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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
SECURITIES ACT OF 1933 FILE NO. 333-40321
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SOVEREIGN CREDIT FINANCE II, INC.
(Name of small business issuer in charter)
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<S> <C> <C>
TEXAS 6153 75-2728381
(State of other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
A. STARKE TAYLOR, III
4015 BELTLINE ROAD 4015 BELTLINE ROAD 4015 BELTLINE ROAD
BUILDING B BUILDING B BUILDING B
DALLAS, TEXAS 75244 DALLAS, TEXAS 75244 DALLAS, TEXAS 75244
(972) 960-5500 (972) 960-5500 (972) 960-5500
(Address and telephone number of (Address of principal place of (Name, address and telephone number
principal executive offices) business of agent for service)
or intended principal place of
business)
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Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE
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11% Notes Due February 15, 2002..... $10,000,000 100% $10,000,000 $3,031
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SOVEREIGN CREDIT FINANCE II, INC.
CROSS REFERENCE SHEET BETWEEN ITEMS
REQUIRED BY PART I OF THE
FORM SB-2 AND THE PROSPECTUS
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ITEM CAPTION OR
NO. ITEM LOCATION IN PROSPECTUS
- --------- ---------------------------------------------------- ----------------------------------------------------
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1. Front of Registration Statement and Outside Front
Cover of Prospectus............................... Facing Page and Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus............................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors................ Summary; The Company; Risk Factors
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... Not Applicable
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Plan of Distribution
9. Legal Proceedings................................... The Company--Litigation
10. Directors, Executive Officers, Promoters and Control
Persons........................................... Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................ Security Ownership of Certain Beneficial Owners and
Management
12. Description of the Securities....................... Description of Notes
13. Interest of Named Experts and Counsel............... None--Omitted
14. Disclosure of Commission Position on Indemnification
for Securities Act
Liabilities....................................... Commission Position on Indemnification for
Securities Act Liabilities
15. Organization Within Last Five Years................. The Company; Purchase and Collection of Contracts
16. Description of Business............................. The Company; Purchase and Collection of Contracts
17. Management's Discussion and Analysis or Plan of
Operation......................................... Management's Discussion and Analysis of Financial
Condition
18. Description of Property............................. None--Omitted
19. Certain Relationships and Related Transactions...... Management
20. Market for Common Equity and Related Stockholder
Matters........................................... Not Applicable
21. Executive Compensation.............................. Management
22. Financial Statements................................ Index to Financial Statements
23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............... Not Applicable
</TABLE>
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SUBJECT TO COMPLETION DATED FEBRUARY 17, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OR AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
$10,000,000 (MAXIMUM) $500,000 (MINIMUM)
SOVEREIGN CREDIT FINANCE II, INC.
11% NOTES DUE FEBRUARY 15, 2002
Sovereign Credit Finance II, Inc., a Texas corporation (the "Company"), a
newly organized, single purpose subsidiary of Sovereign Auto Finance Holdings,
Inc., a Texas corporation ("SAFH"), is hereby offering up to $10,000,000 in
principal amount of its 11% notes due February 15, 2002 (the "Notes"). The Notes
bear interest, payable monthly, at a stated annual rate of 11%. The effective
yield of the Notes will be 10.95%.
The Company will purchase, at a discount, retail installment sales contracts
(the "Contracts") and notes secured by used automobiles and light trucks (the
"Financed Vehicles") using (a) the net proceeds from the sale of the Notes
offered hereby, (b) possible additional borrowing (as described herein), and (c)
as long as no Event of Default (as defined under "Description of the
Notes--Additional Indenture Provisions--Events of Default") exists, the net
collection proceeds from previously purchased Contracts. The Notes are subject
to redemption at any time at the option of the Company at a redemption price of
100% of the outstanding principal amount thereof, together with accrued
interest, without any premium or penalty. Sovereign Auto Finance, Inc. (the
"Administrator"), an affiliate of SAFH, will administer and manage the ongoing
operations of the Company. The Company has contracted with Sovereign Associates,
Inc. (the "Servicer"), which is owned and managed separately from the
Administrator, SAFH and the Company, to provide necessary purchasing and
collecting services. The Contracts will be originated by automobile dealers
("Dealers"). The Company anticipates that it will purchase its Contracts
primarily from Fiesta Motors, a Dealer owned and operated by Fiesta Motors, LLC,
a Texas limited liability company ("Fiesta Motors"). Fiesta Motors is also an
affiliate of SAFH. At least 84.5% of the gross proceeds of the offering will be
available for the purchase of Contracts.
The Company's only business will be the purchase and collection of the
Contracts, and the Company's most significant assets will be the Contracts and
related motor vehicle collateral. No other party will insure or guarantee
payment of the Notes. Noteholders may look only to the Company's assets as a
source of payment on the Notes. The Notes will be unsecured, and Noteholders'
rights in the Contracts will be junior to the rights of any senior lending
source (the "Additional Lender").
