senior Note Initial Interest Rate, and
during each
-199-
<PAGE>
Interest Period thereafter, shall be the lesser of (i) One-Month LIBOR plus the
Taxable LIBOR Rate Series 1998-1 Senior Note Spread, or (ii) the Net Loan Rate.
"Taxable LIBOR Rate Series 1998-1 Senior Note LIBOR-Based Rate" shall have
the meaning assigned thereto on page 112 of this Prospectus.
"Taxable LIBOR Rate Series 1998-1 Senior Note Spread" shall mean ___% per
annum, with respect to the Series 1998-1I Notes, and ___% per annum, with
respect to the Series 1998-1J Notes.
"Taxable LIBOR Rate Series 1998-1 Senior Notes" shall mean, collectively,
the Series 1998-1I Notes and the Series 1998-1J Notes.
"Taxable LIBOR Rate Series 1998-1 Subordinate Note Initial Interest Rate"
shall mean the interest rate to be borne by the Taxable LIBOR Rate Series 1998-1
Subordinate Notes for the Initial Interest Period therefor, as set forth in the
First Supplemental Indenture.
"Taxable LIBOR Rate Series 1998-1 Subordinate Note Interest Rate" shall
mean the rate of interest per annum borne by the Taxable LIBOR Rate Series 1998-
1 Subordinate Notes, which, during the Initial Interest Period for such series,
shall be the Taxable LIBOR Rate Series 1998-1 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 1998-1 Subordinate Note
Spread or (ii) the Net Loan Rate.
"Taxable LIBOR Rate Series 1998-1 Subordinate Note LIBOR-Based Rate" shall
have the meaning assigned thereto on page 116 of this Prospectus.
"Taxable LIBOR Rate Series 1998-1 Subordinate Note Spread" shall mean ___%
per annum.
"Taxable LIBOR Rate Series 1998-1 Subordinate Notes" shall mean the Series
1998-1L Notes.
"Taxable Series 1998-1 Notes" shall mean, collectively, the Taxable Auction
Rate Series 1998-1 Senior Notes and the Taxable LIBOR Rate Series 1998-1 Notes.
"Telerate Page 3750" shall mean the display page so designated on the Dow
Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Terms and Conditions" shall have the meaning assigned thereto on page 49
of this Prospectus.
"Three-Month LIBOR" shall mean, with respect to a series of Taxable Auction
Rate Series 1998-1 Senior Notes and any Interest Rate Determination Date, the
rate of interest per annum equal to the London interbank offered rate for
deposits in United States dollars having a maturity of three months (commencing
on such Interest Rate Determination Date) which appears on Telerate Page 3750 as
of 11:00 a.m., London time, on such Interest Rate Determination Date. If such
rate does not appear on Telerate Page 3750, the rate for that day will be
determined by reference to the Reuters Screen LIBOR Page. If such rate does not
appear on Telerate Page 3750 or the Reuters Screen LIBOR Page, Three-Month LIBOR
for such Interest Rate Determination Date will be determined on the basis of the
rates at which deposits in United States dollars having a maturity of three
months and in a principal amount of not less than U.S. $1,000,000 are offered at
approximately 11:00 a.m., London time, on such Interest Rate Determination Date
to prime banks in the London interbank market by the Reference Banks. The
Auction Agent will request the principal London office of each of the Reference
Banks to provide a quotation of its rate. If at least two such quotations are
provided, Three-Month LIBOR for that Interest Rate Determination Date will be
the arithmetic mean (rounded upwards, if necessary, to the nearest .01%) of such
quotations. If fewer than two such quotations are provided, Three-Month LIBOR
for that Interest Rate Determination Date will be the arithmetic mean (rounded
upwards, if necessary, to the nearest .01%) of the rates quoted at approximately
11:00
-200-
<PAGE>
a.m., New York City time, on such Interest Rate Determination Date by three
major banks in New York, New York, selected by the Auction Agent after
consultation with the Trustee, for loans in United States dollars to leading
European banks having a maturity of three months and in a principal amount of
not less than U.S. $1,000,000; 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 2 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 2 of this
Prospectus.
"Underwriters" shall mean Smith Barney Inc., Salomon Brothers Inc, U.S.
Bancorp Investments, Inc., Dougherty Summit Securities LLC, Miller & Schroeder
Financial, Inc., and Norwest Investment Services, Inc.
"Underwriting Agreement" shall have the meaning assigned thereto on page
171 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 4 of
this Prospectus.
"U.S. Person" shall have the meaning assigned thereto on page 169 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;
(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
-201-
<PAGE>
(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.
-202-
<PAGE>
Index to Financial Statement
----------------------------
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
Independent Auditor's Report.......................................... F-2
Balance Sheet......................................................... F-3
Notes to Balance Sheet................................................ F-4
</TABLE>
F-1
<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 January 27, 1998. 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 January 27, 1998 in
conformity with generally accepted accounting principles.
Eide Helmeke PLLP
January 27, 1998
Aberdeen, South Dakota
F-2
<PAGE>
EDUCATION LOANS INCORPORATED
(a wholly-owned subsidiary of Student Loan Finance Corporation)
BALANCE SHEET
JANUARY 27, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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
====
</TABLE>
See Notes to Balance Sheet
F-3
<PAGE>
EDUCATION LOANS INCORPORATED
(a wholly-owned subsidiary of Student Loan Finance Corporation)
NOTES TO BALANCE SHEET
JANUARY 27, 1998
- --------------------------------------------------------------------------------
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 January 27, 1998. 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
January 27, 1998, 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-4
<PAGE>
COMPUTATIONAL MATERIALS
Annex A
Relating to
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Debt Payment Summary
LIBOR Floating Rate Classes
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Class 1I Senior Notes 1J Senior Notes
- ------------- ----------------------------- ------------------------------
Prepayment Average Payment Average Payment
Rate Life (Yrs) Window Life (Yrs) Window
- ------------- ----------------------------- ------------------------------
<S> <C> <C> <C> <C>
0% 2.09 3/1/98-3/1/02 7.14 3/1/02-5/1/10
3% 1.75 3/1/98-8/1/01 6.34 8/1/01-10/1/08
5% 1.58 3/1/98-4/1/01 5.88 4/1/01-2/1/08
7% 1.44 3/1/98-1/1/01 5.48 1/1/01-7/1/07
10% 1.26 3/1/98-9/1/00 4.93 9/1/00-10/1/06
</TABLE>
<TABLE>
<CAPTION>
- ------------- ------------------------------
Class 1L Subordinate Notes
- ------------- ------------------------------
Prepayment Average Payment
Rate Life (Yrs) Window
- ------------- ------------------------------
<S> <C> <C>
0% 4.94 3/1/98-5/1/10
3% 4.34 3/1/98-10/1/08
5% 4.01 3/1/98-2/1/08
7% 3.72 3/1/98-7/1/07
10% 3.34 3/1/98-10/1/06
</TABLE>
The amounts shown in the tables above and on the following pages are based on
various assumptions and considerations described under "Weighted Average Life of
the Taxable LIBOR Rate Series 1998-1 Notes".
Page A-1
<PAGE>
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Projected Outstanding Balances
1I Senior Notes
<TABLE>
<CAPTION>
0% CPR 3% CPR 5% CPR 7% CPR 10% CPR
Outstanding Outstanding Outstanding Outstanding Outstanding
Date Balance Balance Balance Balance Balance
<S> <C> <C> <C> <C> <C>
19-Feb-98 185,000,000 185,000,000 185,000,000 185,000,000 185,000,000
01-Mar-98 183,817,438 183,511,788 183,303,169 183,090,485 182,763,463
01-Apr-98 180,493,115 179,327,453 178,534,243 177,727,581 176,491,208
01-May-98 177,276,073 175,250,777 173,875,673 172,479,806 170,345,392
01-Jun-98 173,757,807 170,862,066 168,900,091 166,911,927 163,878,567
01-Jul-98 170,157,440 166,390,181 163,842,994 161,266,189 157,343,300
01-Aug-98 166,736,530 162,109,273 158,987,096 155,833,995 151,044,253
01-Sep-98 163,069,220 157,592,098 153,904,131 150,185,962 144,550,165
01-Oct-98 159,463,424 153,144,372 148,898,251 144,624,584 138,160,826
01-Nov-98 155,948,237 148,799,815 144,006,270 139,189,767 131,920,759
01-Dec-98 152,257,408 144,293,414 138,963,945 133,617,987 125,567,388
01-Jan-99 148,488,828 139,686,650 133,807,833 127,920,312 119,072,433
01-Feb-99 144,817,288 135,191,578 128,775,440 122,360,209 112,739,279
01-Mar-99 140,973,517 130,539,166 123,597,834 116,668,781 106,298,943
01-Apr-99 137,082,278 125,834,520 118,366,619 110,923,795 99,807,753
01-May-99 133,311,931 121,262,784 113,278,368 105,333,441 93,491,689
01-Jun-99 129,381,761 116,538,920 108,045,043 99,606,574 87,054,717
01-Jul-99 125,444,921 111,822,920 102,831,236 93,912,414 80,673,042
01-Aug-99 121,630,455 107,245,002 97,767,891 88,382,577 74,479,170
01-Sep-99 117,661,215 102,525,818 92,574,069 82,734,423 68,187,680
01-Oct-99 113,685,200 97,816,016 87,402,162 77,122,065 61,955,205
01-Nov-99 109,832,313 93,248,374 82,386,842 71,682,039 55,921,023
01-Dec-99 105,858,889 88,578,676 77,283,405 66,169,050 49,838,734
01-Jan-2000 101,858,907 83,890,300 72,167,929 60,651,677 43,765,266
01-Feb-2000 97,938,161 79,302,401 67,168,602 55,267,244 37,851,850
01-Mar-2000 93,934,941 74,653,140 62,123,433 49,853,545 31,935,828
01-Apr-2000 89,939,394 70,025,528 57,110,495 44,483,567 26,082,253
01-May-2000 86,002,099 65,472,930 52,184,945 39,214,194 20,350,486
01-Jun-2000 81,981,072 60,850,427 47,199,816 33,896,334 14,588,087
01-Jul-2000 77,973,752 56,259,202 42,258,796 28,636,193 8,905,054
01-Aug-2000 74,044,177 51,764,153 37,427,323 23,499,707 3,368,001
01-Sep-2000 70,048,298 47,217,458 32,554,887 18,333,543 (0)
01-Oct-2000 66,048,244 42,683,600 27,707,481 13,205,154 (0)
01-Nov-2000 62,088,898 38,209,665 22,933,617 8,164,436 (0)
01-Dec-2000 58,089,392 33,712,503 18,148,530 3,124,939 (0)
01-Jan-2001 54,099,593 29,242,408 13,402,752 0 (0)
01-Feb-2001 50,160,355 24,841,260 8,738,811 0 (0)
01-Mar-2001 46,140,013 20,383,346 4,034,719 0 (0)
01-Apr-2001 42,122,823 15,945,270 0 0 (0)
01-May-2001 38,136,786 11,555,694 0 0 (0)
01-Jun-2001 34,110,140 7,130,543 0 0 (0)
01-Jul-2001 30,083,505 2,725,937 0 0 (0)
01-Aug-2001 26,083,845 0 0 0 (0)
01-Sep-2001 22,097,454 0 0 0 (0)
01-Oct-2001 18,125,475 0 0 0 (0)
01-Nov-2001 14,174,574 0 0 0 (0)
01-Dec-2001 10,248,461 0 0 0 (0)
01-Jan-2002 6,334,690 0 0 0 (0)
01-Feb-2002 2,440,759 0 0 0 (0)
01-Mar-2002 (0) 0 0 0 (0)
01-Apr-2002 (0) 0 0 0 (0)
