<PAGE>
Filed Pursuant to Rule 424(b)(4)
File Numbers 333-67993 & 333-67993-01
PROSPECTUS
$394,619,948
GREEN TREE LEASE FINANCE 1998-1, LLC,
ISSUER GREEN TREE VENDOR SERVICES CORPORATION, SERVICER
LEASE-BACKED NOTES
We are offering the following classes of Notes:
<TABLE>
<CAPTION>
ORIGINAL
PRINCIPAL PRICE TO UNDERWRITING PROCEEDS TO
CLASS INTEREST RATE AMOUNT PUBLIC DISCOUNT ISSUER (1)
----- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
A-1 5.201% $122,726,804 100% 0.15% 99.85000%
A-2 5.55% 51,695,213 99.99014% 0.20% 99.79014%
A-3 5.60% 122,332,184 99.98860% 0.25% 99.73860%
A-4 5.74% 58,403,752 99.97080% 0.30% 99.67080%
B 6.66% 25,650,297 99.99649% 0.40% 99.59649%
C 7.63% 13,811,698 99.75981% 0.50% 99.25981%
------------ ------------ -------- ------------
Total $394,619,948 $394,549,776 $940,182 $393,609,594
</TABLE>
--------
(1) Before deducting expenses, which we estimate to be $575,000.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Notes are obligations only of the Issuer. The Notes will not
represent interests in or obligations of Green Tree Vendor Services
Corporation, Green Tree Financial Corporation or any of their affiliates other
than the Issuer.
These Notes will be delivered through the Same-Day Funds Settlement
System of The Depository Trust Company, or through Cedelbank or the Euroclear
System, on or about December 23, 1998.
The underwriters named below will offer these securities to the public at
the offering price listed on this cover page and they will receive the discount
listed above. See "Underwriting."
UNDERWRITERS OF THE CLASS A NOTES
FIRST UNION CAPITAL MARKETS
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES LLC
UNDERWRITER OF THE CLASS B NOTES AND CLASS C NOTES
FIRST UNION CAPITAL MARKETS
The date of this Prospectus is December 18, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
REPORTS TO NOTEHOLDERS................................................... iii
WHERE YOU CAN FIND MORE INFORMATION...................................... iii
SUMMARY.................................................................. 1
RISK FACTORS............................................................. 7
THE ISSUER AND THE SPC................................................... 11
GREEN TREE VENDOR SERVICES CORPORATION................................... 13
THE LEASES............................................................... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE
ISSUER.................................................................. 28
MANAGERS OF THE ISSUER................................................... 29
WEIGHTED AVERAGE LIFE OF THE NOTES....................................... 30
COLLATERAL CASHFLOWS AND RESIDUALS....................................... 35
DESCRIPTION OF THE NOTES................................................. 37
DESCRIPTION OF THE CONTRIBUTION AND SERVICING AGREEMENT.................. 53
CERTAIN LEGAL ASPECTS OF THE LEASES...................................... 58
FEDERAL INCOME TAX CONSEQUENCES.......................................... 60
ERISA CONSIDERATIONS..................................................... 65
RATINGS OF THE NOTES..................................................... 66
USE OF PROCEEDS.......................................................... 66
EXPERTS.................................................................. 66
UNDERWRITING............................................................. 66
LEGAL MATTERS............................................................ 68
INDEX OF PRINCIPAL TERMS................................................. 69
INDEX TO FINANCIAL STATEMENTS............................................ F-1
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES............ A-1
</TABLE>
The Underwriters may engage in transactions that stabilize, maintain, or
in some way affect the price of the Notes. These types of transactions may
include stabilizing, the purchase of Notes to cover syndicate short positions
and the imposition of penalty bids. For a description of these activities,
please read the section entitled "Underwriting."
If you have received a copy of this prospectus in an electronic format,
and if the legal prospectus delivery period has not expired, you may obtain a
paper copy of this prospectus from Green Tree Financial Corporation or an
underwriter by asking for it.
Certain capitalized terms used in this prospectus are defined on the
pages indicated in the section entitled "Index of Principal Terms."
ii
<PAGE>
REPORTS TO NOTEHOLDERS
Unless the Notes are issued in physical, rather than book-entry, form,
unaudited monthly and annual reports, which contain information concerning the
Issuer prepared by the Servicer, will be sent by the Trustee on behalf of the
Issuer only to Cede & Co. You can find a more detailed description of this
under the heading "Description of the Notes--Book-Entry Registration."
If you purchase a Note, you may receive these reports by making a written
request to the Trustee, together with a certification that you are a Note
Owner. You should send any such request to the Trustee at the following
address: 180 East Fifth Street, St. Paul, Minnesota 55102. These reports do not
constitute financial statements prepared in accordance with generally accepted
accounting principles. Neither Green Tree Financial Corporation nor Green Tree
Vendor Services Corporation intends to send any of its financial reports to
Note Owners. The Servicer, on behalf of the Issuer, will file with the
Securities and Exchange Commission periodic reports concerning the Issuer as
required by law.
WHERE YOU CAN FIND MORE INFORMATION
The Issuer and the SPC have filed a registration statement relating to
the Notes with the Securities and Exchange Commission (the "SEC"). This
prospectus is part of the registration statement, but the registration
statement contains additional information. Federal securities law requires the
filing of certain information with the SEC, including annual, quarterly and
special reports, proxy statements and other information. You can read and copy
the registration statement and these documents at the public reference facility
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. You can also read and copy the registration statement
and such reports, proxy statements and other information at the following
regional offices of the SEC:
<TABLE>
<S> <C>
New York Regional
Office Chicago Regional Office
Seven World Trade
Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, IL 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for more information about the
public reference rooms. SEC filings are also available to the public on the
SEC's web site at http://www.sec.gov.
iii
<PAGE>
SUMMARY
This summary highlights selected information regarding the Notes, and
does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the Notes, read
this entire prospectus.
Securities Offered.......... We are offering six classes of Notes:
<TABLE>
<CAPTION>
ORIGINAL
INTEREST PRINCIPAL
CLASS RATE AMOUNT
- ----- -------- ------------
<S> <C> <C>
A-1....................................................... 5.201% $122,726,804
A-2....................................................... 5.55% $ 51,695,213
A-3....................................................... 5.60% $122,332,184
A-4....................................................... 5.74% $ 58,403,752
B......................................................... 6.66% $ 25,650,297
C......................................................... 7.63% $ 13,811,698
</TABLE>
The Class C Notes will be subordinate to the Class B Notes, and the Class
B Notes will be subordinate to the Class A Notes. For a further explanation of
this subordination, see "Description of the Notes--Subordination of the Class B
and Class C Notes."
Issuer...................... Green Tree Lease Finance 1998-1, LLC, will issue
the Notes. It is referred to as the "Issuer" in
this prospectus. The sole member of the Issuer is
Green Tree Lease Finance II, Inc., a special-
purpose corporation that is a subsidiary of Green
Tree Vendor Services Corporation. Green Tree
Lease Finance II, Inc. is referred to as the
"SPC" in this prospectus.
Seller and Servicer......... Green Tree Vendor Services Corporation ("Vendor
Services") will sell the Leases to the SPC which
will in turn sell them to the Issuer and will
service the Leases owned by the Issuer. As
Servicer, Vendor Services will collect payments
on the Leases and enforce defaulted Leases when
necessary.
Trustee..................... U.S. Bank Trust National Association will act as
Trustee under the Indenture that governs the
terms of the Notes.
Terms of the Notes
. Payment Date............ The 20th day of each month, beginning on January
20, 1999.
. Interest............... Interest on the Notes will accrue at the
applicable interest rate from a payment date to
the day before the next payment date. For the
first payment date, interest begins to accrue on
the day the Notes are issued.
The interest rate for each class of Notes is
specified above.
Interest on the Class A-1 Notes will be computed
on the basis of the actual number of days elapsed
and a 360-day year. Interest on the Class A-2,
Class A-3, Class A-4, Class B and Class C Notes
will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
1
<PAGE>
. Principal............... Principal will be paid on the Notes on each
payment date. On each payment date, the Trustee
will pay principal to the Noteholders in the
following order of priority:
- First, all principal payable on the Notes
will be paid to the Class A-1 Notes until
they are paid in full;
- After the Class A-1 Notes have been paid
in full, a portion of the principal
payable on the Notes will be paid to the
Class A-2 Notes until paid in full, then
to the Class A-3 Notes until paid in full,
and then to the Class A-4 Notes until paid
in full;
- After the Class A-1 Notes have been paid
in full, a portion of the principal
payable on the Notes will be paid to the
Class B Notes until paid in full (subject
to the maintenance of certain credit
enhancement levels for the Class A Notes);
- After the Class A-1 Notes have been paid
in full, a portion of the principal
payable on the Notes will be paid to the
Class C Notes until paid in full (subject
to the maintenance of certain credit
enhancement levels for the Class A and
Class B Notes).
See "Description of the Notes--Principal" for a
more complete description of the amount of
principal payable on each class of Notes on each
payment date.
. Stated Maturity Dates... Each class of Notes must be paid in full on or
before the Stated Maturity Date of that class:
<TABLE>
<CAPTION>
STATED MATURITY
CLASS DATE
----- ---------------
<S> <C>
A-1........................................ January 14, 2000
A-2........................................ December 20, 2000
A-3........................................ July 20, 2002
A-4........................................ January 20, 2004
B.......................................... October 20, 2004
C.......................................... October 20, 2006
</TABLE>
. Denominations........... The Notes will be available for purchase in
denominations of $10,000 and integral multiples
thereof.
. Closing Date............ On or about December 23, 1998.
. Subordination........... The Class C Notes will be subordinated to the
Class A and Class B Notes, and the Class B Notes
will be subordinated to the Class A Notes:
- On each Payment Date, the Indenture Trustee
will use the Amount Available to pay
interest on the Class A Notes, then interest
on the Class B Notes, and then interest on
the Class C Notes, and
- On each Payment Date, the Indenture Trustee
will use the Amount Available (after paying
interest on the Notes as described above) to
pay the amount of principal due on the
2
<PAGE>
Class A Notes, then the amount of principal
due on the Class B Notes, and then the
amount of principal due on the Class C
Notes.
This makes it more likely that the Class A Notes
will be paid all interest and principal due on
them, but less likely that the Class C Notes will
be paid all interest and principal due on them.
For a more complete description of the
subordination of the Class B and Class C Notes,
see "Description of the Notes."
. Ratings................. We will not issue the Notes unless Standard &
Poor's Rating Services and Fitch IBCA, Inc. have
assigned the following ratings (or higher) to
each class of Notes:
<TABLE>
<CAPTION>
CLASS S&P FITCH
----- ---- -------
<S> <C> <C>
A-1............. A-1+ F1+/AAA
A-2............. AAA AAA
A-3............. AAA AAA
A-4............. AAA AAA
B............... A A
C............... BBB BBB
</TABLE>
The rating of each class of Notes addresses the
likelihood of the timely receipt of interest and
payment of principal on that class on or before
the Stated Maturity Date for that class. 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. The ratings of the Notes do not address
the likelihood of payment of principal on any
class of Notes prior to its Stated Maturity Date.
For a more complete description of the ratings of
the Notes, see "Ratings of the Notes."
Issuer's Assets............. Payments on the Notes will be made solely from
the Issuer's assets. The Issuer's assets will
consist primarily of:
- a pool of equipment lease contracts and
other similar types of receivables (each, a
"Lease") with various lessees or other
obligors thereunder, including scheduled
payments, prepayments and liquidation
proceeds of the Leases;
- certain rights to the proceeds from
disposition of the leased equipment
following expiration of each Lease that is a
lease rather than a loan; and
- amounts on deposit in certain accounts,
including the Collection Account and the
Reserve Account.
The Leases.................. As of December 1, 1998, the pool of Leases that
the SPC will transfer to the Issuer had the
following characteristics (unless otherwise
noted, amounts and percentages are calculated
using the Statistical Discount Rate and all
percentages are expressed as percentages of the
Statistical Discounted Present Value of the
Leases):
- the Statistical Discounted Present Value of
the Leases was $394,839,208.76;
3
<PAGE>
- there were 34,621 Leases;
- the average Lease Principal Balance was
approximately $11,404.62;
- approximately 32.72% of the Leases related
to data processing equipment; approximately
20.02% of the Leases related to office
machines; approximately 19.63% of the Leases
related to telecommunications; and no other
equipment type represented more than 5.00%
of the Leases;
- the obligors on approximately 11.97% of the
Leases were located in California;
approximately 10.81% were located in New
York; approximately 8.72% were located in
Florida; approximately 6.42% were located in
New Jersey; approximately 6.32% were located
in Texas; and no other state represented
more than 5.00% of the Leases;
- approximately 73.51% of the Leases had been
originated by Vendor Services, with the
remaining 26.49% of the Leases having been
originated by third parties and purchased by
Vendor Services
- the remaining term of the Leases ranged from
6 months to 82 months; and
- the weighted average remaining term of the
Leases was approximately 41.33 months and
the weighted average age of the Leases was
approximately 6.32 months.
All the percentages shown above are based on an
assumed principal balance for the Leases. In
preparing these statistics, we calculated the
principal balance of each Lease by computing the
present value of all future scheduled payments on
that Lease (and not including delinquent
amounts), using a discount rate of 6.506%. Based
on this assumed discount rate, which we refer to
as the "Statistical Discount Rate," the aggregate
principal balance of the Leases as of December 1,
1998 was calculated to be $394,839,208.76. For
more information about the Leases, see "The
Leases--Certain Statistics Relating to the Cut-
Off Date Pool" in this prospectus.
The aggregate Principal Balance of the Leases as
of each Payment Date will be calculated using a
discount rate of 6.539% (the "Discount Rate"). As
of the Initial Cut-Off Date, the aggregate
Principal Balance of the Leases calculated using
the Discount Rate was $394,619,948.
As described under "The Leases--Substitution,"
under certain circumstances Vendor Services or
the SPC may substitute new leases for Leases to
be removed from the Issuer.
4
<PAGE>
Servicer Advances........... For any payment date, the Servicer may, but will
not be required to, advance to the Trustee an
amount to cover delinquencies in scheduled
payments on the Leases. If the Servicer makes
such an advance, it will be entitled to recover
that advance from late payments made on that
delinquent Lease or, if necessary, from payments
made on other Leases.
Lease Equipment and
Residual Realizations......
Because many of the Leases are "true leases," the
equipment subject to those Leases will belong to
the SPC, and the SPC will sell or re-lease the
equipment following the expiration of the Lease.
The SPC will not transfer to the Issuer its
interest in the equipment subject to the Leases,
but it will make the cash flows realized from the
sale or re-lease of equipment during any month
available to the Issuer on the next payment date,
to be used to make payments on the Notes if
collections on the Leases are insufficient. As of
December 1, 1998, Vendor Services estimated the
residual value of the equipment subject to the
Leases to be $31,677,285.62. The amounts the SPC
actually realizes from the disposition of the
equipment could be less.
Reserve Account............. The SPC will establish a "Reserve Account" and
deposit an amount equal to 2.50% of the Initial
Pool Principal Balance (approximately
$9,865,499). The Trustee will use amounts on
deposit in the Reserve Account to pay the
following amounts if payments received on the
Leases are insufficient:
- amounts owed to the Servicer (if Vendor
Services or an affiliate is no longer the
Servicer);
- interest due on the Notes; and
- principal due on the Notes.
For more information about the Reserve Account,
see "Description of the Notes--Reserve Account."
Mandatory Purchase or
Replacement of Certain
Leases..................... Vendor Services will make certain representations
and warranties with respect to each Lease and the
related Equipment, as more fully described in
"The Leases--Representations and Warranties Made
by Vendor Services." If there is a serious breach
of any such representation or warranty and it is
not cured within a specified period, the Trustee
can require Vendor Services to purchase that
Lease. In lieu of such purchase, Vendor Services
may, at its option, replace that lease with a
substitute lease. See "The Leases--
Substitution."
Priority of Payments........ On each Payment Date, the Indenture Trustee will
use payments collected on the Leases and, if
necessary (but only for certain items
5
<PAGE>
described below), amounts from the Reserve
Account, in the following order of priority:
- if Vendor Services is no longer the
Servicer, to pay the servicing fee to the
successor servicer;
- to repay the Servicer for any advances it
made in prior months but has not
recovered;
- to pay interest on the Notes in the
priority described under "Interest" above;
- to pay principal on the Notes in the
priority described under "Principal"
above;
- to deposit in the Reserve Account the
amount, if any, necessary to increase the
balance therein to its requisite amount;
- if Vendor Services is the Servicer, to pay
the servicing fee to Vendor Services; and
- the remainder, if any, to the SPC.
Optional Purchase of Once the unpaid principal balance of the Notes is
Leases..................... less than 10% of the initial principal balance of
the lease pool, the SPC may repurchase all the
Leases. That would result in a prepayment of the
outstanding Notes. For a more complete
description of this repurchase right, see
"Description of the Notes -- Optional Purchase of
Leases."
U.S. Taxation............... In the opinion of Dorsey & Whitney LLP, counsel
to the Issuer, the Notes will be characterized as
indebtedness and the Issuer will not be
characterized as an "association" or "publicly
traded partnership" taxable as a corporation for
federal income tax purposes. By purchasing a
Note, you will agree to treat your Note as
indebtedness for federal, state and local income
tax purposes. You should consult your own tax
advisor regarding the federal income tax
consequences of the purchase, ownership and
disposition of Notes, and the tax consequences
arising under the laws of any state or other
taxing jurisdiction. See "United States
Taxation."
ERISA Considerations........ Subject to the considerations described in "ERISA
Considerations," employee benefit plans that are
subject to the Employee Retirement Income
Security Act of 1974, as amended, may purchase
Notes. A fiduciary of an employee benefit plan
must determine that the purchase of a Note is
consistent with its fiduciary duties under
applicable law and does not result in a non-
exempt prohibited transaction under applicable
law.
Legal Investment............ The Class A-1 Notes will be eligible securities
for purchase by money market funds under Rule 2a-
7 under the Investment Company Act of 1940.
6
<PAGE>
RISK FACTORS
You should consider the following factors in deciding whether to purchase
Notes.
RISKS RESULTING FROM LIMITED ASSETS OF THE ISSUER
The Issuer will have no assets other than the Leases (including the
proceeds derived from the liquidation of defaulted Leases), certain rights to
residual realizations on the related equipment, amounts on deposit from time to
time in the Collection Account, the Residual Account, the Reserve Account and
the accounts established pursuant to the Contribution and Servicing Agreement.
The Notes will represent obligations solely of the Issuer, and will not be
insured or guaranteed by Vendor Services, the SPC, or the Trustee. As a result,
you may be subject to delays in payment and may incur losses on your investment
as a result of defaults or delinquencies on the Leases, or because of
depreciation in the value of the related equipment or because of some other
inability to realize on the equipment. See "--Enforceability of the Leases"
below.
RISKS OF LOSSES TO HOLDERS OF THE CLASS B NOTES AND CLASS C NOTES RESULTING
FROM SUBORDINATION
Payments of interest and principal on the Class B Notes will be
subordinated in priority of payment to interest and principal, respectively, on
the Class A Notes. Similarly, payments of interest and principal on the Class C
Notes will be subordinated in priority of payment to interest and principal,
respectively, on the Class A Notes and the Class B Notes.
The only protection afforded the Class C Noteholders against
delinquencies and defaults on the Leases and resulting losses of principal will
be any residual realizations each month, and the amounts, if any, on deposit in
the Residual Account and the Reserve Account (in each case to the extent not
used to make payments of interest and principal on the Class A and Class B
Notes). High delinquencies and liquidation losses on the Leases will have the
effect of reducing, and could eliminate, the protection against loss afforded
by the residual realizations and the amounts, if any, on deposit in the
Residual Account and the Reserve Account. As a result, the Class C Noteholders
would bear directly the risk of losses on the Leases, and the Class C
Noteholders could incur losses on their investment as a result.
Further, delinquencies and defaults on the Leases could eliminate the
protection afforded the Class B Noteholders by the subordination of the Class C
Notes, and the Class B Noteholders could incur losses on their investment as a
result. In addition, delinquencies and defaults on the Leases could eliminate
the protection offered to the Class A Noteholders by the subordination of the
Class B Notes and the Class C Notes, and the Class A Noteholders could also
incur losses on their investment as a result.
RISKS RELATED TO BANKRUPTCY
Risks Relating to Characterization of the Transfer of the Leases and
Equipment as a Borrowing by Vendor Services. Dorsey & Whitney LLP, counsel to
the Issuer, will deliver a legal opinion to the effect that, the transfer of
the Leases and the related equipment from Vendor Services to the SPC
constitutes a sale or absolute assignment, rather than a pledge to secure
indebtedness of Vendor Services; and that in the event that Vendor Services
were to become a debtor under the federal bankruptcy code, the Leases, payments
thereunder and the equipment would not be property of the bankruptcy estate of
Vendor Services. However, if Vendor Services were to become a debtor under the
federal bankruptcy code or similar applicable state laws, a creditor or trustee
in bankruptcy of Vendor Services, or Vendor Services as debtor-in-possession,
might argue that such transfer of the Leases and the equipment from Vendor
Services to the SPC was (or should be recharacterized as) a pledge of such
assets rather than a sale or absolute assignment. If this position were
accepted by a court, any Leases considered to be "true" leases under the
applicable insolvency laws (as described under "The Leases-- Description of the
Leases"), and any other Lease considered to be executory under such insolvency
laws, could be rejected by the trustee in bankruptcy or by Vendor Services as
debtor-in-possession, which
7
<PAGE>
would result in the termination of scheduled payments under any such Leases and
reductions in distributions to you, and you could incur a loss on your
investment as a result. To reduce the likelihood of such rejection, the SPC
will file UCC financing statements perfecting a security interest for the
benefit of the SPC in Vendor Services' interests in the equipment, and
assignments of such perfected security interest to the Issuer and the Trustee,
against Vendor Services in those states where equipment subject to leases
constituting at least 75% of the initial pool principal balance and at least
75% of the aggregate book value of the equipment as of December 1, 1998 is
located. Even if such Leases were not so rejected in the event of an insolvency
of Vendor Services, the Issuer and the Trustee could experience a delay in or
reduction of collections on all of the Leases, and you could incur a loss on
your investment as a result.
A case decided by the United States Court of Appeals for the Tenth
Circuit contains language to the effect that accounts sold by an entity that
subsequently became bankrupt remained property of the debtor's bankruptcy
estate because the sale of accounts is treated as a "security interest" that
must be perfected under the Uniform Commercial Code ("UCC"). Although the
Leases constitute chattel paper or general intangibles rather than accounts
under the UCC, sales of chattel paper, like sales of accounts, must be
perfected under Article 9 of the UCC. If Vendor Services were to become a
debtor in bankruptcy and a court were to follow the reasoning of the Tenth
Circuit Court of Appeals and apply such reasoning to chattel paper, the Issuer
(and thus the Trustee) could experience a delay in or reduction of collections
on the Leases, and you could incur a loss on your investment as a result.
Risks Relating to Substantive Consolidation of Vendor Services and the
SPC. Dorsey & Whitney LLP will deliver a legal opinion to the effect that, if
Vendor Services were to become a debtor in a bankruptcy case, a bankruptcy
court would not order that the assets and liabilities of the SPC be
consolidated with those of Vendor Services. The SPC has taken steps in
structuring the transactions described herein that are intended to prevent the
voluntary or involuntary application for relief by or on behalf of Vendor
Services under any insolvency law from resulting in the consolidation of the
assets and liabilities of the SPC with those of Vendor Services. Such steps
include the maintenance of separate books and records and the insistence on
arm's-length terms in all agreements with Vendor Services and affiliates
thereof. Nevertheless, there can be no assurance that, in the event of a
bankruptcy or insolvency of Vendor Services, a court would not order that the
Issuer's or the SPC's assets and liabilities be consolidated with those of
Vendor Services. Any such order would adversely affect the Issuer's ability to
receive payments on the Leases, and you could incur a loss on your investment
as a result.
Risks Related to Fraudulent Transfer Laws. Under federal or state
fraudulent transfer laws, a court could, among other things, subordinate the
rights of the Noteholders in the Leases and equipment to the rights of
creditors of Vendor Services, if a court were to find, among other things, that
Vendor Services received less than reasonably equivalent value or fair
consideration for the Leases and the equipment and, at the time of any
transfers, was insolvent or rendered insolvent as a result of such transfer,
and you could incur a loss on your investment as a result.
Risks Relating to Commingling of Trust Assets by Vendor Services as
Servicer. While Vendor Services is the Servicer, cash collections held by
Vendor Services will be commingled and used for its benefit prior to the date
on which those collections must be deposited in a Collection Account. In the
event of the insolvency or receivership of the Servicer or, in certain
circumstances, the lapse of certain time periods, the Issuer may not have a
perfected ownership or security interest in those collections, and you could
incur a loss on your investment as a result.
Risks Relating to Reliance on Representations and Warranties Made by
Vendor Services. Vendor Services will make certain representations and
warranties regarding the Leases, the equipment and certain other matters (see
"The Leases--Representations and Warranties Made by Vendor Services"). In the
event that any such representation or warranty with regard to a specific Lease
is breached, is not cured within a specified period of time, and the value of
such Lease is materially and adversely affected by such breach, Vendor
8
<PAGE>
Services will be required to purchase the Lease from the Issuer (or, subject to
certain conditions, deliver a substitute lease therefor). In the event of a
bankruptcy or insolvency of Vendor Services, the Trustee may be unable to
compel Vender Services to repurchase leases, and you could incur a loss on your
investment as a result.
Risks Relating to Insolvency of the SPC or the Issuer. If the SPC or the
Issuer were to become insolvent under any insolvency law, delays in the amount
of distributions to Noteholders would be likely and Noteholders could incur a
loss on their investment as a result. The SPC and the Issuer have each taken
certain steps to minimize the likelihood that it will become bankrupt or
otherwise insolvent. The SPC is prohibited by its organizational documents and
the agreements related to this transaction from engaging in activities
(including the incurrence or guaranty of debt) other than certain specifically
permitted activities. See "The Issuer and the SPC."
Risk Relating to Insolvency of a Financial Intermediary. As described
under "Green Tree Vendor Services Corporation--Equipment Lease Business,"
Vendor Services from time to time acquires leases from financial
intermediaries. Similar to the risks described above related to any insolvency
of Vendor Services, in the event that a financial intermediary were to become
insolvent, the sale of the related Leases from such financial intermediary to
Vendor Services could be characterized as a fraudulent transfer or as a pledge
to secure indebtedness rather than a sale. In such event, the Issuer and the
Trustee could experience a delay in or reduction of collections on such Leases,
and you could incur a loss on your investment as a result.
PREPAYMENT AND EARLY TERMINATION OF LEASES AND RELATED REINVESTMENT RISKS
The weighted average life of the Notes may be reduced by prepayments and
early terminations of the Leases. Prepayments and early terminations may result
from voluntary prepayments by obligors, defaults, physical damage to the
related equipment, purchases by Vendor Services of Leases as a result of
certain uncured breaches of the representations and warranties made by it with
respect thereto (see "The Leases--Representations and Warranties Made by Vendor
Services") or purchases by Vendor Services of Leases because, as Servicer, it
agreed to certain modifications of the terms of the Lease. In addition, the
Notes may be prepaid in full if the SPC exercises its option to purchase all of
the remaining Leases (see "Description of the Notes--Optional Purchase of
Leases"). The Servicer may allow a voluntary prepayment of a Lease by an
obligor at any time so long as the amount paid by or on behalf of the obligor
is at least equal to the Required Payoff Amount of that Lease. The rate of
prepayments and early terminations on the Leases (including those due to
obligors seeking early termination and those due to defaults) may be influenced
by a wide variety of economic and other factors, including, among others,
changes in the reimbursement policies of governmental or third party payors,
obsolescence of the equipment, changes in interest rates, changes in the local,
regional or national economies or changes in federal income tax laws.