The offering will terminate on January 31, 1999, unless sooner terminated by
the Company for certain reasons. See "Plan of Distribution". The Notes are
offered in minimum subscription amounts of $4,000 ($2,000 for Individual
Retirement Accounts) for each investor, and will be issued without any minimum
denominations.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PUBLIC MARKET IS EXPECTED TO DEVELOP FOR THESE SECURITIES. INVESTORS
SHOULD EXPECT TO RETAIN OWNERSHIP OF THE NOTES AND BEAR THE ECONOMIC RISKS OF
THEIR INVESTMENT FOR THE ENTIRE TERM OF THE NOTES.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING RISKS
OF DEFAULT ON THE CONTRACTS. THESE ARE SPECULATIVE SECURITIES. SEE "RISK
FACTORS" AT PAGE 9 OF THIS PROSPECTUS. DEBT SECURITIES OFFERED WITH HIGH
INTEREST OR YIELD GENERALLY INVOLVE MORE RISK THAN MANY OTHER MEDIUM TERM DEBT
INSTRUMENTS WITH LOWER INTEREST OR YIELD.
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PRICE TO BROKERS COMMISSIONS PROCEEDS TO
PUBLIC AND EXPENSES(1) COMPANY(2)
<S> <C> <C> <C>
Per Note.............................................. 100% 8% 92%
Total Minimum......................................... $500,000 $40,000 $460,000
Total Maximum......................................... $10,000,000 $800,000 $9,200,000
</TABLE>
(1) Payable by the Company to participating licensed broker-dealers. See "Plan
of Distribution".
(2) Before deduction of up to 2% of the offering proceeds for the payment of
offering and organizational expenses incurred by the Company, and the
administration fee (the "Administration Fee") payable by the Company to the
Administrator for its services in administering and managing the ongoing
operations of the Company equal to 5.5% of the gross proceeds from the sale
of the Notes (5.0% of the gross proceeds in excess of $9,000,000). See "The
Company-- General".
--------------------------
The Notes are being sold on a "best efforts" basis on behalf of the Company
by one or more licensed broker-dealers that are members of the National
Association of Securities Dealers, Inc. that may hereafter be engaged by the
Company. As of the date of this Prospectus, the Company has not identified any
broker/dealers who have agreed to participate in this offering of the Notes.
Investor funds will be held in an escrow account at Overton Bank and Trust, N.A.
until a minimum of $500,000 in principal amount of the Notes are sold. In the
event the minimum amount of Notes is not subscribed on or before April 30, 1998,
the offering will be terminated and the escrowed funds, plus any interest earned
thereon, will be promptly returned to the investors by the escrow agent. Upon
the subscription by investors for the minimum amount of Notes, the escrowed
funds (less interest thereon which will be paid to investors) will be released
to the Company. Affiliates of the Company will not purchase Notes in the
offering. Interest will not accrue on the Notes until the escrowed funds are
released to the Company. Any subsequent sales proceeds from Notes will be
immediately available for use by the Company. All subscriptions are subject to
the right of the Company to reject any subscription in whole or in part.
--------------------------
This Prospectus is dated , 1998.
<PAGE>
The Company has filed a Form SB-2 Registration Statement under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
(the "Commission") with respect to the Notes offered pursuant to this
Prospectus. This Prospectus, which forms a part of the Registration Statement,
does not contain all of the information included in the Registration Statement
and the exhibits thereto. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto, which
are available for inspection without charge at the office of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission at Seven World Trade Center, 12th Floor, New York, New York
10048, and at 500 West Madison Street, Suite 1400, Chicago, IL 60661, and copies
of which may be obtained from the Commission at prescribed rates.
The Company became a reporting company as of the date of this Prospectus.
The reports and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission in Washington D.C.,
and at the above Regional Offices, and copies of such material can be obtained
from the Public Reference Section of the Commission in Washington D.C. at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of such site is
http://www.sec.gov.
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REPORTS TO NOTEHOLDERS
The Company will furnish to the Noteholders annual reports of the Company
containing audited financial statements. The Company will also furnish to the
Noteholders quarterly unaudited summary information regarding the Contracts. An
IRS Form 1099 will be mailed to each Noteholder by January 31 of each year for
interest paid during the previous year.
------------------------
MINIMUM SUITABILITY STANDARDS
Minimum suitability requirements have been established for residents of
certain states. Arizona, Arkansas, Missouri, New Mexico, Oklahoma, Texas, and
Wisconsin subscribers must represent that they have either (a) an annual gross
income of at least $45,000 and a net worth of at least $45,000 exclusive of the
subscriber's principal residence and its furnishings and personal use
automobiles; or (b) a net worth of at least $150,000, exclusive of the
subscriber's principal residence and its furnishings and personal use
automobiles. California, Iowa, Kansas, Michigan, and North Carolina subscribers
must represent that they have either (a) an annual gross income of at least
$60,000 and a net worth of at least $60,000 exclusive of the subscriber's
principal residence and its furnishings and personal use automobiles; or (b) a
net worth of at least $225,000, exclusive of the subscriber's principal
residence and its furnishings and personal use automobiles. Indiana subscribers
must represent that they have either (a) an annual gross income of at least
$40,000, and a net worth of at least $40,000, exclusive of the subscriber's
principal residence and its furnishings and personal use automobiles; or (b) a
net worth of at least $150,000, exclusive of the subscriber's principal
residence and its furnishings and personal use automobiles. South Dakota
subscribers must represent that (a) they have either (i) an annual gross income
of at least $45,000 and a net worth of at least $45,000; or (ii) a net worth of
at least $150,000; and (b) the amount of their investment does not exceed 10% of
their net worth, such net worth to be determined in each case exclusive of the
subscriber's principal residence and its furnishings and personal use
automobiles. In the case of sales to a subscriber which is a fiduciary account,
the foregoing standards must be met by the beneficiary, the fiduciary account,
or by the donor or grantor who directly or indirectly supplies the funds to
purchase the securities if the donor or grantor is the fiduciary.