01-May-2002 (0) 0 0 0 (0)
01-Jun-2002 (0) 0 0 0 (0)
01-Jul-2002 (0) 0 0 0 (0)
01-Aug-2002 (0) 0 0 0 (0)
01-Sep-2002 (0) 0 0 0 (0)
01-Oct-2002 (0) 0 0 0 (0)
01-Nov-2002 (0) 0 0 0 (0)
01-Dec-2002 (0) 0 0 0 (0)
01-Jan-2003 (0) 0 0 0 (0)
01-Feb-2003 (0) 0 0 0 (0)
01-Mar-2003 (0) 0 0 0 (0)
01-Apr-2003 (0) 0 0 0 (0)
01-May-2003 (0) 0 0 0 (0)
01-Jun-2003 (0) 0 0 0 (0)
01-Jul-2003 (0) 0 0 0 (0)
01-Aug-2003 (0) 0 0 0 (0)
01-Sep-2003 (0) 0 0 0 (0)
01-Oct-2003 (0) 0 0 0 (0)
</TABLE>
Page A-2
<PAGE>
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Projected Outstanding Balances
1I Senior Notes
<TABLE>
<CAPTION>
0% CPR 3% CPR 5% CPR 7% CPR 10% CPR
Outstanding Outstanding Outstanding Outstanding Outstanding
Date Balance Balance Balance Balance Balance
<S> <C> <C> <C> <C> <C>
01-Nov-2003 (0) 0 0 0 (0)
01-Dec-2003 (0) 0 0 0 (0)
01-Jan-2004 (0) 0 0 0 (0)
01-Feb-2004 (0) 0 0 0 (0)
01-Mar-2004 (0) 0 0 0 (0)
01-Apr-2004 (0) 0 0 0 (0)
01-May-2004 (0) 0 0 0 (0)
01-Jun-2004 (0) 0 0 0 (0)
01-Jul-2004 (0) 0 0 0 (0)
01-Aug-2004 (0) 0 0 0 (0)
01-Sep-2004 (0) 0 0 0 (0)
01-Oct-2004 (0) 0 0 0 (0)
01-Nov-2004 (0) 0 0 0 (0)
01-Dec-2004 (0) 0 0 0 (0)
01-Jan-2005 (0) 0 0 0 (0)
01-Feb-2005 (0) 0 0 0 (0)
01-Mar-2005 (0) 0 0 0 (0)
01-Apr-2005 (0) 0 0 0 (0)
01-May-2005 (0) 0 0 0 (0)
01-Jun-2005 (0) 0 0 0 (0)
01-Jul-2005 (0) 0 0 0 (0)
01-Aug-2005 (0) 0 0 0 (0)
01-Sep-2005 (0) 0 0 0 (0)
01-Oct-2005 (0) 0 0 0 (0)
01-Nov-2005 (0) 0 0 0 (0)
01-Dec-2005 (0) 0 0 0 (0)
01-Jan-2006 (0) 0 0 0 (0)
01-Feb-2006 (0) 0 0 0 (0)
01-Mar-2006 (0) 0 0 0 (0)
01-Apr-2006 (0) 0 0 0 (0)
01-May-2006 (0) 0 0 0 (0)
01-Jun-2006 (0) 0 0 0 (0)
01-Jul-2006 (0) 0 0 0 (0)
01-Aug-2006 (0) 0 0 0 (0)
01-Sep-2006 (0) 0 0 0 (0)
01-Oct-2006 (0) 0 0 0 (0)
01-Nov-2006 (0) 0 0 0 (0)
01-Dec-2006 (0) 0 0 0 (0)
01-Jan-2007 (0) 0 0 0 (0)
01-Feb-2007 (0) 0 0 0 (0)
01-Mar-2007 (0) 0 0 0 (0)
01-Apr-2007 (0) 0 0 0 (0)
01-May-2007 (0) 0 0 0 (0)
01-Jun-2007 (0) 0 0 0 (0)
01-Jul-2007 (0) 0 0 0 (0)
01-Aug-2007 (0) 0 0 0 (0)
01-Sep-2007 (0) 0 0 0 (0)
01-Oct-2007 (0) 0 0 0 (0)
01-Nov-2007 (0) 0 0 0 (0)
01-Dec-2007 (0) 0 0 0 (0)
01-Jan-2008 (0) 0 0 0 (0)
01-Feb-2008 (0) 0 0 0 (0)
01-Mar-2008 (0) 0 0 0 (0)
01-Apr-2008 (0) 0 0 0 (0)
01-May-2008 (0) 0 0 0 (0)
01-Jun-2008 (0) 0 0 0 (0)
01-Jul-2008 (0) 0 0 0 (0)
01-Aug-2008 (0) 0 0 0 (0)
01-Sep-2008 (0) 0 0 0 (0)
01-Oct-2008 (0) 0 0 0 (0)
01-Nov-2008 (0) 0 0 0 (0)
01-Dec-2008 (0) 0 0 0 (0)
01-Jan-2009 (0) 0 0 0 (0)
01-Feb-2009 (0) 0 0 0 (0)
01-Mar-2009 (0) 0 0 0 (0)
01-Apr-2009 (0) 0 0 0 (0)
01-May-2009 (0) 0 0 0 (0)
01-Jun-2009 (0) 0 0 0 (0)
01-Jul-2009 (0) 0 0 0 (0)
01-Aug-2009 (0) 0 0 0 (0)
01-Sep-2009 (0) 0 0 0 (0)
01-Oct-2009 (0) 0 0 0 (0)
01-Nov-2009 (0) 0 0 0 (0)
01-Dec-2009 (0) 0 0 0 (0)
01-Jan-2010 (0) 0 0 0 (0)
01-Feb-2010 (0) 0 0 0 (0)
01-Mar-2010 (0) 0 0 0 (0)
01-Apr-2010 (0) 0 0 0 (0)
01-May-2010 (0) 0 0 0 (0)
01-Jun-2010 (0) 0 0 0 (0)
</TABLE>
Page A-3
<PAGE>
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Projected Outstanding Balances
1J Senior Notes
<TABLE>
<CAPTION>
0% CPR 3% CPR 5% CPR 7% CPR 10% CPR
Outstanding Outstanding Outstanding Outstanding Outstanding
Date Balance Balance Balance Balance Balance
- ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
19-Feb-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Mar-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Apr-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-May-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jun-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jul-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Aug-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Sep-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Oct-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Nov-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Dec-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jan-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Feb-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Mar-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Apr-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-May-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jun-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jul-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Aug-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Sep-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Oct-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Nov-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Dec-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jan-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Feb-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Mar-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Apr-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-May-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jun-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jul-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Aug-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Sep-2000 239,600,000 239,600,000 239,600,000 239,600,000 237,419,084
01-Oct-2000 239,600,000 239,600,000 239,600,000 239,600,000 231,927,849
01-Nov-2000 239,600,000 239,600,000 239,600,000 239,600,000 226,546,201
01-Dec-2000 239,600,000 239,600,000 239,600,000 239,600,000 221,185,012
01-Jan-2001 239,600,000 239,600,000 239,600,000 237,737,389 215,895,225
01-Feb-2001 239,600,000 239,600,000 239,600,000 232,844,934 210,720,868
01-Mar-2001 239,600,000 239,600,000 239,600,000 227,929,119 205,548,424
01-Apr-2001 239,600,000 239,600,000 238,962,001 223,056,403 200,436,769
01-May-2001 239,600,000 239,600,000 234,349,721 218,256,218 195,415,838
01-Jun-2001 239,600,000 239,600,000 229,705,320 213,427,299 190,370,866
01-Jul-2001 239,600,000 239,600,000 225,095,414 208,646,901 185,395,361
01-Aug-2001 239,600,000 237,967,230 220,544,280 203,938,214 180,510,875
01-Sep-2001 239,600,000 233,640,308 216,037,463 199,286,394 175,701,880
01-Oct-2001 239,600,000 229,346,757 211,576,752 194,693,358 170,970,357
01-Nov-2001 239,600,000 225,092,849 207,168,092 190,164,675 166,321,217
01-Dec-2001 239,600,000 220,881,144 202,813,240 185,701,270 161,754,092
01-Jan-2002 239,600,000 216,699,460 198,500,088 181,291,031 157,256,726
01-Feb-2002 239,600,000 212,555,562 194,236,523 176,941,924 152,837,128
01-Mar-2002 238,183,023 208,462,925 190,034,180 172,663,807 148,502,597
01-Apr-2002 234,344,009 204,406,259 185,879,042 168,443,797 144,241,715
01-May-2002 230,520,360 200,382,699 181,768,473 164,279,415 140,052,112
01-Jun-2002 226,708,646 196,387,004 177,695,980 160,162,882 135,924,014
01-Jul-2002 222,913,317 192,424,552 173,667,513 156,100,683 131,864,667
01-Aug-2002 219,143,347 188,503,569 169,690,773 152,099,985 127,880,410
01-Sep-2002 215,383,122 184,609,676 165,752,061 148,147,656 123,958,778
01-Oct-2002 211,646,732 180,754,463 161,861,340 144,252,063 120,105,806
01-Nov-2002 207,938,519 176,942,324 158,023,025 140,417,642 116,325,955
01-Dec-2002 204,250,136 173,165,329 154,229,375 136,636,774 112,611,687
01-Jan-2003 200,586,095 169,424,616 150,479,227 132,905,957 108,955,923
01-Feb-2003 196,932,445 165,710,632 146,765,837 129,221,168 105,358,584
01-Mar-2003 193,294,834 162,027,561 143,092,450 125,584,747 101,820,720
01-Apr-2003 189,690,927 158,391,311 139,473,852 122,010,400 98,354,496
01-May-2003 186,098,966 154,782,799 135,892,521 118,482,000 94,945,599
01-Jun-2003 182,499,444 151,183,927 132,331,083 114,982,744 91,577,823
01-Jul-2003 178,915,124 147,615,196 128,808,673 111,530,513 88,267,375
01-Aug-2003 175,368,600 144,095,616 125,342,120 108,140,115 85,026,310
01-Sep-2003 171,847,806 140,614,649 121,921,746 104,802,613 81,846,616
01-Oct-2003 168,348,970 137,168,963 118,544,424 101,515,029 78,725,443
</TABLE>
Page A-4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
01-Nov-2003 164,877,153 133,762,298 115,213,051 98,279,449 75,663,731
01-Dec-2003 161,433,073 130,395,111 111,927,909 95,095,981 72,661,332
01-Jan-2004 158,012,213 127,063,527 108,685,444 91,961,324 69,715,219
01-Feb-2004 154,635,203 123,785,039 105,501,242 88,889,294 66,836,802
01-Mar-2004 151,262,391 120,525,177 102,343,886 85,851,235 64,001,073
01-Apr-2004 147,923,865 117,309,378 99,236,018 82,867,228 61,224,673
01-May-2004 144,605,150 114,125,446 96,166,736 79,927,502 58,499,267
01-Jun-2004 141,303,733 110,970,536 93,132,935 77,028,671 55,821,024
01-Jul-2004 138,019,001 107,844,306 90,134,413 74,170,650 53,189,999
01-Aug-2004 134,753,194 104,748,610 87,172,758 71,354,760 50,607,129
01-Sep-2004 131,495,314 101,674,141 84,239,602 68,573,442 48,065,858
01-Oct-2004 128,240,895 98,617,195 81,331,629 65,823,692 45,563,531
01-Nov-2004 125,007,883 95,592,262 78,461,290 63,116,114 43,108,320
01-Dec-2004 121,789,939 92,594,242 75,624,147 60,446,825 40,697,006
01-Jan-2005 118,605,088 89,637,450 72,832,349 57,826,032 38,337,266
01-Feb-2005 115,447,207 86,716,710 70,081,239 55,249,523 36,025,444
01-Mar-2005 112,319,711 83,834,464 67,372,676 52,718,624 33,762,158
01-Apr-2005 109,230,433 80,997,705 64,713,072 50,239,167 31,552,386
01-May-2005 106,164,496 78,193,293 62,090,316 47,799,975 29,386,201
01-Jun-2005 103,134,164 75,430,565 59,512,060 45,407,205 27,267,845
01-Jul-2005 100,147,737 72,716,099 56,983,881 43,065,548 25,200,868
01-Aug-2005 97,212,316 70,055,449 54,510,442 40,778,878 23,188,135
01-Sep-2005 94,325,293 67,445,882 52,088,932 38,544,312 21,226,676
01-Oct-2005 91,482,307 64,883,970 49,716,435 36,359,375 19,314,567
01-Nov-2005 88,689,448 62,374,023 47,396,269 34,226,527 17,453,209
01-Dec-2005 85,925,597 59,898,843 45,113,431 32,132,676 15,631,911
01-Jan-2006 83,189,660 57,457,673 42,867,314 30,077,317 13,850,263
01-Feb-2006 80,477,164 55,046,523 40,654,172 28,056,902 12,104,940
01-Mar-2006 77,795,967 52,671,445 38,479,050 26,075,610 10,399,061
01-Apr-2006 75,131,835 50,321,113 36,332,228 24,125,098 8,725,983
01-May-2006 72,511,896 48,016,674 34,231,495 22,220,240 7,096,943
01-Jun-2006 69,931,966 45,754,223 32,173,109 20,357,445 5,508,547
01-Jul-2006 67,393,534 43,534,621 30,157,587 18,536,939 3,960,683
01-Aug-2006 64,892,309 41,354,536 28,182,109 16,756,333 2,451,477
01-Sep-2006 62,424,498 39,210,660 26,243,638 15,012,820 978,426
01-Oct-2006 59,990,763 37,103,319 24,342,302 13,306,365 0
01-Nov-2006 57,602,234 36,040,753 22,484,765 11,642,286 0
01-Dec-2006 55,251,229 33,016,839 20,665,755 10,016,043 0
01-Jan-2007 52,930,302 31,025,604 18,880,090 8,423,121 0
01-Feb-2007 50,641,479 29,068,508 17,128,911 6,864,380 0
01-Mar-2007 48,370,396 27,134,429 15,402,854 5,331,950 0
01-Apr-2007 46,117,261 25,223,304 13,701,685 3,825,438 0
01-May-2007 43,882,740 23,335,620 12,025,797 2,345,160 0
01-Jun-2007 41,684,742 21,484,453 10,385,641 899,353 0