Therefore, you must not assume the Leases will prepay at a certain rate, or
when any prepayments will occur. As the rate of payment of principal of the
Notes will depend on the rate of payment (including prepayments) on the Leases,
the rate at which such principal will be paid cannot be predicted and the final
payment of a class of Notes could occur significantly earlier than the Stated
Maturity Date of such class of Notes. You may not be able to reinvest principal
paid on any Notes at an interest rate equal to the interest rate for such
Notes, and you will bear all reinvestment risk resulting from the timing of
payments of principal on your Notes. See "Weighted Average Life of the Notes."
RISKS RELATING TO SUBSTITUTE LEASES
Vendor Services may, but is not obligated to, substitute one or more
leases in exchange for liquidated leases, leases that it is required to
repurchase, leases that have been modified and leases that have been prepaid in
full. Although any substitute lease must satisfy certain criteria, we cannot
assure you that the delinquency and default experience of the Issuer with
respect to such substitute leases will be comparable to that of the Leases so
replaced. The Servicer's monthly report to Noteholders will disclose all
substitute leases delivered to the Issuer during the related monthly period,
and Vendor Services will make representations and warranties regarding any
substitute leases described under "The Leases--Representations and Warranties
Made by Vendor Services," but the characteristics of such substitute leases
will not be verified by independent accountants or any other third party.
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RISKS RELATING TO RELIANCE ON RESIDUAL REALIZATIONS
The availability of residual realizations will depend on various factors,
including the timing of Lease terminations and the future value of equipment,
which in each case is inherently uncertain. The Servicer will be obligated to
use its best efforts to sell or re-lease any equipment upon the termination of
the Lease to which such equipment is subject (whether as a result of early
termination or upon scheduled expiration of the Lease), in a timely manner and
in a manner so as to maximize, to the extent possible under then prevailing
market conditions, the net proceeds from such Equipment. However, because,
among other things, the market value of equipment generally declines with age
and may be subject to sudden, significant declines in value due to
technological obsolescence, we cannot assure you what amount the Servicer will
be able to realize on any such equipment at that time. Other factors that may
also affect the amount of the residual realization will include whether the
equipment is returned to the Servicer upon termination or expiration of such
Lease and whether there has been damage to or loss of any item of equipment. In
addition, the expected residual value of the equipment subject to some of the
Leases is zero (because it is a financing lease) or insignificant. Vendor
Services may, but is not obligated to, substitute one or more leases in
exchange for liquidated leases, leases that it is required to repurchase,
leases that have been modified, and leases that have been prepaid in full. If
Vendor Services exercises this option, the residual realizations (if any) from
the lease being substituted for would belong to Vendor Services and would not
be available to make payments on the Notes.
Moreover, any month's residual realizations not used to pay interest or
principal on the related Payment Date generally will be (i) deposited into the
Reserve Account to the extent that the amount on deposit in the Reserve Account
is less than the Required Reserve Amount or (ii) released to the SPC, and, upon
such release to the SPC, will not thereafter be available to make payments on
the Notes. Accordingly, we cannot assure you that residual realizations will be
available on a Payment Date when the collections on the Leases are insufficient
to pay interest and principal on the Notes.
ENFORCEABILITY OF THE LEASES
Risks Relating to Decision Not to File Certain UCC Financing
Statements. It has been the general policy of Vendor Services, depending on the
dollar amount of the particular Lease, not to file UCC financing statements
with respect to the equipment relating to certain Leases. See "Green Tree
Vendor Services Corporation--Documentation." Vender Services will make no
representation and warranty about the perfection or priority of any security
interest in the related equipment (see "The Leases--Representations and
Warranties Made by Vendor Services"). With respect to some of the Leases, that
means a purchaser from the applicable obligor of the related equipment would
acquire such equipment free and clear of the interest of Vendor Services in
such equipment, and a creditor of the obligor which has taken a security
interest in such equipment and filed a UCC financing statement with respect
thereto or a trustee in the bankruptcy of such obligor would have priority over
the interest of Vendor Services in such equipment. Any such purchaser, creditor
or trustee would have an interest superior to the interest of the Issuer in
such equipment, which interest is derived from the transfer and conveyance of a
security interest in the equipment by Vendor Services to the SPC, and by the
SPC to the Issuer. All of the Leases prohibit the obligor from selling or
pledging the related equipment to third parties.
Due to the administrative burden and expense, we will not file
assignments of the UCC financing statements perfecting the security interest of
Vendor Services in the equipment (to the extent that such financing statements
have been filed against the obligor, as discussed above) to reflect the SPC's,
the Issuer's or the Trustee's interests therein. While not filing such
assignments does not affect the Issuer's interest in the Leases or perfection
of the Trustee's interest in such Leases, it does expose the Issuer (and thus
Noteholders) to the risk that Vendor Services could release its security
interest in the equipment of record, and it could complicate the Issuer's
enforcement, as assignee, of Vendor Services's security interest in the
equipment. While these risks should not affect the perfection or priority of
the interest of the Trustee in the Leases or rights to payment thereunder, they
may adversely affect the right of the Trustee to receive proceeds of
disposition of the equipment subject to a liquidated lease. Additionally,
statutory liens for repairs or unpaid taxes and other liens arising by
operation of law may have priority even over prior perfected security interests
in the equipment assigned to the Trustee.
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Risks Relating to Servicer's Retention of Lease Documents; Risk of Sale
to Third Party. The Servicer will hold the Leases and certain related documents
on behalf of the Issuer and the Trustee. To facilitate servicing and save
administrative costs, the documents will not be physically segregated from
other similar documents that are in the Servicer's possession. UCC financing
statements will be filed in the appropriate jurisdictions reflecting (i) the
sale and assignment of the Leases and Vendor Services' interests in the
Equipment to the SPC (provided that filings with respect to Vendor Services'
interests in the Equipment will be made only in those jurisdictions described
above under "Risks Related to Bankruptcy--Risks Relating to Characterization of
the Transfer of the Leases and Equipment as a Borrowing by Vendor Services"),
(ii) the transfer and assignment of the Leases and rights to residual
realizations by the SPC to the Issuer, and (iii) the pledge of the Leases and
the residual realizations by the Issuer to the Trustee. The Servicer's
accounting records and computer systems will also reflect such transfers. The
Leases will not, however, be stamped or otherwise marked to reflect that such
Leases have been sold to the SPC, transferred to the Issuer or pledged to the
Trustee. If, through inadvertence or otherwise, Vendor Services were to sell
any of the Leases to another party (or grant security interest therein to
another party) that purchased (or took a security interest in) any of such
Leases in the ordinary course of business and took possession of such Leases,
the purchaser (or secured party) would acquire an interest in the Leases
superior to the interest of the Issuer and the Trustee if the purchaser (or
secured party) acquired (or took a security interest in) such Leases for new
value and without actual knowledge of the Issuer's or the Trustee's interest.
Such superior interest may include an ownership interest, which would cut off
all rights of the Issuer to such Leases and payments thereunder, or a security
interest, which would be senior to the security interest held by the Issuer; in
either case, you could incur a loss on your investment as a result.
LIMITED LIQUIDITY OF THE NOTES
There is currently no market for the Notes. Each Underwriter expects, but
will not be obligated, to make a market for the classes of Notes for which it
is acting as underwriter. We cannot assure you that a secondary market for the
Notes will develop or, if it does develop, that it will provide you with
liquidity of investment or will continue for the life of such Notes. As a
result, you must be prepared to bear the risk of holding the Notes for as long
as the Notes are outstanding.
EFFECT OF BOOK-ENTRY REGISTRATION
The Notes will be issued in book-entry, rather than physical, form and,
as a result, in certain circumstances, the liquidity of the Notes in the
secondary market and your ability to pledge them may be adversely affected. See
"Underwriting" and "Description of the Notes--Book-Entry Registration." The
Notes will be registered in the name of a nominee of DTC and will not be
registered in the names of the beneficial owners or their nominees. As a
result, unless and until Definitive Notes are issued in the limited
circumstances described under "Description of the Notes--Definitive Notes,"
beneficial owners will not be recognized by the Trustee as Noteholders, as that
term is used in the Indenture. Hence, until such time, beneficial owners will
only be able to exercise the rights of Noteholders indirectly through DTC,
Cedelbank or Euroclear, as the case may be, and their participating
organizations. In addition, the laws of some states require that certain
purchasers of securities take physical delivery of such securities in
certificated form. Such limits and such laws may impair the ability to transfer
beneficial interests in the Notes.
THE ISSUER AND THE SPC
The Issuer is a limited liability company organized under the laws of the
State of Delaware. Green Tree Lease Finance II, Inc. ("SPC"), a corporation
organized under the laws of the State of Minnesota, is the sole and managing
member of the Issuer. The SPC is wholly owned by Vendor Services.
The Issuer has been formed solely for the purposes of the transactions
described in this Prospectus. Under its LLC Agreement and the Indenture, the
Issuer is not permitted to engage in any activity other than (i) acquiring the
Leases and rights to the Residual Realizations from the SPC, (ii) pledging the
Leases and its rights to the Residual Realizations to the Trustee, (iii)
executing and performing its obligations under the
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Contribution and Servicing Agreement and the Indenture, and (iv) engaging in
other transactions, including entering into agreements, that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith. The Issuer is prohibited from incurring any debt, issuing
any obligations, incurring any liabilities, except in connection with the
issuance of the Notes or voting to file for bankruptcy without the affirmative
vote of all of the SPC's directors, including the independent director.
The SPC, as sole and managing member of the Issuer, does not intend to
engage in any business or activities other than (i) becoming a member or
shareholder of, making capital contributions to, and acting as the managing
member of, the Issuer and other similar special purpose entities; (ii)
acquiring, owning, leasing, transferring, receiving and pledging the Leases and
related equipment (the "Equipment"), other similar leases and related
equipment, and related activities set forth in the SPC's Articles of
Incorporation; and (iii) engaging in any lawful act or activity and exercising
any powers permitted to corporations organized under the Minnesota Business
Corporation Act that are incidental to and necessary or convenient for the
accomplishment of the above mentioned business and purposes, all as more
specifically set forth in its Articles of Incorporation, provided that none of
the actions referenced in clauses (ii) and (iii) with respect to such other
leases and equipment and related activities above, shall result in a downgrade
of a rating issued by a Rating Agency with respect to the Notes. The SPC is not
liable, responsible or obligated, directly or indirectly, for payment of any
principal, interest or any other amount in respect of any of the Notes.
Pursuant to its Articles of Incorporation, the SPC must at all times have at
least one director who is "independent" of Green Tree and its affiliates, as
defined in such articles.
On the Closing Date, Vendor Services will contribute the Leases and the
Equipment to the SPC pursuant to the Transfer Agreement, dated as of December
1, 1998 (the "Transfer Agreement"), between Vendor Services, as seller and the
SPC, as purchaser. Immediately thereafter, the SPC will, pursuant to the
Contribution and Servicing Agreement, dated as of December 1, 1998 (the
"Contribution and Servicing Agreement"), among the Issuer, the SPC, Vendor
Services, as Servicer and the Trustee, contribute to the Issuer all of the
Leases and certain rights to the Residual Realizations and the Reserve Account,
and Vendor Services will agree to service the Leases on behalf of the Issuer.
The Issuer will pledge the Trust Assets to the Trustee and issue the Notes
pursuant to the Indenture.
The Trust Assets will consist of:
(1) a pool of equipment lease contracts (each, a "Lease" and in the
aggregate, the "Lease Pool") with various lessees, borrowers or other
obligors thereunder (each, an "Obligor"), including all monies at any time
paid or payable thereon or in respect thereof from and after December 1,
1998 (the "Initial Cut-Off Date") or, in the case of Substitute Leases, the
first day of the month of transfer to the Issuer (each such date, or the
Initial Cut-Off Date, as applicable to each Lease, a "Cut-Off Date") (in
the form of (i) Scheduled Payments (including all Scheduled Payments due
prior to, but not received as of, the Cut-Off Date, but excluding any
Scheduled Payments due on or after, but received prior to, the Cut-Off
Date), (ii) Prepayments, and (iii) Liquidation Proceeds (including all net
proceeds from the disposition of the related Equipment) received with
respect to defaulted Leases;
(2) certain rights to Residual Realizations and amounts, if any, on
deposit in the Residual Account, to the extent necessary to make payments
of interest and principal then due on the Notes;
(3) amounts on deposit in (and Eligible Investments allocated to) certain
accounts established pursuant to the Indenture and the Contribution and
Servicing Agreement, including the Collection Account;
(4) funds on deposit in the Reserve Account; and
(5) the Issuer's rights under the Contribution and Servicing Agreement
and the SPC's rights under the Transfer Agreement.
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GREEN TREE VENDOR SERVICES CORPORATION
GENERAL
The Leases comprising the Trust Assets have been originated by Green Tree
Vendor Services Corporation ("Vendor Services"), a Delaware corporation, or, in
some cases, purchased from third parties by Vendor Services. Vendor Services is
a leading independent provider of vendor/manufacturer-oriented equipment
finance programs, with headquarters in Bloomington, Minnesota, additional
operations in Paramus, New Jersey, and twelve regional sales offices located
throughout the United States. Vendor Services, a wholly-owned subsidiary of
Green Tree Financial Corporation ("Green Tree"), was acquired from FINOVA
Corporation in November 1996. Vendor Services' original predecessor,
TriContinental Leasing Corporation, was established in 1968, although its
equipment leasing business has undergone several restructurings and changes of
ownership since that time.
Vendor Services offers "small-ticket" equipment leasing programs, for
assets with a purchase price generally less than $100,000, to manufacturers,
dealers and distributors, and to a select group of financial intermediaries
nationwide, facilitating the sale of their products to end-user customers.
EQUIPMENT LEASE BUSINESS
Market Position
Vendor Services establishes customized financing programs for the end-
user customers of equipment vendors and select financial intermediaries that
focus on end-user customers who meet Vendor Services's general customer
profiles. The equipment vendor segment has been the primary focus of Vendor
Services's activities. In total, as of November 1998, Vendor Services had in
its portfolio a total of 70,000 individual end-user customers with active
accounts. Vendor Services attempts to maintain geographical diversity and a
broad cross-section of commercial account types in its lease portfolio.
Equipment Vendors
The primary sales focus of Vendor Services is on providing point-of-sale
financing for the customers of equipment vendors, including equipment
manufacturers, dealers and distributors that sell their products regionally or
nationally. While Vendor Services primarily finances office equipment such as
copy machines, fax machines, personal computers and related peripherals, office
furniture and telephone systems, its vendor base also consists of sellers of
commercial laundry equipment, automotive diagnostic equipment and health-care
related products.
Financial Intermediaries
With respect to financial intermediaries, Vendor Services focuses its
activities on those that have industry recognition, proven track records in
generating new business through end-user contracts or through low-end equipment
dealers and a customer base consistent with Vendor Services's general customer
profiles. Each lease acquired from financial intermediaries is individually
approved by Vendor Services using Vendor Services' own credit underwriting
criteria.
CREDIT UNDERWRITING STANDARDS
Vendor Services has established policies, controls, systems and
procedures designed to manage and limit credit risk. These policies, controls,
systems and procedures are subject to periodic review by management.
Vendor Services seeks to minimize credit risk through diversification of
the portfolio by customer, industry segment, equipment type, geography and
transaction maturity. Vendor Services's financing activities
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are spread across a wide range of equipment types, including general equipment,
office equipment, information technology and light commercial equipment, with
end-users located throughout the United States.
Underwriting procedures are divided into three main categories: Equipment
Dealers and Manufacturers, Financial Intermediaries and Lessees. Listed below
is an overview of each underwriting process.
Equipment Dealers and Manufacturers
Vendor Services requires that all leased equipment be sold by authorized
sellers that have sufficient experience with each brand they sell. Credit
requirements vary depending on the degree to which Vendor Services relies on
the dealer or manufacturer to support and service the equipment.
Financial Intermediaries
Financial intermediaries are required to have well-established histories
and conform to Vendor Services's approved equipment Dealer/Manufacturers
business line. Although standard industry representations and warranties are
required, Vendor Services's credit decision will not depend on an financial
intermediary's ability to honor these obligations.
Lessees
Vendor Services's underwriting standards are intended to evaluate a
prospective customer's credit standing and repayment ability. Credit decisions
are based on the credit characteristics of the applicant, loss experience with
comparable customers, the amount, terms and conditions of the proposed
transaction and the type of equipment to be leased or financed. Vendor Services
uses a proprietary automated credit scoring system, which is a statistically
based scoring system that quantifies information obtained from customers'
credit applications and credit reports.
DOCUMENTATION
Prior to funding a leasing and financing transaction, a complete
documentation package must be completed. Generally, such a package includes a
credit application, signed lease/installment sale or financing agreement,
vendor invoice, initial lease/advance payment, proof of insurance (where
relevant), delivery and acceptance acknowledgments and appropriate UCC
financing statements. UCC filings are generally required if the underlying
equipment cost is over $25,000.
COLLECTIONS
Invoices are generated 21 days prior to the due date with a 10-day grace
period before late charges accrue. Identified payments are electronically
posted according to an established hierarchy.
The collection processes begin after 15 days with an automatic late
notice. Collection calls are placed between 15 and 30 days after the due date.
A contract is classified as delinquent when it reaches 31 days past due.
Automated "work to be done screens" are updated daily, allowing individual
collectors to customize their follow-up procedures. Management approval is
required for contract rewrites or extensions.
CHARGE-OFF POLICY
Vendor Services works closely with vendors to manage delinquencies by
maintaining and closely monitoring non-accrual and write-off policies. Vendor
Services requires that accounts 90-plus days past due (or less, if in the
judgment of the collection manager the account is impaired) are deemed "non-
earning" and are placed on non-accrual status. Non-accrual accounts are
assigned to the legal administration department. This department is responsible
for ensuring collection costs are reasonable in relation to exposure and
ability to collect from a lessee or guarantor, and for negotiating and
processing settlements and write-offs within
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authorized levels. A write-off is recommended by the legal administration
department if it has been determined that the lease is uncollectible even
through litigation. A legal administrator may refer a delinquent account to a
pre-approved collection agency or to an attorney, based upon dollar amount and
the likelihood of collection.
Before an account is written-off or settled, its disposition must be
approved at a level of management commensurate with the size of the account.
Similarly, re-writes and extensions must be approved at a level of management
commensurate with the size of the account.
PORTFOLIO MONITORING
Portfolio Performance Tracking
Vendor Services uses a number of tools to monitor portfolio performance.
Monthly vendor performance reports are prepared for all active accounts,
indicating the dollar amount of delinquent accounts, the percentage of accounts
delinquent, the dollar amount of accounts on non-accrual status, the percentage
of accounts on non-accrual status and the dollar amount of any accounts written
off. Accounts that fall outside standard Vendor Services guidelines are subject
to further analysis.
Each vendor relationship with a portfolio balance in excess of $1,000,000
is given an annual in-depth review covering portfolio performance, an analysis
of management, the quality of the business sent to Vendor Services and the
financial condition of the vendor. Any vendors whose portfolio performance
falls outside the standard guidelines are assigned to a more senior analyst or
manager for further review.
Ongoing Credit Review
In addition to the initial credit review, Vendor Services conducts
ongoing credit review procedures to identify at an early stage those customers
who may be experiencing financial difficulty. These customers are monitored by
credit personnel, who periodically summarize for the credit committee the
possible remedial actions, what portion, if any, of total credit exposures
should be written off, and whether a specific allocation of Vendor Services's
loss reserves is appropriate.
In establishing allowances for credit losses, Vendor Services' management
reviews, among other things, the maturity of Vendor Services' portfolio, the
status of all non-performing leases and receivables, prior collection
experience and Vendor Services' overall exposure and changes in credit risk.
YEAR 2000 COMPLIANCE
Many existing computer programs had been designed and developed to use
only two digits to identify a year in the date field. If not corrected, these
computer programs could cause system failures in the year 2000, with possible
adverse effects on Vendor Services' operations. In 1997, Vendor Services
initiated a comprehensive program designed to ensure that its computer programs
function properly in the year 2000. A number of Vendor Services' employees
(including several officers), as well as external consultants and contract
programmers, are working on various year-2000 projects.
Vendor Services also has been working with vendors and other external
business relations to help avoid year-2000 problems related to the software or
services they provide to Vendor Services. Under the program, Vendor Services is
analyzing its application systems, operating systems, hardware, networks,
electronic data interfaces and infrastructure devices (such as facsimile
machines and telephone systems).
Vendor Services' year-2000 projects are currently on schedule. It is
conducting its year-2000 projects in three phases: (i) an audit and assessment
phase, designed to identify year-2000 issues; (ii) a modification phase,
designed to correct year-2000 issues; and (iii) a testing phase, designed to
test the modifications after they have been installed. Vendor Services has
completed the audit and assessment phase for all critical systems. It expects
to substantially complete the second phase of its program by the end of the
second quarter of 1999. The testing phase of its program will be conducted
throughout 1999. Vendor Services has provided for significant contingency time
in order to complete any additional modifications before December 31, 1999.
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THE LEASES
DESCRIPTION OF THE LEASES
General
Substantially all of the Leases are commercial leases rather than
consumer leases. The following description of the Leases generally describes
the material terms of the Leases to be included in the Lease Pool, although an
immaterial number of Leases may differ in one or more provisions from the
following description.
Vendor Services offers a variety of lease and financing plans based on
(i) the type of equipment sold by the vendor, (ii) the average transaction
size, (iii) the vendor's monthly lease volume, (iv) the general credit
characteristics of the vendor's end-user customers and (v) the end-of-lease
purchase option.
The Leases include both true leases and leases intended for security.
Under a true lease the lessor bears the risk of ownership and takes any federal
tax benefits associated with the lease, and no title is conferred upon the
lessee. The lessee under a true lease has the right to the temporary use of
equipment for a term shorter than the economic life of such equipment in
exchange for payments at scheduled intervals during the lease term and the
lessor retains a significant "residual" economic interest in the leased
equipment. End of lease options for true leases include purchase of the
equipment at fair market value or renewal of the lease at fair market value.
Under leases intended for security, the lessor in effect finances the
"purchase" of the leased assets by the lessee and retains a security interest
in the leased assets. The lessee retains the leased property for substantially
all its economic life and the lessor retains no significant residual interest.
These leases are considered conditional sales type leases for federal tax
purposes, and, accordingly, the lessor may not claim any federal tax benefits
of ownership of the leased equipment. End of lease options for such leases
depend on the terms of the related Lease, although generally these terms
provide for purchase of the Equipment at a prestated price. The inclusion of
true leases in the Lease Pool will have no income tax impact on Noteholders
since the Notes are treated as debt for income tax purposes. See "Federal
Income Tax Consequences." However, true leases are treated differently under
the Bankruptcy Code from leases intended for security. See "Risk Factors--Risks
Related to Bankruptcy" and "Certain Legal Aspects of the Leases--Insolvency
Matters" for a discussion of these differences.
Lease Forms
The Leases are generally in one of two forms: (a) a master lease
agreement containing all of the general terms and conditions of the lease
transaction or transactions, with schedules setting forth the specific terms of
each lease transaction with that particular Obligor (a "Master Form Lease") or
(b) a specific lease agreement form containing all of the terms and conditions
of the lease transaction (a "Specific Lease Form"). In certain cases, the Lease
may be written on another form which was created by Vendor Services, by a
customer or by a financial intermediary.
Payments
All of the Leases require that the Obligor make periodic payments on a
monthly basis. The payments under all of the Leases are required to be made in
United States dollars and are fixed and specified payments, rather than
payments which are tied to a formula or are otherwise at a floating rate.
Payments under the Leases are ordinarily payable in advance, although a small
percentage provide for payments in arrears. Many Leases also require security
deposits which are held until all contractual obligations are met.
Expenses Relating to Equipment
The Leases require the Obligors to assume the responsibility for payment
of all expenses of the related Equipment including (without limitation) any
expenses in connection with the maintenance and repair of the related
Equipment, the payment of any and all premiums for casualty and liability
insurance and the payment of all taxes relating to the Equipment.
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Insurance; Repair and Replacement
The Leases (except for a small number of Leases which, in relation to the
Initial Pool Principal Balance, is not material) require the Obligors to
maintain liability insurance which must name the lessor as additional insured.
Leases require Obligors to procure property insurance against the loss, theft
or destruction of, or damage to, the Equipment for its full replacement value,
naming the lessor (or lender) as loss payee. This requirement is, from time to
time, waived by the originator for a small number of transactions and, for some
Leases, the Obligor is permitted to self-insure the Equipment under the
Obligor's already existing self-insurance program.
For transactions involving Equipment with a cost of $200,000 or less, the
Obligor is generally provided with written information concerning its property
insurance obligations under the Lease and the originator's own property
insurance coverage that will be provided at the expense of the Obligor if the
Obligor does not provide the originator with satisfactory evidence of its own
insurance coverage. The Obligor is given a specified time period in which to
provide such evidence. Proper evidence of coverage is verified independently
and tracked by a third party tracking company and licensed broker. If the
originator provides the insurance coverage, the Obligor is charged a monthly
fee covering the insurance charges and other related administrative charges.
The Obligor has the ability to "opt out" of the program by providing evidence
of its own coverage, at which time such monthly charges cease.
For transactions involving Equipment with a cost of more than $200,000,
insurance coverage generally is verified and traced by the respective
originator, and the failure to maintain such insurance constitutes an event of
default under the applicable Lease. Generally, either pursuant to the Specific
Lease Form or the Master Form Lease, the Obligor also agrees to indemnify the
originator for all liability and expenses arising from the use, condition or
ownership of the Equipment.
Under each Lease, if the Equipment is damaged or destroyed, the Obligor
is required (i) to repair such Equipment, (ii) to make a termination payment to
the lessor in an amount not less than the Required Payoff Amount, or (iii) in
some cases, to replace such damaged or destroyed Equipment with other equipment
of comparable use and value. Under the Contribution and Service Agreement, the
Servicer is permitted (in the case of the destruction of the Equipment related
to a particular Lease) either to allow the Lessee to replace such Equipment
(provided that the replacement equipment is, in the judgment of the Servicer,
of comparable use and at least equivalent value to the value of the Equipment
which was destroyed) or to accept the termination payment referred to above.
Assignment of Leases
The Leases permit the assignment thereof by the lessor or secured party
without the consent of the Obligor, except for a small number of Leases which
require notification of the assignment to, or the consent of, the Obligor.
The Leases do not permit the assignment thereof (or the Equipment related
thereto) by the Obligor without the prior consent of the lessor or secured
party, other than Leases which (i) may permit assignments to a parent,
subsidiary or affiliate, (ii) permit the assignment to a third party, provided
the Obligor remains liable under the Lease or (iii) permit assignment to a
third party with a credit standing (determined by Vendor Services in accordance
with its underwriting policy and practice at the time for an equivalent
contract type, term and amount) equal to or better than the original Obligor.