------------------------
The mailing address of the Company's principal executive offices is 4015
Beltline Road, Building B, Dallas, Texas 75244, and its telephone number is
(972) 960-5500.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. See "Definitions at
the end of this prospectus for the meanings of certain terms used herein.
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Company............... Sovereign Credit Finance II, Inc. (the "Company") has been formed
for the purpose of purchasing, collecting and servicing retail
installment sales contracts and notes secured by motor vehicles (the
"Contracts"). Except as set forth under "Capitalization", it does
not have, and does not expect to have in the future, any significant
assets other than the Contracts and proceeds thereof.
The Company's principal executive offices are located at 4015
Beltline Road, Building B, Dallas, Texas 75244 and its telephone
number is (972) 960-5500. The Company is a newly organized, single
purpose subsidiary of Sovereign Auto Finance Holdings, Inc.
("SAFH"). Sovereign Auto Finance, Inc. (the "Administrator"), which
serves as Administrator of the Company, is an affiliate of SAFH by
virtue of common ownership. Sovereign Associates, Inc. (the
"Servicer"), which provides purchasing and collecting services on
behalf of the Company, is owned and managed separately from the
Administrator, SAFH and the Company. See "The Company".
Notes................. 11% Notes due February 15, 2002 (the "Notes") to be issued subject
to the terms of a trust indenture agreement (the "Indenture")
between the Company and the Trustee.
Offering Amount....... Up to $10,000,000 in principal amount of the Notes. Investor funds
will be held in escrow until subscriptions for a minimum amount of
$500,000 in principal amount of the Notes have been received.
Interest Payments to
Noteholders......... Each Note will bear interest at 11% per annum on its outstanding
principal, payable monthly on the 15th day of each month during the
term of the Note (for interest accruing through the last day of the
prior month) beginning with the second full calendar month following
the calendar month in which the Note is issued (the "Payment
Dates"). For example, if a Note is issued to an investor in March,
1998, such investor will receive the first interest payment on May
15, 1998, which will be for interest accruing through April 30,
1998.
Interest will not accrue on the Notes, nor will the Notes be issued,
until release of escrowed subscription funds to the Company, which
will not occur until the minimum of $500,000 of the Notes is sold.
Investors in this offering will receive an IRS Form 1099 following
the end of each calendar year which will state the amount of
interest on which to calculate income taxes.
The record date for each payment of interest on the Notes is the
close of business on the first day of the month of the Payment Date
for that payment. At all times while the Notes remain outstanding,
the monthly interest payments on the Notes must be fully satisfied
before the collection proceeds from the Contracts may be used to
purchase additional Contracts.
Effective Yield....... The effective interest rates of the Notes will be 10.95%. This is
lower than the stated interest rates of the Notes because each
payment of interest will be paid 15 days after the end of the month
during which it accrued, and because
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3
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interest is computed on the basis of a 360-day year, comprised of
twelve 30-day periods.
Principal Payments.... The Notes will mature on February 15, 2002, at which time all
outstanding and accrued principal and interest will be finally due
and payable.
Maturity.............. February 15, 2002
Additional
Borrowing........... In addition to the Notes, the Company intends to pursue an
additional lending source (the "Additional Lender") to borrow funds
(the "Additional Borrowing") with which to purchase additional
Contracts. The Additional Lender may be a bank or an institutional
lender such as an insurance company. The Company anticipates that
any borrowings from the Additional Lender will be secured by first
priority security interests in all the Contracts owned by the
Company. The Additional Borrowings will be utilized to purchase
additional Contracts. As of the date of this Prospectus, the Company
has not obtained a commitment for Additional Borrowing from an
Additional Lender, and no assurance can be made that any Additional
Borrowing will be obtained. The Notes are unsecured, and will be
subject to any first priority security interests in the Company's
Contracts that may be granted to any Additional Lender. Such first
priority of the Additional Lender in the Contracts will result in
the Noteholders being placed in a junior position with respect to
the Contracts. Subject to the first priority of the Additional
Lender, the Noteholders may look to any Contracts purchased from the
proceeds of the Additional Borrowing, in addition to other Contracts
purchased by the Company, as sources of payment on the Notes.
The Contracts......... The Contracts will consist of retail installment sales contracts and
promissory notes. The Contracts will be secured by liens on used
automobiles and light trucks (the "Financed Vehicles") and will be
purchased by the Company, at a discount, using (i) the net proceeds
from the sale of Notes, and (ii) possible Additional Borrowing from
the Additional Lender and (iii) so long as no Event of Default
exists, any remaining net collection proceeds from previously
purchased Contracts. The Contracts will be purchased and serviced,
on behalf of the Company, under the terms of a Master Contract
Purchasing Agreement and a Servicing Agreement (collectively, the
"Servicing Agreement") between the Company and the Servicer. The
Contracts will be originated by automobile dealers ("Dealers"). The
Company anticipates that it will purchase its Contracts primarily
from Fiesta Motors, a Dealer owned and operated by Fiesta Motors,
LLC, a Texas limited liability company ("Fiesta Motors"). Fiesta
Motors is an affiliate of SAFH by virtue of common ownership. The
Company may also purchase Contracts which are lease agreements for
Financed Vehicles.