01-Jul-2007 39,550,208 19,689,918 8,797,668 (0) 0
01-Aug-2007 37,471,174 17,945,685 7,256,448 (0) 0
01-Sep-2007 35,422,353 16,232,452 5,745,908 (0) 0
01-Oct-2007 33,392,949 14,542,000 4,259,202 (0) 0
01-Nov-2007 31,407,479 12,892,336 2,810,869 (0) 0
01-Dec-2007 29,511,905 11,317,462 1,428,570 (0) 0
01-Jan-2008 27,690,927 9,805,105 101,695 (0) 0
01-Feb-2008 25,876,559 8,305,564 0 (0) 0
01-Mar-2008 24,525,462 7,153,613 0 (0) 0
01-Apr-2008 23,257,557 6,068,749 0 (0) 0
01-May-2008 22,012,798 5,005,636 0 (0) 0
01-Jun-2008 20,781,595 3,957,755 0 (0) 0
01-Jul-2008 19,559,073 2,921,448 0 (0) 0
01-Aug-2008 18,342,402 1,894,487 0 (0) 0
01-Sep-2008 17,147,279 888,444 0 (0) 0
01-Oct-2008 15,957,207 (0) 0 (0) 0
01-Nov-2008 14,766,362 (0) 0 (0) 0
01-Dec-2008 13,577,131 (0) 0 (0) 0
01-Jan-2009 12,529,278 (0) 0 (0) 0
01-Feb-2009 11,491,114 (0) 0 (0) 0
01-Mar-2009 10,461,725 (0) 0 (0) 0
01-Apr-2009 9,538,184 (0) 0 (0) 0
01-May-2009 8,641,976 (0) 0 (0) 0
01-Jun-2009 7,753,565 (0) 0 (0) 0
01-Jul-2009 6,871,946 (0) 0 (0) 0
01-Aug-2009 6,015,626 (0) 0 (0) 0
01-Sep-2009 5,193,257 (0) 0 (0) 0
01-Oct-2009 4,398,656 (0) 0 (0) 0
01-Nov-2009 3,613,720 (0) 0 (0) 0
01-Dec-2009 2,845,948 (0) 0 (0) 0
01-Jan-2010 2,118,810 (0) 0 (0) 0
01-Feb-2010 1,394,702 (0) 0 (0) 0
01-Mar-2010 705,961 (0) 0 (0) 0
01-Apr-2010 47,090 (0) 0 (0) 0
01-May-2010 (0) (0) 0 (0) 0
01-Jun-2010 (0) (0) 0 (0) 0
</TABLE>
Page A-5
<PAGE>
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Projected Outstanding Balances
1L Subordinate Notes
<TABLE>
<CAPTION>
0% CPR 3% CPR 5% CPR 7% CPR 10% CPR
Outstanding Outstanding Outstanding Outstanding Outstanding
Date Balance Balance Balance Balance Balance
- ---- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
19-Feb-98 59,200,000 59,200,000 59,200,000 59,200,000 59,200,000
01-Mar-98 59,035,121 58,992,506 58,963,419 58,933,765 58,888,170
01-Apr-98 58,571,626 58,409,103 58,298,510 58,186,040 58,013,659
01-May-98 58,123,089 57,840,711 57,648,987 57,454,368 57,156,776
01-Jun-98 57,632,553 57,228,814 56,955,265 56,678,064 56,255,137
01-Jul-98 57,130,571 56,605,320 56,250,177 55,890,905 55,343,955
01-Aug-98 56,653,609 56,008,453 55,573,142 55,133,520 54,465,708
01-Sep-98 56,142,294 55,378,644 54,864,448 54,346,041 53,560,268
01-Oct-98 55,639,554 54,758,518 54,166,501 53,570,644 52,669,432
01-Nov-98 55,149,448 54,152,777 53,484,435 52,812,893 51,799,409
01-Dec-98 54,634,853 53,524,470 52,781,407 52,036,045 50,913,588
01-Jan-99 54,109,417 52,882,171 52,062,515 51,241,645 50,008,026
01-Feb-99 53,597,512 52,255,444 51,360,872 50,466,426 49,125,024
01-Mar-99 53,061,593 51,606,780 50,638,982 49,672,896 48,227,078
01-Apr-99 52,519,055 50,950,833 49,909,618 48,871,900 47,322,042
01-May-99 51,993,373 50,313,417 49,200,187 48,092,463 46,441,422
01-Jun-99 51,445,408 49,654,790 48,470,529 47,293,992 45,543,946
01-Jul-99 50,896,513 48,997,261 47,743,592 46,500,082 44,654,178
01-Aug-99 50,364,679 48,358,983 47,037,633 45,729,083 43,790,596
01-Sep-99 49,811,267 47,701,009 46,313,483 44,941,587 42,913,402
01-Oct-99 49,256,910 47,044,343 45,592,388 44,159,082 42,044,437
01-Nov-99 48,719,720 46,407,498 44,893,125 43,400,605 41,203,120
01-Dec-99 48,165,724 45,756,424 44,181,577 42,631,954 40,355,094
01-Jan-2000 47,608,025 45,102,746 43,468,350 41,862,693 39,508,299
01-Feb-2000 47,061,373 44,463,076 42,771,317 41,111,966 38,683,819
01-Mar-2000 46,503,223 43,814,851 42,067,893 40,357,159 37,858,976
01-Apr-2000 45,946,143 43,169,645 41,368,962 39,608,448 37,042,839
01-May-2000 45,397,184 42,534,897 40,682,216 38,873,764 36,243,685
01-Jun-2000 44,836,551 41,890,403 39,987,162 38,132,320 35,440,261
01-Jul-2000 44,277,829 41,250,270 39,298,259 37,398,923 34,647,902
01-Aug-2000 43,729,946 40,623,547 38,624,629 36,682,766 33,875,896
01-Sep-2000 43,172,820 39,989,622 37,945,288 35,962,472 33,102,237
01-Oct-2000 42,615,111 39,357,487 37,269,437 35,247,445 32,336,620
01-Nov-2000 42,063,078 38,733,707 36,603,839 34,544,641 31,586,281
01-Dec-2000 41,505,445 38,106,689 35,936,677 33,842,008 30,838,796
01-Jan-2001 40,949,166 37,483,445 35,274,995 33,146,617 30,101,266
01-Feb-2001 40,399,936 36,869,813 34,624,724 32,464,484 29,379,829
01-Mar-2001 39,839,399 36,248,267 33,968,854 31,779,095 28,658,659
01-Apr-2001 39,279,301 35,629,487 33,317,359 31,099,715 27,945,965
01-May-2001 38,723,546 35,017,468 32,674,290 30,430,448 27,245,920
01-Jun-2001 38,162,130 34,400,490 32,026,743 29,757,174 26,542,523
01-Jul-2001 37,600,715 33,786,377 31,384,005 29,090,665 25,848,811
01-Aug-2001 37,043,061 33,178,662 30,749,462 28,434,155 25,167,790
01-Sep-2001 36,487,257 32,575,380 30,121,097 27,785,574 24,497,295
01-Oct-2001 35,933,462 31,976,750 29,499,161 27,145,188 23,837,600
01-Nov-2001 35,382,607 31,383,647 28,884,482 26,513,775 23,189,392
01-Dec-2001 34,835,207 30,796,429 28,277,305 25,891,463 22,552,620
01-Jan-2002 34,289,528 30,213,396 27,675,943 25,276,564 21,925,573
01-Feb-2002 33,746,616 29,635,632 27,081,494 24,670,188 21,309,369
01-Mar-2002 33,208,749 29,065,014 26,495,580 24,073,710 20,705,025
01-Apr-2002 32,673,493 28,499,412 25,916,249 23,485,334 20,110,950
01-May-2002 32,140,380 27,938,426 25,343,131 22,904,714 19,526,814
01-Jun-2002 31,608,930 27,381,325 24,775,323 22,330,764 18,951,252
01-Jul-2002 31,079,765 26,828,859 24,213,652 21,764,391 18,385,276
01-Aug-2002 30,554,136 26,282,174 23,659,194 21,206,592 17,829,770
01-Sep-2002 30,029,865 25,739,267 23,110,038 20,655,537 17,282,995
01-Oct-2002 29,508,918 25,201,753 22,567,573 20,112,393 16,745,793
01-Nov-2002 28,991,899 24,670,244 22,032,414 19,577,778 16,218,786
01-Dec-2002 28,477,645 24,143,635 21,503,483 19,050,629 15,700,923
01-Jan-2003 27,966,785 23,622,085 20,980,618 18,530,458 15,191,217
01-Feb-2003 27,457,373 23,104,261 20,462,877 18,016,705 14,689,657
01-Mar-2003 26,950,198 22,590,748 19,950,714 17,509,696 14,196,389
01-Apr-2003 26,447,722 22,083,763 19,446,190 17,011,342 13,713,109
01-May-2003 25,946,912 21,580,645 18,946,861 16,519,393 13,237,823
01-Jun-2003 25,445,047 21,078,871 18,450,306 16,031,508 12,768,269
01-Jul-2003 24,945,302 20,581,299 17,959,193 15,550,180 12,306,709
01-Aug-2003 24,450,827 20,090,580 17,475,868 15,077,472 11,854,822
01-Sep-2003 23,959,939 19,605,246 16,998,981 14,612,140 11,411,492
01-Oct-2003 23,472,113 19,124,830 16,528,097 14,153,768 10,976,322
</TABLE>
Page A-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
01-Nov-2003 22,988,053 18,649,854 16,063,619 13,702,646 10,549,442
01-Dec-2003 22,507,861 18,180,383 15,605,587 13,258,790 10,130,831
01-Jan-2004 22,030,907 17,715,876 15,153,505 12,821,739 9,720,068
01-Feb-2004 21,560,066 17,258,771 14,709,547 12,393,420 9,318,744
01-Mar-2004 21,089,811 16,804,264 14,269,331 11,969,838 8,923,371
01-Apr-2004 20,624,335 16,355,900 13,836,016 11,553,792 8,536,271
01-May-2004 20,161,622 15,911,979 13,408,080 11,143,919 8,156,280
01-Jun-2004 19,701,321 15,472,105 12,985,091 10,739,749 7,782,865
01-Jul-2004 19,243,346 15,036,229 12,567,021 10,341,268 7,416,034
01-Aug-2004 18,788,010 14,604,611 12,154,092 9,948,662 7,055,916
01-Sep-2004 18,333,779 14,175,952 11,745,135 9,560,876 6,701,599
01-Oct-2004 17,880,031 13,749,736 11,339,690 9,177,491 6,352,711
01-Nov-2004 17,429,267 13,327,984 10,939,492 8,799,986 6,010,392
01-Dec-2004 16,980,604 12,909,984 10,543,923 8,427,819 5,674,194
01-Jan-2005 16,536,555 12,497,732 10,154,675 8,062,414 5,345,186
01-Feb-2005 16,096,266 12,090,507 9,771,101 7,703,184 5,022,860
01-Mar-2005 15,660,214 11,688,649 9,393,458 7,350,312 4,707,300
01-Apr-2005 15,229,490 11,293,133 9,022,642 7,004,613 4,399,202
01-May-2005 14,802,021 10,902,127 8,656,964 6,664,528 4,097,181
01-Jun-2005 14,379,516 10,516,932 8,297,489 6,330,915 3,801,829
01-Jul-2005 13,963,132 10,138,467 7,944,997 6,004,429 3,513,640
01-Aug-2005 13,553,860 9,767,505 7,600,137 5,685,609 3,233,014
01-Sep-2005 13,151,336 9,403,665 7,262,517 5,374,054 2,959,537
01-Oct-2005 12,754,952 9,046,470 6,931,731 5,069,418 2,692,940
01-Nov-2005 12,365,557 8,696,519 6,608,241 4,772,045 2,433,420
01-Dec-2005 11,980,206 8,351,417 6,289,956 4,480,109 2,179,485
01-Jan-2006 11,598,747 8,011,056 5,976,790 4,193,540 1,931,078
01-Feb-2006 11,220,556 7,674,880 5,668,222 3,911,843 1,687,735
01-Mar-2006 10,846,729 7,343,734 5,364,955 3,635,601 1,449,893
01-Apr-2006 10,475,282 7,016,038 5,065,633 3,363,650 1,216,623
01-May-2006 10,109,996 6,694,741 4,772,738 3,098,065 989,494
01-Jun-2006 9,750,288 6,379,298 4,485,747 2,838,344 768,031
01-Jul-2006 9,396,366 6,069,829 4,204,732 2,584,519 552,220
01-Aug-2006 9,047,632 5,765,870 3,929,300 2,336,257 341,798
01-Sep-2006 8,703,557 5,466,960 3,659,028 2,093,168 136,417
01-Oct-2006 8,364,233 5,173,143 3,393,934 1,855,245 0
01-Nov-2006 8,031,211 4,885,569 3,134,946 1,623,230 0
01-Dec-2006 7,703,421 4,603,384 2,881,330 1,396,490 0
01-Jan-2007 7,379,825 4,325,755 2,632,363 1,174,397 0
01-Feb-2007 7,060,705 4,052,887 2,388,204 957,069 0
01-Mar-2007 6,744,059 3,783,227 2,147,548 743,409 0
01-Apr-2007 6,429,915 3,516,768 1,910,362 533,363 0
01-May-2007 6,118,366 3,253,577 1,676,701 326,975 0
01-Jun-2007 5,811,909 2,995,477 1,448,022 125,393 0
01-Jul-2007 5,514,301 2,745,274 1,226,618 0 0
01-Aug-2007 5,224,431 2,502,083 1,011,733 0 0
01-Sep-2007 4,938,774 2,263,215 801,125 0 0
01-Oct-2007 4,655,823 2,027,523 593,841 0 0
01-Nov-2007 4,378,999 1,797,518 391,906 0 0
01-Dec-2007 4,114,707 1,577,941 199,179 0 0
01-Jan-2008 3,860,817 1,367,080 14,179 0 0
01-Feb-2008 3,607,848 1,158,006 (0) 0 0
01-Mar-2008 3,419,471 997,395 (0) 0 0
01-Apr-2008 3,242,693 846,137 (0) 0 0
01-May-2008 3,069,142 697,912 (0) 0 0
01-Jun-2008 2,897,481 551,811 (0) 0 0
01-Jul-2008 2,727,030 407,324 (0) 0 0
01-Aug-2008 2,557,396 264,140 (0) 0 0
01-Sep-2008 2,390,765 123,872 (0) 0 0
01-Oct-2008 2,224,839 (0) (0) 0 0
01-Nov-2008 2,058,805 (0) (0) 0 0
01-Dec-2008 1,892,996 (0) (0) 0 0
01-Jan-2009 1,746,899 (0) (0) 0 0
01-Feb-2009 1,602,153 (0) (0) 0 0
01-Mar-2009 1,458,630 (0) (0) 0 0
01-Apr-2009 1,329,865 (0) (0) 0 0
01-May-2009 1,204,910 (0) (0) 0 0
01-Jun-2009 1,081,043 (0) (0) 0 0
01-Jul-2009 958,123 (0) (0) 0 0
01-Aug-2009 838,731 (0) (0) 0 0
01-Sep-2009 724,072 (0) (0) 0 0
01-Oct-2009 613,284 (0) (0) 0 0
01-Nov-2009 503,844 (0) (0) 0 0
01-Dec-2009 396,797 (0) (0) 0 0
01-Jan-2010 295,416 (0) (0) 0 0
01-Feb-2010 194,457 (0) (0) 0 0
01-Mar-2010 98,429 (0) (0) 0 0
01-Apr-2010 6,566 (0) (0) 0 0
01-May-2010 0 (0) (0) 0 0
01-Jun-2010 0 (0) (0) 0 0
</TABLE>
Page A-7
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATION 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 1998-1 NOTES OFFERED HEREBY NOR AN OFFER OF
THE SERIES 1998-1 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 SUBSE-
QUENT TO ITS DATE.