Under the Contribution and Servicing Agreement, the Servicer may permit
an assignment of a particular Lease from an Obligor to a third party only if
the Servicer (utilizing the current underwriting criteria for its contract
origination activities generally) determines that such third party is of
sufficient credit quality that the Servicer would permit such third party to
become an Obligor with respect to a Lease originated by the Servicer generally.
17
<PAGE>
Hell-or-High-Water Leases
The Leases are "hell-or-high-water" contracts which require any payments
thereunder to be made regardless of the condition or suitability of the related
Equipment and notwithstanding any defense, set-off or counterclaim that the
Obligor may have against the lessor.
Events of Default and Remedies
Events of default under the Leases generally include the failure to pay
all amounts required by the Lease when due, the failure of the Obligor to
perform its agreements and covenants under the applicable Lease, material
misrepresentations made by the Obligor, the bankruptcy or insolvency of the
Obligor or the appointment of a receiver for the Obligor and, in some cases,
default by the Obligor under other contracts or agreements. Some of these
default provisions are subject to notice provisions and cure periods. Remedies
available to the lessor or secured party upon the occurrence of an event of
default by the Obligor include the right to cancel or terminate the Lease, to
recover possession of the related Equipment, and to receive an amount intended
to make the lessor or secured party (as the case may be) whole plus costs and
expenses (including legal fees) incurred by the lessor or secured party as a
result of such default. Notwithstanding such events of default and remedies,
under the Contribution and Servicing Agreement, the Servicer is permitted to
take such actions, with respect to delinquent and defaulted Leases, as a
reasonably prudent creditor would do under similar circumstances. See
"Description of the Contribution and Servicing Agreement--Servicing." Vendor
Services may occasionally provide payment extensions (generally of three months
or less, although longer extensions are occasionally granted) to customers
experiencing delays in payment due to cash flow shortages or other reasons.
However, it is not intended that extensions be used to provide a temporary
solution for a delinquent account. Rather, extensions are intended to be used
when, in the judgment of the relevant credit authority, it will permit the
permanent resolution of the delinquency.
Prepayments and Early Termination
None of the Leases permit the prepayment or early termination of the
Lease (except for a de minimis number of Leases which allow for a prepayment or
early termination upon payment of an amount which is not less than the Required
Payoff Amount). Nevertheless, the Servicer is permitted under the Contribution
and Servicing Agreement to accept prepayments of any of the Leases, but only if
the amount paid by or on behalf of the Obligor (or, in the case of a partial
prepayment, the sum of such amount and the remaining Principal Balance of the
Lease after application of such amount) is at least equal to the Required
Payoff Amount for such Lease.
Disclaimer of Warranties
The Leases contain provisions whereby the lessor (or Vendor Services, as
assignee of the lessor) disclaims all warranties with respect to the Equipment
and, in the majority of cases, the lessor assigns the manufacturer's warranties
to the Obligor for the term of the Lease. Under the Leases, the Obligor
"accepts" the Equipment under the applicable Lease following delivery and an
opportunity to inspect the related Equipment.
REPRESENTATIONS AND WARRANTIES MADE BY VENDOR SERVICES
Under the Transfer Agreement, Vendor Services will make the following
representations and warranties regarding each Lease (and the related Equipment)
as of the Initial Cut-Off Date, and regarding each Substitute Lease as of the
applicable Cut-Off Date:
(A) Each Lease (i) constitutes a valid, binding and enforceable payment
obligation of the Obligor in accordance with its terms (except as may be
limited by applicable bankruptcy, insolvency or other similar laws
affecting the enforceability of creditors' rights generally and the
availability of equitable remedies), (ii) has been duly and properly sold,
assigned and conveyed by Vendor Services under the Transfer Agreement to
the SPC and has been duly and properly transferred and conveyed by the SPC
to the Issuer
18
<PAGE>
pursuant to the Contribution and Servicing Agreement, (iii) was originated
by Vendor Services in the ordinary course of its business, or (in the case
of any Lease purchased by Vendor Services) was acquired by Vendor Services
for proper consideration and was validly assigned to Vendor Services by the
originator of such Lease, and (iv) contains customary and enforceable
provisions adequate to enable realization against the Obligor and/or the
related Equipment (although no representation or warranty is made with
respect to the perfection or priority of any security interest in such
related Equipment);
(B) No selection procedures adverse to the Noteholders were utilized in
selecting the Leases from those leases owned by Vendor Services on the Cut-
Off Date;
(C) All requirements of applicable Federal, state and local laws, and
regulations thereunder, in respect of all of the Leases, have been complied
with in all material respects;
(D) There is no known default, breach, violation or event permitting
cancellation or termination of the Lease by the lessor under the terms of
any Lease (other than Scheduled Payment delinquencies (in excess of 10% of
the Scheduled Payment due) of not more than 59 days), and (except for
payment extensions and waivers of Administrative Fees in accordance with
Vendor Services's servicing and collection policies and procedures) there
has been no waiver of any of the foregoing; and as of the Cut-Off Date, no
related Equipment had been repossessed;
(E) Immediately prior to the sale, assignment and conveyance of each
Lease by Vendor Services to the SPC, Vendor Services had good title to such
Lease and Vendor Services' interest in the related Equipment (subject to
the terms of such Lease) and was the sole owner thereof, free of any lien;
and immediately prior to the transfer and conveyance of the Leases by the
SPC to the Issuer, the SPC had good title to such Leases and such interest
in the related Equipment and was the sole owner thereof, free of any lien
(other than the rights of the Obligor under the related Lease);
(F) No person has a participation in or other right to receive Scheduled
Payments under any Lease, and neither the SPC nor Vendor Services has taken
any action to convey any right to any person that would result in such
person having a right to Scheduled Payments received with respect to any
Lease;
(G) Each Lease was originated by Vendor Services or acquired by Vendor
Services and was sold and assigned by Vendor Services to the SPC without
any fraud or misrepresentation on the part of Vendor Services;
(H) Each Obligor (i) is located in the United States, and (ii) is not (a)
the United States of America or any state or local government or any
agency, department, subdivision, or instrumentality thereof (except for
Leases representing no more than 1% of the Initial Pool Principal Balance)
or (b) Vendor Services or an affiliate thereof;
(I) The sale, transfer and assignment of such Lease and Vendor Services'
interest in the related Equipment to the SPC under the Transfer Agreement,
and the transfer and conveyance of such Lease from, and the grant of rights
to the related Residual Realizations by, the SPC to the Issuer under the
Contribution and Servicing Agreement, are not unlawful, void or voidable
under the laws of the jurisdiction applicable to such Lease;
(J) All filings and other actions required to be made, taken or performed
by any person in any jurisdiction to give the Issuer a first priority
perfected lien or ownership interest in the Leases and a first priority
perfected security interest in Vendor Services' interest in the Equipment
have been made, taken or performed;
(K) There exists a Lease File pertaining to each Lease, and such Lease
File contains the Lease or a facsimile copy thereof;
(L) There is only one original executed copy of each Lease;
(M) The Leases constitute chattel paper within the meaning of the UCC as
in effect in the States of Minnesota and Delaware (other than those Leases
in which the lessor is financing exclusively the Obligor's software license
or maintenance contract for Equipment, which Leases, in proportion to the
Initial Pool Principal Balance, are not material);
19
<PAGE>
(N) Each Lease was entered into by an Obligor who, at the Cut-Off Date,
had not been identified on the records of Vendor Services as being the
subject of a current bankruptcy proceeding;
(O) The computer tape containing information with respect to the Leases
that was made available by Vendor Services to the Trustee on the Closing
Date and was used to select the Leases was complete and accurate in all
material respects as of the Cut-Off Date and includes a description of the
same Leases that are described in the Schedule of Leases to the
Contribution and Servicing Agreement;
(P) By the Closing Date, the portions of the electronic master record of
Vendor Services relating to the Leases will have been clearly and
unambiguously marked to show that the Leases constitute part of the Trust
Assets and are owned by the Issuer in accordance with the terms of the
Contribution and Servicing Agreement;
(Q) No Lease has a Scheduled Payment delinquency (in excess of 10% of the
Scheduled Payment due) of more than 59 days past due as of the Cut-Off
Date;
(R) Each Lease may be sold, assigned and transferred by Vendor Services
to the SPC, and may be assigned and transferred by the SPC to the Issuer,
without the consent of, or prior approval from, or any notification to, the
applicable Obligor, other than (i) certain Leases (which, in proportion to
the aggregate of all of the Leases, are not material) that require
notification of the assignment to the Obligor, which notification will be
given by the Servicer not later than 10 days following the Closing Date,
and (ii) Leases (which, in proportion to the aggregate of all of the
Leases, are not material) that require the consent of the Obligor, which
consent will be obtained by the Servicer not later than 10 days following
the Closing Date;
(S) Each Lease prohibits the sale, assignment or transfer of the
Obligor's interest therein, the assumption of the Lease by another person
in a manner that would release the Obligor thereof from the Obligor's
obligation, or any sale, assignment or transfer of the related Equipment,
without the prior consent of the lessor, other than Leases which may (i)
permit assignment to a subsidiary, corporate parent or other affiliate,
(ii) permit the assignment to a third party, provided the Obligor remains
liable under the Lease, or (iii) permit assignment to a third party with a
credit standing (determined by Vendor Services in accordance with its
underwriting policy and practice at the time for an equivalent contract
type, term and amount) equal to or better than the original Obligor;
(T) The Obligor under each Lease is required to make payments thereunder
(i) in United States dollars, and (ii) in fixed amounts and on fixed and
predetermined dates;
(U) Each Lease requires the Obligor to assume responsibility for payment
of all expenses in connection with the maintenance and repair of the
related Equipment, the payment of all premiums for insurance of such
Equipment and the payment of all taxes (including sales and property taxes)
relating to such Equipment;
(V) Each Lease requires the Obligor thereunder to make all Scheduled
Payments thereon under all circumstances and regardless of the condition or
suitability of the related Equipment and notwithstanding any defense, set-
off or counterclaim that the Obligor may have against the manufacturer,
lessor or lender (as the case may be);
(W) Under each Lease, if the Equipment is damaged or destroyed, the
Obligor is required either (i) to repair such Equipment, (ii) to make a
termination payment to the lessor in an amount not less than the Required
Payoff Amount, or (iii) in some cases, to replace such damaged or destroyed
Equipment with other equipment of comparable use and value;
(X) None of the Leases permit the Obligor to terminate the Lease prior to
the latest Stated Maturity Date or to otherwise prepay the amounts due and
payable thereunder, except for a de minimis number of Leases which allow
for an early termination or prepayment upon payment of an amount which is
not less than the Required Payoff Amount;
20
<PAGE>
(Y) It is not a precondition to the valid transfer or assignment of
Vendor Services' interest in any of the Equipment related to any Lease that
title to such Equipment be transferred on the records of any governmental
or quasi-governmental agency, body or authority;
(Z) The information with respect to the Leases listed on the Schedule of
Leases attached to the Contribution and Servicing Agreement is true,
correct and complete in all material respects;
(AA) No provisions of any Lease have been waived, altered or modified in
any material respect, except as indicated in the Lease File;
(BB) No Lease is a "consumer lease" as defined in Article 2A of the
Uniform Commercial Code, except for a de minimis number of Leases;
(CC) To the best of Vendor Services' knowledge, each Obligor has accepted
the related Equipment and has had reasonable opportunity to inspect and
test such Equipment; and
(DD) The Obligor has made at least one payment under the Lease.
The above-described representations and warranties of Vendor Services
will survive the transfer and assignment of the related Leases and other Trust
Assets to the Issuer.
In the event of a breach of any such representation or warranty with
respect to a Lease that materially and adversely affects the value of such
Lease (any such breach being a "Repurchase Event"), Vendor Services, unless it
cures the breach by the end of the second Collection Period after the date on
which Vendor Services becomes aware of or receives written notice from the
Trustee or the Servicer of such breach, will be obligated to repurchase (or
substitute another lease for) the Lease and the related Equipment. Any such
repurchase shall be made on the Deposit Date immediately following the end of
such second Collection Period at a price equal to the Required Payoff Amount
applicable to such Lease plus the Book Value of the related Equipment. The
"Required Payoff Amount," with respect to any Collection Period for any Lease,
is equal to the sum of: (i) the Scheduled Payment due in such Collection
Period, together with any Scheduled Payments due in prior Collection Periods
and not yet received, plus (ii) the Principal Balance of such Lease as of the
last day of such Collection Period (after taking into account the Scheduled
Payment due in such Collection Period). This repurchase or substitution
obligation may be enforced by the Trustee on behalf of the holders of the
Notes, and will constitute the sole remedy available to the Noteholders against
Vendor Services for any such uncured breach, except that pursuant to the
Transfer Agreement, Vendor Services will indemnify the Trustee, the Issuer and
the Noteholders against losses, damages, liabilities and claims which may be
asserted against any of them as a result of third-party claims arising out of
the facts giving rise to such breach.
Upon the repurchase or substitution by Vendor Services of a Lease and any
related Equipment, such Lease and related Equipment will be released to Vendor
Services.
SUBSTITUTION
Vendor Services will have the option to substitute one or more Leases
having similar characteristics (each, a "Substitute Lease") for (a) Liquidated
Leases, (b) Leases that have been prepaid in full, whether pursuant to their
terms or with the Servicer's consent ("Prepaid Leases"), (c) Leases subject to
repurchase as a result of a breach or representation or warranty ("Warranty
Leases") and (d) Leases following a material modification or adjustment to the
terms of such Lease ("Adjusted Leases"). The aggregate Principal Balance of the
Liquidated Leases, Warranty Leases or Adjusted Leases for which Vendor Services
may substitute Substitute Leases cannot exceed 10% of the Initial Pool
Principal Balance.
In no event will the Lease Pool Principal Balance after the inclusion of
the Substitute Leases be less than the Lease Pool Principal Balance prior to
such substitution. In addition, after giving effect to such substitutions, the
aggregate Book Value of the Equipment subject to the Leases cannot be
materially less than the aggregate Book Value of the Equipment subject to the
Leases immediately prior to such substitutions. Additionally, the final payment
on each Substitute Lease must be on or prior to September 30, 2005 or, to the
21
<PAGE>
extent the final payment on such Lease is due subsequent to September 30, 2005,
only scheduled payments due on or prior to such date may be included in
calculating the Principal Balance of such Lease.
CERTAIN STATISTICS RELATING TO THE CUT-OFF DATE POOL
General
Vendor Services has prepared certain statistics relating to the Lease
Pool as of the Initial Cut-Off Date (the "Cut-Off Date Pool"). All statistical
information concerning the Leases set forth herein, insofar as it involves
calculations of the Principal Balances of the Leases, are made using the
Statistical Discount Rate of 6.506%.
The aggregate Principal Balance of the Leases calculated using the
Statistical Discount Rate, and not including delinquent amounts (the
"Statistical Discounted Present Value of the Leases") is equal to
$394,839,208.76. The aggregate Principal Balance of each Lease (the "Lease Pool
Principal Balance") as of the Initial Cut-Off Date (the "Initial Pool Principal
Balance") and as of each Payment Date will be calculated at the "Discount Rate"
of 6.539%.
The total number of Leases in the Cut-Off Date Pool is 34,621. The
average Principal Balance of the Leases, as of the Initial Cut-Off Date, was
approximately $11,404.62.
COMPOSITION OF THE CUT-OFF DATE POOL
<TABLE>
<CAPTION>
STATISTICAL DISCOUNTED WEIGHTED AVERAGE
NUMBER PRESENT VALUE OF THE ORIGINAL TERM WEIGHTED AVERAGE AVERAGE PRINCIPAL
OF LEASES LEASES (RANGE) REMAINING TERM (RANGE) BALANCE (RANGE)
- --------- ---------------------- ----------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
34,621 $394,839,208.76 47.65 months 41.33 months $11,404.62
(7 months to 84 months) (6 months to 82 months) ($98.54 to $3,193,926.43)
</TABLE>
22
<PAGE>
Geographical Diversity
The following table shows the geographical diversity of the Cut-Off Date
Pool, by indicating the number of Leases, the aggregate Statistical Discounted
Present Value of the Leases and the percentage (by number of Leases and by
aggregate Statistical Discounted Present Value) of such Leases relative to all
of the Leases in the Cut-Off Date Pool by reference to the State in which the
Obligors on such Leases are (according to the Servicer's records) located:
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
STATISTICAL DISCOUNTED DISCOUNTED PRESENT
% OF TOTAL NUMBER PRESENT VALUE VALUE OF THE
STATE NUMBER OF LEASES OF LEASES OF THE LEASES LEASES
- ----- ---------------- ----------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Alabama................. 287 0.83% $3,073,725.63 0.78%
Alaska.................. 70 0.20 479,890.77 0.12
Arizona................. 604 1.74 6,977,195.61 1.77
Arkansas................ 112 0.32 783.252.47 0.20
California.............. 3,421 9.88 47,253,950.52 11.97
Colorado................ 621 1.79 6,248,521.29 1.58
Connecticut............. 680 1.96 8,184,154.83 2.07
Delaware................ 178 0.51 2,045,067.83 0.52
District of Columbia.... 168 0.49 2,116,882.21 0.54
Florida................. 3,329 9.62 34,447,676.65 8.72
Georgia................. 1,024 2.96 11,881,996.54 3.01
Hawaii.................. 55 0.16 575,597.98 0.15
Idaho................... 63 0.18 391,622.12 0.10
Illinois................ 1,416 4.09 16,551,269.13 4.19
Indiana................. 603 1.74 6,790,755.77 1.72
Iowa.................... 245 0.71 1,989,644.32 0.50
Kansas.................. 238 0.69 3,084,275.73 0.78
Kentucky................ 313 0.90 2,846,244.59 0.72
Louisiana............... 358 1.03 3,404,755.25 0.86
Maine................... 150 0.43 1,284,251.39 0.33
Maryland................ 650 1.88 9,054,610.69 2.29
Massachusetts........... 1,276 3.69 12,591,703.54 3.19
Michigan................ 807 2.33 13,005,672.44 3.29
Minnesota............... 934 2.70 8,605,454.22 2.18
Mississippi............. 172 0.50 1,691,243.89 0.43
Missouri................ 470 1.36 5,659,869.54 1.43
Montana................. 80 0.23 518,517.65 0.13
Nebraska................ 103 0.30 1,142,206.67 0.29
Nevada.................. 386 1.11 4,281,898.10 1.08
New Hampshire........... 245 0.71 2,445,385.96 0.62
New Jersey.............. 2,030 5.86 25,330,704.62 6.42
New Mexico.............. 135 0.39 1,317,869.12 0.33
New York................ 3,555 10.27 42,676,206.58 10.81
North Carolina.......... 1,418 4.10 16,155,347.87 4.09
North Dakota............ 48 0.14 560,643.60 0.14
Ohio.................... 1,106 3.19 10,132,850.30 2.57
Oklahoma................ 306 0.88 2,747,690.15 0.70
Oregon.................. 342 0.99 2,783,396.25 0.70
Pennsylvania............ 1,509 4.36 16,031,010.32 4.06
Rhode Island............ 159 0.46 2,209,732.70 0.56
South Carolina.......... 494 1.43 4,695,214.99 1.19
South Dakota............ 51 0.15 414,201.29 0.10
Tennessee............... 419 1.21 4,735,186.67 1.20
Texas................... 1,918 5.54 24,970,870.82 6.32
Utah.................... 160 0.46 1,754,092.01 0.44
Vermont................. 68 0.20 757,010.91 0.19
Virginia................ 918 2.65 10,052,108.68 2.55
Washington.............. 466 1.35 4,358,103.99 1.10
West Virginia........... 125 0.36 1,033,202.96 0.26
Wisconsin............... 286 0.83 2,518,788.04 0.64
Wyoming................. 50 0.14 197,683.52 0.05
------ ------ --------------- ------
Total.................. 34,621 100.00% $394,839,208.76 100.00%
====== ====== =============== ======
</TABLE>
23
<PAGE>
Adverse economic conditions in states where a substantial number of
Obligors are located, such as New York, California and Florida, may adversely
affect such Obligors' ability to make payments on the related Leases, and the
Noteholders could suffer a loss on their investment as a result.
Payment Status
The following table shows the payment status of the Cut-Off Date Pool, by
indicating the number of Leases, the aggregate Statistical Discounted Present
Value of such Leases and the percentage (by number of Leases and by aggregate
Statistical Discounted Present Value) of such Leases relative to all of the
Leases in the Cut-Off Date Pool by reference to whether such Leases were
current as of the Initial Cut-Off Date or were 31-60 days delinquent. For these
purposes, a "delinquency" means that the Obligor on the Lease has failed to
make a required Scheduled Payment in an amount equal to at least 90% of the
required Scheduled Payment within 30 days of the due date.
<TABLE>
<CAPTION>
AGGREGATE
STATISTICAL % OF STATISTICAL
% OF TOTAL DISCOUNTED DISCOUNTED
NUMBER OF PRESENT VALUE PRESENT VALUE OF
PAYMENT STATUS NUMBER OF LEASES LEASES OF THE LEASES THE LEASES
- -------------- ---------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Current................. 33,859 97.80% $388,779,154.22 98.47%
31-60 Days Delinquent... 762 2.20 6,060,054.54 1.53
------ ------ --------------- ------
Total................. 34,621 100.00% $394,839,208.76 100.00%
====== ====== =============== ======
</TABLE>
Leases by Equipment Type
The following table shows the type of Equipment securing or otherwise
related to the Leases, by the number of Leases, the aggregate Statistical
Discounted Present Value of such Leases, and the percentage (by number of
Leases and by aggregate Statistical Discounted Present Value) of such Leases
relative to all of the Leases:
<TABLE>
<CAPTION>
AGGREGATE
STATISTICAL % OF STATISTICAL
% OF TOTAL DISCOUNTED DISCOUNTED
NUMBER OF PRESENT VALUE PRESENT VALUE OF
TYPE OF EQUIPMENT NUMBER OF LEASES LEASES OF THE LEASES THE LEASES
- ----------------- ---------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Data Processing
Equipment.............. 15,798 45.63% $129,206,580.26 32.72%
Office Machines......... 7,305 21.10 79,046,457.24 20.02
Telecommunications...... 6,068 17.53 77,493,428.70 19.63
Auto Services........... 1,263 3.65 16,890,907.92 4.28
Healthcare Related...... 460 1.33 13,699,467.72 3.47
Laundry & Cleaning...... 545 1.57 13,423,134.35 3.40
Furniture............... 715 2.07 11,998,664.96 3.04
Machine Tool............ 483 1.40 10,991,781.97 2.78
Other................... 438 1.27 10,029,283.29 2.54
Recreation.............. 422 1.22 6,386,195.06 1.62
Secured Loans........... 22 0.06 6,089,040.63 1.54
Food & Lodging.......... 307 0.89 5,397,999.88 1.37
Printing................ 245 0.71 4,174,015.82 1.06
HVAC.................... 112 0.32 2,734,617.03 0.69
Imaging................. 144 0.42 1,880,903.10 0.48
Construction............ 65 0.19 1,376,407.42 0.35
Material Handling....... 97 0.28 1,337,493.95 0.34
Maintenance............. 59 0.17 897,414.84 0.23
Unclassified............ 34 0.10 771,366.30 0.20
Waste Management........ 26 0.08 605,268.51 0.15
Manufacturing........... 9 0.03 295,745.74 0.07
Transportation.......... 4 0.01 113,034.07 0.03
------ ------ --------------- ------
Total................. 34,621 100.00% $394,839,208.76 100.00%
====== ====== =============== ======
</TABLE>
24
<PAGE>
Principal Balances
The following table shows the distribution of the Cut-Off Date Pool by
Principal Balance by indicating the number of Leases which have a Principal
Balance within a defined range and the aggregate Statistical Discounted Present
Value of the Leases, and the percentage (by number of Leases and by aggregate
Statistical Discounted Present Value) of such Leases relative to all of the
Leases:
<TABLE>
<CAPTION>
AGGREGATE
STATISTICAL % OF STATISTICAL
% OF TOTAL DISCOUNTED DISCOUNTED
NUMBER OF PRESENT VALUE PRESENT VALUE OF
PRINCIPAL BALANCE NUMBER OF LEASES LEASES OF THE LEASES THE LEASES
- ----------------- ---------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
$ 0.01 to
$ 10,000.00.......... 24,215 69.94% $102,196,506.28 25.88%
$ 10,000.01 to
$ 25,000.00.......... 7,066 20.41 110,124,029.37 27.89
$ 25,000.01 to
$ 40,000.00.......... 1,772 5.12 55,080,040.75 13.95
$ 40,000.01 to
$ 60,000.00.......... 825 2.38 39,856,448.99 10.09
$ 60,000.01 to
$ 80,000.00.......... 319 0.92 21,797,021.93 5.52
$ 80,000.01 to
$ 100,000.00.......... 159 0.46 14,255,309.09 3.61
$100,000.01 to
$ 150,000.00.......... 163 0.47 19,295,820.73 4.89
$150,000.01 to
$ 200,000.00.......... 46 0.13 8,075,149.88 2.05
$200,000.01 to
$ 300,000.00.......... 29 0.08 7,031,530.07 1.78
$300,000.01 to
$ 400,000.00.......... 12 0.03 4,210,628.16 1.07
$400,000.01 to
$ 500,000.00.......... 5 0.01 2,263,426.03 0.57
$500,000.01 to
$1,000,000.00.......... 7 0.02 4,975,500.12 1.26
Over $1,000,000.00...... 3 0.01 5,677,797.37 1.44
------ ------ --------------- ------
Total................. 34,621 100.00% $394,839,208.76 100.00%
====== ====== =============== ======
</TABLE>
Original Equipment Costs
The following table shows the distribution of the Cut-Off Date Pool by
original equipment costs by indicating the number of Leases, the aggregate
Statistical Discounted Present Value of such Leases, and the percentage (by
number of Leases and by aggregate Statistical Discounted Present Value) of such
Leases relative to all of the Leases:
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
% OF TOTAL STATISTICAL DISCOUNTED
NUMBER OF DISCOUNTED PRESENT PRESENT VALUE OF
ORIGINAL EQUIPMENT COSTS NUMBER OF LEASES LEASES VALUE OF THE LEASES THE LEASES
- ------------------------ ---------------- ---------- ------------------- ----------------
<S> <C> <C> <C> <C>
$ 0.01 to
$ 10,000.00.......... 22,973 66.36% $ 91,767,383.20 23.24%
$ 10,000.01 to
$ 25,000.00.......... 7,828 22.61 110,721,386.60 28.04
$ 25,000.01 to
$ 40,000.00.......... 2,033 5.87 57,654,821.66 14.60
$ 40,000.01 to
$ 60,000.00.......... 949 2.74 42,273,773.95 10.71
$ 60,000.01 to
$ 80,000.00.......... 346 1.00 21,882,102.79 5.54
$ 80,000.01 to
$ 100,000.00.......... 176 0.51 14,606,356.29 3.70
$100,000.01 to
$ 150,000.00.......... 191 0.55 20,823,752.93 5.27
$150,000.01 to
$ 200,000.00.......... 58 0.17 9,040,527.97 2.29
$200,000.01 to
$ 300,000.00.......... 39 0.11 8,750,315.70 2.22
$300,000.01 to
$ 400,000.00.......... 7 0.02 2,208,711.19 0.56
$400,000.01 to
$ 500,000.00.......... 9 0.03 3,524,739.50 0.89
$500,000.01 to
$1,000,000.00.......... 9 0.03 5,907,539.61 1.50
Over $1,000,000.00...... 3 0.01 5,677,797.37 1.44
------ ------ --------------- ------
Total................. 34,621 100.00% $394,839,208.76 100.00%
====== ====== =============== ======
</TABLE>
25
<PAGE>
Remaining Terms of Leases
The following table shows the remaining term of the Leases from the
Initial Cut-Off Date to the scheduled expiration date of such Leases, by
indicating the number of Leases, the aggregate Statistical Discounted Present
Value of such Leases, and the percentage (by number of Leases and by aggregate
Statistical Discounted Present Value) of such Leases relative to all of the
Leases:
<TABLE>
<CAPTION>
AGGREGATE
STATISTICAL % OF STATISTICAL
% OF TOTAL DISCOUNTED DISCOUNTED
NUMBER OF PRESENT VALUE PRESENT VALUE OF
REMAINING TERMS OF LEASES NUMBER OF LEASES LEASES OF THE LEASES THE LEASES
- ------------------------- ---------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
One Month to 12 Months... 1,165 3.37% $4,663,363.27 1.18%
13 Months to 24 Months... 6,298 18.19 34,884,289.48 8.84
25 Months to 36 Months... 17,023 49.17 139,401,451.28 35.31
37 Months to 48 Months... 3,516 10.16 51,071,282.69 12.93
49 Months to 60 Months... 6,479 18.71 156,903,654.97 39.74
Over 60 Months........... 140 0.40 7,915,167.06 2.00
------ ------ --------------- ------
Total.................. 34,621 100.00% $394,839,208.76 100.00%
====== ====== =============== ======
</TABLE>
Original Terms of Leases
The following table shows the original term of the Leases from the date
of origination to the scheduled expiration date of such leases, by indicating
the number of Leases, the aggregate Statistical Discounted Present Value of
such Leases, and the percentage (by number of Leases and by aggregate
Statistical Discounted Present Value) of such Leases relative to all of the
Leases:
<TABLE>
<CAPTION>
AGGREGATE
STATISTICAL % OF STATISTICAL
% OF TOTAL DISCOUNTED DISCOUNTED
NUMBER OF PRESENT VALUE PRESENT VALUE OF
ORIGINAL TERMS OF LEASES NUMBER OF LEASES LEASES OF THE LEASES THE LEASES
- ------------------------ ---------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
One Month to 12 Months.. 493 1.42% $ 2,024,746.67 0.51%
13 Months to 24 Months.. 4,472 12.92 21,128,835.89 5.35
25 Months to 36 Months.. 18,611 53.76 146,831,944.89 37.19
37 Months to 48 Months.. 3,072 8.87 36,628,707.41 9.28
49 Months to 60 Months.. 7,390 21.35 172,798,496.53 43.76
61 Months to 72 Months.. 558 1.61 11,783,347.73 2.98
73 Months to 84 Months.. 25 0.07 3,643,129.64 0.92
------ ------ --------------- ------
Total................. 34,621 100.00% $394,839,208.76 100.00%
====== ====== =============== ======
</TABLE>
Leases by Purchase Options
The following table shows the types of equipment purchase options related
to the Leases, by the number of Leases, the aggregate Statistical Discounted
Present Value of such Leases, and the percentage (by number of Leases and by
aggregate Statistical Present Value) of such Leases relative to all of the
Leases. The
26
<PAGE>
purchase option types listed below indicate Leases for which the purchase price
of the related Equipment at the scheduled lease termination date is set at (i)
$1.00 or another nominal amount ("Nominal Buyout"), (ii) 10% or a similar fixed
percentage of the original equipment cost ("Fixed Purchase Option"), (iii) the
fair market value of the Equipment at Lease termination, as determined pursuant
to the Lease terms ("Fair Market Value") or (iv) a predetermined amount which
the Obligor is required to pay ("Guaranteed Purchase"):
<TABLE>
<CAPTION>
AGGREGATE
STATISTICAL % OF STATISTICAL
% OF TOTAL DISCOUNTED DISCOUNTED
NUMBER OF PRESENT VALUE PRESENT VALUE OF
TYPE NUMBER OF LEASES LEASES OF THE LEASES THE LEASES
- ---- ---------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Nominal Buyout.......... 15,001 43.33% $183,483,751.24 46.47%
Fixed Purchase Option... 3,451 9.97 35,041,007.17 8.87
Fair Market Value....... 16,145 46.63 175,832,120.24 44.53
Guaranteed Purchase..... 24 0.07 482,330.11 0.12
------ ------ --------------- ------
Totals................ 34,621 100.00% $394,839,208.76 100.00%
====== ====== =============== ======
</TABLE>
CERTAIN STATISTICS RELATING TO DELINQUENCIES AND DEFAULTS
Delinquencies
The following table sets forth statistics relating to delinquencies on
leases within Vendor Services' owned and managed portfolio of receivables
similar to the Leases as of December 31, 1996, December 31, 1997 and November
30, 1998. Vendor Services was acquired by Green Tree in November 1996, and
current management, accordingly, cannot certify delinquency and default
experience for prior periods. However, current management does not believe that
Vendor Services' delinquency and default experience in prior periods was
substantially different from the experience presented here. For these purposes,
a "Delinquency" means that the obligor on the lease has failed to make a
required Scheduled Payment in an amount equal to at least 90% of the required
Scheduled Payment within 30 days of the due date. For these purposes, any
payment made by the obligor on a lease subsequent to the required payment date
is applied to the earliest payment which was unpaid. The following table is
based, where indicated, on the gross receivable balance of the leases, as it
appears on the accounting records of Vendor Services as of the date set forth
below and not solely the overdue payments.