The Contract
Proceeds............ All proceeds from the Contracts will be paid directly by the
obligors on the Contracts ("Obligors"), or deposited by the
Servicer, to a lockbox account maintained by the Servicer in the
Company's name (the "Collections Account"). On at least a weekly
basis, the Company is required to transfer all amounts in the
Collections Account attributable to the Contracts to a commercial
bank account maintained by the Company (the "Operating Account"). So
long as no Event of Default exists and subject to the receipt by the
Trustee of any required certificates, and subject further to any
restrictions imposed by any Additional Lender, the Company will have
the right to cause
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4
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the funds contained in the Operating Account to be withdrawn or
applied for the following purposes in the following priority: first,
to the payment of any interest and principal due to any Additional
Lender; second, to the payment of any interest due on the
outstanding Notes on each Payment Date; third, to any amounts due
the Trustee for its fees and expenses; fourth, except during an
Event of Default, to the payment of any other allowed expenses
("Allowed Expenses"), as certified by the Company; fifth, to the
deposit into the trust account established in the name of the
Trustee (the "Trust Account") for payment of principal owing on the
Notes on the maturity date; and, sixth, except during an Event of
Default, to the purchase of additional eligible Contracts, as
certified by the Company and the Servicer. Otherwise, the Company is
prohibited from withdrawing any funds from the Operating Account.
The Trustee will be provided regular reports by which the use of
such funds may be monitored and will have the right to make any
required transfers of funds. Allowed Expenses include servicing,
trustee, bank, legal and accounting fees, taxes, repossession,
repair and liquidation expenses, insurance premiums and vehicle
warranty service contract charges. See "Description of the
Notes--The Contract Proceeds and Operating Account".
The Trust Account..... On or before each Payment Date, the Company will transfer funds from
the Operating Account to the Trust Account in an amount sufficient
to pay all interest on the Notes due on such date. On or before the
maturity date of the Notes, the Company will transfer funds from the
Operating Account to the Trust Account in an amount sufficient to
pay the principal of the Notes due on such date. There is no
schedule of minimum payments required to be made into the Trust
Account. All transfers to the Trust Account will be subject to the
priority rights of the Additional Lender, if any.
Purchase of
Contracts........... The Company will purchase Contracts using (i) the net proceeds from
the sale of Notes, (ii) possible Additional Borrowings from the
Additional Lender, and (iii) so long as no Event of Default exists,
any remaining net collection proceeds from previously purchased
Contracts, after deduction for payments of interest and Allowed
Expenses. On a monthly basis, the Company and the Servicer will
certify to the Trustee, among other things, that the Contracts
satisfy certain purchasing criteria established by the Indenture and
the Servicing Agreement. See "Purchase and Collection of
Contracts--Contract Purchase Criteria". The Company's cost for each
Contract will equal the purchase price payable to the Dealer for the
Contract. The Company must also pay a fee per purchased Contract
equal to the lesser of $500, or 5% of the total amount of
installments due under the Contract as of the date of purchase (the
"Purchase Administration Fee") to the Servicer for its purchase
administration services.
Although direct purchases from Dealers are expected to be the norm,
the Company may also purchase Contracts that the Servicer or one or
more Securitization Subsidiaries has previously purchased. In order
to determine the cost to the Company for each such Contract, the
Servicer will first determine the original purchaser's initial
internal rate of return on its investment in the Contract as of its
purchase from the Dealer, assuming that the Contract was paid in
full in accordance with its scheduled installments. The cost to the
Company will then be (i) an amount determined so that it will
experience the same internal rate of return on its investment in the
Contract, assuming that
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5
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the Contract is paid in full in accordance with its scheduled
installments, plus (ii) the Purchase Administration Fee paid by the
original purchaser with respect to such Contract. Contracts
purchased from affiliates of the Servicer or the Administrator may
not be in default at the time of purchase.
Through application of the purchasing criteria, the Company will
endeavor to purchase Contracts from Dealers (i) at prices involving
an initial payment to the Dealer (A) of no more than 90% of
principal plus accrued interest (pay-off balance) of such Contract
at the time of purchase, and (B) limited to the average retail value
plus tax, title, license and warranty, (ii) having maturities that
are less than the remaining useful lives of the Financed Vehicles,
and (iii) under which down payments (in cash or trade-in vehicle) of
at least approximately 10% of the Dealer's cost (excluding sale
preparation expenses) have been paid by the Obligors. In addition,
the Servicer has established certain criteria with respect to
Dealers from which Contracts will generally be purchased. Fiesta
Motors meets all of these criteria. The Servicer does not
specifically limit the number of Contracts originated by any one
Dealer, including Fiesta Motors, that may be included in the
Contracts inventory at any one time. The Company may purchase
Contracts from Dealers subject to the requirement that the selling
Dealer repurchase any Contract that becomes overdue for more than 60
days, although the terms of any such requirement for any particular
Dealer or group of Contracts purchased will be determined by the
Servicer and such Dealer. See "Purchase and Collection of
Contracts".
Redemption of Notes... The Company may elect on any Payment Date to redeem the Notes in
whole or in part, thus reducing the term of the Notes. The
redemption price for the Notes is 100% of the outstanding principal
amount of the Notes, together with accrued interest through the date
of redemption, without any premium or penalty. In the event that
prior to 180 days following the termination date of the offering the
Company has been unable to invest the net proceeds from the sale of
the Notes in suitable Contracts, the uninvested net proceeds at such
date will be utilized for a mandatory partial redemption of the
Notes within 45 days following such date. See "Description of the
Notes--Redemption".