-----------
TABLE OF CONTENTS TO PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 6
Reports to Noteholders..................................................... 6
Prospectus Summary......................................................... 7
Risk Factors............................................................... 32
Description of Series 1998-1 Notes......................................... 45
Application of Series 1998-1 Note Proceeds................................. 55
Source of Payment and Security for the Notes............................... 57
The Original Issuer........................................................ 60
The Servicer............................................................... 61
The Corporation............................................................ 65
The SLFC Servicing Agreement............................................... 67
Description of Financed Eligible Loan Program.............................. 71
Characteristics of the Initial Financed Eligible Loans..................... 75
Description of Federal Family Education Loan Program....................... 80
Description of the Guarantee Agencies...................................... 95
Terms of the Tax Exempt Auction Rate Series 1998-1 Senior Notes............ 104
Terms of the Tax Exempt Fixed Rate Series 1998-1 Senior Notes.............. 107
Terms of the Taxable Auction Rate Series 1998-1 Senior Notes............... 107
Terms of the Taxable LIBOR Rate Series 1998-1 Senior Notes................. 111
Terms of the Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes......... 115
Terms of the Taxable LIBOR Rate Series 1998-1 Subordinate Notes............ 115
Weighted Average Life of the Taxable LIBOR Rate Series 1998-1 Notes........ 118
Auction of the Auction Rate Series 1998-1 Senior Notes..................... 119
Settlement Procedures for Auction Rate Series 1998-1 Senior Notes.......... 135
Summary of the Indenture................................................... 138
Tax Matters................................................................ 165
ERISA Considerations....................................................... 169
Certain Relationships Among Financing Participants......................... 170
Plan of Distribution....................................................... 171
Legal Matters.............................................................. 172
Experts.................................................................... 172
Ratings.................................................................... 172
Glossary of Certain Defined Terms.......................................... 173
Index to Financial Statement............................................... F-1
Annex A - Computational Materials.......................................... A-1
</TABLE>
-----------
UNTIL MAY , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE SERIES 1998-1
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EDUCATION LOANS INCORPORATED STUDENT LOAN ASSET-BACKED CALLABLE NOTES, SERIES
1998-1
$274,900,000
Tax Exempt Auction Rate Student Loan Asset-Backed Callable Notes, Senior
Series 1998-1A through E
$24,055,000
Tax Exempt Fixed Rate Student Loan Asset-Backed Callable Notes, Senior Series
1998-1F
$107,500,000
Taxable Auction Rate Student Loan Asset-Backed Callable Notes, Senior Series
1998-1G and H
$424,600,000
Taxable LIBOR Rate Student Loan Asset-Backed Callable Notes, Senior Series
1998-1I and J
$33,215,000
Tax Exempt Fixed Rate Student Loan Asset-Backed Callable Notes, Subordinate
Series 1998-1K
$59,200,000
Taxable LIBOR Rate Student Loan Asset-Backed Callable Notes, Subordinate
Series 1998-1L
-------
PROSPECTUS
-------
SALOMON SMITH BARNEY
U.S. BANCORP INVESTMENTS, INC.
DOUGHERTY SUMMIT SECURITIES LLC
MILLER & SCHROEDER FINANCIAL, INC.
NORWEST INVESTMENT SERVICES, INC.
FEBRUARY , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS--
EDUCATION LOANS INCORPORATED,
A Delaware corporation
Item 13. 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>
<CAPTION>
<S> <C>
SEC registration fee.......................... $ 279,840
Blue Sky fees and expenses.................... 11,145
Trustees' fees and expenses................... 175,000
Printing and engraving expenses............... 75,000
Legal fees and expenses....................... 925,000
Accounting fees and expenses.................. 15,000
Rating agency fees............................ 160,000
State fees.................................... 146,250
Miscellaneous................................. 42,765
----------
Total.................................... $1,830,000
==========
</TABLE>
- ----------------
All of the above expenses except the SEC registration fee are estimated.
All of the above expenses are being paid by Education Loans Incorporated, a
South Dakota nonprofit corporation, of which the registrant is an indirect,
wholly-owned subsidiary.
Item 14. 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 15. Recent Sales of Unregistered Securities.
In May 1997, in connection with the formation of the registrant, the
registrant accepted the subscription of Student Loan Finance Corporation, a
South Dakota corporation, to purchase 100 shares of the registrant's common
stock for consideration of $100. Based on the fact that there was only one
purchaser and no effort was made to sell stock to any other person, the
registrant believes this transaction was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended.
Item 16. Exhibits.
1.1 Revised 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 Revised Form of Indenture+
4.2 Revised Form of First Supplemental Indenture+
4.3 Revised Form of Auction Agent Agreement (Taxable Auction Rate Series
1997-1 Notes)+
4.4 Revised Form of Auction Agent Agreement (Tax Exempt Auction Rate Series
1997-1 Notes)+
4.5 Revised Form of Broker-Dealer Agreement (Taxable Auction Rate Series
1997-1 Notes)+
4.6 Revised 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 Revised 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 Agreements with Education Assistance Corporation dated July 3,
1997 and September 12, 1997+
10.5 Guarantee Agreement with Pennsylvania Higher Education Assistance Agency
dated February 28, 1994+
10.6 Guarantee Agreement with United Student Aid Funds, Inc. dated July 11,
1997+
10.7 Guarantee Agreement with Student Loans of North Dakota dated July 8,
1997+
10.8 Guarantee Agreement with Northstar Guarantee, Inc. dated July 15, 1997+
10.9 Guarantee Agreement with Great Lakes Higher Education Corporation dated
July 15, 1997+
10.10 Guarantee Agreement with Educational Credit Management Corporation
(formerly known as Transitional Guaranty Agency, Inc.) dated December 15,
1994+
10.11 Guarantee Agreements with Iowa College Aid Commission dated July 15,
1997+
10.12 Guarantee Agreement with Missouri Coordinating Board for Higher Education
dated July 15, 1997+
10.13 Guarantee Agreement with Illinois Student Assistance Commission dated
July 7, 1997+
10.14 Guarantee Agreements with California Student Aid Commission dated July 6
and July 10, 1997+
23.1 Consents of Dorsey & Whitney LLP (included in Exhibits 5.1 and 8.1)
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 Form of Opinion of Dorsey & Whitney LLP as to "true sale" matters+
99.2 Form of Opinion of Dorsey & Whitney LLP as to nonconsolidation+
99.3 Form of Assignment and Assumption Agreement by and among Education Loans
Incorporated, a South Dakota nonprofit corporation, Student Loan Finance
Corporation, a South Dakota corporation, and the Registrant to be
executed as of the closing of the offering
99.4 Form of Contribution Agreement by and among Education Loans Incorporated,
a South Dakota not-for-profit corporation, Student Loan Finance
Corporation, a South Dakota corporation, and the Registrant to be
executed as of the closing of the offering
______________
* Incorporated by reference to a similarly numbered exhibit filed by the
registrant's former co-registrant, Education Loans Incorporated, a South
Dakota nonprofit corporation, on this registration statement (SEC File No.
333-26679).
+ Previously filed.
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes as follows:
(a) 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.
(b) 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.
(c) 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
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
January 30, 1998
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>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ A. Norgrin Sanderson President, Treasurer January 30, 1998
- ---------------------------- and Chairman of the Board
A. Norgrin Sanderson (principal executive officer,
principal financial and
accounting officer)
* Director January 30, 1998
- ----------------------------
V. G. Stoia
* Director January 30, 1998
- ----------------------------
Manley B. Feinstein
* Director January 30, 1998
- ----------------------------
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
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<C> <S>
1.1 Revised 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 Revised Form of Indenture+
4.2 Revised Form of First Supplemental Indenture+
4.3 Revised Form of Auction Agent Agreement (Taxable Auction Rate Series
1997-1 Notes)+
4.4 Revised Form of Auction Agent Agreement (Tax Exempt Auction Rate
Series 1997-1 Notes)+
4.5 Revised Form of Broker-Dealer Agreement (Taxable Auction Rate Series
1997-1 Notes)+
4.6 Revised 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 Revised 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 Agreements with Education Assistance Corporation dated
July 3, 1997 and September 12, 1997+
10.5 Guarantee Agreement with Pennsylvania Higher Education Assistance
Agency dated February 28, 1994+
10.6 Guarantee Agreement with United Student Aid Funds, Inc. dated July 11,
1997+
10.7 Guarantee Agreement with Student Loans of North Dakota dated July 8,
1997+
10.8 Guarantee Agreement with Northstar Guarantee, Inc. dated July 15,
1997+
10.9 Guarantee Agreement with Great Lakes Higher Education Corporation
dated July 15, 1997+
10.10 Guarantee Agreement with Educational Credit Management Corporation
(formerly known as Transitional Guaranty Agency, Inc.) dated
December 15, 1994+
10.11 Guarantee Agreements with Iowa College Aid Commission dated July 15,
1997+
10.12 Guarantee Agreement with Missouri Coordinating Board for Higher
Education dated July 15, 1997+
10.13 Guarantee Agreement with Illinois Student Assistance Commission dated
July 7, 1997+
10.14 Guarantee Agreements with California Student Aid Commission dated
July 6 and July 10, 1997+
23.1 Consents of Dorsey & Whitney LLP (included in Exhibits 5.1 and 8.1)
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 Form of Opinion of Dorsey & Whitney LLP as to "true sale" matters+
99.2 Form of Opinion of Dorsey & Whitney LLP as to nonconsolidation+
99.3 Form of Assignment and Assumption Agreement by and among Education
Loans Incorporated, a South Dakota nonprofit corporation, Student Loan
Finance Corporation, a South Dakota corporation, and the Registrant to
be executed as of the closing of the offering
99.4 Form of Contribution Agreement by and among Education Loans
Incorporated, a South Dakota not-for-profit corporation, Student Loan
Finance Corporation, a South Dakota corporation, and the Registrant to
be executed as of the closing of the offering
</TABLE>
- ----------
* Incorporated by reference to a similarly numbered exhibit filed by the
registrant's former co-registrant, Education Loans Incorporated, a South
Dakota nonprofit corporation, on this registration statement (SEC File No.
333-26679).
+ 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 January 27, 1998, on the balance sheet of Education Loans Incorporated, a
newly organized Delaware corporation (the "Corporation"), in Amendment No. 7 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 Callable
Notes Series 1998-1 and to the reference to our firm under the heading "Experts"
in such Prospectus and Registration Statement.
EIDE HELMEKE PLLP
January 28, 1998
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> JAN-27-1998
<PERIOD-END> JAN-27-1998
<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 January
27, 1998.