<TABLE>
<CAPTION>
PERCENTAGE OF GROSS RECEIVABLE
BALANCE OF LEASES WHICH WERE
GROSS DELINQUENT
RECEIVABLE -------------------------------
BALANCE OF 31 TO 60 61 TO 90 OVER 90
DATE OF CALCULATION LEASES DAYS DAYS DAYS TOTAL
------------------- ------------ -------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
12/31/96....................... $618,075,465 2.20% 0.36% 0.13% 2.69%
12/31/97....................... $735,621,630 2.07% 0.39% 0.15% 2.61%
11/30/98....................... $893,014,108 1.81% 0.35% 0.09% 2.25%
</TABLE>
Non-Accruals
The following table sets forth statistics relating to Non-Accruals on
leases within Vendor Services' owned and managed portfolio of receivables
similar to the Leases as of December 31, 1996, December 31, 1997 and as of
November 30, 1998. Vendor Services was acquired by Green Tree in November 1996,
and current management, accordingly, cannot certify non-accrual experience for
prior periods. However, current management does not believe that Vendor
Services' non-accrual experience in prior periods was substantially different
from the experience presented here. For these purposes, a "Non-Accrual" means
that, as of the date indicated, the obligor on the relevant lease had failed to
make payments in an amount at least equal to 90% of the required Scheduled
Payment for at least 90 days beyond the date required (or less, if in the
judgment of the collection manager the account is impaired), or commenced a
bankruptcy or insolvency proceeding. The
27
<PAGE>
following table is based, where indicated, on the net investment of the leases
(gross of any allowance for losses) as it appears on the records of Vendor
Services as of the date specified below:
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE NET AGGREGATE NET INVESTMENT
INVESTMENT OF OF LEASES WHICH WERE
DATE OF CALCULATION LEASES ON NON-ACCRUAL
------------------- ------------- ------------------------
<S> <C> <C>
12/31/96............................ $558,040,000 3.42%
12/31/97............................ $672,210,148 3.58%
11/30/98............................ $832,231,935 4.05%
</TABLE>
Losses and Recoveries
The following table sets forth statistics relating to gross losses and
losses net of recoveries on defaulted leases within Vendor Services' owned and
managed portfolio of receivables similar to the Leases during the twelve-month
periods ending December 31, 1996 and December 31, 1997 and during the eleven-
month period ending November 30, 1998. Vendor Services was acquired by Green
Tree in November 1996, and current management, accordingly, cannot certify loss
and recovery experience for prior periods. However, current management does not
believe that Vendor Services' loss and recovery experience in prior periods was
substantially different from the experience presented here. For these purposes,
"gross losses" means total losses before recoveries measured against the net
investment of the leases (gross of any allowance for losses), and "net losses"
means losses after recoveries measured against the net investment of the leases
(gross of any allowance for losses).
<TABLE>
<CAPTION>
AGGREGATE
NET GROSS LOSSES AS A NET LOSSES AS A
INVESTMENT PERCENTAGE OF NET PERCENTAGE OF NET
DATE OF CALCULATION OF LEASES INVESTMENT INVESTMENT
------------------- ------------ ----------------- -----------------
<S> <C> <C> <C>
12/31/96.................... $558,040,000 2.96% 1.83%
12/31/97.................... 672,210,148 2.40% 1.51%
11/30/98.................... 832,231,935 2.17% 1.38%
</TABLE>
Vendor Services' delinquency, non-accrual and net loss experience has
historically been affected by prevailing economic conditions, particularly in
industries and geographic regions where it has customer concentrations. These
conditions are often volatile, and no predictions can be made regarding them.
There can be no assurance that the delinquency, non-accrual and net loss
experience on the Leases will be comparable to that set forth above.
It has been Vendor Services' experience that collections from the
obligors constitute a significant portion of recoveries on defaulted equipment
lease receivables, in addition to the proceeds from liquidation of the related
equipment. The resale value of individual items of Equipment, which would be
collected by the Servicer in the event of a default under the related Lease,
will vary substantially, depending on such factors as the expected remaining
useful life of the Equipment at the time of the default and the obsolescence of
the Equipment, it is possible that the resale values for some Equipment would
be negligible or insufficient to justify repossession and resale. See "Risk
Factors--Risks Relating to Reliance on Residual Realizations."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE ISSUER
As of the date of this Prospectus, the Issuer has had no operating
history. The net proceeds of the sale of the Notes will be employed to purchase
the Leases. See "Use of Proceeds." The Issuer is prohibited by its LLC
Agreement from engaging in business other than (i) acquiring the Leases and
rights to the Residual Realizations from the SPC, (ii) pledging the Leases and
its rights to the Residual Realizations to the Trustee, (iii) executing and
performing its obligations under the Contribution and Servicing Agreement and
the Indenture, and (iv) engaging in other transactions, including entering into
agreements, that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
28
<PAGE>
MANAGERS OF THE ISSUER
The following table sets forth the managers of the Issuer and their ages
and positions as of the date of this Prospectus. Because the Issuer is
organized as a special purpose company and will be largely passive, it is
expected that the managers in such capacity will participate in the management
of the Issuer to a limited extent. Most of the actions related to maintaining
and servicing the assets will be performed by the Servicer.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------------------------------------
<S> <C> <C>
Joel H. Gottesman............... 49 Manager and Chair of Board of Managers
Phyllis A. Knight............... 36 Manager
</TABLE>
Joel H. Gottesman was named to the Board of Managers of the Issuer in
November 1998. Mr. Gottesman has been Senior Vice President and General Counsel
of Green Tree Financial Corporation since September 1995, and Secretary since
May 1996. From 1983 to 1995, Mr. Gottesman was an attorney at Briggs & Morgan,
Professional Association, Minneapolis, Minnesota.
Phyllis A. Knight is Senior Vice President and Treasurer of Green Tree
Financial Corporation. She joined Green Tree in September 1994. Prior to
joining Green Tree, she was a Senior Manager at KPMG Peat Marwick.
None of the above-listed managers of the Issuer will be compensated
directly by the Issuer nor with any funds or assets of the Issuer nor will any
such managers receive compensation in the capacities in which they act for the
Issuer.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to managers and controlling persons of the Issuer pursuant
to its LLC Agreement, or otherwise, the Issuer has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Issuer of expenses incurred or paid by a manager, officer or
controlling person of the Issuer in the successful defense of any action, suit
or proceeding) is asserted by such manager or controlling person in connection
with the Notes, the Issuer will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
29
<PAGE>
WEIGHTED AVERAGE LIFE OF THE NOTES
THE FOLLOWING INFORMATION IS GIVEN SOLELY TO ILLUSTRATE THE EFFECT OF
PREPAYMENTS ON THE LEASES ON THE WEIGHTED AVERAGE LIFE OF THE NOTES UNDER THE
ASSUMPTIONS STATED BELOW AND IS NOT A PREDICTION OF THE PREPAYMENT RATE THAT
MIGHT ACTUALLY BE EXPERIENCED BY THE LEASES.
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 Notes will be
primarily a function of the rate at which payments are made on the Leases.
Payments on the Leases may be in the form of Scheduled Payments or prepayments
(including, for this purpose, liquidations due to default). See "Risk Factors--
Prepayment and Early Termination of Leases and Related Reinvestment Risks."
The Constant Prepayment Rate prepayment model ("CPR") represents an
assumed constant rate of prepayment of Leases outstanding as of the beginning
of each month expressed as a per annum percentage. There can be no assurance
that Leases will experience prepayments at a constant prepayment rate or
otherwise in the manner assumed by the prepayment model. See "Risk Factors--
Prepayment and Early Termination of Leases and Related Reinvestment Risk."
The weighted average lives in the following tables were created using the
Discount Rate, assuming that: (i) Scheduled Payments on the Leases are received
in a timely manner and prepayments are made at the percentages of the
prepayment model set forth in the table; (ii) with respect to the caption
"Weighted Average Life to Call" the SPC will exercise its right to purchase the
Leases on the Payment Date following the date on which the unpaid principal
balance of all of the outstanding Notes is less than 10% of the Initial Pool
Principal Balance, and with respect to the caption "Weighted Average Life to
Maturity," the SPC will not exercise that right at any time; (iii) payments are
made on the Notes on the 20th day of each month commencing January 20, 1999;
(iv) the Notes are issued on December 23, 1998; (v) the SPC does not substitute
new leases for Leases that are prepaid in full and (vi) there are no investment
earnings on funds in the Collection Account, Reserve Account or Residual
Account. On the Closing Date the Issuer will issue $122,726,804 aggregate
principal amount of 5.201% Class A-1 Notes, $51,695,213 aggregate principal
amount of 5.55% Class A-2 Notes, $122,332,184 aggregate principal amount of
5.60% Class A-3 Notes, $58,403,752 aggregate principal amount of 5.74% Class A-
4 Notes, $25,650,297 aggregate principal amount of 6.66% Class B Notes, and
$13,811,698 aggregate principal amount of 7.63% Class C Notes. No
representation is made that these assumptions will be correct, including the
assumption that the Leases will not experience delinquencies or losses.
30
<PAGE>
In making an investment decision with respect to the Notes, investors
should consider a variety of possible prepayment scenarios, including the
limited scenarios described in the tables below.
<TABLE>
<CAPTION>
PERCENTAGE OF THE PERCENTAGE OF THE
INITIAL PRINCIPAL BALANCE INITIAL PRINCIPAL BALANCE
OF THE OF THE
CLASS A-1 NOTES CLASS A-2 NOTES
------------------------------ ------------------------------
CPR CPR
------------------------------ ------------------------------
PAYMENT DATE 0% 7% 12% 18% 0% 7% 12% 18%
------------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
January 20, 1999........ 91.81 89.92 88.49 86.67 100.00 100.00 100.00 100.00
February 20, 1999....... 83.57 79.91 77.14 73.65 100.00 100.00 100.00 100.00
March 20, 1999.......... 75.29 69.96 65.96 60.93 100.00 100.00 100.00 100.00
April 20, 1999.......... 66.97 60.07 54.93 48.50 100.00 100.00 100.00 100.00
May 20, 1999............ 58.60 50.25 44.07 36.36 100.00 100.00 100.00 100.00
June 20, 1999........... 50.18 40.50 33.36 24.51 100.00 100.00 100.00 100.00
July 20, 1999........... 41.76 30.85 22.84 12.98 100.00 100.00 100.00 100.00
August 20, 1999......... 33.34 21.31 12.52 1.76 100.00 100.00 100.00 100.00
September 20, 1999...... 24.92 11.87 2.39 0.00 100.00 100.00 100.00 81.41
October 20, 1999........ 16.50 2.53 0.00 0.00 100.00 100.00 84.68 59.86
November 20, 1999....... 8.10 0.00 0.00 0.00 100.00 86.44 64.90 38.92
December 20, 1999....... 0.00 0.00 0.00 0.00 99.47 68.03 45.58 18.63
January 20, 2000........ 0.00 0.00 0.00 0.00 82.57 49.89 26.68 0.00
February 20, 2000....... 0.00 0.00 0.00 0.00 65.73 32.01 8.18 0.00
March 20, 2000.......... 0.00 0.00 0.00 0.00 48.95 14.38 0.00 0.00
April 20, 2000.......... 0.00 0.00 0.00 0.00 32.21 0.00 0.00 0.00
May 20, 2000............ 0.00 0.00 0.00 0.00 15.56 0.00 0.00 0.00
June 20, 2000........... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Weighted Average Life to
Call (in years)........ 0.53 0.46 0.41 0.36 1.28 1.12 1.02 0.91
Weighted Average Life To
Maturity (in years).... 0.53 0.46 0.41 0.36 1.28 1.12 1.02 0.91
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE PERCENTAGE OF THE
INITIAL PRINCIPAL BALANCE INITIAL PRINCIPAL BALANCE
OF THE OF THE
CLASS A-3 NOTES CLASS A-4 NOTES
------------------------------ ------------------------------
CPR CPR
------------------------------ ------------------------------
PAYMENT DATE 0% 7% 12% 18% 0% 7% 12% 18%
------------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
January 20, 1999........ 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
February 20, 1999....... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
March 20, 1999.......... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
April 20, 1999.......... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
May 20, 1999............ 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
June 20, 1999........... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
July 20, 1999........... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
August 20, 1999......... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
September 20, 1999...... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
October 20, 1999........ 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
November 20, 1999....... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
December 20, 1999....... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
January 20, 2000........ 100.00 100.00 100.00 99.56 100.00 100.00 100.00 100.00
February 20, 2000....... 100.00 100.00 100.00 91.50 100.00 100.00 100.00 100.00
March 20, 2000.......... 100.00 100.00 95.81 83.68 100.00 100.00 100.00 100.00
April 20, 2000.......... 100.00 98.73 88.33 76.10 100.00 100.00 100.00 100.00
May 20, 2000............ 100.00 91.50 81.01 68.76 100.00 100.00 100.00 100.00
June 20, 2000........... 99.58 84.38 73.87 61.65 100.00 100.00 100.00 100.00
July 20, 2000........... 92.62 77.39 66.90 54.77 100.00 100.00 100.00 100.00
August 20, 2000......... 85.72 70.51 60.11 48.13 100.00 100.00 100.00 100.00
September 20, 2000...... 78.88 63.78 53.50 41.73 100.00 100.00 100.00 100.00
October 20, 2000........ 72.12 57.19 47.08 35.56 100.00 100.00 100.00 100.00
November 20, 2000....... 65.48 50.78 40.87 29.66 100.00 100.00 100.00 100.00
December 20, 2000....... 58.97 44.55 34.90 24.01 100.00 100.00 100.00 100.00
January 20, 2001........ 52.67 38.58 29.19 18.67 100.00 100.00 100.00 100.00
February 20, 2001....... 46.63 32.90 23.80 13.65 100.00 100.00 100.00 100.00
March 20, 2001.......... 40.85 27.50 18.70 8.94 100.00 100.00 100.00 100.00
April 20, 2001.......... 35.35 22.41 13.92 4.55 100.00 100.00 100.00 100.00
May 20, 2001............ 30.16 17.63 9.46 0.48 100.00 100.00 100.00 100.00
June 20, 2001........... 25.25 13.14 5.28 0.00 100.00 100.00 100.00 93.09
July 20, 2001........... 20.67 8.97 1.43 0.00 100.00 100.00 100.00 85.82
August 20, 2001......... 16.38 5.10 0.00 0.00 100.00 100.00 95.52 79.12
September 20, 2001...... 12.46 1.57 0.00 0.00 100.00 100.00 88.73 73.07
October 20, 2001........ 8.87 0.00 0.00 0.00 100.00 96.54 82.55 67.23
November 20, 2001....... 5.60 0.00 0.00 0.00 100.00 90.41 76.95 61.44
December 20, 2001....... 2.47 0.00 0.00 0.00 100.00 84.60 71.67 56.01
January 20, 2002........ 0.00 0.00 0.00 0.00 98.71 78.92 66.03 50.80
February 20, 2002....... 0.00 0.00 0.00 0.00 92.36 73.39 60.25 0.00
March 20, 2002.......... 0.00 0.00 0.00 0.00 86.08 68.00 54.64 0.00
April 20, 2002.......... 0.00 0.00 0.00 0.00 79.92 61.85 0.00 0.00
May 20, 2002............ 0.00 0.00 0.00 0.00 73.80 55.83 0.00 0.00
June 20, 2002........... 0.00 0.00 0.00 0.00 67.74 0.00 0.00 0.00
July 20, 2002........... 0.00 0.00 0.00 0.00 60.72 0.00 0.00 0.00
August 20, 2002......... 0.00 0.00 0.00 0.00 53.80 0.00 0.00 0.00
September 20, 2002...... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Weighted Average Life to
Call (in years)........ 2.20 2.00 1.86 1.71 3.59 3.33 3.16 2.96
Weighted Average Life to
Maturity (in years).... 2.20 2.00 1.86 1.71 3.76 3.55 3.39 3.19
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE
INITIAL PRINCIPAL BALANCE
OF THE
CLASS B NOTES
------------------------------
CPR
------------------------------
PAYMENT DATE 0% 7% 12% 18%
------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Closing Date................................... 100.00% 100.00% 100.00% 100.00%
January 20, 1999............................... 100.00 100.00 100.00 100.00
February 20, 1999.............................. 100.00 100.00 100.00 100.00
March 20, 1999................................. 100.00 100.00 100.00 100.00
April 20, 1999................................. 100.00 100.00 100.00 100.00
May 20, 1999................................... 100.00 100.00 100.00 100.00
June 20, 1999.................................. 100.00 100.00 100.00 100.00
July 20, 1999.................................. 100.00 100.00 100.00 100.00
August 20, 1999................................ 100.00 100.00 100.00 100.00
September 20, 1999............................. 100.00 100.00 100.00 95.87
October 20, 1999............................... 100.00 100.00 96.59 91.07
November 20, 1999.............................. 100.00 96.98 92.19 86.41
December 20, 1999.............................. 99.88 92.89 87.90 81.90
January 20, 2000............................... 96.12 88.86 83.69 77.53
February 20, 2000.............................. 92.38 84.88 79.58 73.29
March 20, 2000................................. 88.65 80.96 75.55 69.17
April 20, 2000................................. 84.92 77.09 71.61 65.18
May 20, 2000................................... 81.22 73.28 67.77 61.31
June 20, 2000.................................. 77.54 69.54 64.01 57.57
July 20, 2000.................................. 73.88 65.86 60.34 53.96
August 20, 2000................................ 70.24 62.24 56.76 50.46
September 20, 2000............................. 66.64 58.69 53.28 47.09
October 20, 2000............................... 63.09 55.23 49.91 43.84
November 20, 2000.............................. 59.59 51.85 46.64 40.74
December 20, 2000.............................. 56.17 48.58 43.49 37.77
January 20, 2001............................... 52.85 45.43 40.49 34.95
February 20, 2001.............................. 49.67 42.44 37.65 32.31
March 20, 2001................................. 46.63 39.60 34.97 29.83
April 20, 2001................................. 43.73 36.92 32.45 27.52
May 20, 2001................................... 41.00 34.41 30.11 25.38
June 20, 2001.................................. 38.42 32.04 27.91 23.39
July 20, 2001.................................. 36.00 29.85 25.88 21.56
August 20, 2001................................ 33.75 27.81 24.00 19.88
September 20, 2001............................. 31.69 25.95 22.29 18.36
October 20, 2001............................... 29.80 24.26 20.74 17.04
November 20, 2001.............................. 28.07 22.72 19.34 17.04
December 20, 2001.............................. 26.43 21.26 18.01 17.04
January 20, 2002............................... 24.80 19.83 17.23 17.04
February 20, 2002.............................. 23.21 18.44 17.23 0.00
March 20, 2002................................. 21.63 17.09 17.23 0.00
April 20, 2002................................. 20.08 17.09 0.00 0.00
May 20, 2002................................... 18.54 17.09 0.00 0.00
June 20, 2002.................................. 17.02 0.00 0.00 0.00
July 20, 2002.................................. 17.02 0.00 0.00 0.00
August 20, 2002................................ 17.02 0.00 0.00 0.00
September 20, 2002............................. 0.00 0.00 0.00 0.00
Weighted Average Life To Call (in years)....... 2.35 2.14 2.00 1.85
Weighted Average Life To Maturity (in years)... 2.50 2.32 2.20 2.06
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE
INITIAL PRINCIPAL BALANCE
OF THE
CLASS C NOTES
------------------------------
CPR
------------------------------
PAYMENT DATE 0% 7% 12% 18%
------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Closing Date................................... 100.00% 100.00% 100.00% 100.00%
January 20, 1999............................... 100.00 100.00 100.00 100.00
February 20, 1999.............................. 100.00 100.00 100.00 100.00
March 20, 1999................................. 100.00 100.00 100.00 100.00
April 20, 1999................................. 100.00 100.00 100.00 100.00
May 20, 1999................................... 100.00 100.00 100.00 100.00
June 20, 1999.................................. 100.00 100.00 100.00 100.00
July 20, 1999.................................. 100.00 100.00 100.00 100.00
August 20, 1999................................ 100.00 100.00 100.00 100.00
September 20, 1999............................. 100.00 100.00 100.00 95.87
October 20, 1999............................... 100.00 100.00 96.59 91.07
November 20, 1999.............................. 100.00 96.98 92.19 86.41
December 20, 1999.............................. 99.88 92.89 87.90 81.90
January 20, 2000............................... 96.12 88.86 83.69 77.53
February 20, 2000.............................. 92.38 84.88 79.58 73.29
March 20, 2000................................. 88.65 80.96 75.55 69.17
April 20, 2000................................. 84.92 77.09 71.61 65.18
May 20, 2000................................... 81.22 73.28 67.77 61.31
June 20, 2000.................................. 77.54 69.54 64.01 57.57
July 20, 2000.................................. 73.88 65.86 60.34 53.96
August 20, 2000................................ 70.24 62.24 56.76 50.46
September 20, 2000............................. 66.64 58.69 53.28 47.09
October 20, 2000............................... 63.09 55.23 49.91 43.84
November 20, 2000.............................. 59.59 51.85 46.64 40.74
December 20, 2000.............................. 56.17 48.58 43.49 37.77
January 20, 2001............................... 52.85 45.43 40.49 34.95
February 20, 2001.............................. 49.67 42.44 37.65 32.31
March 20, 2001................................. 46.63 39.60 34.97 29.83
April 20, 2001................................. 43.73 36.92 32.45 27.52
May 20, 2001................................... 41.00 34.41 30.11 25.38
June 20, 2001.................................. 38.42 32.04 27.91 23.39
July 20, 2001.................................. 36.00 29.85 25.88 21.56
August 20, 2001................................ 33.75 27.81 24.00 19.88
September 20, 2001............................. 31.69 25.95 22.29 18.36
October 20, 2001............................... 29.80 24.26 20.74 18.36
November 20, 2001.............................. 28.07 22.72 19.34 18.36
December 20, 2001.............................. 26.43 21.26 18.01 18.36
January 20, 2002............................... 24.80 19.83 18.01 18.36
February 20, 2002.............................. 23.21 18.44 18.01 0.00
March 20, 2002................................. 21.63 17.09 18.01 0.00
April 20, 2002................................. 20.08 17.09 0.00 0.00
May 20, 2002................................... 18.54 17.09 0.00 0.00
June 20, 2002.................................. 17.02 0.00 0.00 0.00
July 20, 2002.................................. 17.02 0.00 0.00 0.00
August 20, 2002................................ 17.02 0.00 0.00 0.00
September 20, 2002............................. 0.00 0.00 0.00 0.00
Weighted Average Life To Call (in years)....... 2.35 2.14 2.01 1.86
Weighted Average Life To Maturity (in years)... 2.61 2.42 2.31 2.17
</TABLE>
34
<PAGE>
COLLATERAL CASHFLOWS AND RESIDUALS
The following table sets forth the Scheduled Payments and the scheduled
Book Value (as described under "Description of the Notes--Residual
Realizations") of the Leases comprising the Cut-Off Date Pool. For the purposes
of this table, we have assumed there are no delinquencies, losses or
prepayments on the Leases. In addition, we have assumed that an amount equal to
the Book Value of a Lease is received from the disposition of the related
Equipment in the Collection Period immediately following the Collection Period
in which the last Scheduled Payment on the Lease is due. The information set
forth below is not a prediction of the actual payments that will be received.