Servicer.............. Sovereign Associates, Inc. (the "Servicer"), a Texas corporation,
whose principal offices are located at 4015 Beltline Road, Building
B, Dallas, Texas 75244. The Servicer is owned and managed separately
from the Administrator, SAFH and the Company. The Servicer is
obligated pursuant to the Servicing Agreement, subject to the
limitations set forth therein, to provide services for the
purchasing and collecting of the Contracts on behalf of the Company,
and to repurchase certain of the Contracts under certain
circumstances. For its services with regards to the collection of
the Contracts, the Servicer will be entitled to a monthly servicing
fee of $20 for each Contract that is not assigned for repossession
(the "Contract Servicing Fee") and a fee of $125 for each Financed
Vehicle assigned for repossession. See "Purchase and Collection of
Contracts".
The Servicer provides purchasing and collecting services on behalf
of a number of other entities administered by the Administrator (the
"Securitization Subsidiaries") which have issued notes to investors
and used the net proceeds thereof to purchase consumer contracts and
notes created by the retail sale and financing of used automobiles
and light trucks. The average term remaining, and the average
principal amount, for Contracts in the
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6
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Servicer's servicing portfolio at December 31, 1997 is approximately
21 months and approximately $5,096, respectively. Such Contracts
were originated primarily from Dealers unaffiliated with the
Administrator, the Servicer, or SAFH. For Contracts originated by
Fiesta Motors, the average term remaining, and the average principal
amount, in the Servicer's servicing portfolio at December 31, 1997
is approximately 38 months and approximately $12,229, respectively.
Contracts purchased on behalf of the Company may vary from these
averages. The Servicer expects that (a) its repossession rate, over
the life of the portfolio of all Contracts purchased on behalf of
the Company through its services, will be in the range of 25% to 35%
of such contracts, and (b) the average purchase price payable to
Dealers will be no more than 66% of the original total future
installments payable under the Contracts. See "Information Regarding
the Securitization Subsidiaries--Delinquency, Repossession and
Collections."
Trustee............... Sterling Trust Company, Waco, Texas.
Administrator......... Sovereign Auto Finance, Inc. (the "Administrator"), a Texas
corporation and an affiliate of SAFH, will administer and manage the
ongoing operations of the Company. The Administrator will pay all
general and administrative overhead expenses incurred by the
Company, other than Allowed Expenses. The Administrator will also
pay offering and organization expenses of the Company (other than
commissions to broker-dealers) to the extent such expenses exceed 2%
of the gross proceeds from the sale of the Notes. For such services,
the Company will pay the Administrator the Administration Fee equal
to 5.5% of the gross proceeds from the sale of the Notes (5.0% of
the gross proceeds in excess of $9,000,000). See "Use of Proceeds".
In addition, the Administrator will administer Noteholder payments,
communications and relations. For such services, the Company will
pay the Administrator a monthly fee equal to 1/12 of 0.5% of the
outstanding principal amount of the Notes (the "Investor
Administration Fee"), payable on or before the 15th day of each
month. See "Management--Certain Relationships and Related
Transactions".
Tax Status............ The Notes will be taxable obligations under the Internal Revenue
Code of 1986 as amended, and interest paid or accrued will be
taxable to non-exempt holders of the Notes. Frederick C. Summers,
III, a Professional Corporation, has delivered its opinion to the
Company as to the tax status of the Notes. See "Certain Federal
Income Tax Considerations".
Use of Proceeds....... The Company will use at least 84.5% of the proceeds from the sale of
the Notes for the purchase of Contracts and no more than 15.5% of
such proceeds for commissions, fees and expenses as stated in this
Prospectus. See "Use of Proceeds".
Denominations......... The Notes will be issued in fully registered form, without any
minimum denominations, but subject to a minimum purchase by each
investor of at least $4,000 (or $2,000 for Individual Retirement
Accounts).
No Rating............. The Company has not sought, and is not required by the Indenture or
any other document, to obtain a rating of the Notes by a rating
agency.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Risk Factors.......... An investment in the Notes entails certain risks, including the
following:
* The Company is a single purpose entity and is not expected to
have any significant assets other than the Contracts, except as set
forth under "Capitalization".
* The Notes are unsecured, and will be subject to any and all
security interests granted to Additional Lender with respect to the
Contracts and the proceeds thereof.
* Obligors under the Contracts are anticipated to be somewhat less
credit-worthy than typical purchasers of automobiles from new car
dealers.
* The Company anticipates that a portion of the Contracts will
become delinquent and require repossession and resale of the related
vehicle.
* No public market for the Notes presently exists and none is
expected to result from this offering.
* The Company will have numerous competitors engaged in the
business of buying new and used motor vehicle retail installment
contracts and notes at a discount, including companies with
greater financial resources than either the Company or the
Servicer.
* There may be conflicts of interest among the Company, the
Servicer, the Administrator and other note purchasing entities which
have contracted with the Servicer for Contract purchasing and
servicing services with respect to allocation of management time,
services, overhead expenses and functions.
For a more complete discussion of the risks involved, see "Risk
Factors".