</FN>
</TABLE>
<PAGE>
Exhibit 99.3
Draft of 2/2/98
---------------
================================================================================
ASSIGNMENT AND ASSUMPTION AGREEMENT
by and among
EDUCATION LOANS INCORPORATED,
a South Dakota nonprofit corporation,
STUDENT LOAN FINANCE CORPORATION,
EDUCATION LOANS INCORPORATED,
a Delaware corporation,
and
FIRST BANK NATIONAL ASSOCIATION,
as Trustee,
___________________
Dated as of February __, 1998
___________________
================================================================================
<PAGE>
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of February
_______, 1998 (this "Agreement"), is being entered into by and among EDUCATION
LOANS INCORPORATED, a South Dakota nonprofit corporation (the "Original
Issuer"), STUDENT LOAN FINANCE CORPORATION, a South Dakota corporation ("SLFC"),
EDUCATION LOANS INCORPORATED, a Delaware corporation ("EdLinc"), and FIRST BANK
NATIONAL ASSOCIATION, Minneapolis, Minnesota, a national banking association
duly established and existing under the laws of the United States of America, as
Trustee (the "Trustee") under a certain Indenture of Trust, as hereinafter
described;
W I T N E S S E T H:
WHEREAS, the Original Issuer and the Trustee have entered into an
Indenture of Trust and a First Supplemental Indenture of Trust, each dated as of
February 1, 1998 (such Indenture of Trust, as heretofore and hereafter
supplemented and amended, including by such First Supplemental Indenture of
Trust, being herein referred to as the "Indenture"); and
WHEREAS, pursuant to the Indenture, the Original Issuer has issued its
Student Loan Asset-Backed Callable Notes, Series 1998-1 (together with any
additional notes hereafter issued under the Indenture, the "Notes"), and has
undertaken obligations with respect to the Notes, the proceeds thereof, assets
acquired with such proceeds and certain other matters; and
WHEREAS, the Original Issuer has entered into two Auction Agent
Agreements, each dated as of February 1, 1998 (the "Auction Agent Agreements"),
with the Trustee and Bankers Trust Company (the "Auction Agent"), under which it
has undertaken obligations with respect to the Notes, the holding of auctions in
respect thereof and certain other matters; and
WHEREAS, the Original Issuer has entered into Student Loan Purchase
Agreements with various Lenders, under which it has undertaken obligations with
respect to the purchase of student loans thereunder and related matters; and
WHEREAS, pursuant to a Contribution Agreement, dated as of February
_______, 1998 (the "Contribution Agreement"), among the Original Issuer, SLFC
and EdLinc, the Original Issuer has, in accordance with Section 150(d)(3) of the
Internal Code of 1986, as amended, agreed to transfer to SLFC, and SLFC has, in
turn, agreed to transfer to EdLinc, all of the Original Issuer's right, title
and interest in and to (i) the Trust Estate under the Indenture, (ii) the
Auction Agent Agreements and (iii) the Student Loan Purchase Agreements; and
-1-
<PAGE>
WHEREAS, in consideration for such transfers, SLFC and EdLinc have,
pursuant to the Contribution Agreement, each, in turn, agreed to assume all of
the Original Issuer's obligations under the Indenture, the Notes, the Auction
Agent Agreements and all Student Loan Purchase Agreements;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Original Issuer, SLFC and EdLinc agree as
follows:
Section 1. Definitions. Capitalized terms used herein and not
otherwise defined herein shall have the meanings given such terms in the
Indenture.
Section 2. Assignment to SLFC. The Original Issuer hereby conveys,
transfers and assigns to SLFC all of its right, title and interest in and to (i)
the Trust Estate under the Indenture, (ii) the Auction Agent Agreements and
(iii) the Student Loan Purchase Agreements.
Section 3. Assumption of Obligations by SLFC. SLFC hereby agrees to be
bound, as successor by assignment to the Original Issuer, by all of the terms,
covenants and conditions of the Indenture, the Notes, each Auction Agent
Agreement and each Student Loan Purchase Agreement. SLFC hereby assumes, for the
benefit of the Original Issuer, the Trustee, each Noteholder and each other
party to or beneficiary of the Indenture, the Auction Agent Agreements and the
Student Loan Purchase Agreements, all of the obligations of the Original Issuer
under the Indenture, the Notes, each Auction Agent Agreement and each Student
Loan Purchase Agreement from and after the date of this Agreement.
Section 4. Release of Original Issuer. The Trustee hereby acknowledges
and agrees that, upon the assumption by SLFC under Section 2 hereof, SLFC has
become the successor to the Original Issuer as the Corporation under the
Indenture and the Notes for all intents and purposes, and the Original Issuer
has no further obligations or liabilities thereunder from and after the date of
this Agreement.
Section 5. Assignment to EdLinc. SLFC hereby conveys, transfers and
assigns to EdLinc all of its right, title and interest in and to (i) the Trust
Estate under the Indenture, (ii) the Auction Agent Agreements and (iii) the
Student Loan Purchase Agreements.
Section 6. Assumption of Obligations by EdLinc. EdLinc hereby agrees
to be bound, as successor by assignment to SLFC and the Original Issuer, by all
of the terms, covenants and conditions of the Indenture, the Notes, each Auction
Agent Agreement and each Student Loan Purchase Agreement. EdLinc hereby assumes,
for the benefit of SLFC, the Trustee, each Noteholder and each other party to or
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beneficiary of the Indenture, the Auction Agent Agreements and the Student Loan
Purchase Agreements, all of the obligations of SLFC and the Original Issuer
under the Indenture, the Notes, each Auction Agent Agreement and each Student
Loan Purchase Agreement from and after the date of this Agreement; provided that
such assumption shall not affect SLFC's obligations under the Servicing
Agreement, dated as of February 1, 1998 (the "Servicing Agreement"), among the
EdLinc, the Trustee and SLFC, as servicer, each of which will continue to be the
obligation solely of SLFC.
Section 7. Release of SLFC. The Trustee hereby acknowledges and agrees
that, upon the assumption by EdLinc under Section 4 hereof, EdLinc has become
the successor to SLFC and the Original Issuer as the Corporation under the
Indenture and the Notes for all intents and purposes, and neither the Original
Issuer nor SLFC has any further obligation or liability thereunder from and
after the date of this Agreement; provided that such release shall not release
SLFC from its obligations or liabilities under the Servicing Agreement.
Section 8. Performance of Original Issuer's Covenants under
Contribution Agreement. The Original Issuer hereby covenants and agrees with the
Trustee, for the benefit of the Holders of the Notes, that it will at all times
comply with Sections 9.04 through 9.07 of the Contribution Agreement.
Section 9. Performance of SLFC's Covenants under Contribution
Agreement. SLFC hereby covenants and agrees with the Trustee, for the benefit of
the Holders of the Notes, that it will at all times comply with Sections 10.02
through 10.04 of the Contribution Agreement.
Section 10. Performance of EdLinc's Covenants under Contribution
Agreement. EdLinc hereby covenants and agrees with the Trustee, for the benefit
of the Holders of the Notes, that it will at all times comply with Section 11.02
of the Contribution Agreement.
Section 11. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of South Dakota applicable to
agreements made and to be performed in such state, it being understood that the
corporate powers and legal capacity of EdLinc shall be construed and interpreted
in accordance with the laws of the State of Delaware.
Section 12. Benefits. Nothing herein, express or implied, shall give
to any person, other than the Trustee, each Noteholder and each other party to
or beneficiary of the Indenture, the Auction Agent Agreements and the Student
Loan Purchase Agreements, any benefit of any legal or equitable right, remedy or
claim hereunder.
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Section 13. Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a
written instrument signed by duly authorized representatives of the parties
hereto.
(b) Failure of a party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by any other party shall not
constitute a waiver of any such right or remedy with respect to any
subsequent breach.
Section 14. Successors and Assigns. This Agreement shall be binding
upon, inure to the benefit of and be enforceable by the respective successors
and assigns of each of the Original Issuer, SLFC, EdLinc and the Trustee. This
Agreement may not be assigned by any party hereto absent the prior written
consent of the other parties hereto, which consents shall not be unreasonably
withheld.
Section 15. Severability. If any clause, provision or section
hereof shall be ruled invalid or unenforceable by any court of competent
jurisdiction, the invalidity or unenforceability of such clause, provision or
section shall not affect any of the remaining clauses, provisions or sections
hereof.
Section 16. Execution in Counterparts. This Agreement may be
executed in several counterparts, each of which shall be an original and all of
which shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the date first above written.
EDUCATION LOANS INCORPORATED,
a South Dakota nonprofit corporation
By:
---------------------------
Title: President
STUDENT LOAN FINANCE
CORPORATION
By:
---------------------------
Title: President
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EDUCATION LOANS INCORPORATED, a
Delaware corporation
By: _______________________
-----------------------
Title: President
FIRST BANK NATIONAL ASSOCIATION, as
Trustee
By: _______________________
-----------------------
Title: Trust Officer
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Exhibit 99.4
Draft of 2/2/98
---------------
================================================================================
CONTRIBUTION AGREEMENT
by and among
EDUCATION LOANS INCORPORATED,
a South Dakota not-for-profit corporation,
STUDENT LOAN FINANCE CORPORATION
and
EDUCATION LOANS INCORPORATED,
a Delaware corporation
-------------------------
February __, 1998
-------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
<S> <C> <C>
CONTRIBUTION OF ASSETS BY ORIGINAL ISSUER TO SLFC AND
ASSUMPTION OF LIABILITIES BY SLFC............................................ 2
1.01 Contribution of Assets........................................ 2
1.02 Liabilities Transferred....................................... 2
ARTICLE II
CONTRIBUTION CONSIDERATION................................................... 2
2.01 Contribution Consideration.................................... 2
ARTICLE III
CONTRIBUTION OF ASSETS BY SLFC TO EDLINC AND ASSUMPTION OF SLFC
LIABILITIES BY EDLINC........................................................ 2
3.01 Contribution of Assets........................................ 2
3.02 Liabilities Transferred....................................... 3
ARTICLE IV
CONTRIBUTION CONSIDERATION FOR EDLINC ASSETS................................. 3
4.01 Contribution Consideration.................................... 3
ARTICLE V
CLOSING...................................................................... 3
5.01 Closing....................................................... 3
5.02 General Procedure............................................. 3
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ORIGINAL ISSUER............................ 4
6.01 Incorporation and Corporate Power............................. 5
6.02 Subsidiaries.................................................. 5
6.03 Execution, Delivery; Valid and Binding Agreement.............. 5
6.04 Authority; No Breach.......................................... 5
6.05 SLFC Assets "AS IS, WHERE IS"................................. 5
6.06 Brokerage..................................................... 6
</TABLE>
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<TABLE>
<CAPTION>
ARTICLE VII
<S> <C> <C>
REPRESENTATIONS AND WARRANTIES OF SLFC...................................... 7
7.01 Incorporation and Corporate Power............................ 7
7.02 Subsidiaries................................................. 7
7.03 Execution, Delivery; Valid and Binding Agreement............. 7
7.04 Authority; No Breach......................................... 7
7.05 EdLinc Assets "AS IS, WHERE IS".............................. 7
7.06 Brokerage.................................................... 8
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF EDLINC.................................... 8
8.01 Incorporation and Corporate Power............................ 8
8.03 Execution, Delivery; Valid and Binding Agreement............. 8
8.04 Authority; No Breach......................................... 8
ARTICLE IX
COVENANTS OF ORIGINAL ISSUER................................................ 9
9.01 Conduct of the Business...................................... 9
9.02 Cooperation.................................................. 9
9.03 Conditions................................................... 9
9.04 On-Going Covenants........................................... 9
9.05 Nonpetition Covenant......................................... 10
9.06 Valuation of SLFC Assets..................................... 10
9.07 Transfer of SLFC Stock....................................... 10
ARTICLE X
COVENANTS OF SLFC........................................................... 11
10.01 Conditions................................................... 11
10.02 On-Going Covenants........................................... 11
10.03 Nonpetition Covenant......................................... 12
10.04 Transfer of EdLinc Stock..................................... 12
ARTICLE XI
COVENANTS OF EDLINC......................................................... 12
11.01 Conditions................................................... 12
11.02 On-Going Covenants........................................... 12
</TABLE>
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<TABLE>
<CAPTION>
ARTICLE XII
<S> <C> <C>
CONDITIONS TO CLOSING.............................................. 13
12.02 Conditions to Original Issuer's Obligations.......... 14
12.03 Conditions to EdLinc's Obligations................... 15
ARTICLE XIII
TERMINATION........................................................ 16
13.01 Termination.......................................... 16
13.02 Effect of Termination................................ 17
ARTICLE XIV
SURVIVAL; INDEMNIFICATION.......................................... 17
14.01 Survival.............................................. 17
14.02 Indemnification of SLFC and EdLinc.................... 17
14.03 Indemnification of Original Issuer.................... 17
14.04 Legal Proceedings..................................... 17
ARTICLE XV
MISCELLANEOUS...................................................... 18
15.01 Expenses............................................. 18
15.02 Further Assurances................................... 18
15.03 Amendment and Waiver................................. 18
15.04 Notices.............................................. 18
15.05 Assignment........................................... 20
15.06 Severability......................................... 20
15.07 Complete Agreement................................... 20
15.08 Counterparts......................................... 20
15.09 Governing Law........................................ 20
SCHEDULE 1.01...................................................... 22
EXHIBIT A.......................................................... A-1
EXHIBIT B.......................................................... B-1
EXHIBIT C.......................................................... C-1
</TABLE>
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CONTRIBUTION AGREEMENT
----------------------
This CONTRIBUTION AGREEMENT (this "Agreement"), dated as of February
________, 1998, is made and entered into by and among EDUCATION LOANS
INCORPORATED, a South Dakota not-for-profit corporation (the "Original Issuer"),
STUDENT LOAN FINANCE CORPORATION, a South Dakota corporation ("SLFC") and a
wholly-owned subsidiary of the Original Issuer, and EDUCATION LOANS
INCORPORATED, a Delaware corporation ("EdLinc") and a wholly-owned subsidiary of
SLFC.