The information regarding delinquencies, non-accruals and net losses set forth
under the caption "The Leases--Certain Statistics Relating to Delinquencies and
Defaults," as well as the information under "Risk Factors--Risks Relating to
Reliance on Residual Realizations," should be reviewed together with the
information set forth below.
<TABLE>
<CAPTION>
SCHEDULED SCHEDULED
COLLECTION PERIOD PAYMENTS BOOK VALUE
----------------- -------------- -------------
<S> <C> <C>
December 1998.................................... $12,202,912.60 --
January 1999..................................... 12,202,912.60 --
February 1999.................................... 12,202,912.60 --
March 1999....................................... 12,202,912.60 --
April 1999....................................... 12,202,912.60 --
May 1999......................................... 12,202,912.60 --
June 1999........................................ 12,147,776.13 $ 8,950.77
July 1999........................................ 12,091,423.62 12,985.72
August 1999...................................... 12,038,227.85 25,307.82
September 1999................................... 11,982,441.84 26,246.61
October 1999..................................... 11,909,911.66 39,604.34
November 1999.................................... 11,795,853.98 98,481.04
December 1999.................................... 11,698,362.92 90,342.86
January 2000..................................... 11,606,207.93 134,238.31
February 2000.................................... 11,516,877.88 95,013.59
March 2000....................................... 11,433,949.49 94,452.62
April 2000....................................... 11,326,709.38 116,155.50
May 2000......................................... 11,221,601.49 139,369.80
June 2000........................................ 11,100,344.59 195,253.86
July 2000........................................ 10,974,033.45 219,312.09
August 2000...................................... 10,829,685.69 239,143.56
September 2000................................... 10,656,484.85 252,804.73
October 2000..................................... 10,440,058.98 353,550.16
November 2000.................................... 10,192,952.33 507,740.31
December 2000.................................... 9,850,709.10 847,659.82
January 2001..................................... 9,432,342.25 1,111,927.84
February 2001.................................... 9,005,946.02 1,143,492.62
March 2001....................................... 8,552,881.01 1,092,031.31
April 2001....................................... 8,074,312.06 1,238,189.77
May 2001......................................... 7,635,810.36 1,274,634.20
June 2001........................................ 7,129,551.26 1,282,105.29
July 2001........................................ 6,661,763.50 1,283,807.91
August 2001...................................... 6,111,986.52 1,396,873.32
September 2001................................... 5,610,932.05 1,372,849.61
October 2001..................................... 5,124,175.78 1,410,874.42
November 2001.................................... 4,892,125.72 782,677.62
December 2001.................................... 4,804,071.62 253,432.37
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
SCHEDULED SCHEDULED
COLLECTION PERIOD PAYMENTS BOOK VALUE
----------------- ------------- -------------
<S> <C> <C>
January 2002...................................... $4,711,383.48 $ 247,288.70
February 2002..................................... 4,628,526.87 183,004.42
March 2002........................................ 4,533,280.49 187,643.79
April 2002........................................ 4,476,387.16 159,376.34
May 2002.......................................... 4,416,104.18 152,762.06
June 2002......................................... 4,350,340.67 167,048.26
July 2002......................................... 4,272,258.06 171,854.51
August 2002....................................... 4,190,395.94 188,330.30
September 2002.................................... 4,097,316.12 177,698.27
October 2002...................................... 3,951,615.20 261,982.46
November 2002..................................... 3,747,392.48 553,311.14
December 2002..................................... 3,490,913.99 812,402.45
January 2003...................................... 3,218,423.51 901,086.46
February 2003..................................... 2,926,986.65 865,857.63
March 2003........................................ 2,636,559.28 918,309.75
April 2003........................................ 2,333,643.84 1,027,066.02
May 2003.......................................... 2,015,133.34 1,022,540.55
June 2003......................................... 1,710,645.77 922,969.52
July 2003......................................... 1,393,064.18 935,288.73
August 2003....................................... 1,090,235.59 859,197.08
September 2003.................................... 808,951.74 982,121.81
October 2003...................................... 378,738.40 1,406,914.87
November 2003..................................... 152,714.99 1,110,959.60
December 2003..................................... 136,264.59 72,206.14
January 2004...................................... 117,177.81 93,618.72
February 2004..................................... 106,695.91 49,290.47
March 2004........................................ 100,792.68 4.00
April 2004........................................ 97,075.20 5.00
May 2004.......................................... 95,753.45 2.00
June 2004......................................... 86,789.22 5.00
July 2004......................................... 83,090.94 2.00
August 2004....................................... 76,336.48 4,360.90
September 2004.................................... 74,379.04 4.00
October 2004...................................... 59,872.01 28,831.37
November 2004..................................... 55,882.17 2.00
December 2004..................................... 54,149.86 3.00
January 2005...................................... 48,478.97 2.00
February 2005..................................... 44,039.72 2.00
March 2005........................................ 31,196.92 71,348.90
April 2005........................................ 26,458.66 1.00
May 2005.......................................... 23,418.26 3,059.60
June 2005......................................... 21,912.87 1.00
July 2005......................................... 18,134.36 4.00
August 2005....................................... 10,034.18 2.00
September 2005.................................... 4,814.43 2.00
October 2005...................................... -- 4.00
November 2005..................................... -- --
December 2005..................................... -- --
</TABLE>
36
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture. The
following summary describes certain terms of the Notes and the Indenture. A
copy of the form of the Indenture has been filed with the Commission as an
Exhibit to the Registration Statement of which this Prospectus is a part. U.S.
Bank Trust National Association, a national banking association headquartered
in St. Paul, Minnesota, will be the Trustee.
Pursuant to the Indenture, the Issuer will issue six classes of notes
(the "Notes"), consisting of classes of senior notes, designated as the
5.201% Lease-Backed Notes, Class A-1, in the original principal amount of
$122,726,804, the 5.55% Lease-Backed Notes, Class A-2, in the original
principal amount of $51,695,213, the 5.60% Lease-Backed Notes, Class A-3, in
the original principal amount of $122,332,184 and the 5.74% Lease-Backed Notes,
Class A-4, in the original principal amount of $58,403,752 (together, the
"Class A Notes") and two classes of subordinated notes, designated as the 6.66%
Lease-Backed Notes, Class B, in the original principal amount of $25,650,297
and the 7.63% Lease-Backed Notes, Class C, in the original principal amount of
$13,811,698.
Payments on the Notes will be made by the Trustee on each Payment Date to
persons in whose names the Notes are registered as of the related Record Date
(the "Holders" or "Noteholders"). The Payment Date for the Notes will be the
20th day of each month (or if such 20th day is not a Business Day, the next
succeeding Business Day), commencing in January 1999. If the Class A-1 Notes
have not been paid in full on or before the December 1999 Payment Date, the
Payment Date for the Class A-1 Notes in January 2000 will be January 14, 2000.
The Record Date for any Payment Date will be the Business Day immediately
preceding the Payment Date (so long as the Notes are held in the book-entry
form), or the last day of the prior calendar month (if Definitive Notes have
been issued).
A "Business Day" is any day (other than a Saturday, Sunday or legal
holiday) on which commercial banks in New York City, or any other location of a
successor Servicer or Trustee, are open for regular business.
Each Class of Notes initially will be represented by one or more
certificates (the "Book-Entry Certificates") registered in the name of the
nominee of DTC (together with any successor depository selected by the Trustee,
the "Depository"), except as set forth below. Beneficial interests in each
Class of Notes will be available for purchase in minimum denominations of
$10,000 and integral multiples of $1,000 in excess thereof, except that one
Class C Note may be issued in another denomination in book-entry form only. The
Issuer has been informed by DTC that DTC's nominee will be Cede & Co.
Accordingly, Cede & Co. is expected to be the Holder of record of the Notes.
Unless and until Definitive Notes are issued under the limited circumstances
described herein, no Note Owner acquiring an interest in any Class of Notes
will be entitled to receive a certificate representing such Note Owner's
interest in such Notes. Until such time, all references herein to actions by
Noteholders of any Class of Notes will refer to actions taken by the Depository
upon instructions from its participating organizations and all references
herein to distributions, notices, reports and statements to Noteholders of any
Class of Notes will refer to distributions, notices, reports and statements to
the Depository or its nominee, as the registered Holder of the Notes of such
Class, for distribution to Note Owners of such Class in accordance with the
Depository's procedures. See "--Book-Entry Registration" and "--Definitive
Notes."
Subject to applicable laws with respect to escheat of funds, any money
held by the Trustee or any paying agent in trust under the Indenture for the
payment of any amount due with respect to any Note and remaining unclaimed for
two years after such amount has become due and payable shall be discharged from
such trust and, upon request of the Issuer, shall be deposited by the Trustee
in the Collection Account; and the Holder of such Note shall thereafter, as an
unsecured general creditor, look only to the Issuer for payment thereof, and
all liability of the Trustee or such paying agent with respect to such money
shall thereupon cease.
37
<PAGE>
DISTRIBUTIONS
Principal of and interest on the Notes will be paid on each Payment Date,
solely from, and secured by, the "Amount Available" for such Payment Date,
which is equal to the sum of those (a) Pledged Revenues on deposit in the
Collection Account as of the last Business Day preceding the related
Determination Date (the "Deposit Date") which were received by the Servicer
during the related Collection Period or which represent amounts paid by Vendor
Services to repurchase Leases as of the end of such Collection Period and
investment earnings on funds on deposit in the Collection Account (the
"Available Pledged Revenues") plus (b) Servicer Advances made by the Servicer,
plus (c) funds, if any, on deposit in the Residual Account and investment
earnings thereon, as described under "--Residual Realizations" below, plus (d)
funds on deposit in the Reserve Account and investment earnings thereon. See
"--The Reserve Account" below.
"Pledged Revenues" will consist of (i) "Scheduled Payments" on the Leases
(which will consist of all required payments under the Leases other than those
portions of such payments which, under the Leases, are to be (A) applied by the
Servicer to the payment of insurance charges, maintenance, taxes and other
similar obligations, or (B) under the Contribution and Servicing Agreement, are
to be retained by the Servicer in payment of Administrative Fees or are late
payments as to which Servicer Advances were made on a Payment Date) received on
or after the Cut-Off Date and due during the term of the Leases, without giving
effect to end-of-term extensions or renewals thereof (including all Scheduled
Payments due prior to, but not received as of, the Cut-Off Date, but excluding
any Scheduled Payments due on or after, but received prior to, the Cut-Off
Date); (ii) any voluntary prepayments ("Prepayments") of Scheduled Payments
received on or after the Cut-Off Date under the Leases (unless Vendor Services
has delivered a Substitute Lease for that Prepaid Lease); (iii) any amounts
paid by Vendor Services to repurchase Leases (to the extent Vendor Services has
not delivered a Substitute Lease) due to a breach of representations and
warranties with respect thereto, as described under "The Leases--
Representations and Warranties Made by Vendor Services" or as a result of a
Lease becoming an Adjusted Lease, as described under "Description of the
Contribution and Servicing Agreement--Servicing"; (iv) any amounts paid by the
SPC to repurchase the Leases as described under "--Optional Repurchase of
Leases"; (v) Liquidation Proceeds derived from the liquidation of the Leases
and the disposition of the related Equipment, as described under "--Liquidated
Leases" below (unless Vendor Services has substituted a Substitute Lease
therefor); and (vi) any earnings on the investment of amounts credited to the
Collection Account.
On each Payment Date, the Trustee will be required to make the following
payments, first, from Available Pledged Revenues plus any Servicer Advances,
second, from amounts on deposit in the Residual Account as described under "--
Residual Realizations" below, and third, from amounts on deposit in the Reserve
Account, in the following order of priority (except as otherwise described
under "--Events of Default; Rights Upon Event of Default" below):
(i) the Servicing Fee if Vendor Services or an affiliate is no longer
the Servicer;
(ii) to reimburse the Servicer for unreimbursed Nonrecoverable
Servicer Advances made with respect to a prior Payment Date;
(iii) interest on the Notes in the following order of priority:
(a) interest on the Class A Notes,
(b) interest on the Class B Notes, and
(c) interest on the Class C Notes;
(iv) an amount equal to the Monthly Principal Amount as of such
Payment Date, in respect of principal on the Notes in the amounts and in
the priority described under "--Principal" below;
(v) from Available Pledged Revenues and amounts (if any) on deposit
in the Residual Account, to the Reserve Account, an amount equal to the
excess of the Required Reserve Amount over the Available Reserve Amount;
(vi) from Available Pledged Revenues only, for so long as Vendor
Services or an affiliate is the Servicer, the Servicing Fee; and
(vii) the remainder of Available Pledged Revenues, if any, to the
SPC.
38
<PAGE>
CLASS A INTEREST
Interest will be paid to the Holders of each Class of the Class A Notes
on each Payment Date, to the extent the Amount Available (after taking into
account any prior applications described under "--Distributions" above) is
sufficient therefor, at the Interest Rate for such Class on the Outstanding
Principal Amount of such Class. Interest on the Class A-1 Notes will be
calculated on the basis of actual days elapsed in a year of 360 days, and
interest on the Class A-2 Notes, Class A-3 Notes and Class A-4 Notes will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Such interest so payable on such Payment Date will be equal to the product of
(i) the Interest Rate for such Class (calculated in the manner described above)
and (ii) the Outstanding Principal Amount of such Class as of such Payment
Date. Interest on each Class of the Class A Notes will accrue from and
including the Closing Date to but excluding January 20, 1999 (in the case of
the first interest period), and thereafter for each successive Payment Date
from and including the most recent prior Payment Date to which interest has
been paid, to but excluding such Payment Date.
In the event that, on a given Payment Date, the Amount Available is not
sufficient to make a full payment of interest to the Holders of Class A Notes,
the amount of interest to be paid on the Class A Notes will be allocated among
the Notes of each Class of Class A Notes pro rata in accordance with their
respective entitlements to interest (and within each such Class pro rata among
the holders of such Class), and the amount of such shortfall will be carried
forward and, together with interest thereon at the applicable Interest Rate,
added to the amount of interest such Holders will be entitled to receive on the
next Payment Date.
CLASS B INTEREST
Interest will be paid to the Holders of the Class B Notes on each Payment
Date, to the extent the remaining Amount Available (after taking into account
all prior applications described under "--Distributions" above) is sufficient
therefor, at the Class B Interest Rate on the Outstanding Principal Amount of
the Class B Notes, and will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. Such interest so paid on such Payment Date
will be equal to one-twelfth of the product of (i) the Class B Interest Rate
and (ii) the Outstanding Principal Amount of the Class B Notes as of such
Payment Date. Interest on the Class B Notes will accrue from and including the
Closing Date to but excluding January 20, 1999 (in the case of the first
interest period), and thereafter for each successive Payment Date from and
including the most recent prior Payment Date to which interest has been paid,
to but excluding such Payment Date.
In the event that, on a given Payment Date, the Amount Available, after
payment of interest on the Class A Notes, is not sufficient to make a full
payment of interest to the Holders of Class B Notes, the amount of interest to
be paid on the Class B Notes will be allocated among the Class B Notes pro
rata, and the amount of such shortfall will be carried forward and, together
with interest thereon at the Class B Interest Rate, added to the amount of
interest such Holders will be entitled to receive on the next Payment Date.
CLASS C INTEREST
Interest will be paid to the Holders of the Class C Notes on each Payment
Date, to the extent the remaining Amount Available (after taking into account
all prior applications described under "--Distributions" above) is sufficient
therefor, at the Class C Interest Rate on the Outstanding Principal Amount of
the Class C Notes, and will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. Such interest so paid on such Payment Date
will be equal to one-twelfth of the product of (i) the Class C Interest Rate
and (ii) the Outstanding Principal Amount of the Class C Notes as of such
Payment Date. Interest on the Class C Notes will accrue from and including the
Closing Date to but excluding January 20, 1999 (in the case of the first
interest period), and thereafter for each successive Payment Date from and
including the most recent prior Payment Date to which interest has been paid,
to but excluding such Payment Date.
In the event that, on a given Payment Date, the Amount Available, after
payment of interest on the Class A and Class B Notes, is not sufficient to make
a full payment of interest to the Holders of Class C Notes,
39
<PAGE>
the amount of interest to be paid on the Class C Notes will be allocated among
the Class C Notes pro rata, and the amount of such shortfall will be carried
forward and, together with interest thereon at the Class C Interest Rate, added
to the amount of interest such Holders will be entitled to receive on the next
Payment Date.
PRINCIPAL
For each Payment Date, each of the Class A Noteholders, the Class B
Noteholders and the Class C Noteholders will be entitled to receive payments of
principal, to the extent funds are available therefor, in the priorities set
forth in the Indenture and described herein below and under "--Distributions."
On each Payment Date, to the extent funds are available therefor, principal
will be paid to the Noteholders in the following priority:
(a) (i) to the Class A-1 Noteholders only, until the Outstanding
Principal Amount on the Class A-1 Notes has been reduced to zero, the Class
A Principal Payment, then (ii) to the Class A-2 Noteholders, Class A-3
Noteholders and Class A-4 Noteholders, sequentially, the Class A Principal
Payment in that order, until the Outstanding Principal Amount of each such
Class has been reduced to zero,
(b) to the Class B Noteholders, the Class B Principal Payment,
(c) to the Class C Noteholders, the Class C Principal Payment,
(d) to the extent that the Class B Floor exceeds the Class B Target
Investor Principal Amount and the Class C Floor exceeds the Class C Target
Investor Principal Amount, Additional Principal (defined below) shall be
distributed, sequentially, as an additional principal payment on the Class
A-2 Notes, the Class A-3 Notes, the Class A-4 Notes, the Class B Notes and
the Class C Notes, in that order, until the Outstanding Principal Amount of
each such Class has been reduced to zero, and
(e) to the extent the Class C Floor exceeds the Class C Target
Investor Principal Amount, but the Class B Floor does not exceed the Class
B Target Investor Principal Amount, Additional Principal shall be
distributed as an additional principal payment on the Class A and Class B
Notes, pro rata (and among the Class A Notes, sequentially on the Class A-
2, Class A-3 and Class A-4 Notes, in that order), until the Outstanding
Principal Amount of each such Class has been reduced to zero.
The "Outstanding Principal Amount" as of a Payment Date shall mean the
then unpaid principal amounts of the Class A-1 Notes, the Class A-2 Notes, the
Class A-3 Notes, the Class A-4 Notes, the Class B Notes and the Class C Notes,
as applicable (determined prior to payment of any principal in respect thereof
on such Payment Date).
The "Class A Principal Payment" shall equal (a) while the Class A-1 Notes
are outstanding, (i) on all Payment Dates prior to the January 2000 Payment
Date, the lesser of (1) the amount necessary to reduce the Outstanding
Principal Amount on the Class A-1 Notes to zero and (2) the Monthly Principal
Amount, and (ii) on the January 2000 Payment Date, the entire Outstanding
Principal Amount on the Class A-1 Notes and (b) after the Class A-1 Notes have
been paid in full, the amount necessary to reduce the aggregate Outstanding
Principal Amount of the Class A Notes to the Class A Target Investor Principal
Amount.
The "Class B Principal Payment" shall equal (a) while the Class A-1 Notes
are outstanding, zero and (b) after the Outstanding Principal Amount on the
Class A-1 Notes has been reduced to zero, the amount necessary to reduce the
Outstanding Principal Amount of the Class B Notes to the greater of the Class B
Target Investor Principal Amount and the Class B Floor.
The "Class C Principal Payment" shall equal (a) while the Class A-1 Notes
are outstanding, zero and (b) after the Outstanding Principal Amount of the
Class A-1 Notes has been reduced to zero, the amount necessary to reduce the
Outstanding Principal Amount of the Class C Notes to the greater of the Class C
Target Investor Principal Amount and the Class C Floor.
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"Additional Principal" with respect to each Payment Date is an amount
equal to (a) the Monthly Principal Amount, less (b) the Class A Principal
Payment, the Class B Principal Payment and the Class C Principal Payment to be
paid on such Payment Date.
The "Class A Target Investor Principal Amount" with respect to each
Payment Date is an amount equal to the product of (a) the Class A Percentage
and (b) the Lease Pool Principal Balance as of the last day of the Collection
Period related to such Payment Date.
The "Class B Target Investor Principal Amount" with respect to each
Payment Date is an amount equal to the product of (a) the Class B Percentage
and (b) the Lease Pool Principal Balance as of the last day of the Collection
Period related to such Payment Date.
The "Class C Target Investor Principal Amount" with respect to each
Payment Date is an amount equal to the product of (a) the Class C Percentage
and (b) the Lease Pool Principal Balance as of the last day of the Collection
Period related to such Payment Date.
The "Class A Percentage" will be approximately 85.4862%. The "Class B
Percentage" will be approximately 9.4340%. The "Class C Percentage" will be
approximately 5.0798%.
The "Class B Floor" with respect to each Payment Date means (a) 4.25% of
the Initial Pool Principal Balance, plus (b) the Cumulative Loss Amount with
respect to such Payment Date, minus (c) the sum of the Outstanding Principal
Amount of the Class C Notes as of such Payment Date and the amount on deposit
in the Reserve Account after giving effect to withdrawals to be made on such
Payment Date.
The "Class C Floor" with respect to each Payment Date means (a) 2.75% of
the Initial Pool Principal Balance, plus (b) the Cumulative Loss Amount with
respect to such Payment Date minus (c) the amount on deposit in the Reserve
Account after giving effect to withdrawals to be made on such Payment Date;
provided that if the Outstanding Principal Amount on the Class B Notes is
equal to the Class B Floor on such Payment Date, the Class C Floor will equal
the Outstanding Principal Amount of the Class C Notes as of such Payment Date.
The "Monthly Principal Amount" for any Payment Date will equal the
excess, if any, of (i) the sum of the Outstanding Principal Amount of the
Notes for such Payment Date, over (ii) the Lease Pool Principal Balance as of
the last day of the Collection Period relating to such Payment Date.
The "Cumulative Loss Amount" with respect to each Payment Date is an
amount equal to the excess, if any, of
(a) the total of (i) the Outstanding Principal Amount of the Notes
for such Payment Date, minus (ii) the lesser of (A) the Monthly Principal
Amount and (B) the Amount Available remaining after the payment of amounts
owing to the Servicer (other than the Servicing Fee to the extent that
Vendor Services is the Servicer) and in respect of interest on the Notes on
such Payment Date, over
(b) the Lease Pool Principal Balance as of the last day of the
Collection Period related to such Payment Date.
The "Principal Balance" of any Lease as of the last day of any
Collection Period is:
(1) in the case of any Lease that does not by its terms permit
prepayment or early termination, the present value of the unpaid Scheduled
Payments due on such Lease after such last day of the Collection Period
(excluding all Scheduled Payments due on or prior to, but not received as
of, such last day, as well as any Scheduled Payments due after such last
day and received on or prior thereto), after giving effect to any
Prepayments received on or prior to such last day, discounted monthly
(assuming, for
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purposes of such calculation, that each Scheduled Payment is due on the
last day of the applicable Collection Period) at the Discount Rate.
(2) in the case of any Lease that permits prepayment or early
termination only upon payment of a premium that is at least equal to the
present value (calculated in the manner described in clause (1) above) of
the unpaid Scheduled Payments due on such Lease after the date of such
prepayment, the amount specified in clause (1) above; and
(3) in the case of any Lease that permits prepayment or early
termination without payment of a premium at least equal to the amount
specified in clause (2) above, the lesser of (a) the outstanding principal
balance of such Lease after giving effect to Scheduled Payments due on or
prior to such last day of the Collection Period, whether or not received,
as well as any Prepayments, and any Scheduled Payments due after such last
day, received on or prior to such last day, and (b) the amount specified in
clause (1) above.
The "Initial Pool Principal Balance," which is the aggregate Principal
Balance of the Leases as of the Initial Cut-Off Date, calculated at the
Discount Rate, is $394,619,948.
The Principal Balance of any Lease which became a Liquidated Lease during
a given Collection Period or which Vendor Services was obligated to purchase as
of the end of a given Collection Period due to a breach of representations and
warranties, will be deemed to be zero on and after the last day of such
Collection Period.
A "Liquidated Lease" is any Lease (a) which the Servicer has charged off
as uncollectible in accordance with its credit and collection policies and
procedures (which shall be no later than the date as of which the Servicer has
repossessed and disposed of the related Equipment, or otherwise collected all
proceeds which, in the Servicer's reasonable judgment, can be collected under
such Lease), or (b) as to which 10% or more of a Scheduled Payment is
delinquent 180 days or more.
The "Collection Period" for any Payment Date will be the calendar month
preceding the month in which such Payment Date occurs.
SERVICER ADVANCES
Prior to any Payment Date, the Servicer may, but will not be required to,
advance to the Trustee an amount sufficient to cover delinquencies in Scheduled
Payments on the Leases with respect to the prior Collection Period (a "Servicer
Advance"). The Servicer will be reimbursed for Servicer Advances from late
payments on the delinquent Leases with respect to which such advances were made
and, if the Servicer later determines that such Servicer Advance will not be
reimbursed from the recovery on the delinquent Lease (a "Nonrecoverable
Servicer Advance"), from the Amount Available on the next Payment Date.
RESIDUAL REALIZATIONS
Cash flows realized from the sale or re-lease of the Equipment following
the scheduled expiration dates or voluntary early termination of the Leases,
other than Equipment subject to Liquidated Leases or Leases for which Vendor
Services delivers a Substitute Lease (the "Residual Realizations"), will
provide additional credit support for the Notes. Historically Vendor Services
has realized amounts greater than book value through sale or re-lease of
equipment similar to the Equipment, but there can be no assurance as to the
amount or timing of Residual Realizations. See "Risk Factors--Risks Relating to
Reliance on Residual Realizations." The Residual Realizations will be deposited
in the Residual Account. As provided in the Indenture, funds on deposit in the
Residual Account will be available to cover shortfalls in the Available Pledged
Revenues to pay interest and principal payments then due on the Notes. As of
the Initial Cut-Off Date, the aggregate residual value of the Equipment
recorded on the accounting books of Vendor Services (the "Book Value") of the
Leases was $31,677,285.62. Actual Residual Realizations may be more or less
than Book Value. The Residual Realizations for a Collection Period not
distributed to Noteholders,
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paid to the Servicer or deposited into the Reserve Account on the related
Payment Date will be released to the SPC on such Payment Date, except during
the continuation of certain limited circumstances specified in the Indenture (a
"Residual Event"). Amounts released to the SPC will not be available to the
Noteholders under any circumstances. During the continuation of a Residual
Event, amounts in the Residual Account that otherwise would be released to the
SPC will be retained in the Residual Account for application on future Payment
Dates.