Plan of
Distribution........ The Notes will be sold on a "best efforts" basis by licensed
broker-dealers who are members of the National Association of
Securities Dealers, Inc. As of the date of this Prospectus, the
Company has not identified any broker/dealers who have agreed to
participate in this offering of the Notes. Investor funds will be
held in a subscription escrow account until the minimum of $500,000
in principal amount of the Notes are sold. If subscriptions for the
minimum amount of Notes are not received on or before April 30,
1998, the offering will be terminated and the escrowed funds, plus
any interest thereon, will be promptly returned to the subscribing
investors by the escrow agent. Upon subscription of the minimum
amount of Notes, the escrowed funds will be released to the Company.
See "Plan of Distribution".
Offering Termination
Date................ January 31, 1999, unless sooner terminated by the Company for
certain reasons. See "Plan of Distribution".
</TABLE>
8
<PAGE>
RISK FACTORS
An investment in the Notes involves certain risks. In considering a purchase
of these securities, prospective investors should carefully consider the risks
involved, including the following:
LIMITED ASSETS; SINGLE PURPOSE NATURE
The Company had no operating history prior to the date of this Prospectus.
The Company has been formed for the sole purpose of purchasing and collecting
retail installment sales contracts and obligations secured by used automobiles
and light trucks. The Company does not have, and is not expected to have, any
significant assets other than the Contracts, except as set forth under
"Capitalization". No other party, including either the Administrator or the
Servicer, will insure or guarantee the Company's obligations under the Notes or
will be obligated to make capital contributions to the Company at any time for
the purpose of paying any delinquencies on the Notes. If an Event of Default
under the Indenture occurs, the holders of the Notes will have no recourse
against the Administrator or the Servicer for payment of the Notes.
Consequently, Noteholders must rely upon payments made on or in respect of the
Contracts for the payment of interest on and principal of the Notes. If such
payments are insufficient to make the payments of interest or principal on the
Notes when due, the Company will have no other significant assets to apply to
payment of the deficiency, except as set forth under "Capitalization". There can
be no assurance that any or all of the Contracts will perform as anticipated, or
that there will not be greater than anticipated defaults on such Contracts.
UNSECURED NATURE OF NOTES
The Notes are unsecured obligations of the Company. Upon the occurrence of
an Event of Default with respect to the Notes, the Trustee will not have the
rights of a secured creditor with respect to the Company's assets, but must
first obtain a judgment against the Company before proceeding to execute against
the Company's assets.
POSSIBLE USE OF LEVERAGE; NOTES TO BE JUNIOR TO ANY ADDITIONAL BORROWINGS
In addition to the proceeds of this offering, the Company may borrow funds
from an Additional Lender, and in conjunction therewith will pledge Contracts
and the proceeds thereof to secure all Additional Borrowings. There is no limit
on the Additional Borrowings. There can be no assurance that the Company will be
able to borrow funds for such purpose. The Notes will be subject to any and all
security interests granted to any Additional Lender with respect to the
Contracts and the proceeds thereof. A default by the Company with respect to any
Additional Borrowings would have a material adverse effect on the interests of
the Noteholders, since the Additional Lender would then have the right to
foreclose on the pledged Contracts. In the event of default by the Company on
any secured debt, the Company may lose its interest in Contracts or the proceeds
thereof which would otherwise be available for payments on the Notes. In
addition, the Additional Lender, as a secured lender, will have priority over
the Noteholders in the event of bankruptcy or dissolution of the Company. Any
such Additional Lender will be unaffiliated with the Company.
PURCHASING AND SERVICING OF CONTRACTS DEPENDENT ON THE SERVICER
The Company's ability to purchase Contracts is dependent on the Servicer for
purchasing services and the Servicer's established network of motor vehicle
dealers (the "Dealers") from which the Contracts will be purchased, including
Fiesta Motors. In addition, the Company's ability to purchase Contracts is
dependent on the availability of Contracts which satisfy the purchasing criteria
employed by the Company, of which there can be no assurance. In the event the
Servicer is unable to effectively service the Contracts owned by the Company,
the Company will need to engage the services of another servicing company, and
9
<PAGE>
there can be no assurance that a qualified servicer could be located or what
such servicer would charge the Company for its services.
Although the Servicer has been engaged almost exclusively in the purchase
and collection of used automobile notes since June, 1993, the Servicer has no
prior experience in purchasing and servicing automobile leases.
NATURE OF CONTRACTS
The Contracts represent Dealer financing for the sale of used motor
vehicles. Unlike companies financing the sale of new automobiles, which are
primarily credit-based lenders, the Dealers from which the Company will purchase
Contracts base their used automobile financing decisions primarily upon the
value of the underlying automobile collateral. The Contracts which the Company
will purchase are generally entered into by Dealers with customers who generally
cannot obtain a loan from a local financial institution or from the credit
facilities of a major automobile manufacturer. The "creditworthiness grade" of
such customers will generally be "D", meaning they cannot finance the purchase
of a new car or a late-model used car, may have spotty employment histories, and
may have had serious problems with credit in the past that may include personal
bankruptcy. Although the Servicer has established certain purchasing criteria in
order to reduce the risk of default, there is no assurance that such customers
will be creditworthy or that loans will ultimately be repaid. In addition, there
is no assurance that the collateral could be sold for sufficient net proceeds to
recoup the Company's investment in the Contracts.