WHEREAS, the Board of Directors of the Original Issuer has determined that
it is in the Original Issuer's best interests to transfer substantially all its
assets to a for-profit corporation that will assume substantially all its
liabilities or otherwise provide for their payment; and
WHEREAS, the Original Issuer has created a new South Dakota for-profit
corporation, SLFC, to which it can transfer substantially all of its assets in
exchange for senior stock of SLFC and the assumption by SLFC of its liabilities,
in accordance with Section 150(d)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, the Original Issuer desires to contribute to SLFC, and SLFC
desires to accept from the Original Issuer, on the terms and subject to the
conditions set forth in this Agreement, all of the assets of the Original
Issuer, except such assets as are identified as Excluded Assets in Article I of
this Agreement; and
WHEREAS, SLFC has created a wholly-owned subsidiary and Delaware
bankruptcy-remote corporation, EdLinc, to hold assets contributed to it by SLFC;
and
WHEREAS, SLFC desires to contribute to EdLinc, and EdLinc desires to accept
from SLFC, on the terms and subject to the conditions set forth in this
Agreement, the assets of SLFC identified in Article III of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements and the conditions set forth in this Agreement, the
Original Issuer, SLFC and EdLinc hereby agree as follows;
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ARTICLE I
CONTRIBUTION OF ASSETS BY ORIGINAL ISSUER TO SLFC AND ASSUMPTION OF LIABILITIES
--------------------------
BY SLFC
-------
1.01 Contribution of Assets. On the terms and subject to the conditions set
forth in this Agreement, the Original Issuer shall, at the Closing (as defined
in Section 5.01 hereof), contribute to SLFC, and SLFC shall accept and acquire
from the Original Issuer, all of the Original Issuer's right, title and
interest, as of the Closing Date (as defined in Section 6.01 hereof), in and to
all of the assets of the Original Issuer, except "Excluded Assets" consisting
of cash and investments in an aggregate amount equal to
_____________________________________ dollars ($_________________________) and
certain other assets, all as more particularly set forth on Schedule 1.01 hereto
(such assets, exclusive of the Excluded Assets, being collectively referred to
herein as the "SLFC Assets").
1.02 Liabilities Transferred. The Original Issuer shall transfer and SLFC
shall accept and assume all liabilities, obligations and undertakings of the
Original Issuer of any nature whatsoever, whether accrued, absolute, fixed or
contingent, known or unknown, due or to become due, unliquidated or otherwise,
except "Excluded Liabilities" consisting of such liabilities, obligations and
undertakings of the Original Issuer as are set forth in this Agreement (such
liabilities, obligations and undertakings, exclusive of the Excluded
Liabilities, being collectively referred to herein as the "SLFC Liabilities").
ARTICLE II
CONTRIBUTION CONSIDERATION FOR SLFC ASSETS
------------------------------------------
2.01 Contribution Consideration. The contribution consideration to be
given by SLFC to the Original Issuer for the SLFC Assets shall be the ownership
by the Original Issuer on the Closing Date of _______ ______________ shares
of Class A Common Stock of SLFC (the "Class A Common Stock"), representing all
of the outstanding capital stock of SLFC having an aggregate value of
____________________Dollars ($______________________), as well as the
assumption of the SLFC Liabilities in accordance with Section 1.02 hereof.
ARTICLE III
CONTRIBUTION OF ASSETS BY SLFC TO EDLINC AND ASSUMPTION OF SLFC
LIABILITIES BY EDLINC
3.01 Contribution of Assets. On the terms and subject to the conditions
set forth in this Agreement, SLFC shall, at the Closing, contribute to EdLinc,
and EdLinc
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shall accept and acquire from SLFC, all of SLFC's right, title and interest, as
of the Closing Date, in and to the Trust Estate established under the Indenture
of Trust, dated as of February 1, 1998 (the "Series 1998 Indenture"), between
the Original Issuer and First Bank National Association, as trustee (the
"Trustee")(the "EdLinc Assets").
3.02 Liabilities Transferred. SLFC shall transfer and EdLinc shall accept
and assume all liabilities, obligations or undertakings of SLFC of any nature
whatsoever, whether accrued, absolute, fixed or contingent, known or unknown,
due or to become due, unliquidated or otherwise, under the Series 1998 Indenture
and all other agreements included in the EdLinc Assets (the "EdLinc
Liabilities"); provided that such acceptance and assumption shall not affect
SLFC's liabilities, obligations or undertakings under the Servicing Agreement,
dated as of February 1, 1998 (the "Servicing Agreement"), among the EdLinc, the
Trustee and SLFC, as servicer, each of which will continue to be the liability,
obligation or undertaking solely of SLFC and do not constitute EdLinc
Liabilities.
ARTICLE IV
CONTRIBUTION CONSIDERATION FOR EDLINC ASSETS
--------------------------------------------
4.01 Contribution Consideration. The contribution consideration to be given
by EdLinc to SLFC for the EdLinc Assets shall be the ownership by SLFC on the
Closing Date of ____ _________ shares of Common Stock of EdLinc (the "EdLinc
Common Stock"), representing all of the outstanding capital stock of EdLinc and
having an aggregate value of ______________________________________ Dollars
($______________________), as well as the assumption of the EdLinc Liabilities
in accordance with Section 3.02 hereof.
ARTICLE V
CLOSING
-------
5.01 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Dorsey & Whitney
LLP, 250 Park Avenue, New York, New York, at _________________ p.m. on the date
of issuance and delivery of the initial series of notes to be issued under the
Series 1998 Indenture (the "Series 1998 Notes"), or at such other place and on
such other date as is mutually agreeable to the Original Issuer, SLFC and
EdLinc. The date on which the Closing occurs is referred to herein as the
"Closing Date," and the Closing shall be deemed effective as of _________ p.m.,
New York time, on the Closing Date.
5.02 General Procedure. At the Closing, each party shall deliver to the
party entitled to receipt thereof the documents required to be delivered
pursuant to Article XII hereof and such other documents, instruments and
materials (or
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<PAGE>
complete and accurate copies thereof, where appropriate) as may be reasonably
required in order to effectuate the intent and provisions of this Agreement, and
all such documents, instruments and materials shall be satisfactory in form and
substance to counsel for the receiving party.
(a) The conveyance, transfer, assignment and delivery of the SLFC
Assets to SLFC shall be effected by the Original Issuer's execution and
delivery to SLFC of (i) as to that portion of the SLFC Assets consisting of
the EdLinc Assets, an Assignment and Assumption Agreement, substantially in
the form attached hereto as Exhibit A (the "Assignment and Assumption
Agreement"), among the Original Issuer, SLFC, EdLinc and the Trustee, and
(ii) as to the remainder of the SLFC Assets, a bill of sale substantially
in the form attached hereto as Exhibit B (the "SLFC Bill of Sale"), and
such other instruments of conveyance, transfer, assignment and delivery as
SLFC shall reasonably request to cause the Original Issuer to transfer,
convey, assign and deliver the SLFC Assets to SLFC.
(b) The conveyance, transfer, assignment and delivery of the EdLinc
Assets to EdLinc shall be effected by SLFC's execution and delivery to
EdLinc of the Assignment and Assumption Agreement and such other
instruments of conveyance, transfer, assignment and delivery as EdLinc
shall reasonably request to cause SLFC to transfer, convey, assign and
deliver the EdLinc Assets to EdLinc.
(c) The transfer by the Original Issuer and assumption by SLFC of the
SLFC Liabilities (other than that portion thereof consisting of the EdLinc
Liabilities) shall be evidenced by an assumption agreement substantially in
the form attached hereto as Exhibit C (the "SLFC Liabilities Assumption
Agreement") between the Original Issuer and SLFC.
(d) The transfer by the Original Issuer and assumption by SLFC, and
the transfer by SLFC and the assumption by EdLinc, of the EdLinc
Liabilities shall be evidenced by the Assignment and Assumption Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ORIGINAL ISSUER
-------------------------------------------------
The Original Issuer hereby represents and warrants to SLFC and EdLinc that,
except as set forth in the Disclosure Schedule delivered by the Original Issuer
to SLFC on the date hereof (the "Disclosure Schedule") (which Disclosure
Schedule sets forth the exceptions to the representations and warranties
contained in this Article VI):
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<PAGE>
6.01 Incorporation and Corporate Power. The Original Issuer is a not-for-
profit corporation duly incorporated, validly existing and in good standing
under the laws of the State of South Dakota and has all requisite corporate
power and authority to enter into this Agreement and perform its obligations
hereunder.
6.02 Subsidiaries. The SLFC Assets do not include any stock, partnership
interest, joint venture interest or any other equity or ownership interest
issued by any other corporation, organization or entity.
6.03 Execution, Delivery; Valid and Binding Agreement. The execution,
delivery and performance of this Agreement by the Original Issuer and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all requisite corporate action, and no other proceedings on its
part are necessary to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly executed and delivered by the Original
Issuer and, assuming that this Agreement is the valid and binding agreement of
SLFC and EdLinc, constitutes the valid and binding obligation of the Original
Issuer, enforceable in accordance with its terms, except as such enforcement may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors' rights or
by general principles of equity.
6.04 Authority; No Breach. The Original Issuer has the requisite corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution, delivery and performance of this
Agreement by the Original Issuer and the consummation of the transactions
contemplated hereby do not conflict with or result in any breach of any of the
provisions of, or constitute a default under, result in a violation of, result
in the creation of a right of termination or acceleration or any lien, security
interest, charge or encumbrance upon any assets of the Original Issuer, or
require any authorization, consent, approval, exemption or other action by or
notice to any court or other governmental body, under the provisions of the
Articles of Incorporation or Bylaws of the Original Issuer or under any
indenture, mortgage, lease, loan agreement or other agreement or instrument by
which the Original Issuer or the SLFC Assets are bound or affected (other than
consents required under Section 12.01(c) hereof, which the Original Issuer
undertakes to obtain prior to the Closing Date), or any law, statute, rule or
regulation or order, judgment or decree to which the Original Issuer or the SLFC
Assets are subject.
6.05 SLFC Assets "AS IS, WHERE IS". (a) Except as otherwise set forth in
clause (b) below, each of the SLFC Assets being transferred by the Original
Issuer to SLFC pursuant to this Agreement shall be transferred "AS IS" and
"WHERE IS" without any warranty whatsoever.
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<PAGE>
(b) Notwithstanding clause (a) above, the Original Issuer hereby represents
and warrants that:
(1) the Original Issuer's Plan has been duly adopted by the Original
Issuer and the Original Issuer's Plan and the Plan Approval are each
in full force and effect;
(2) the Original Issuer's Plan complies with the requirements of the
Higher Education Act of 1965, as amended, and the regulations
promulgated thereunder (the "Higher Education Act");
(3) the Original Issuer has complied with, and is now in compliance with,
each of the provisions of the Original Issuer's Plan; and
(4) no student loan included in the SLFC Assets is ineligible to have
special allowance payments paid with respect thereto because of any
failure of the Original Issuer's Plan to comply with the Higher
Education Act or any failure of the Original Issuer to comply with the
Original Issuer's Plan.
As used in this Agreement: "Original Issuer's Plan" means the Original Issuer's
Plan for Doing Business, dated February 6, 1981, as amended on September 16,
1983, November 18, 1983, April 22, 1985, January 12, 1987, July 26, 1988,
June 6, 1991, June 22, 1993, May 23, 1996 and February 1, 1998, as required by
Section 438 of the Higher Education Act (which term shall include the Original
Issuer's Justifications for the issuance of tax-exempt obligations submitted to
the Department of Education in connection with the Original Issuer's Series D
Student Loan Revenue Bonds and Series E Student Loan Revenue Bonds); and "Plan
Approval" means the approval of the Original Issuer's Plan by the Governor of
the State of South Dakota, dated February _____, 1998 (together with prior such
approvals by the Governor of the State of South Dakota and by the United States
Secretary of Education).
(c) The Original Issuer's obligations under Section 14.02 shall apply to
the inaccuracy of any representation or warranty in clause (b) above.