Upon the termination of a Residual Event, any amounts on deposit in the
Residual Account will be (i) deposited into the Reserve Account, to the extent
that the amount on deposit in the Reserve Account is less than the Required
Reserve Amount, or (ii) released to the SPC, and thereafter will not be
available to Noteholders under any circumstance. The Residual Events will be
established prior to the Closing Date based on criteria prescribed by the
Rating Agencies. Such criteria may be amended or otherwise altered after the
Closing Date, without the consent of Noteholders, to alter the performance
parameters that must occur to cause a Residual Event, so long as doing so would
not cause either Rating Agency to reduce, withdraw or qualify any of its
ratings on the Notes.
RESERVE ACCOUNT
On the Closing Date, the SPC will make an initial deposit in an amount
equal to 2.50% of the Initial Pool Principal Balance into the Reserve Account.
In the event that Available Pledged Revenues are insufficient to pay the
amounts owing the Servicer, interest payments on the Notes and the Class A
Principal Payment, the Class B Principal Payment, the Class C Principal Payment
and any Additional Principal for the related Payment Date (such payments, the
"Required Payments"), and amounts on deposit in the Residual Account are
insufficient to make up such shorfall, the Trustee will withdraw from the
Reserve Account an amount equal to the lesser of the funds on deposit in the
Reserve Account (the "Available Reserve Amount") and such deficiency. In
addition, on each Payment Date, the Amount Available remaining after the
payment of the Required Payments will be deposited into the Reserve Account to
the extent that the Required Reserve Amount exceeds the Available Reserve
Amount. The "Required Reserve Amount" equals the lesser of (a) 2.50% of the
Initial Pool Principal Balance and (b) the Outstanding Principal Amount of the
Notes. Any amounts on deposit in the Reserve Account in excess of the Required
Reserve Amount will be released to the SPC, and thereafter will not be
available to Noteholders under any circumstance.
SUBORDINATION OF CLASS B NOTES AND CLASS C NOTES
The likelihood of payment of interest on each Class of Notes will be
enhanced by the application of the Amount Available to the payment of such
interest prior to the payment of principal on any of the Notes, as well as by
the preferential right of the Holders of Class A and Class B Notes to receive
such interest (1) in the case of the Class A Notes, prior to the payment of any
interest on the Class B Notes or the Class C Notes, and (2) in the case of the
Class B Notes, prior to the payment of any interest on the Class C Notes.
Likewise, the likelihood of payment of principal, to the extent of the Class A
Principal Payment and the Class B Principal Payment on a Payment Date on the
Class A and Class B Notes, respectively, will be enhanced by the preferential
right of the Holders of Notes of each such Class to receive such principal, to
the extent of the Amount Available, after payment of interest on the Notes as
aforesaid, (i) in the case of the Class A Notes, prior to the payment of any
principal on the Class B Notes or the Class C Notes and (ii) in the case of the
Class B Notes, prior to the payment of any principal on the Class C Notes.
LIQUIDATED LEASES
Liquidation Proceeds (which will consist generally of all amounts
received by the Servicer in connection with the liquidation of a Liquidated
Lease and disposition of the related Equipment, net of any related out-of-
pocket liquidation expenses) will be deposited in the Collection Account and
constitute Pledged Revenues to be applied to the payment of interest and
principal on the Notes in accordance with the priorities described under "--
Distributions" above (except that, to the extent that Vendor Services elects to
substitute
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one or more Substitute Leases for all or a portion of the unpaid Principal
Balance of the Liquidated Lease, Liquidation Proceeds will be remitted to
Vendor Services and will not be available to Noteholders).
OPTIONAL REPURCHASE OF LEASES
The SPC may purchase all of the Leases on any Payment Date following the
date on which the unpaid principal balance of the Notes is less than 10% of the
Initial Pool Principal Balance. The purchase price to be paid in connection
with such purchase shall be at least equal to the unpaid principal balance of
the Notes as of such Payment Date plus interest to be paid on the Notes on such
Payment Date. The proceeds of such purchase shall be applied on such Payment
Date to the payment of the remaining principal balance of the Notes, together
with accrued interest thereon.
TRUST ACCOUNTS
The Trustee will establish and maintain under the Indenture segregated
trust accounts (which need not be deposit accounts, but which shall constitute
"Eligible Accounts"), consisting of the "Collection Account," the "Servicing
Account," the "Residual Account," the "Reserve Account" and the "Note
Distribution Account" (collectively, the "Trust Accounts"). An "Eligible
Account" means any account which is (i) an account maintained with an Eligible
Institution (as defined below); (ii) an account or accounts the deposits in
which are fully insured by either the Bank Insurance Fund or the Savings
Association Insurance Fund of the FDIC; (iii) a "segregated trust account"
maintained with the corporate trust department of a federal or state chartered
depository institution or trust company with trust powers and acting in its
fiduciary capacity for the benefit of the Trustee, which depository institution
or trust company has capital and surplus (or, if such depository institution or
trust company is a subsidiary of a bank holding company system, the bank
holding company has capital and surplus) of not less than $50,000,000 and the
securities of such depository institution or trust company (or, if such
depository institution or trust company is a subsidiary of a bank holding
company system and such depository institution's or trust company's securities
are not rated, the securities of the bank holding company) have a credit rating
from each of the Rating Agencies (if rated by such Rating Agency) which
signifies "investment grade"; or (iv) an account that will not cause any Rating
Agency to reduce, qualify or withdraw its then-current rating assigned to the
Notes, as confirmed in writing by such Rating Agency. "Eligible Institution"
means any depository institution organized under the laws of the United States
or any state, the deposits of which are insured to the full extent permitted by
law by the Bank Insurance Fund (currently administered by the Federal Deposit
Insurance Corporation), whose short-term deposits or unsecured long-term debt
have a credit rating that is acceptable to each of the Rating Agencies, and
which is subject to supervision and examination by federal or state
authorities.
The Servicer, as agent for the Trustee, may designate, or otherwise
arrange for the purchase by the Trustee of, investments to be made with funds
in the Trust Accounts, which investments shall be Eligible Investments (as
defined in the Indenture) that will mature not later than the business day
preceding the applicable monthly Payment Date. "Eligible Investments" include,
among other investments, obligations of the United States or of any agency
thereof backed by the full faith and credit of the United States; federal
funds, certificates of deposit, time deposits and bankers' acceptances sold by
eligible financial institutions; certain repurchase agreements with eligible
institutions and other investments which would not result in the reduction,
qualification or withdrawal of any rating of the Notes by any Rating Agency.
REPORTS TO NOTEHOLDERS
The Servicer will furnish to the Trustee, and the Trustee will include
with each distribution to a Noteholder, a statement in respect of the related
Payment Date setting forth, among other things:
(i) the amount of interest paid on each Class of Class A Notes,
including any unpaid interest from the prior Payment Date, and any
remaining unpaid interest on each Class of Class A Notes;
(ii) the amount of interest paid on the Class B Notes, including any
unpaid interest from the prior Payment Date, and any remaining unpaid
interest on the Class B Notes;
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(iii) the amount of interest paid on the Class C Notes, including any
unpaid interest from the prior Payment Date, and any remaining unpaid
interest on the Class C Notes;
(iv) the amount of principal paid on each Class of Class A Notes;
(v) the amount of principal paid on the Class B Notes;
(vi) an amount of principal paid on the Class C Notes;
(vii) the Cumulative Loss Amount, if any, for such Payment Date;
(viii) all Substitute Leases delivered by Vendor Services;
(ix) the balance in the Reserve Account and the Required Reserve
Amount; and
(x) the balance in the Residual Account.
The Notes will be registered in the name of a nominee of DTC and will not
be registered in the names of the beneficial owners or their nominees. As a
result, unless and until Definitive Notes are issued in the limited
circumstances described under "--Definitive Notes" below, beneficial owners
will not be recognized by the Trustee as Noteholders, as that term is used in
the Indenture. Hence, until such time, beneficial owners will receive reports
and other information provided for under the Indenture only if, when and to the
extent provided by DTC and its participating organizations.
BOOK-ENTRY REGISTRATION
Notes may only be held through the Depository Trust Company ("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 & Co., as nominee for DTC, will hold the Notes. Cedel and
Euroclear will hold omnibus positions in the Notes 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 depositaries (collectively, the "Cedel/Euroclear Depositaries"),
which in turn will hold such positions in customers' securities accounts in the
Cedel/Euroclear Depositaries' names on the books of DTC. All references in this
Prospectus to "Holders" or "Noteholders" shall reflect the right of beneficial
owners of the Notes (the "Note Owners") as they may indirectly exercise such
rights through DTC, Cedel and Euroclear and their respective Participants
(except as otherwise specified herein).
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). DTC was created to hold securities for its
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Transfers between DTC's participating organizations (the "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 Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant
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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
Depositary 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 Depositaries.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a 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 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.
Note Owners that are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
Notes may do so only through Participants and Indirect Participants. In
addition, Note Owners will receive all distributions of principal and interest
from the Trustee, only through Participants. Under a book-entry format, Note
Owners may therefore experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to DTC's nominee. DTC will
forward such payments to its Participants, which thereafter will forward them
to Indirect Participants or Note Owners. The only "Noteholder" will be DTC's
nominee. Note Owners will not be recognized by the Trustee as Noteholders, as
such term is used in the Indenture, and Note Owners will be permitted to
exercise the rights of Noteholders only indirectly through DTC and its
Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of securities among Participants on whose behalf it acts with respect to the
Notes and to receive and transmit distributions of principal of, and interest
on, the Notes. Participants and Indirect Participants with which Note Owners
have accounts with respect to the Notes similarly are required to make book-
entry transfers and receive and transmit such payments on behalf of their
owners. Accordingly, although Note Owners will not possess Notes, the Rules
provide a mechanism by which Participants will receive payments and will be
able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Note Owner
to pledge Notes to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to such Notes, may be limited due to
the lack of a physical certificate for such Notes.
DTC has advised the Issuer that it will take any action permitted to be
taken by a Note Owner under the Indenture only at the direction of one or more
Participants to whose accounts with DTC the Notes are credited. DTC may take
conflicting actions with respect to other undivided interests to the extent
that such actions are taken on behalf of Participants whose holdings include
such undivided interests.
Except as required by law, Vendor Services, the SPC, the Issuer, and the
Trustee will not have any liability for any aspect of the records relating to
or payments made on account of beneficial ownership interest of the Notes held
by DTC's nominee, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DTC has advised the Issuer that DTC management is aware that some
computer applications, systems, and the like for processing data ("Systems")
that are dependent upon calendar dates, including dates before, on, and after
January 1, 2000, may encounter "Year 2000 Problems." DTC has informed its
Participants and other
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members of the financial community (the "Industry") that it has developed and
is implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information of the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to:
(i) impress upon them the importance of such services being Year 2000
compliant; and (ii) determine the extent of their efforts for Year 2000
remediation (and, as appropriate, testing) of their services. In addition, DTC
is in the process of developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
Cedelbank ("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 28 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 for the Notes.
Indirect access to Cedel is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Cedel Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in Euroclear
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 several countries generally similar to
the arrangements for cross-market transfers with DTC. 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, S.C., 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 establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of the Notes. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
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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 and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions with respect to 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 Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences" in this Prospectus and
"Global Clearance, Settlement and Tax Documentation Procedures" in Annex I to
this Prospectus. Cedel or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a 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 Depositary'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 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.
In the event that any of DTC, Cedel or Euroclear should discontinue its
services, the Trustee would seek an alternative depository (if available) or
cause the issuance of Definitive Notes to the owners thereof or their nominees
in the manner described below under "--Definitive Notes".
DEFINITIVE NOTES
The Notes of each Class will be issued in registered, certificated form
to the Note Owners of such Class or their nominees ("Definitive Notes"), rather
than to the Depository or its nominee, only if (i) the Depository advises the
Trustee in writing that it is no longer willing or able to discharge properly
its responsibilities as Depository with respect to the Notes of such Class, and
the Trustee is unable to locate a qualified successor, or (ii) an Event of
Default has occurred, and Note Owners representing not less than 50% of the
principal balance of such Class advise the Trustee and the Depository through
Participants in writing that the continuation of a book-entry system through
the Depository is no longer in the best interest of the Note Owners of such
Class.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Depository is required to notify all Participants of
the availability through the Depository of Definitive Notes. Upon surrender by
the Depository of the definitive certificate representing the Notes of the
affected Class and instructions for registration, the Trustee will issue the
Notes of such Class as Definitive Notes, and thereafter the Trustee will
recognize the Note Owners of such Definitive Notes as Noteholders under the
Indenture.
Distributions of principal and interest on the Notes will be made by the
Trustee directly to Noteholders in accordance with the procedures set forth
herein and in the Indenture. Interest payments and any principal payments on
each Payment Date will be made to Noteholders in whose names the Definitive
Notes were registered at the close of business on the related Record Date.
Distributions will be made by check mailed to
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the address of such Noteholder as it appears on the register maintained by the
Trustee. The final payment on any Note, however, will be made only upon
presentation and surrender of such Note at the office or agency specified in
the notice of final distribution to Noteholders. The Trustee will provide such
notice to registered Noteholders mailed not later than the fifth day of the
month of such final distributions.
Definitive Notes will be transferable and exchangeable at the offices of
the transfer agent and registrar, which initially will be the Trustee (in such
capacity, the "Transfer Agent and Registrar"). No service charge will be
imposed for any registration of transfer or exchange, but the Transfer Agent
and Registrar may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith. The Transfer Agent and
Registrar will not be required to register the transfer or exchange of
Definitive Notes for the period from the Record Date preceding the due date for
any payment to the Payment Date with respect to such Definitive Notes.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT
The Issuer and the Trustee may, when authorized by an Issuer Order,
without consent of the Noteholders, enter into one or more supplemental
indentures for any of the following purposes: (i) to correct or amplify the
description of the collateral or add additional collateral; (ii) to provide for
the assumption of the Notes and the Indenture obligations by a permitted
successor to the Issuer (as described under "--Certain Covenants"); (iii) to
add additional covenants for the benefit of the Noteholders, or to surrender
any rights or power conferred upon the Issuer; (iv) to convey, transfer,
assign, mortgage or pledge any property to or with the Trustee; (v) to cure any
ambiguity or correct or supplement any provision in the Indenture or in any
supplemental indenture which may be inconsistent with any other provision of
the Indenture; (vi) to provide for the acceptance of the appointment of a
successor Trustee or to add to or change any of the provisions of the Indenture
or in any supplemental indenture as shall be necessary and permitted to
facilitate the administration by more than one trustee; (vii) to modify,
eliminate or add to the provisions of the Indenture in order to comply with the
Trust Indenture Act of 1939, as amended; (viii) to avoid a reduction,
qualification or withdrawal of any rating of the Notes; or (ix) to add any
provisions to, or change in any manner or eliminate any of the provisions of,
the Indenture or to modify in any manner the rights of the Holders of the Notes
under the Indenture, provided that such action shall not (a) result in a
reduction, qualification or withdrawal of the then-current ratings of the
Notes, or (b) as evidenced by an opinion of counsel, adversely affect in any
material respect the interests of any Noteholder.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT
With the consent of the Holders representing a majority of the principal
balance of each Class of the Notes affected thereby, the Issuer and the Trustee
may, when authorized by an Issuer Order, execute a supplemental indenture to
add provisions to change in any manner or eliminate any provisions of, the
Indenture, or modify in any manner the rights of the Noteholders.
Without the consent of the Holder of each outstanding Note affected
thereby, however, no supplemental indenture may: (i) change the date, timing or
method of determination of any installment of principal of or interest on any
Note or reduce the principal amount thereof, the interest rate specified
thereon or the redemption price with respect thereto or change the manner of
calculating any such payment or any place of payment where, or the coin or
currency in which, any Note or any interest thereon is payable; (ii) impair the
right to institute suit for the enforcement of certain provisions of the
Indenture regarding payment; (iii) reduce the percentage of each Class of the
Notes then outstanding the consent of the Holders of which is required for any
such supplemental indenture or for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences; (iv) modify or alter the provisions of the Indenture regarding
the voting of Notes held by the Issuer, any other obligor on the Notes, the
Issuer or an affiliate of any of them; (v) reduce the percentage of the Notes
the consent of the Holders of which is required to direct the Trustee to sell
or liquidate the Trust Assets if the proceeds of such sale would be
insufficient to pay the principal amount and accrued but unpaid interest on the
outstanding Notes; (vi) reduce the percentage of each
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Class of the Notes then outstanding required to amend the sections of the
Indenture which specify the applicable percentage of each Class of the Notes
then outstanding necessary to amend the Indenture or certain other related
agreements; (vii) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture with respect to any of the collateral for
the Notes or, except as otherwise permitted or contemplated in the Indenture,
terminate the lien of the Indenture on any such collateral or deprive the
Holder of any Note of the security afforded by the lien of the Indenture; or
(viii) result in a reduction, qualification or withdrawal of the rating of any
Class of Notes by a Rating Agency, as confirmed in writing by each Rating
Agency.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
"Events of Default" under the Indenture will consist of: (i) a default
for five calendar days or more in the payment of interest due on any Note; (ii)
failure to pay the unpaid principal amount of any Class of Notes on the Stated
Maturity Date or any redemption date for such Class; (iii) a default in the
observance or performance in any material respect of any covenant or agreement
of the Issuer made in the Indenture, or any representation or warranty made by
the Issuer in the Indenture or in any certificate delivered pursuant thereto or
in connection therewith having been incorrect as of the time made, and the
continuation of any such default or the failure to cure such breach of a
representation or warranty for a period of 30 calendar days after notice
thereof is given to the Issuer by the Trustee or to the Issuer and the Trustee
by the Holders of at least 25% in principal amount of the Notes then
outstanding; or (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Issuer.
If an Event of Default should occur and be continuing with respect to the
Notes, the Trustee or a Note Majority may declare the principal of the Notes to
be immediately due and payable. Such declaration may, under certain
circumstances, be rescinded by a majority of the Principal Balance of each
Class of the Notes then outstanding (a "Note Majority").
If the Notes have been declared due and payable following an Event of
Default, the Trustee may institute proceedings to collect amounts due or
foreclose on Trust Assets or any portion thereof, exercise remedies as a
secured party, sell the Trust Assets or any portion thereof or elect to have
the Issuer maintain possession of the Trust Assets and continue to apply
collections on the Trust Assets as if there had been no declaration of
acceleration. The Trustee, however, will be prohibited from selling the Trust
Assets following an Event of Default, unless (i) the Holders of all the
outstanding Notes consent to such sale; (ii) the proceeds of such sale
distributable to Holders of the Notes are sufficient to pay in full the
principal of and the accrued interest on all the outstanding Notes at the date
of such sale; or (iii) the Trustee determines that the Trust Assets would not
be sufficient on an ongoing basis to make all payments on the Notes as such
payments would have become due if such obligations had not been declared due
and payable, and the Trustee obtains the consent of the Holders of 66 2/3% of
the aggregate outstanding amount of the Notes. Following a declaration upon an
Event of Default that the Notes are immediately due and payable, any proceeds
of liquidation of the Trust Assets, will be applied in the following order of
priority: (i) to the Servicer, the Servicing Fee (if Vendor Services or an
affiliate is no longer the Servicer); (ii) to the reimbursement of the Trustee
for its expenses; (iii) to the payment of interest, sequentially, on the Class
A Notes until paid in full (and among the Class A Notes, pro rata), then on the
Class B Notes until paid in full, and then on the Class C Notes until paid in
full; (iv) to the payment of principal, sequentially, on the Class A Notes, the
Class B Notes and the Class C Notes; (v) to the Servicer, the Servicing Fee (if
Vendor Services or an affiliate is the Servicer); and (vi) the remainder, if
any, to the Issuer.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the Holders of the Notes, if the Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, a Note Majority will have the right to direct the
time, method and place of conducting any
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proceeding or any remedy available to the Trustee, and a Note Majority may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or
consent of all of the Holders of such outstanding Notes.
No Holder of a Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such Holder previously has given to the
Trustee written notice of a continuing Event of Default, (ii) the Holders of
not less than 25% in principal amount of the outstanding Notes have made
written request of the Trustee to institute such proceeding in its own name as
Trustee, (iii) such Holder or Holders have offered the Trustee reasonable
indemnity, (iv) the Trustee has for 60 days failed to institute such
proceeding, and (v) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of such outstanding Notes.
If an Event of Default occurs and is continuing and if it is known to the
Trustee, the Trustee will mail to each Noteholder notice of the Event of
Default within 90 days after it occurs. Except in the case of a failure to pay
principal of or interest on any Note, the Trustee may withhold the notice if
and so long as it determines in good faith that withholding the notice is in
the interests of the Noteholders.
In addition, the Trustee and the Noteholders, by accepting the Notes,
will covenant that they will not at any time institute against the Issuer any
bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
Neither the Trustee nor the Issuer in its individual capacity, nor any
Holder of a Note including, without limitation, the SPC, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the Notes or for any
agreement or covenant of the Issuer contained in the Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States or any
state, (ii) such entity expressly assumes the Issuer's obligation to make due
and punctual payments upon the Notes and the performance or observance of every
agreement and covenant of the Issuer under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) the Issuer has been advised that the rating of the Notes
then in effect would not be reduced, qualified or withdrawn by the Rating
Agencies as a result of such merger or consolidation, (v) the Issuer has
received an opinion of counsel to the effect that such consolidation or merger
would have no material adverse tax consequence to the Issuer or to any
Noteholder, and (vi) the Issuer or the Person (if other than the Issuer) formed
by or surviving such consolidation or merger has a net worth, immediately after
such consolidation or merger, that is (a) greater than zero and (b) not less
than the net worth of the Issuer immediately prior to giving effect to such
consolidation or merger.
The Issuer will not, among other things, (i) except as expressly
permitted by the Indenture, sell, transfer, exchange or otherwise dispose of
any of the Trust Assets, (ii) claim any credit on or make any deduction from
the principal and interest payable in respect of the related Notes (other than
amounts withheld under the Code or applicable state law) or assert any claim
against any present or former Holder of such Notes because of the payment of
taxes levied or assessed upon the Issuer, (iii) dissolve or liquidate in whole
or in part, (iv) permit the validity or effectiveness of the Indenture to be
impaired or permit any person to be released from any covenants or obligations
with respect to the Notes under the indenture except as may be expressly
permitted thereby, or (v) except as expressly permitted by the Indenture or the
Contribution and Servicing Agreement, permit any lien, charge, excise, claim,
security interest, mortgage or other encumbrance to be
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created on or extend to or otherwise arise upon or burden the assets of the
Issuer or any part thereof, or any interest therein or proceeds thereof.
The Issuer may not engage in any activity other than as specified under
"The Issuer and the SPC." The Issuer will not incur, assume or guarantee any
indebtedness other than indebtedness incurred pursuant to the Notes and the
Indenture or otherwise in accordance with the Indenture and the Contribution
and Servicing Agreement.
ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Trustee a written
statement as to the fulfillment of its obligations under the Indenture.
TRUSTEE'S ANNUAL REPORT
The Trustee will be required to mail each year to all Noteholders a brief
report relating to its eligibility and qualification to continue as Trustee
under the related Indenture, any amounts advanced by it under the Indenture,
the amount, interest rate and maturity date of certain indebtedness owing by
the Issuer to the Trustee in its individual capacity, the property and funds
physically held by the Trustee as such and any action taken by it that
materially affects the Notes and that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing
the Notes upon the delivery to the related Trustee for cancellation of all such
Notes or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of such Notes.
THE TRUSTEE
U.S. Bank Trust National Association will be the Trustee. The Trustee may
resign at any time, in which event the Issuer will be obligated to appoint a
successor trustee. The Issuer may also remove the Trustee if the Trustee ceases
to be eligible to continue as such under the Indenture, if the Trustee becomes
insolvent or if the rating assigned to the long-term unsecured debt obligations
of the Trustee (or the holding company thereof) by the Rating Agencies shall be
lowered below an investment grade rating or be withdrawn by any Rating Agency.
In such circumstances and others set forth in the Indenture, the Issuer will be
obligated to appoint a successor trustee. Any resignation or removal of the
Trustee and appointment of a successor trustee will not become effective until
acceptance of the appointment by a successor trustee.
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DESCRIPTION OF THE CONTRIBUTION AND SERVICING AGREEMENT
TRANSFER AND ASSIGNMENT OF LEASES AND EQUIPMENT
On the Closing Date, Vendor Services will transfer to the SPC pursuant
to the Transfer Agreement all of its right, title and interest in the Leases
and the related Equipment, including all security interests created thereby
and therein, the right to receive all Scheduled Payments and Prepayments
received on the Leases on or after the Cut-Off Date (including all Scheduled
Payments due prior to, but not received as of, the Cut-Off Date, but excluding
any Scheduled Payments due on or after, but received prior to, the Cut-Off
Date), all rights under insurance policies maintained on the Equipment
pursuant to the Leases, all documents contained in the Lease Files and all
proceeds derived from any of the foregoing. Pursuant to the Contribution and
Servicing Agreement, on the Closing Date, the SPC will transfer all of its
rights in the Leases and certain rights to Residual Realizations, together
with all its rights under the Transfer Agreement, to the Issuer.
The Contribution and Servicing Agreement will designate the Servicer as
custodian to maintain possession, as the Issuer's agent, of the Leases and all
documents related thereto. To facilitate servicing and save administrative
costs, the documents will not be physically segregated from other similar
documents that are in the Servicer's possession. UCC financing statements will
be filed on the Closing Date in the applicable jurisdictions reflecting the
transfer of the Leases by Vendor Services to the SPC, by the SPC to the
Issuer, and the pledge of the Leases by the Issuer to the Trustee, and Vendor
Services's accounting records and computer systems will also reflect such
assignments and pledge. The Leases will not, however, be stamped or otherwise
physically marked to reflect their assignment to the Issuer. If, through
fraud, negligence or otherwise, a subsequent purchaser were able to take
physical possession of the Leases without knowledge of the assignment, the
Issuer's interest in the Leases could be defeated. See "Risk Factors--
Enforceability of the Leases" and "Certain Legal Aspects of the Leases."
COLLECTIONS ON LEASES
The Trustee will establish and maintain a Servicing Account, into which
the Servicer will deposit, no later than the second Business Day after receipt
thereof, all Scheduled Payments, Prepayments, Liquidation Proceeds, Residual
Realizations and other amounts received by the Servicer in respect of the
Leases on and after the Cut-Off Date. The Servicer will thereafter transfer to
the Collection Account, no later than the third Business Day after deposit
thereof in the Servicing Account, the following amounts:
(i) all Scheduled Payments made by or on behalf of Obligors under the
Leases;
(ii) all Prepayments (unless Vendor Services has delivered a
Substitute Lease for such Lease);
(iii) all amounts constituting Liquidation Proceeds on Liquidated
Leases (unless Vendor Services has delivered a Substitute Lease for such
Lease);
(iv) any and all payments made by Vendor Services pursuant to the
Transfer Agreement in connection with the purchase of any Leases as a
result of a breach of a representation or warranty with respect thereto, as
described under "The Leases--Representations and Warranties Made by Vendor
Services," or pursuant to the Contribution and Servicing Agreement as a
result of the Lease becoming an Adjusted Lease as described below under "--
Servicing"; and
(v) the amount paid by the SPC to purchase the Leases, as described
under "Description of the Notes--Optional Purchase of Leases."