The Servicer does not specifically limit the number of Contracts originated
by any one Dealer that may be included in the Contracts inventory at any one
time. The average term remaining, and the average principal amount, for
Contracts in the Servicer's servicing portfolio at December 31, 1997 is
approximately 21 months and approximately $5,096, respectively. Such Contracts
were originated primarily from Dealers unaffiliated with the Administrator, the
Servicer, or SAFH. For Contracts originated by Fiesta Motors, the average term
remaining, and the average principal amount, in the Servicer's servicing
portfolio at December 31, 1997 is approximately 38 months and approximately
$12,229, respectively.
DEFAULTS ON CONTRACTS AND REPOSSESSIONS
The Company anticipates that a portion of the Contracts will become
delinquent and require repossession and resale of the related vehicle. See
"Information Regarding the Securitization Subsidiaries--Delinquency,
Repossession and Collections." There can be no assurance that the repossession
and collection rates anticipated by the Servicer will in fact be met, since
actual repossession rates and collection rates on the Contracts are impossible
to predict precisely.
If an Obligor defaults under a Contract, and the Servicer must repossess and
liquidate the Financed Vehicle to recover installments due thereon and costs
associated with the repossession and resale, certain factors may limit the
ability of the Company to realize net proceeds sufficient to recover the cost of
the Contract. These factors include, without limitation, the value of the
repossessed Financed Vehicles, the costs of seeking and collecting a deficiency
judgment and limitations imposed by bankruptcy laws or other Federal or state
laws. In general, the Servicer is required to commence repossession of a
Financed Vehicle if the Obligor is delinquent on at least two monthly
installments and has made no payments for a period of 45 days. Nevertheless, the
Servicer may grant extensions or modifications to Obligors or accept partial
payments from Obligors in lieu of commencement or repossession activities. If a
substantial number of such Obligors make no further payments on their Contracts,
the delay in the repossession of the Financed Vehicles could result in a
decrease in repossession proceeds received by the Company and could have an
adverse impact on the Company's ability to pay the Notes.
Although the Company believes that the net collection proceeds from the
Contracts, after deduction of Allowed Expenses, together with any proceeds from
the sale or refinancing of the Contracts, will be sufficient to make the
required payments on the Company's debts, the actual collection rates on the
10
<PAGE>
Contracts are impossible to predict precisely and adverse changes in
collectibility rates caused by changes in economic conditions, including
particularly in the Company's primary markets, or other factors beyond the
Company's control could adversely affect the Company's ability to collect on the
Contracts. If the Contracts do not collectively perform as expected by the
Company, the Company's ability to make the required payments on the Notes could
be adversely affected. The Company's expectations of performance are based on
the historical performance of similar Contracts purchased and serviced by the
Servicer, which Contracts were originated primarily from Dealers unaffiliated
with the Administrator, the Servicer, or SAFH.
FINANCIAL DIFFICULTIES OF CERTAIN SECURITIZATION SUBSIDIARIES
Noteholders in certain of the Securitization Subsidiaries have been or will
be asked to reduce interest rates on such notes and to extend the due dates of
their notes in order to provide the particular Securitization Subsidiary which
issued their note more time to repay principal. Such modifications to those
notes were and will be requested due to the fact that the total assets of those
Securitization Subsidiaries are less than necessary to make all note payments as
originally scheduled. In fact, some of these Securitization Subsidiaries have
already failed to make scheduled payments of principal. In addition, some of
these Securitization Subsidiaries have been unable to make scheduled payments of
interest, and the administrator of such entities has caused a portion of such
payments to be made from its own funds, but has not committed to continue to
provide such payments on behalf of these or any other Securitization
Subsidiaries. As of the date of this Prospectus, Securitization Subsidiaries
experiencing financial difficulties include approximately 27 entities with total
principal due investors of $15.4 million. As of December 31, 1997, such entities
held Contracts with a gross receivable amount of $2.7 million. The reasons for
the financial difficulties include the following: the high interest rate paid by
these programs (15% per annum) in relation to their performance; losses incurred
on the Contracts held by these programs were significantly higher than planned;
and repurchase agreements entered into between these programs and certain
unaffiliated Dealers were not honored by the Dealers, although the programs are
pursuing legal recourse against these Dealers. See "Information Regarding the
Securitization Subsidiaries".
RIGHT TO AMEND PURCHASING CRITERIA WITHOUT CONSENT OF NOTEHOLDERS
The Company and the Servicer have the right to amend, without obtaining the
consent of any Noteholder, the purchasing criteria and the purchasing and
servicing obligations of the Servicer under the Servicing Agreement to permit
the institution by the Servicer of new programs to improve the collection rates
on the Contracts that it purchases and services. Nevertheless, the actual
benefits received by the Company following the institution of any such program
may be less than anticipated and the actual costs and detriments to the Company
may be more than anticipated. Consequently, the Company's financial performance
may be adversely affected.
POSSIBLE INSUFFICIENT AMOUNT IN THE TRUST ACCOUNT
The Company and the Servicer are required to transfer to the Trust Account,
on or before each Payment Date, all amounts necessary to pay interest and
principal due on the Notes on such Payment Date. The net collection proceeds
from the Contracts may be insufficient to pay all principal outstanding on the
Notes on February 15, 2002, after payment of all interest, and some refinancing
or sale of the remaining Contracts may be necessary for full repayment of the
Notes on that date, which refinancing or sale cannot be assured. In that event,
unless the Company is able to refinance the Notes through other financing
sources, the Company will be in default under the Indenture, and there can be no
assurance that the proceeds, if any, received by the Trustee as a result of the
exercise of its default remedies will be sufficient to repay the Notes in full
or of the timing of any such payments.