6.06 Brokerage. No third party shall be entitled to receive any brokerage
commissions, finder's fees, fees for financial advisory services or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of the Original
Issuer [other than the fees and expenses of __________________, which fees and
expenses will be paid by the Original Issuer].
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ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF SLFC
--------------------------------------
SLFC hereby represents and warrants to the Original Issuer and EdLinc that:
7.01 Incorporation and Corporate Power. SLFC is a business corporation
duly incorporated, validly existing and in good standing under the laws of the
State of South Dakota, with the requisite corporate power and authority to enter
into this Agreement and perform its obligations hereunder.
7.02 Subsidiaries. The EdLinc Assets do not include any stock, partnership
interest, joint venture interest or any other equity or ownership interest
issued by any other corporation, organization or entity.
7.03 Execution, Delivery; Valid and Binding Agreement. The execution,
delivery and performance of this Agreement by SLFC and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
requisite corporate action, and no other corporate proceedings on its part are
necessary to authorize the execution, delivery or performance of this Agreement.
This Agreement has been duly executed and delivered by SLFC and, assuming that
this Agreement is the valid and binding agreement of the Original Issuer and
EdLinc, constitutes the valid and binding obligation of SLFC, enforceable in
accordance with its terms, except as such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights or by general
principles of equity.
7.04 Authority; No Breach. SLFC has the requisite corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement by SLFC and
the consummation by SLFC of the transactions contemplated hereby do not conflict
with or result in any breach of any of the provisions of, constitute a default
under, result in a violation of, result in the creation of a right of
termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of SLFC, or require any authorization, consent,
approval, exemption or other action by or notice to any court or other
governmental body, under the provisions of the Articles of Incorporation or
Bylaws of SLFC or any indenture, mortgage, lease, loan agreement or other
agreement or instrument by which SLFC is bound or affected, or any law, statute,
rule or regulation or order, judgment or decree to which SLFC or EdLinc Assets
are bound or affected.
7.05 EdLinc Assets "AS IS, WHERE IS". Each of the EdLinc Assets being
transferred by SLFC to EdLinc pursuant to this Agreement shall, except to the
extent
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<PAGE>
of the representations, warranties and obligations of the Original Issuer
pursuant to Sections 6.05(b) and 14.02 hereof (which shall run with the EdLinc
Assets), be transferred "AS IS" and "WHERE IS" without any warranty whatsoever.
7.06 Brokerage. No third party shall be entitled to receive any brokerage
commissions, finder's fees, fees for financial advisory services or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of SLFC [other than
the fees and expenses of _________________________, which fees and expenses will
be paid by the Original Issuer.]
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF EDLINC
----------------------------------------
EdLinc hereby represents and warrants to the Original Issuer and SLFC that:
8.01 Incorporation and Corporate Power. EdLinc is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to enter into
this Agreement and perform its obligations hereunder.
8.02 Subsidiary of EdLinc. EdLinc is a wholly-owned subsidiary of SLFC,
and EdLinc does not own any equity interest in any other corporation,
partnership or other entity.
8.03 Execution, Delivery; Valid and Binding Agreement. The execution,
delivery and performance of this Agreement by EdLinc and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
requisite corporate action, and no other corporate proceedings on its part are
necessary to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly executed and delivered by EdLinc and,
assuming that this Agreement is the valid and binding agreement of the Original
Issuer and SLFC, constitutes the valid and binding obligation of EdLinc,
enforceable in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors' rights or
by general principles of equity.
8.04 Authority; No Breach. EdLinc has the requisite corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution, delivery and performance of this Agreement by EdLinc
and the consummation of the transactions contemplated hereby do not conflict
with or result in any breach of any of the provisions of, or constitute a
default under,
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<PAGE>
result in a violation of, result in the creation of a right of termination or
acceleration or any lien, security interest, charge or encumbrance upon any
assets of EdLinc, or require any authorization, consent, approval, exemption or
other action by or notice to any court or other governmental body, under the
provisions of the Certificate of Incorporation or Bylaws of EdLinc or under any
indenture, mortgage, lease, loan agreement or other agreement or instrument by
which EdLinc is bound or affected, or any law, statute, rule or regulation or
order, judgment or decree to which EdLinc or the EdLinc Assets are subject.
ARTICLE IX
COVENANTS OF ORIGINAL ISSUER
----------------------------
9.01 Conduct of the Business. The Original Issuer agrees from the date
hereof until the Closing Date, unless otherwise consented to by SLFC in writing,
the Original Issuer shall not, directly or indirectly, sell, pledge, dispose of
or encumber any of the SLFC Assets, except in the ordinary course of business.
9.02 Cooperation. The Original Issuer shall take all commercially
reasonable actions to cause the transfer documents and such other documents
which shall cause the SLFC Assets to be transferred to SLFC to be duly executed
by the appropriate officers of the Original Issuer.
9.03 Conditions. The Original Issuer shall take all commercially
reasonable actions necessary to cause the conditions set forth in Section 12.01
to be satisfied and to consummate the transactions contemplated herein as soon
as reasonably possible after the satisfaction thereof.
9.04 On-Going Covenants. The Original Issuer will at all times, whether
before or after the Closing:
(a) comply with restrictions (whether characterized as expectations,
prohibitions or otherwise) contained in the Certificate as to No Arbitrage
delivered in connection with the issuance of the Series 1998 Notes on the
investment of any of its moneys (including the Excluded Assets and any
moneys pledged under indentures (in addition to the Series 1998 Indenture)
relating to its outstanding bonds, notes or other indebtedness) not
transferred pursuant to this Agreement;
(b) take all such action, and refrain from taking such action, as is
necessary to comply with the provisions of Section 150(d)(3) of the Code
(including, without limitation, ensuring that the Original Issuer continues
to be described in Section 501(c)(3) of the Code, ceases to be described in
Section
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150(d)(2)(A) and (B) of the Code and maintains at least eighty percent
(80%) of its board of directors as "independent" within the meaning of
Section 150(d)(3)(C)(iii) of the Code) in effecting the transfers and
assumptions provided for in this Agreement; and
(c) take all such action (including, without limitation, the
preparation and filing of any amendments to the Original Issuer's Plan),
and refrain from taking such action, as is necessary to comply with the
provisions of the Original Issuer's Plan and as is necessary to comply with
the requirements of the Higher Education Act relating to plans for doing
business, so that the receipt by the Trustee of special allowance payments
with respect to student loans included in the SLFC Assets and the Edlinc
Assets will not be adversely affected.
For purposes of complying with the foregoing clause (b), the Original Issuer
agrees that no compensation will be paid to directors of the Original Issuer who
are also directors or officers of SLFC or EdLinc, or both, for any period after
the Closing Date unless the Original Issuer has first obtained a study or report
prepared by an independent firm of accountants or other qualified organization
to the effect that any compensation proposed to be so paid is reasonable for the
services rendered solely to the Original Issuer (excluding, for this purpose,
any services such directors may render to SLFC or EdLinc, for which such
directors will not be entitled to compensation). A copy of any such report or
study shall be delivered to the Original Issuer, SLFC, EdLinc and Dorsey &
Whitney LLP.
9.05 Nonpetition Covenant. The Original Issuer shall not petition or
otherwise invoke the process of any court or government authority for the
purpose of commencing or sustaining a case against EdLinc under any federal or
state bankruptcy, insolvency or similar law or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar official
of EdLinc or any substantial part of its property, or ordering the winding up or
liquidation of the affairs of EdLinc.
9.06 Valuation of SLFC Assets. The Original Issuer shall, within thirty
days after the Closing, deliver to SLFC and Dorsey & Whitney LLP a valuation by
Smith Barney Inc. or such other qualified entity as the Original Issuer shall
designate and SLFC shall reasonably find acceptable, of the fair market value of
the SLFC Assets (as reduced by the SLFC Liabilities) as of the Closing. Such
valuation shall be made in accordance with, and shall be used in determining the
redemption price of the Class A Common Stock pursuant to, Section
150(d)(3)(D)(ii)(II) of the Code.
9.07 Transfer of SLFC Stock. So long as any of the Series 1998 Notes, or
any other outstanding bonds, notes or other indebtedness of the Original Issuer,
are outstanding, the Original Issuer shall not transfer any portion or all of
the Class A
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Common Stock of SLFC unless it has received an opinion from nationally-
recognized bond counsel that such transfer will not adversely affect the
exclusion from gross income for federal income tax purposes of interest on such
Series 1998 Notes or other outstanding bonds, notes or other indebtedness of the
Original Issuer.
ARTICLE X
COVENANTS OF SLFC
-----------------
SLFC covenants and agrees with the Original Issuer as follows:
10.01 Conditions. SLFC shall take all commercially reasonable actions
necessary to cause the conditions set forth in Section 12.02 to be satisfied and
to consummate the transactions contemplated herein as soon as reasonably
possible after the satisfaction thereof.
10.02 On-Going Covenants. SLFC will at all times, whether before or after
Closing:
(a) comply with the restrictions (whether characterized as
expectations, prohibitions or otherwise) contained in the Certificate as to
No Arbitrage delivered in connection with the issuance of the Series 1998
Notes on the investment of any of its moneys not transferred to EdLinc as
part of the EdLinc Assets;
(b) take all such action, and refrain from taking such action, as is
necessary to comply with Section 150(d)(3) of the Code (including, without
limitation, ensuring that the Original Issuer maintains at least eighty
percent (80%) of its board of directors as "independent" within the meaning
of Section 150(d)(3)(C)(iii) of the Code) in effecting the transfers and
assumptions provided for in this Agreement; and
(c) take all such action (including, without limitation, performance
of its obligations under Section 23 of the Servicing Agreement), and
refrain from taking such action, as is necessary to comply with the
provisions of the Original Issuer's Plan and as is necessary to comply with
the requirements of the Higher Education Act relating to plans for doing
business, so that the receipt by the Trustee of special allowance payments
with respect to student loans included in the SLFC Assets and the Edlinc
Assets will not be adversely affected.
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For purposes of complying with the foregoing clause (b), SLFC agrees that no
compensation will be paid, directly or indirectly, to any director of the
Original Issuer for any services performed in connection with SLFC or any
services as a member of the board of directors or as an officer of SLFC.
10.03 Nonpetition Covenant. SLFC shall not petition or otherwise
invoke the process of any court or government authority for the purpose of
commencing or sustaining a case against EdLinc under any federal or state
bankruptcy, insolvency or similar law or appointing a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official of EdLinc
or any substantial part of its property, or ordering the winding up or
liquidation of the affairs of EdLinc.
10.04 Transfer of EdLinc Stock. So long as any of the Series 1998 Notes,
or any other outstanding bonds, notes or other indebtedness of the Original
Issuer, are outstanding, SLFC shall not transfer any portion or all of the stock
of EdLinc unless it has received an opinion from nationally-recognized bond
counsel that such transfer will not adversely affect the exclusion from gross
income for federal income tax purposes of interest on such Series 1998 Notes or
other outstanding bonds, notes or other indebtedness of the Original Issuer.
ARTICLE XI
COVENANTS OF EDLINC
-------------------
EdLinc covenants and agrees with the Original Issuer as follows:
11.01 Conditions. EdLinc shall take all commercially reasonable actions
necessary to cause the conditions set forth in Section 12.03 to be satisfied and
to consummate the transactions contemplated herein as soon as reasonably
possible after the satisfaction thereof.
11.02 On-Going Covenants. EdLinc will at all times, whether before or
after Closing:
(a) comply with the restrictions (whether characterized as
expectations, prohibitions or otherwise) contained in the Certificate as to
No Arbitrage delivered in connection with the issuance of the Series 1998
Notes;
(b) take all such action, and refrain from taking such action, as is
necessary to comply with Section 150(d)(3) of the Code (including, without
limitation, ensuring that the Original Issuer maintains at least eighty
percent (80%) of its board of directors as "independent" within the meaning
of Section 150(d)(3)(C)(iii) of the Code) in effecting the transfers and
assumptions provided for in this Agreement; and
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<PAGE>
(c) take all such action, and refrain from taking such action, as is
necessary to comply with the provisions of the Original Issuer's Plan and
as is necessary to comply with the requirements of the Higher Education Act
relating to plans for doing business, so that the receipt by the Trustee of
special allowance payments with respect to student loans included in the
SLFC Assets and the Edlinc Assets will not be adversely affected.
For purposes of complying with the foregoing clause (b), EdLinc agrees that no
compensation will be paid, directly or indirectly, to any director of the
Original Issuer for any services performed in connection with EdLinc or any
services as a member of the board of directors or as an officer of EdLinc.