The Servicer will transfer all Residual Realizations from the Servicing
Account to the Residual Account no later than the third Business Day after
deposit thereof in the Servicing Account.
So long as no Event of Termination shall have occurred and be continuing
with respect to the Servicer, the Servicer, if Vendor Services or an affiliate
is no longer the Servicer, may make the remittances to
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be made by it to the Collection Account net of amounts (which amounts may be
netted prior to any such remittance for a Collection Period) otherwise to be
distributed to it in payment of its Servicing Fee.
The Servicer will be entitled to withdraw from the Collection Account any
amounts deposited therein in error or required to be repaid to an Obligor,
based on the Servicer's good-faith determination that such amount was deposited
in error or must be returned to the Obligor.
Under the Contribution and Servicing Agreement, the Servicer is required
to establish in its own name one or more "Insurance, Maintenance and Tax
Accounts," into which are to be deposited any payments made by or on behalf of
Obligors which constitute (a) insurance charges paid by an Obligor to the
lessor or secured party under a Lease (unless such payments are made directly
by the Obligor to the applicable insurance company, or Vendor Services has
previously paid such charges), (b) any insurance payments or recoveries paid by
an insurance company or comparable third party and related to the damage to, or
destruction of, the Equipment related to such Lease (unless paid directly by
such insurance company or comparable third party directly to the Obligor), (c)
any payments made by or on behalf of Obligors which constitute amounts paid by
an Obligor to the lessor or secured party under a Lease in respect of the
maintenance of the related Equipment, and (d) taxes paid by the Obligor and
related to the applicable Lease or the Equipment related thereto (unless such
payment is made directly by the Obligor to the applicable taxing authority or
authorities, or Vendor Services has previously paid such taxes). The Servicer
may withdraw amounts from the Insurance, Maintenance and Tax Accounts, when and
if appropriate, to pay when due (or may pay from its own funds and thereafter
reimburse itself from amounts in the Insurance, Maintenance and Tax Accounts)
(1) all insurance charges in the amounts received under clause (a) above, (2)
any amounts payable under any applicable maintenance contract or otherwise with
respect to the maintenance of the related Equipment in the amounts received
under clause (c) above, and (3) all taxes in the amounts received under clause
(d) above. Amounts on deposit in the Insurance, Maintenance and Tax Accounts
which represent amounts received by the Servicer pursuant to clause (b) above
shall be applied by the Servicer as follows: if equipment is purchased to
replace the Equipment that was damaged or destroyed, and such replacement
equipment is (in the reasonable opinion of the Servicer) of comparable use and
equivalent value to the Equipment that was damaged or destroyed, or if the
Equipment is to be repaired, the Servicer shall release such amount so received
from the insurance company or comparable third party in payment or
reimbursement for such replacement equipment or such repair; and if this
replacement option is not exercised and the Equipment is not to be repaired,
then the Servicer shall treat such amount as Liquidation Proceeds and transfer
that portion thereof which would be allocable to the Notes from the Insurance,
Maintenance and Tax Accounts to the Collection Account.
On or before the first Business Day preceding each Payment Date (the
"Determination Date"), the Servicer is required to determine the amount of
Available Pledged Revenues for such Payment Date, the amount of interest
payable on the Notes on such Payment Date, the Monthly Principal Amount for
such Payment Date, the Cumulative Loss Amount (if any) for such Payment Date,
and the amount, if any, by which such Available Pledged Revenues plus any
Servicer Advances with respect to such Payment Date, when applied in accordance
with the priorities described under "Description of the Notes--Distributions,"
are insufficient to pay the interest and principal payable on the Notes on such
Payment Date (a "Payment Shortfall"). If there is a Payment Shortfall for such
Payment Date, amounts on deposit in the Residual Account and then amounts on
deposit in the Reserve Account will be applied to the payment of interest and
principal on the Notes to the extent necessary to cure such Payment Shortfall.
The Servicer shall further give notice to the Trustee of (1) any remaining
Payment Shortfall (after giving effect to the previous application of funds in
the Residual Account or Reserve Account as aforesaid), (2) the Cumulative Loss
Amount (if any), and (3) if such Payment Date is the Stated Maturity Date for
any Class of Notes, the remaining unpaid principal balance of such Class of
Notes (after giving effect to previous application of funds in the Residual
Account as aforesaid).
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SERVICING
Pursuant to the Contribution and Servicing Agreement, Vendor Services
will be engaged to act as Servicer on behalf of the Issuer. The Servicer is
generally obligated under the Contribution and Servicing Agreement to service
the Leases in accordance with customary and usual procedures of institutions
which service equipment Leases, installment sale contracts, promissory notes,
loan and security agreements and other similar types of receivables comparable
to the Leases and, to the extent more exacting, the degree of skill and
attention that the Servicer exercises from time to time with respect to all
comparable such contracts that it services for itself or others. In performing
such duties, so long as Vendor Services is the Servicer, it shall comply in all
material respects with its credit and collection policies and procedures in
effect from time to time (which credit and collection policies currently in
effect are described under "Green Tree Vendor Services Corporation"). The
Servicer may delegate certain of its servicing responsibilities with respect to
the Leases to third parties, provided that the Servicer will remain obligated
to the Issuer for the proper performance of all such servicing
responsibilities.
The Servicer will use its best efforts to sell or re-lease any Equipment
upon the termination of the Lease to which such Equipment is subject (whether
as a result of early termination following an Obligor default or upon scheduled
expiration of the Lease), in a timely manner and in a manner so as to maximize,
to the extent possible under then prevailing market conditions, the net
proceeds from such Equipment. The Servicer may, in its discretion, choose to
dispose of Equipment through a new lease or in some other manner which provides
for payment for the Equipment over time. In any such event, the Servicer will
be required to pay from its own funds an amount which, in its reasonable
judgment, is equal to the fair market value of such Equipment (less any related
out-of-pocket liquidation expenses), and the Servicer will be entitled to all
payments received thereafter in respect of such Equipment. Any such amounts so
paid by the Servicer will be deemed to constitute additional Liquidation
Proceeds or Residual Realizations, depending on the reason for the disposition
of the Equipment, with respect to the related Lease and Equipment.
Under the Contribution and Servicing Agreement, the Servicer is
responsible for, among other things: reviewing and certifying that the Lease
Files are complete; monitoring and tracking any property and sales taxes to be
paid by Obligors; billing, collection and recording of payments from Obligors;
communicating with and providing billing records to Obligors; deposit of funds
into the Collection Account; receiving payments as the Issuer's agent on the
insurance policies maintained by the Obligors and communicating with insurers
with respect thereto; issuance of reports to the Trustee specified in the
Indenture and in the Contribution and Servicing Agreement; repossession and
remarketing of Equipment following Obligor defaults or upon scheduled
termination or early termination of Leases; and paying the fees and ordinary
expenses of the Trustee.
The Servicer shall, to the extent the proceeds of such liquidation are
sufficient therefor, be entitled to recover all reasonable out-of-pocket
expenses incurred by it in the course of liquidating a Lease and disposing of
the related Equipment, which amounts may be retained by the Servicer from such
proceeds to the extent of such expenses. The Servicer is entitled under the
Contribution and Servicing Agreement to retain, from liquidation proceeds, a
reserve for out-of-pocket liquidation expenses in an amount equal to such
expenses, in addition to those previously incurred, as it reasonably estimates
will be incurred. Upon completion of such liquidation, the remainder of any
such reserve, after reimbursement to the Servicer of all out-of-pocket
liquidation expenses, shall constitute Liquidation Proceeds and be deposited in
the Collection Account.
Under the Contribution and Servicing Agreement, the Servicer, subject to
certain limitations, is permitted to grant payment extensions on a Lease in
accordance with its credit and collection policies and procedures if the
Servicer believes in good faith that such extension is necessary to avoid a
termination and liquidation of such Lease and will maximize the amount to be
received by the Issuer with respect to such Lease. Under the Contribution and
Servicing Agreement, the Servicer, subject to certain limitations, is permitted
to grant modifications or amendments to a Lease in accordance with its credit
and collection policies and procedures. Following modifications or amendments
to a Lease that exceed the limitations imposed on the
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Servicer's ability to agree to such modifications or amendments under the
Contribution and Servicing Agreement, such a Lease will be deemed an "Adjusted
Lease" and must either be purchased by the Servicer for a price equal to the
Required Payoff Amount or substituted for in the manner described under "The
Leases--Substitution."
Prepayments. The Servicer may in its discretion allow a Prepayment of any
Lease, but only if the amount paid by or on behalf of the Obligor (or, in the
case of a partial Prepayment, the sum of such amount and the remaining
Principal Balance of the Lease after application of such amount) is at least
equal to the Required Payoff Amount of such Lease. To the extent any Prepayment
exceeds the Required Payoff Amount of a Lease, such excess will be paid to the
Issuer.
Evidence as to Compliance. On or before March 31 (or within 90 days after
the end of the Servicer's fiscal year, if other than December 31) of each year,
the Servicer must deliver to the Trustee a report of a nationally recognized
accounting firm stating that such firm has examined certain documents and
records relating to the servicing of equipment leases and loans serviced by the
Servicer and stating that, on the basis of such procedures, such servicing has
been conducted in compliance with the Contribution and Servicing Agreement,
except for any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from
its obligations under the Contribution and Servicing Agreement except upon a
determination that its duties thereunder are no longer permissible under
applicable law. No such resignation will become effective until a successor
servicer has assumed the Servicer's obligations and duties under the
Contribution and Servicing Agreement. The Servicer can be removed as Servicer
only upon the occurrence of an Event of Termination as discussed below.
The Servicer must keep in place throughout the term of the Contribution
and Servicing Agreement (i) a policy or policies of insurance covering errors
and omissions by the Servicer, and (ii) a fidelity bond. Such policy or
policies and such fidelity bond shall be in such form and amount as is
generally customary among persons that service a portfolio of equipment leases
having an unpaid balance of at least $100 million and which are generally
regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. Compensation to the
Servicer will include a monthly fee (the "Servicing Fee"), which will be
payable to the Servicer from the Amount Available on each Payment Date, in an
amount equal to the product of one-twelfth of .75% per annum multiplied by the
Lease Pool Principal Balance as of the last day of the second preceding
Collection Period (or, in the case of the Servicing Fee with respect to the
Collection Period commencing on the Initial Cut-Off Date, the Initial Pool
Principal Balance), plus any late fees, late payment interest, documentation
fees, insurance administration charges and other administrative fees and
charges and a portion of any extension fees (collectively, the "Administrative
Fees") collected with respect to the Leases during the prior Collection Period
and any investment earnings on collections prior to deposit thereof in the
Collection Account. The Servicer is authorized under the Contribution and
Servicing Agreement, in its discretion, to waive any Administrative Fees or
extension fees that may be collected in the ordinary course of servicing any
Lease.
Events of Termination. An Event of Termination under the Contribution and
Servicing Agreement will occur if (a) the Servicer fails to make any payment or
deposit required under the Contribution and Servicing Agreement and such
failure continues for five business days after notice from the Trustee or after
discovery by the Servicer; (b) the Servicer fails to deliver to the Trustee and
the Issuer the Servicer's Certificate (as defined in the Contribution and
Servicing Agreement) by the third Business Day prior to the related Payment
Date; (c) the Servicer fails to observe or perform in any material respect any
other covenants or agreements of the Servicer set forth in the Contribution and
Servicing Agreement (and, if Vendor Services is the Servicer, the Transfer
Agreement), and such failure (i) materially and adversely affects the rights of
the Issuer or Noteholders, and (ii) continues unremedied for 30 days after
written notice thereof has been given to the Servicer by the Issuer, the
Trustee or any Noteholder; (d) certain events of bankruptcy or insolvency occur
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with respect to the Servicer; or (e) any representation, warranty or statement
of the Servicer made in the Contribution and Servicing Agreement or any
certificate, report or other writing delivered pursuant thereto proves to be
incorrect in any material respect, and such incorrectness (i) has a material
adverse effect on the Issuer or Noteholders, and (ii) continues uncured for 30
days after written notice thereof has been given to the Servicer by the Issuer,
the Trustee or any Noteholder. The Servicer is required under the Contribution
and Servicing Agreement to give the Trustee, the Issuer and each Rating Agency
notice of an Event of Termination promptly after having obtained knowledge of
such event.
Federal bankruptcy laws limit the termination of contracts solely by
reason of the fact that the party obligated to provide such performance is
subject to federal bankruptcy proceedings. In such a circumstance, the Trustee
may be unable to terminate the Servicer unless it could demonstrate that
independent grounds (whether or not arising from the same facts causing the
Servicer to be subject to bankruptcy proceedings) exist to declare an Event of
Termination and the court supervising the bankruptcy proceeding determines that
such grounds warrant termination of the Servicer.
Rights upon Event of Termination. So long as an Event of Termination
remains unremedied, the Trustee may, and at the written direction of a Note
Majority (as defined in the Indenture) shall, terminate all of the rights and
obligations of the Servicer under the Contribution and Servicing Agreement in
and to the Leases, whereupon a successor servicer (which, unless and until the
Trustee appoints a new servicer, will be the Trustee) will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Contribution
and Servicing Agreement and will be entitled to similar compensation
arrangements; provided, however, that any successor servicer be liable for any
acts or omissions of the prior Servicer occurring prior to a transfer of the
Servicer's servicing and related functions or for any breach by such Servicer
of any of its obligations contained in the Contribution and Servicing
Agreement.
A Note Majority may waive any default by the Servicer in the performance
of its obligations under the Contribution and Servicing Agreement and its
consequences. Upon any such waiver of a past default, such default shall cease
to exist, and any Event of Termination arising therefrom shall be deemed to
have been remedied. No such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
AMENDMENT
The Contribution and Servicing Agreement may be amended by the parties
thereto (i) to cure any ambiguity, (ii) to correct or supplement any provision
therein that may be inconsistent with any other provision therein, or (iii) to
make any other provisions with respect to matters or questions arising under
the Contribution and Servicing Agreement that are not inconsistent with the
provisions thereof, provided that such action will not adversely affect in any
material respect the interests of the Noteholders. The Contribution and
Servicing Agreement may also be amended by the parties thereto with the consent
of a Note Majority for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Contribution and
Servicing Agreement or of modifying in any manner the rights of the
Noteholders; provided, however, that no such amendment (a) that reduces in any
manner the amount of, or accelerates or delays the timing of, any payment
received on or with respect to Leases that are required to be distributed on
any Note or that reduces the aforesaid percentage required to consent to any
such amendment or any waiver under the Contribution and Servicing Agreement,
may be effective without the consent of the Holder of each such Note, or (b)
will be effective unless each Rating Agency confirms that such amendment will
not result in a reduction, qualification or withdrawal of the ratings on the
Notes.
TERMINATION OF THE CONTRIBUTION AND SERVICING AGREEMENT
The obligations created by the Contribution and Servicing Agreement will
terminate (after distribution of all interest and principal then due to
Noteholders) on the earlier of (i) the Payment Date next succeeding the later
of the final payment or other liquidation of the last Lease or the disposition
of all Equipment acquired
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upon termination of any Lease; or (b) the Payment Date on which the SPC
repurchases the Leases as described under "Description of the Notes--Optional
Purchase of Leases." However, Vendor Services's representations, warranties and
indemnities will survive any termination of the Contribution and Servicing
Agreement.
CERTAIN LEGAL ASPECTS OF THE LEASES
ENFORCEMENT OF SECURITY INTERESTS IN THE EQUIPMENT
Due to the administrative burden and expense, no assignments of the UCC
financing statements evidencing the security interest of Vendor Services in the
Equipment (to the extent that such financing statements have been filed against
the Obligor, as discussed under "Green Tree Vendor Services Corporation--
Documentation") will be filed to reflect the SPC's, the Issuer's or the
Trustee's interests therein, except to the extent described under "Risk
Factors--Risks Related to Bankruptcy--Risks Relating to Characterization of the
Transfer of the Leases and Equipment as a Borrowing by Vendor Services." While
failure to file such assignments does not affect the Issuer's interest in the
Leases (including Vendor Services's interest in the related Equipment), it does
expose the Issuer and the Noteholders to the risk that Vendor Services could
release its security interest in the Equipment of record, and it could
complicate the Issuer's enforcement, as assignee, of Vendor Services's security
interest in the Equipment. While these risks should not affect the perfection
or priority of the interest of the Trustee in the Leases or rights to payment
thereunder, they may adversely affect the right of the Trustee to receive
proceeds of disposition of the Equipment subject to a Liquidated Lease, which
are to be allocated to the payment of the Notes as described under "Description
of the Notes--Liquidated Leases." Additionally, statutory liens for repairs or
unpaid taxes and other liens arising by operation of law may have priority even
over prior perfected security interests assigned to the Trustee in the
Equipment.
In the event of a default by the Obligor under a Lease intended for
security, the Servicer on behalf of the Issuer may take action to enforce
Vendor Services' interest in the related Equipment by repossession and resale
or re-lease of the Equipment. Under the UCC in most states, a creditor can,
without prior notice to the debtor, repossess assets securing a defaulted
contract by the Obligor's voluntary surrender, or by "self-help" repossession
that does not involve a breach of the peace and by judicial process. In the
event of bankruptcy or insolvency of the Obligor these remedies may require the
permission of a bankruptcy court or may otherwise not be immediately available.
See "--Insolvency Matters" below.
In the event of a default by the Obligor under a Lease intended for
security, some jurisdictions require that the Obligor be notified of the
default and be given a time period within which it may cure the default prior
to repossession. Generally, this right of reinstatement may be exercised on a
limited number of occasions in any one-year period.
The UCC and other state laws place restrictions on repossession sales,
including requirements that the secured party provide the debtor with
reasonable notice of the date, time and place of any public sale and/or the
date after which any private sale of the collateral may be held and that any
such sale be conducted in a commercially reasonable manner.
Under most state laws, an Obligor under a Lease intended for security has
the right to redeem collateral for its obligations prior to actual sale by
paying the lessor or secured party the unpaid balance of the obligation plus
reasonable expenses for repossessing, holding and preparing the collateral for
disposition and arranging for its sale, plus, to the extent provided for in the
written agreement of the parties, reasonable attorneys' fees.
In addition, because the market value of equipment of the type subject to
the Leases generally declines with age, due to obsolescence, the net
disposition proceeds of Equipment at any time during the term of the Leases may
not equal or exceed the Principal Balance on the related Lease. Because of
this, and because other
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creditors may in certain cases have rights in the related Equipment superior to
those of the Issuer, the Servicer may not be able to recover the entire amount
due on a defaulted Lease in the event that the Servicer elects to repossess and
dispose of such Equipment at any time.
Under the UCC and laws applicable in most states, a creditor is entitled
to obtain a deficiency judgment from an Obligor under a Lease intended for
security for any deficiency on repossession and resale of the asset securing
the unpaid balance of such Obligor's Lease. However, some states impose
prohibitions or limitations on deficiency judgments. In most jurisdictions, the
courts, in interpreting the UCC, would impose upon a creditor an obligation to
repossess the equipment in a commercially reasonable manner and to "mitigate
damages" in the event of an Obligor's failure to cure a default. The creditor
would be required to exercise reasonable judgment and follow acceptable
commercial practice in seizing, selling or re-leasing the equipment and to
offset the net proceeds of such disposition against its claim. In addition, an
Obligor may successfully invoke an election of remedies defense to a deficiency
claim in the event that the Servicer's repossession and sale of the Equipment
is found to be a retention discharging the Obligor from all further obligations
under the UCC. If a deficiency judgment were granted, the judgment would be a
personal judgment against the Obligor for the shortfall, but a defaulting
Obligor may have limited assets or sources of income available following
repossession. Therefore, in many cases, it may not be useful to seek a
deficiency judgment or, if one is obtained, it may be settled at a significant
discount.
Many states have adopted a version of Article 2A of the UCC ("Article
2A"). Article 2A purports to codify many provisions of existing common law.
Although there is little precedental authority regarding how Article 2A will be
interpreted, it may, among other things, limit enforceability of any
"unconscionable" provision in a Lease, provide an Obligor with remedies
including the right to cancel the Lease for any lessor breach or default, and
may add to or modify the terms of "consumer leases" and leases where the
Obligor is a "merchant lessee." However, each Lease contains an acknowledgement
by the Obligor that the Equipment was acquired for business purposes, and
Vendor Services will represent in the Contribution and Servicing Agreement that
no Lease (other than a de minimis number of Leases) is a "consumer lease" under
Article 2A. Article 2A, moreover, recognizes typical commercial lease "hell or
high water" rental payment clauses and validates reasonable liquidated damages
provisions in the event of lessor or Obligor defaults. Article 2A also
recognizes the concept of freedom of contract and permits the parties in a
commercial context a wide latitude to vary provisions of the law.
INSOLVENCY MATTERS
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws, may also limit the ability of the Servicer to repossess and
resell or re-lease Equipment or obtain a deficiency judgment. In the event of
the bankruptcy or reorganization of an Obligor, various provisions of the
Bankruptcy Code of 1978 (the "Bankruptcy Code") and related laws may interfere
with or eliminate the ability of the Servicer to enforce the Issuer's rights
under the Leases. For example, although the bankruptcy or reorganization of an
Obligor would constitute an event of default under such Lease, the Bankruptcy
Code provides generally that rights and obligations under an unexpired lease or
an executory contract may not be terminated or modified solely because of a
provision in the lease or executory contract conditioned upon the commencement
of a case under the Bankruptcy Code. If bankruptcy proceedings were instituted
in respect of an Obligor under such a Lease, the Issuer could be prevented from
continuing to collect payments due from or on behalf of such Obligor or
exercising any remedies assigned to the Issuer without the approval of the
bankruptcy court, and, with respect to a Lease intended as security, the
bankruptcy court could permit the Obligor, as owner of the Equipment, to use or
dispose of the Equipment and provide the Issuer with a lien on substitute
collateral, so long as the court held that such substitute collateral
constituted "adequate protection" within the meaning of the Bankruptcy Code.
In the case of a Lease that is deemed not to be intended as security, the
Bankruptcy Code grants to the bankruptcy trustee or the debtor-in-possession a
right to elect to assume or reject any executory contract or
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unexpired lease. Any such rejection by the lessee would result in the return of
the leased equipment to the lessor. Any rejection of such a lease or contract
constitutes a breach of such lease or contract, entitling the non-breaching
party to a claim for breach of contract, which claim would be payable only from
the assets of the debtor's bankruptcy estate. The net proceeds from any
resulting judgment would be deposited into the Collection Account by the
Servicer. See "Description of the Notes--Liquidated Leases."
In the event that, as a result of the bankruptcy or reorganization of an
Obligor, the related Lease becomes a defaulted Lease without breach of any
representation or warranty of Vendor Services, no recourse would be available
against Vendor Services and the Noteholders could suffer a loss with respect to
such Lease.
These UCC and bankruptcy provisions, in addition to the possible decrease
in the value of a repossessed item of Equipment, may limit the amount realized
on the sale of Equipment securing the Leases to less than the amount due
thereunder.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain United States federal
income tax considerations relevant to the purchase, ownership and disposition
of the Notes by the holders thereof. Dorsey & Whitney LLP, counsel to the
Issuer ("Counsel"), will deliver their opinion regarding the treatment of the
Notes and the treatment of the Issuer, as discussed below. The opinion of
Counsel addresses only those issues specifically identified below as being
covered by such opinion; however, the opinion of Counsel also states that the
additional discussion set forth below accurately sets forth Counsel's advice
with respect to material tax issues. The opinion of Counsel is not binding on
the Internal Revenue Service (the "IRS"). There can be no assurance that the
IRS will take a similar view of such issues, and no assurance can be given that
the opinion of Counsel would be sustained if challenged by the IRS. No ruling
on any of the issues discussed below will be sought from the IRS.
This summary does not purport to be a complete analysis of all the
potential federal income tax consequences relating to the purchase, ownership
and disposition of the Notes. Moreover, the discussion does not address all
aspects of taxation that may be relevant to particular purchasers in light of
their individual circumstances (including the effect of any foreign, state or
local tax laws) or to certain types of purchasers (including dealers in
securities, insurance companies, financial institutions and tax-exempt
entities) subject to special treatment under United States federal income tax
laws. The discussion below assumes that the Notes are held as capital assets.
The discussion of the United States federal income tax consequences set
forth below is based upon currently existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), judicial decisions and administrative
interpretations, all of which are subject to change, which changes may be
retroactive. Because individual circumstances may differ, each prospective
purchaser of the Notes is strongly urged to consult its own tax advisor with
respect to its particular tax situation and the tax effects of any state,
local, foreign, or other tax laws and possible changes in the tax laws.
As used herein, the term "United States Holder" means a beneficial owner
of a Note who or which is for United States federal income tax purposes either
(i) a citizen or resident of the United States, (ii) a corporation, partnership
or other entity created or organized in or under the laws of the United States,
including any state thereof and the District of Columbia, (iii) an estate the
income of which is subject to United States federal income taxation regardless
of its source, (iv) a trust with respect to which a court within the United
States is able to exercise primary supervision over its administration, and one
or more United States persons have the authority to control all of its
substantial decisions, or (v) certain trusts in existence on August 20, 1996
and treated as a United States person prior to such date that elect to continue
to be so treated. The term also includes certain former citizens of the United
States whose income and gain on the Notes will be subject to
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United States taxation. As used herein, the term "United States Alien Holder"
means a beneficial owner of a Note that is not a United States Holder.
OPINION OF COUNSEL REGARDING TREATMENT OF THE NOTES
In the opinion of Counsel, the Notes will be treated as indebtedness for
United States federal income tax purposes. Under the terms of the Notes and the
Indenture, each Noteholder agrees and acknowledges upon its purchase of the
Notes and by acceptance of the Notes that it will also treat the Notes as
indebtedness for such purposes.
OPINION OF COUNSEL REGARDING TREATMENT OF THE ISSUER
In the opinion of Counsel, the Issuer will not be characterized as an
"association" taxable as a corporation for United States federal income tax
purposes. In addition, in the opinion of Counsel, the Issuer will not be
characterized as a "publicly traded partnership" taxable as a corporation for
United States federal income tax purposes, based on Counsel's opinion that the
Notes will be treated as indebtedness for federal income tax purposes. If the
Issuer were treated as either an association or a publicly traded partnership
taxable as a corporation, the resulting entity would be subject to federal
income taxes at corporate tax rates on its taxable income generated by
ownership of the Leases, and certain distributions by the entity would not be
deductible in computing the entity's taxable income. Such an entity-level tax
could result in reduced distributions to Noteholders.
PAYMENTS OF INTEREST
Interest paid on a Note will generally be taxable to a United States
Holder as ordinary interest income at the time it accrues or is received in
accordance with the United States Holder's method of accounting for federal
income tax purposes.
ORIGINAL ISSUE DISCOUNT
Under applicable regulations, a Note will be considered issued with
original issue discount ("OID") if the "stated redemption price at maturity" of
the Note (generally equal to its principal amount as of the date of issuance
plus all interest other than "qualified stated interest" payable prior to or at
maturity) exceeds the original issue price (in this case, the initial offering
price at which a substantial amount of the Notes are sold to the public). Any
OID would be considered de minimis under the regulations if it does not exceed
0.25% of the stated redemption price at maturity of a Note multiplied by the
number of full years until its maturity date or, in the case of the Notes which
have more than one principal payment, the weighted average maturity date. It is
anticipated that the Notes will not be considered issued with more than de
minimis OID. Under the OID regulations, a holder of a Note issued with a de
minimis amount of OID must include an allocable portion of such OID in income
as principal payments are made on the Note.
While it is not anticipated that the Notes will be issued with more than
de minimis OID, it is possible that they will be so issued. If the Notes are
issued with more than de minimis OID, such OID would be includible in the
income of United States Holders as interest over the term of the Notes under a
constant yield method. Any amount included in income as OID would not, however,
be includible again when the amount is actually received. Noteholders would be
required to currently include accrued OID in gross income without regard to
their regular method of accounting. Each United States Holder should consult
its own tax advisor regarding the impact of the OID rules if the Notes are
issued with OID and the consequences to such holder as a result of special
rules in the Code which are applicable to debt instruments whose principal
payments may be accelerated by reason of prepayments of other obligations
securing such debt instruments.
MARKET DISCOUNT
If a United States Holder purchases a Note at a price that is less than
its remaining principal amount or, in the case of a Note issued with OID, its
adjusted issue price, by 0.25% or more of its remaining
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redemption amount multiplied by the number of whole years to maturity, the Note
will be considered to bear "market discount" in the hands of such United States
Holder. In such case, principal payments received by the United States Holder,
or gain realized by the United States Holder on the disposition of the Note,
generally will be treated as ordinary interest income to the extent of the
market discount that accrued on the Note while held by such United States
Holder and that has not previously been included in income. Market discount
generally accrues on a straight-line basis over the remaining term of a Note
except that, at the election of the United States Holder, market discount may
accrue on a constant yield basis. A United States Holder may not be allowed to
deduct immediately all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or to carry such Note. A United States Holder
may elect to include market discount in income currently as it accrues (either
on a straight-line basis or, if the United States Holder so elects, on a
constant yield basis), in which case the interest deferral rule set forth in
the preceding sentence will not apply. Such an election will apply to all bonds
acquired by the United States Holder on or after the first day of the first
taxable year to which such election applies and may be revoked only with the
consent of the IRS.
AMORTIZABLE BOND PREMIUM
If a United States Holder purchases a Note for an amount that is greater
than the amount payable at maturity, such holder will be considered to have
purchased such Note with "amortizable bond premium" equal in amount to such
excess, and may elect (in accordance with applicable Code provisions) to
amortize such premium using a constant yield method over the remaining term of
the Note. The amount amortized in any year will be treated as a reduction of
the United States Holder's interest income from the Note in such year. A United
States Holder that elects to amortize bond premium must reduce its tax basis in
the Note by the amount of the premium amortized in any year. An election to
amortize bond premium applies to all taxable debt obligations held on the first
day of the first taxable year to which the election applies or thereafter
acquired by the United States Holder and may be revoked only with the consent
of the IRS.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement of a Note, a United States Holder
will recognize taxable gain or loss equal to the difference between the amount
realized on the sale, exchange or retirement (not including any amount
attributable to accrued but unpaid interest) and such holder's adjusted tax
basis in the Note. To the extent attributable to accrued but unpaid interest,
the amount realized by a United States Holder would be treated as a payment of
interest. A United States Holder's adjusted tax basis in a Note will equal the
cost of the Note to such holder, increased by the amount of any OID and market
discount previously included in income by such holder with respect to such Note
and reduced by any amortized bond premium and any principal payments received
by such holder.
Subject to the discussion of market discount above, gain or loss realized
on the sale, exchange or retirement of a Note by a United States Holder will be
capital gain or loss, and will be short-term or long-term capital gain or loss
depending upon whether, at the time of the sale, exchange or retirement, the
Note has been held for one year or less or more than one year. Long-term
capital gains are taxed at a lower rate than ordinary income for certain non-
corporate taxpayers, but not for corporate taxpayers. The distinction between
capital gain or loss and ordinary income or loss is also relevant for purposes
of, among other things, limitations on the deductibility of capital losses.
TAX CONSEQUENCES TO UNITED STATES ALIEN HOLDERS
Under present United States federal income and estate tax law, and
subject to the discussion below concerning backup withholding:
(a) payments of principal of and interest on the Notes by the Trustee
or any paying agent to a beneficial owner of a Note that is a United States
Alien Holder, as defined above, will not be subject to United States
federal withholding tax, provided that, in the case of interest, (i) such
holder does not own, actually or constructively, 10 percent or more of the
total combined voting power of all classes of stock of
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Green Tree entitled to vote, (ii) such holder is not, for United States
federal income tax purposes, a controlled foreign corporation related,
directly or indirectly, to Green Tree through stock ownership, (iii) such
holder is not a bank receiving interest described in Section 881(c)(3)(A)
of the Code, and (iv) the certification requirements under Section 871(h)
or Section 881(c) of the Code and Treasury regulations thereunder
(summarized below) are met:
(b) a United States Alien Holder of a Note will not be subject to
United States federal income tax on gain realized on the sale, exchange or
other disposition of such Note, unless (i) such holder is an individual who
is present in the United States for 183 days or more in the taxable year of
sale, exchange or other disposition, and certain conditions are met or (ii)
such gain is effectively connected with the conduct by such holder of a
trade or business in the United States; and
(c) a Note held by an individual who is not a citizen or resident of
the United States at the time of his death will not be subject to United
States federal estate tax as a result of such individual's death, provided
that, at the time of such individual's death, the individual does not own,
actually or constructively, 10 percent or more of the total combined voting
power of all classes of stock of Green Tree entitled to vote and payments
with respect to such Note would not have been effectively connected to the
conduct by such individual of a trade or business in the United States.
Sections 871(h) and 881(c) of the Code and Treasury Regulations
thereunder require that, in order to obtain the exemption from withholding tax
described in paragraph (a) above, either (i) the beneficial owner of a Note
must certify under penalties of perjury to the Trustee or the paying agent, as
the case may be, that such owner is a United States Alien Holder and must
provide such owner's name and address, and United States taxpayer
identification number, if any, or (ii) a securities clearing organization, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution") and holds the Note
on behalf of the beneficial owner thereof must certify under penalties of
perjury to the Indenture Trustee or the paying agent, as the case may be, that
such certificate has been received from the beneficial owner by it or by a
Financial Institution between it and the beneficial owner and must furnish the
payor with copy thereof. A certificate described in this paragraph is effective
only with respect to payments of interest made to the certifying United States
Alien Holder after issuance of the Notes in the calendar year of its issuance
and the two immediately succeeding calendar years. Under temporary United
States Treasury Regulations, such requirement will be fulfilled if the
beneficial owner of a Note certifies on IRS Form W-8, under penalties of
perjury, that it is a United States Alien Holder and provides its name and
address, and any Financial Institution holding the Note on behalf of the
beneficial owner files a statement with the withholding agent to the effect
that it has received such a statement from the beneficial owner (and furnishes
the withholding agent with a copy thereof). If the information shown on IRS
Form W-8 changes, a new IRS Form W-8 must be filed within 30 days of such
change. IRS Form W-8 is valid for the calendar year in which filed and the two
succeeding calendar years.
A United States Alien Holder residing in a country that has a tax treaty
with the United States may be eligible for an exemption or reduced rate
(depending upon the terms of the treaty) with respect to U.S. withholding tax.
In order to secure this exemption or reduced rate, the United States Alien
Holder (or his agent) must certify the holder's residence in the treaty country
filing IRS Form 1001. If the treaty provides only for a reduced rate, U.S.
withholding tax will be imposed at the reduced rate unless the requirements set
forth in paragraph (a) above and the immediately preceding paragraph (including
filing of IRS Form W-8) are satisfied. IRS Form 1001 is valid for the calendar
year in which filed and the two succeeding calendar years.
If the United States Alien Holder of a Note is engaged in a trade or
business in the United States, and if interest on the Note, or gain realized on
the sale, exchange or other disposition of the Note, is effectively connected
with the conduct of such trade or business, the United States Alien Holder,
although exempt from United States withholding tax, will generally be subject
to regular United States income tax on such interest or gain in the same manner
as if it were a United States Holder. In lieu of the certificate described in
the preceding paragraph, such a holder will be required to provide to the
Trustee or the paying agent, as the case
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may be, a properly executed IRS Form 4224 in order to claim an exemption from
withholding tax. In addition, if such United States Alien Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% (or such
lower rate provided by an applicable treaty) of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments. For
purposes of the branch profits tax, interest on and any gain recognized on the
sale, exchange or other disposition of a Note will be included in the
effectively connected earnings and profits of such United States Alien Holder
if such interest or gain is effectively connected with the conduct by the
United States Alien Holder of a trade or business in the United States. IRS
Form 4224 is valid solely for the calendar year in which filed.
New Withholding Rules in 2000. Effective January 1, 2000, new withholding
tax regulations will take effect with respect to interest payments and certain
other categories of payments made to United States Alien Holders. Among other
things, these regulations generally will require any United States Alien Holder
that seeks the protection of an income tax treaty with respect to the
imposition of U.S. withholding tax to obtain a taxpayer identification number
("TIN") from the IRS in advance and provide verification that such holder is
entitled to the protection of the relevant income tax treaty. Tax-exempt United
States Alien Holders will generally be required to provide verification of
their tax-exempt status. United States Alien Holders are urged to consult with
their tax advisors with respect to these new withholding rules.
BACKUP WITHHOLDING
Under current United States federal income tax law, a 31% backup
withholding tax requirement applies to certain payments of interest on, and the
proceeds of a sale, exchange or redemption of, the Notes.
Backup withholding will generally not apply with respect to payments made
to certain exempt recipients such as corporations or other tax-exempt entities.
In the case of a non-corporate United States Holder, backup withholding will
apply only if such holder (i) fails to furnish its TIN which, for an
individual, would be his social security number, (ii) furnishes an incorrect
TIN, (iii) is notified by the IRS that it has failed to report properly
payments of interest and dividends or (iv) under certain circumstances, fails
to certify under penalties of perjury that it has furnished a correct TIN and
has not been notified by the IRS that it is subject to backup withholding for
failure to report interest and dividend payments.
In the case of a United States Alien Holder, under current Treasury
Regulations, backup withholding will not apply to payments made by the
Indenture Trustee or any paying agent thereof on a Note if such holder has
provided the required certificate under penalties of perjury that it is not a
United States Holder (as defined above) or has otherwise established an
exemption, provided in each case that the Trustee or such paying agent, as the
case may be, does not have actual knowledge that the payee is a United States
Holder.
Under current Treasury Regulations, if payments on a Note are made to or
through a foreign office of a custodian, nominee or other agent acting on
behalf of a beneficial owner of a Note, such custodian, nominee or other agent
will not be required to apply backup withholding to such payments made to such
beneficial owner.
Under current Treasury Regulations, payments on the sale, exchange or
other disposition of a Note made to or through a foreign office of a broker
generally will not be subject to backup withholding. Payments to or through the
United States office of a broker will be subject to backup withholding and
information reporting unless the holder certifies under penalties of perjury
that it is not a United States Holder and that certain other conditions are met
or otherwise establishes an exemption.
Holders of Notes should consult their tax advisors regarding the
application of backup withholding in their particular situations, the
availability of an exemption therefrom and the procedure for obtaining such an
exemption, if available. Any amounts withheld from payment under the backup
withholding rules will be allowed as a credit against a holder's United States
federal income tax liability and may entitle such holder to a refund, provided
that the required information is furnished to the IRS.
64
<PAGE>
POSSIBLE ALTERNATIVE TREATMENT OF THE NOTES
If, contrary to the opinion of Counsel, the IRS successfully asserted
that one or more classes of Notes did not represent indebtedness for federal
income tax purposes, the Notes might be treated as equity interests in the
Issuer. If so treated, the Issuer might be characterized as a publicly traded
partnership taxable as a corporation with the adverse consequences described
above (and the taxable corporation would not be able to reduce its taxable
income by deductions for interest expense on Notes recharacterized as equity).
In addition, treatment of the Notes as equity interests in such a partnership
could have adverse tax consequences to certain holders. For example, income to
foreign holders generally would be subject to federal tax and federal tax
return filing and withholding requirements at a rate as high as 30%, and
individual holders might be subject to certain limitations on their ability to
deduct their share of Issuer expenses.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX
ADVICE. ACCORDINGLY, EACH PROSPECTIVE NOTEHOLDER SHOULD CONSULT ITS OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO THE PROSPECTIVE NOTEHOLDER,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME
TAX LAWS AND ANY RECENT OR POSSIBLE CHANGES IN APPLICABLE TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act ("ERISA"),
and/or Section 4975 of the Code, prohibits a pension, profit-sharing or other
employee benefit plan, as well as an individual retirement account and a Keogh
Plan of certain types (each a "Benefit Plan") from engaging in certain
transactions with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons.
Title I of ERISA also requires that fiduciaries of a Benefit Plan subject to
ERISA make investments that are prudent, diversified (except if prudent not to
do so) and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Issuer 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 Issuer 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 Issuer 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 Notes should be treated as debt without
substantial equity features for purposes of the Plan Assets Regulation and that
the Notes do not constitute equity interests in the Issuer for purposes of the
Plan Assets Regulation. However, without regard to whether the Notes are
treated as an equity interest for such purposes, the acquisition or holding of
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Issuer 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
accounts; PTCE 91-38, regarding investments by bank collective investment
funds; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers."
65
<PAGE>
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements.
A PLAN FIDUCIARY CONSIDERING THE PURCHASE OF ANY OF THE NOTES SHOULD
CONSULT ITS TAX AND/OR LEGAL ADVISORS REGARDING WHETHER THE ASSETS OF THE
ISSUER WOULD BE CONSIDERED PLAN ASSETS, THE POSSIBILITY OF EXEMPTIVE RELIEF
FROM THE PROHIBITED TRANSACTION RULES AND OTHER ISSUES AND THEIR POTENTIAL
CONSEQUENCES.
RATINGS OF THE NOTES
It is a condition of issuance that each of S&P and Fitch (i) rate the
Class A-1 Notes "A-1+" and "F1+/AAA," respectively, (ii) rate the Class A-2
Notes, Class A-3 Notes and Class A-4 Notes "AAA," (iii) rate the Class B Notes
at least "A," and (iv) rate the Class C Notes at least "BBB." The rating of
each Class of Notes addresses the likelihood of the timely receipt of interest
and payment of principal on such Class of Notes on or before the Stated
Maturity Date for such Class of Notes. The rating of the Class A and Class B
Notes will be based primarily upon the Pledged Revenues, the Residual
Realizations, the Reserve Account and the subordination provided by (1) the
Class B Notes and the Class C Notes, in the case of the Class A Notes and (2)
the Class C Notes, in the case of the Class B Notes. A variety of events
subsequent to the issuance of the Notes could cause a Rating Agency to qualify,
reduce or withdraw its ratings of some or all Classes of the Notes. These
events may include unexpected negative performance of the Leases, unexpected
negative developments at Green Tree Financial Corporation or Vendor Services,
unexpected negative performance of other pools of leases serviced by Vendor
Services, or unexpected changes in law. In the event that a rating or ratings
with respect to the Notes is qualified, reduced or withdrawn, no person or
entity will be obligated to provide any additional credit enhancement with
respect to the Notes so qualified, reduced or withdrawn.
The rating of the Notes should be evaluated independently from similar
ratings on other types of securities. A rating is not a recommendation to buy,
sell or hold the Notes, inasmuch as such rating does not comment as to market
price or suitability for a particular investor. The ratings of the Notes do not
address the likelihood of payment of principal on any Class of Notes prior to
the Stated Maturity Date thereof, or the possibility of the imposition of
United States withholding tax with respect to non-United States Persons.
USE OF PROCEEDS
The proceeds from the offering and sale of the Notes, after paying the
expenses of the Issuer and the funding of the Reserve Account, will be paid by
the Issuer to the SPC and by the SPC to Vendor Services in connection with the
transfer of the Leases and Vendor Services' interests in the Equipment.
EXPERTS
The financial statements of Green Tree Lease Finance 1998-1, LLC as of
December 11, 1998 included herein have been included in reliance upon the
report of PricewaterhouseCoopers LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
through their representative, First Union Capital Markets,
66
<PAGE>
a division of Wheat First Securities, Inc. (the "Representative"), have
severally agreed to purchase from the Issuer the following respective initial
principal amount of Notes at the initial public offering price less the
underwriting discounts set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
INITIAL PRINCIPAL INITIAL PRINCIPAL INITIAL PRINCIPAL INITIAL PRINCIPAL INITIAL PRINCIPAL INITIAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS B CLASS C
UNDERWRITERS NOTES NOTES NOTES NOTES NOTES NOTES
- ------------ ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
First Union
Capital Markets.. $ 40,908,936 $17,231,739 $ 40,777,396 $19,467,918 $25,650,297 $13,811,698
Lehman Brothers
Inc.............. 40,908,934 17,231,737 40,777,394 19,467,917
NationsBanc
Montgomery
Securities LLC... 40,908,934 17,231,737 40,777,394 19,467,917
------------ ----------- ------------ ----------- ----------- -----------
Total........... $122,726,804 $51,695,213 $122,332,184 $58,403,752 $25,650,297 $13,811,698
============ =========== ============ =========== =========== ===========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Notes
offered hereby if any of such Notes are purchased. The Issuer has been advised
by the Representative that the Underwriters propose initially to offer the
Notes to the public at the respective public offering prices set forth on the
cover page of this Prospectus, and to certain dealers at such price, less a
concession not in excess of 0.09% per Class A-1 Note, 0.12% per Class A-2 Note,
0.15% per Class A-3 Note, 0.18% per Class A-4 Note, 0.24% per Class B Note and
0.30% per Class C Note. The Underwriters may allow and such dealers may reallow
to other dealers a discount not in excess of 0.045% per Class A-1 Note, 0.06%
per Class A-2 Note, 0.075% per Class A-3 Note, 0.09% per Class A-4 Note, 0.12%
per Class B Note and 0.15% per Class C Note. After the initial public offering
of the Notes, the offering prices and such concessions and discounts may be
varied by the Underwriters.
Until the distribution of the Notes is completed, rules of the SEC may
limit the ability of the Underwriters and certain selling group members to bid
for and purchase the Notes. As an exception to these rules, the Underwriters
are permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Issuer nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Notes. In addition,
neither the Issuer nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Green Tree Financial Corporation has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
The Notes are new issues of securities with no established trading
market. The Issuer has been advised by the Representative that each Underwriter
intends to make a market in the United States in the Classes of Notes for which
it is acting as underwriter but is not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Notes.
Funds in the Trust Accounts may, from time to time, be invested in
Eligible Investments acquired from the Underwriters.
67
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for
the Issuer by Dorsey & Whitney LLP. Brown & Wood LLP will act as counsel to the
Underwriters. The Indenture, the Contribution and Servicing Agreement, the
Transfer Agreement and the Notes will be governed by the laws of the State of
Minnesota.
68
<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Additional Principal.... 41
Adjusted Lease.......... 21, 56
Administrative Fees..... 56
Amortizable Bond
Premium................ 62
Amount Available........ 38
Article 2A.............. 59
Available Pledged
Revenues............... 38
Available Reserve
Amount................. 43
Bankruptcy Code......... 59
Benefit Plan............ 65
Book-Entry
Certificates........... 37
Book Value.............. 42
Business Day............ 37
Cedel................... 47
Cedel/Euroclear
Depositaries........... 45
Cedel Participants...... 47
Class A Notes........... 37
Class A Percentage...... 41
Class A Principal
Payment................ 40
Class A Target Investor
Principal Amount....... 41
Class B Floor........... 41
Class B Percentage...... 41
Class B Principal
Payment................ 40
Class B Target Investor
Principal Amount....... 41
Class C Floor........... 41
Class C Percentage...... 41
Class C Principal
Payment................ 40
Class C Target Investor
Principal Amount....... 41
Code.................... 60
Collection Account...... 44
Collection Period....... 42
Company................. F-4
Contribution & Servicing
Agreement.............. 12
Cooperative............. 47
Counsel................. 60
CPR..................... 30
Cumulative Loss Amount.. 41
Cut-Off Date............ 12
Cut-Off Date Pool....... 22
Definitive Notes........ 48
Delinquency............. 24, 27
Deposit Date............ 38
Depository.............. 37
Determination Date...... 54
Discount Rate........... 4, 22
DTC..................... 43
Eligible Account........ 44
Eligible Institution.... 44
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Eligible Investments.... 44
Equipment............... 12
ERISA................... 65
Events of Default....... 50
Exchange Act............ 45
Euroclear............... 47
Euroclear Operator...... 47
Euroclear Participants.. 47
Financial Institution... 63
Global Securities....... A-1
Green Tree.............. 13
Gross Losses............ 28
Hell-or-High-Water...... 18
Holders................. 37
Indirect Participants... 45
Industry................ 47
Initial Cut-Off Date.... 12
Initial Pool Principal
Balance................ 22, 42
Insurance, Maintenance
and Tax Accounts....... 54
IRS..................... 60
Issuer.................. 1
Lease................... 3, 12
Lease Pool.............. 12
Lease Pool Principal
Balance................ 22
Liquidated Lease........ 42
Market Discount......... 63
Master Form Lease....... 16
Monthly Principal
Amount................. 41
Net Losses.............. 28
Non-Accrual............. 27
Non-Earning............. 14
Nonrecoverable Servicer
Advance................ 42
Note Distribution Ac-
count.................. 44
Note Majority........... 50
Note Owner.............. 45
Noteholders............. 37
Notes................... 37
Obligor................. 12
OID..................... 61
Outstanding Principal
Amounts................ 40
Participants............ 45
Payment Date............ 1
Payment Shortfall....... 54
Plan Assets Regulation.. 65
Pledged Revenues........ 38
Prepaid Leases.......... 21
Prepayments............. 38
Principal Balance....... 41
PTCE.................... 65
Representative.......... 67
Repurchase Event........ 21
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Required Payoff Amount.............................................. 21
Required Payment.................................................... 43
Required Reserve Amount............................................. 43
Reserve Account..................................................... 5, 44
Residual Account.................................................... 44
Residual Event...................................................... 43
Residual Realizations............................................... 42
Rules............................................................... 46
Scheduled Payments.................................................. 38
SEC................................................................. iii
Servicer Advance.................................................... 42
Servicing Account................................................... 44
Servicing Fee....................................................... 56
SPC................................................................. 1, 11, F-4
Specific Lease Form................................................. 16
Statistical Discounted Present Value of the Leases.................. 22
Substitute Lease.................................................... 21
Systems............................................................. 46
Terms and Conditions................................................ 48
TIN................................................................. 64
Transfer Agent and Registrar........................................ 48
Transfer Agreement.................................................. 12
Trust Accounts...................................................... 44
Trustee............................................................. 1
UCC................................................................. 8
Underwriters........................................................ 66
Underwriting Agreement.............................................. 66
United States Alien Holder.......................................... 61
United States Holder................................................ 60
U.S. Person......................................................... A-4
Vendor Services..................................................... 1, 13
Warranty Leases..................................................... 21
</TABLE>
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report ............................................... F-2
Balance Sheet as of December 11, 1998....................................... F-3
Notes to Balance Sheet ..................................................... F-4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Green Tree Financial Corporation:
We have audited the accompanying balance sheet of Green Tree Lease
Finance 1998-1, LLC, a wholly owned subsidiary of Green Tree Lease Finance II,
Inc., as of December 11, 1998. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
balance sheet based on our audit.
We 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit of a balance sheet
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Green Tree Lease Finance 1998-
1, LLC as of December 11, 1998 in conformity with generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
December 11, 1998
F-2
<PAGE>
GREEN TREE LEASE FINANCE 1998-1, LLC
BALANCE SHEET
DECEMBER 11, 1998
<TABLE>
<CAPTION>
ASSET
<S> <C>
Cash................................................................ $1,000
======
MEMBER'S EQUITY
Member's Equity (authorized 10 Units; issued
and outstanding 10 Units).......................................... $1,000
======
</TABLE>
The accompanying notes are an integral part of the balance sheet.
F-3
<PAGE>
GREEN TREE LEASE FINANCE 1998-1, LLC
NOTES TO BALANCE SHEET
DECEMBER 11, 1998
(1) ORGANIZATION
Green Tree Lease Finance 1998-1, LLC (the "Company"), a wholly owned
subsidiary of Green Tree Lease Finance II, Inc., (the "SPC"), was formed as a
limited liability company in the State of Delaware on November 24, 1998. The
Company has been inactive since that date.
The Company was organized to engage exclusively in the following business
and financial activities: to acquire leases and rights to residual realizations
on the underlying equipment from the SPC; to issue and sell notes
collateralized by any or all of its assets pursuant to one or more indentures
between the Company and an indenture trustee; and to engage in other
transactions, including entering into agreements that are incidental and
necessary, suitable or convenient to the foregoing and permitted under Delaware
law.
(2) CAPITAL CONTRIBUTION
The SPC purchased 10 Units of the Company for $1,000 on November 25,
1998.
(3) ACCOUNTING POLICIES
Generally all lease receivables are classified as direct financing leases
as defined in Statement of Financial Accounting Standards Boards No. 13. The
carrying value of lease receivables represents the present value of both the
future minimum lease payments and related residual value less an allowance for
expected losses. Revenue is recognized in interest income as a constant
percentage return on the asset carrying value.
F-4
<PAGE>
ANNEX 1
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Notes (the
"Global Securities") will be available only in book-entry form. Investors in
the Global Securities may hold such Global Securities through any of DTC, Cedel
or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior debt issues. Investors'
securities custody accounts will be credited with their holdings against
payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
A-1
<PAGE>
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Securities against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment date to and excluding the
settlement date. Payment will then be made by such Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
applicable clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's
account. The Global Securities credit will appear the next day (European time)
and the cash debit will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debit
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day
funds settlement. The most direct means of doing so is to pre-position funds
for settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited to
their accounts. However, interest on the Global Securities would accrue from
the value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although this result will depend on each
Cedel Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing systems, through
their respective Depositaries, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
Cedel or Euroclear will instruct their respective Depositaries, as appropriate,
to deliver the bonds to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date. The payment will
then be reflected in the account of the Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its clearing system and elect to be in debit in anticipation of
A-2
<PAGE>
receipt of the sale proceeds in its account, the back-valuation will
extinguish any overdraft charges incurred over that one-day period. If
settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement
date. Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, 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 U.S. 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 ON NON-U.S. PERSONS (FORM W-8). Beneficial owners of Notes that
are non-U.S. Persons generally can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must
be filed within 30 days of such change.
EXEMPTION FOR NON-U.S. PERSON WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the 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 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) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, 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 Notes or such owner's agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the 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
Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly
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<PAGE>
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 a citizen or resident of the United States, a
corporation or a partnership organized in or under the laws of the United
States or any political subdivision thereof or an estate, the income of
which from sources outside the United States is includible in gross income
for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States or a trust if a
court within the United States is able to exercise primary supervision of
the administration of the trust and one or more United States fiduciaries
have the authority to control all substantial decisions of the trust.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the Notes in any state where the offer is not
permitted.
We do not claim the accuracy of the information in this prospectus as of
any date other than the date of this document stated on the cover.
Dealers will deliver a prospectus when acting as underwriters of the
Notes and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the Notes will deliver a prospectus until March
19, 1999.
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