ARTICLE XII
CONDITIONS TO CLOSING
---------------------
12.01 Conditions to SLFC's Obligations. The obligation of SLFC to
consummate the transactions contemplated by this Agreement is subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Articles VI and
VIII hereof shall be true and correct in all material respects at and as of
the Closing Date as though then made, except that any such representation
or warranty made as of a specified date (other than the date hereof) shall
only need to have been true on and as of such date;
(b) The Original Issuer and EdLinc shall have performed in all
material respects all of the covenants and agreements required to be
performed and complied with by them under this Agreement prior to the
Closing;
(c) The Original Issuer shall have obtained, or caused to be
obtained, each consent and approval required in order to complete the
transactions contemplated hereby;
(d) EdLinc shall have obtained, or caused to be obtained, each
consent and approval required in order to complete the transactions
contemplated hereby;
(e) There shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency,
domestic or foreign, challenging or seeking to make illegal, or to delay or
otherwise directly or indirectly restrain or prohibit, the consummation of
the
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<PAGE>
transactions contemplated hereby or seeking to obtain material damages in
connection with such transactions;
(f) On the Closing Date, the Original Issuer shall have delivered to
SLFC the following:
(i) the Assignment and Assumption Agreement, the SLFC Bill of
Sale and such other instruments of conveyance, transfer, assignment
and delivery as SLFC shall have reasonably requested pursuant to
Section 5.02 hereof, and
(ii) a certificate of an appropriate officer of the Original
Issuer, dated the Closing Date, stating that the conditions set forth
in subsections 12.01(a), (b) and (c) above to be satisfied by the
Original Issuer have been satisfied;
(g) On the Closing Date, EdLinc shall have delivered to SLFC the
following:
(i) the Assignment and Assumption Agreement, and
(ii) a certificate of an appropriate officer of EdLinc, dated
the Closing Date, stating that the conditions set forth in subsections
12.01(a), (b) and (d) to be satisfied by EdLinc have been satisfied.
12.02 Conditions to Original Issuer's Obligations. The obligations of the
Original Issuer to consummate the transactions contemplated by this Agreement
are subject to the satisfaction of the following conditions on or before the
Closing Date:
(a) The representations and warranties set forth in Articles VII and
VIII hereof will be true and correct in all material respects at and as of
the Closing as though then made;
(b) SLFC and EdLinc shall have performed in all material respects all
the covenants and agreements required to be performed by them under this
Agreement prior to the Closing;
(c) SLFC shall have obtained, or caused to be obtained, each
consent and approval required in order to complete the transactions
contemplated hereby;
(d) EdLinc shall have obtained, or caused to be obtained, each consent
and approval required in order to complete the transactions contemplated
hereby;
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<PAGE>
(e) There shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency,
domestic or foreign, challenging or seeking to make illegal, or to delay or
otherwise directly or indirectly restrain or prohibit, the consummation of
the transactions contemplated hereby or seeking to obtain material damages
in connection with such transactions;
(f) On the Closing Date, SLFC and EdLinc shall have delivered to the
Original Issuer the Assignment and Assumption Agreement;
(g) On the Closing Date, SLFC shall have delivered to the Original
Issuer the following:
(i) the SLFC Liabilities Assumption Agreement, and
(ii) a certificate of an appropriate officer of SLFC dated the
Closing Date, stating that the conditions set forth in subsections
12.02(a), (b) and (c) above to be satisfied by SLFC have been
satisfied; and
(h) On the Closing Date, EdLinc shall have delivered to the Original
Issuer a certificate of an appropriate officer of EdLinc, dated the Closing
Date, stating that the conditions set forth in subsections 12.02(a), (b)
and (d) above to be satisfied by EdLinc have been satisfied.
12.03 Conditions to EdLinc's Obligations. The obligations of EdLinc to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Articles VI and
VII hereof shall be true and correct in all material respects at and as of
the Closing Date as though then made, except that any such representation
or warranty made as of a specified date (other than the date hereof) shall
only need to have been true on and as of such date;
(b) The Original Issuer and SLFC shall have performed in all material
respects all of the covenants and agreements required to be performed and
complied with by them under this Agreement prior to the Closing;
(c) The Original Issuer shall have obtained, or caused to be
obtained, each consent and approval required in order to complete the
transactions contemplated hereby;
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<PAGE>
(d) SLFC shall have obtained, or caused to be obtained, each consent
and approval required in order to complete the transactions contemplated
hereby;
(e) There shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency,
domestic or foreign, challenging or seeking to make illegal, or to delay or
otherwise directly or indirectly restrain or prohibit, the consummation of
the transactions contemplated hereby or seeking to obtain material damages
in connection with such transactions;
(f) On the Closing Date, the Original Issuer and SLFC shall have
delivered to EdLinc the Assignment and Assumption Agreement and such other
instruments of conveyance, transfer, assignment and delivery as EdLinc
shall have reasonably requested pursuant to Section 5.02 hereof;
(g) On the Closing Date, the Original Issuer shall have delivered to
EdLinc a certificate of an appropriate officer of the Original Issuer,
dated the Closing Date, stating that the conditions set forth in subsection
12.03(a), (b) and (c) above to be satisfied by the Original Issuer have
been satisfied; and
(h) On the Closing Date, SLFC shall have delivered to EdLinc a
certificate of an appropriate officer of SLFC, dated the Closing Date,
stating that the conditions set forth in subsection 12.03(a), (b) and (d)
above to be satisfied by SLFC have been satisfied.
ARTICLE XIII
TERMINATION
-----------
13.01 Termination. This Agreement may be terminated at any time prior to
the Closing:
(a) by the mutual consent of SLFC and the Original Issuer;
(b) by either SLFC or the Original Issuer if (i) there has been a
material misrepresentation, breach of warranty or breach of covenant on the
part of the other (including, for SLFC, on the part of EdLinc) in the
representations, warranties and covenants set forth in this Agreement, or
(ii) the tax consequences expected by either party are threatened to be
changed by any future or pending legislation, Treasury Regulations,
administrative interpretations or Court decisions; or
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<PAGE>
(c) by either SLFC or the Original Issuer if the transactions
contemplated hereby have not been consummated by ______________________;
provided that neither SLFC nor the Original Issuer will be entitled to
terminate this Agreement pursuant to this Section 13.01(c) if such party's
(including, for SLFC, EdLinc's) willful breach of this Agreement has
prevented the consummation of the transactions contemplated hereby.
13.02 Effect of Termination. In the event of termination of this Agreement
by either SLFC or the Original Issuer as provided in Section 14.01, this
Agreement shall become void and there shall be no liability on the part of any
of SLFC, EdLinc or the Original Issuer, or their respective stockholders,
officers, or directors, except that Sections 15.01 and 15.09 hereof shall
survive indefinitely, and except with respect to willful breaches of this
Agreement prior to the time of such termination.
ARTICLE XIV
SURVIVAL; INDEMNIFICATION
-------------------------
14.01. Survival. The covenants contained in this Agreement shall survive
the Closing.
14.02. Indemnification of SLFC and EdLinc. The Original Issuer agrees to
indemnify SLFC and EdLinc with respect to, and hold SLFC and EdLinc harmless
from, any loss, liability or expense (including, but not limited to, reasonable
legal fees) which SLFC or EdLinc may directly or indirectly incur or suffer by
reason of, or which results, arises out of or is based upon (a) the inaccuracy
of any representation or warranty made by the Original Issuer in Section
6.05(b), or (b) the failure of the Original Issuer to comply with any covenants
or other commitments made by the Original Issuer in this Agreement.
14.03. Indemnification of Original Issuer. SLFC agrees to indemnify the
Original Issuer with respect to, and hold the Original Issuer harmless from, any
loss, liability or expense (including, but not limited to, reasonable legal
fees) which the Original Issuer may directly or indirectly incur or suffer by
reason of, or which results, arises out of or is based upon (a) the inaccuracy
of any representation or warranty made by SLFC or EdLinc in this Agreement, (b)
the failure of SLFC to comply with any covenants made by SLFC in this Agreement,
or (c) the failure of EdLinc to comply with any covenants made by EdLinc in this
Agreement.
14.04. Legal Proceedings. In the event SLFC, EdLinc or the Original Issuer
becomes involved in any legal, governmental or administrative proceeding which
may result in indemnification claims hereunder, such party shall promptly notify
the other party against whom indemnity may be sought (the "Indemnifying Party")
in writing and in full detail of the filing, and of the nature of such
proceeding. The
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Indemnifying Party may, at its option and expense, defend any such proceeding if
the proceeding could give rise to an indemnification obligation hereunder. If
the Indemnifying Party elects to defend any proceeding, it shall have full
control over the conduct of such proceeding, although each party being
indemnified shall have the right to retain legal counsel at its own expense and
shall have the right to approve any settlement of any dispute giving rise to
such proceeding, provided that such approval may not be withheld unreasonably by
the party being indemnified. The party being indemnified shall reasonably
cooperate with the Indemnifying Party in such proceeding.
ARTICLE XV
MISCELLANEOUS
-------------
15.01 Expenses. Except as otherwise expressly provided for herein, the
Original Issuer will pay all of the expenses incurred by the parties hereto
(including attorneys' and accountants' fees) in connection with the negotiation
of this Agreement, the performance of their respective obligations hereunder and
the consummation of the transactions contemplated by this Agreement (whether
consummated or not).
15.02 Further Assurances. The Original Issuer, SLFC and EdLinc each agrees
that, on and after the Closing Date, it shall take all appropriate action (with
any out-of-pocket expenses to be paid by the Original Issuer) and execute any
documents, instruments or conveyances of any kind which may be reasonably
necessary or advisable to carry out the transfers of assets and assumptions of
liabilities provided for herein.
15.03 Amendment and Waiver. This Agreement may not be amended or waived
except in a writing executed by the party against which such amendment or waiver
is sought to be enforced. No such amendment or waiver shall be effective unless
all parties to this Agreement have received an opinion from nationally-
recognized bond counsel that such amendment or waiver will not adversely affect
the exclusion from gross income for federal income tax purposes of interest on
any of the Series 1998 Notes or any other outstanding bonds, notes or other
indebtedness of the Original Issuer. No course of dealing between or among any
persons having any interest in this Agreement will be deemed effective to modify
or amend any part of this Agreement or any rights or obligations of any person
under or by reason of this Agreement.
15.04 Notices. All notices, demands and other communications to be given
or delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when personally delivered or three
business days after being mailed by first class U.S. mail, return receipt
requested, or when receipt is acknowledged, if sent by facsimile, telecopy or
other electronic
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transmission device. Notices, demands and communications to the parties will,
unless another address is specified in writing, be sent to the address indicated
below:
Notices to EdLinc: Education Loans Incorporated
- ----------------- 105 First Avenue Southwest, Suite 200
Aberdeen, South Dakota 57401
Attn: President
Telecopy: (605) 622-4574
with a copy to:
--------------
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Michael E. Reeslund, Esq.
Telecopy: (612) 340-2644
Notices to SLFC: Student Loan Finance Corporation
- --------------- 105 First Avenue Southwest
Aberdeen, South Dakota 57401
Attn: President
Telecopy: (605) 622-4574
with a copy to:
--------------
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Michael E. Reeslund, Esq.
Telecopy: (612) 340-2644
Notices to Original Issuer: Education Loans Incorporated
- -------------------------- 105 First Avenue Southwest
Aberdeen, South Dakota 57401
Attn: President
Telecopy: (605) ___________________
with copies to:
--------------
Rollyn H. Samp
101 East 38th Street
Sioux Falls, South Dakota 57101
Telecopy: (605) 334-6630
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<PAGE>
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Michael E. Reeslund, Esq.
Telecopy: (612) 340-2644
Copies of any such notices will also be sent to Smith Barney Inc. at the
following address, but failure to do so shall not affect the effectiveness of
any notice otherwise given in accordance with the foregoing provisions of this
Section:
Notices to Smith Barney Inc.: Smith Barney Inc.
- ----------------------------
388 Greenwich Street, 32nd Floor
New York, New York 10013
Attn: Student Loan Finance Group
Telecopy: (212) 816-0598
15.05 Assignment. This Agreement and all of the provisions hereof will be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, except that neither this Agreement nor any of
the rights, interests or obligations hereunder may be assigned by any party
hereto without the prior written consent of the other parties hereto.
15.06 Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
15.07 Complete Agreement. This Agreement and the Schedules and Exhibits
hereto, the Disclosure Schedule and the other documents referred to herein
contain the complete agreement between the parties and supersede any prior
understandings, agreements or representations by or between the parties, written
or oral, which may have related to the subject matter hereof in any way.
15.08 Counterparts. This Agreement may be executed in one or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument.
15.09 Governing Law. The internal law, without regard to conflicts of laws
principles, of the State of South Dakota will govern all questions concerning
the
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construction, validity and interpretation of this Agreement and
the performance of the obligations imposed by this Agreement.
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the day and year first above written.
EDUCATION LOANS INCORPORATED,
a South Dakota not-for-profit corporation
By ___________________________________
Its ______________________________
STUDENT LOAN FINANCE
CORPORATION
By____________________________________
Its ______________________________
EDUCATION LOANS INCORPORATED,
a Delaware corporation
By_____________________________________
Its _______________________________
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SCHEDULE 1.01
[List of Cash, Investments and other Excluded Assets
Retained by Original Issuer]
Cash
Investments
Other Assets
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<PAGE>
EXHIBIT A
[Assignment and Assumption Agreement]
A-1
<PAGE>
EXHIBIT B
[SLFC Bill of Sale]
B-1
<PAGE>
EXHIBIT C
[SLFC Liabilities Assumption Agreement]
C-1