11
<PAGE>
LACK OF MARKET FOR NOTES
No public market for the Notes presently exists and none is expected to
result from this offering. Noteholders have no right to require redemption of
the Notes and may not be able to liquidate their investment in the Notes in the
event of an emergency or for any other reason, and the Notes may not be readily
accepted as collateral for loans. Accordingly, the Notes should be purchased
only by persons who have no need for liquidity in their investment.
DELAYS IN CONTRACT PURCHASES
To maximize its investment yields, the Company expects to purchase Contracts
using the net proceeds from the sale of Notes as soon as practicable following
receipt of such proceeds. However, the timing of expenditure of the net proceeds
will be based partly on availability of Contract purchases, and cannot be
predicted with certainty. In addition, it is expected that the Company will
purchase Contracts on a volume basis, thereby potentially further delaying
expenditures of the net proceeds. If unforeseen delays occur in the investment
of the net proceeds from the sale of Notes in the purchase of Contracts, the
Company's overall profitability and ability to repay the Notes could be
adversely affected because the yields of its short-term investment alternatives
for such funds are expected to be less than the yields anticipated to be
received by the Company from the Contracts.
CERTAIN LEGAL MATTERS RELATING TO THE CONTRACTS
PRIORITY LIENS IN FINANCED VEHICLES. Statutory liens for repairs or unpaid
taxes may have priority over a perfected security interest in the Financed
Vehicles, and certain state and federal laws permit the confiscation of motor
vehicles used in unlawful activity which may result in the loss of a secured
party's perfected security interest in a confiscated motor vehicle. Liens for
repairs or taxes, or the confiscation of a Financed Vehicle, could arise or
occur at any time during the term of a Contract. Notice may not necessarily be
given to the Company or the Servicer in the event such a lien arises or
confiscation occurs.
BANKRUPTCIES AND DEFICIENCY JUDGMENTS. Certain statutory provisions,
including federal and state bankruptcy and insolvency laws, may limit or delay
the ability of the Servicer to repossess and resell Financed Vehicles or enforce
a deficiency judgment. In addition, the Servicer may determine in its discretion
that a deficiency judgment is not an appropriate or economically viable remedy,
or may settle at a significant discount any deficiency judgment that it does
obtain. In the event that deficiency judgments are not obtained, are not
satisfied, are satisfied at a discount or are discharged, in whole or in part,
in bankruptcy proceedings, the loss will be borne by the Company and may
adversely affect the ability of the Company to repay the Notes. See "Certain
Legal Aspects of the Contracts--Deficiency Judgments and Excess Proceeds."
CONSUMER PROTECTION LAWS. Numerous federal and state consumer protection
laws impose requirements upon the origination and collection of retail
installment contracts and notes. State laws impose finance charge ceilings and
other restrictions on consumer transactions and may require certain contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon creditors who fail to comply with
their provisions. A risk exists that this liability could affect the ability of
the Company, as an assignee of the Contracts, to enforce the Contracts. In
addition, certain of these laws make an assignee of such a contract liable to
the obligor thereon for any violation by the assignor. Accordingly, the Company,
as holder of the Contracts, may be subject to liability to an obligor under one
or more of the Contracts. See "Certain Legal Aspects of the Contracts--Consumer
Protection Laws."
POTENTIAL CONFLICTS OF INTEREST
The Company is a subsidiary of SAFH. In addition, the Administrator, which
will administer and manage the ongoing operations of the Company, is an
affiliate of SAFH by virtue of common ownership.
12
<PAGE>
The Contracts will be purchased primarily from Fiesta Motors, an automobile
dealer owned by Fiesta Motors, LLC, which is affiliated with SAFH by virtue of
common ownership. Consequently, the terms of such purchases, including without
limitation the purchase price or discount and the quality of the Contracts, will
not be determined on an arm's length basis.
The Administrator administers a number of other note purchasing entities
(the "Securitization Subsidiaries"), including entities whose business purposes
are or will be, or may include, the purchase and servicing of used motor vehicle
retail installment contracts and notes. Purchasing and servicing for such
entities will be conducted by the Servicer. Consequently, there may be conflicts
of interest among the Servicer and the Administrator with respect to allocation
of management time, services, and functions. Furthermore the management of the
Administrator and the Servicer are involved in other business enterprises
independent of the Company. The management of the Administrator and the Servicer
intend to resolve any such conflicts in a manner that is fair and equitable to
the Company, but there can be no assurance that any particular conflict will be
resolved in a manner that does not adversely affect Noteholders.
A situation could arise in which the Company and the Securitization
Subsidiaries contemporaneously have funds available to invest in Contract
packages that the Servicer deems appropriate to be purchased by more than one of
such entities. The determination of which entity will purchase or invest in a
particular Contract package and what portion, if any, of such Contract package
will be purchased for such entity will be based upon the respective periods of
time the purchasing entities have been in existence, the cost of the available
Contract package, the amount of their unexpended funds and the need to diversify
their holdings. In such event, the Servicer intends to exercise good faith and
to deal fairly with the respective entities in deciding which entity, if any, is
to purchase or invest in a particular Contract package.
In addition, the Company may purchase Contracts from or sell Contracts to
the Securitization Subsidiaries, as determined by the Servicer as the Contract
purchaser and servicer on behalf of the Company and by the Servicer in that same
role on behalf of the Securitization Subsidiaries. The primary purpose for any
such transaction will be to provide for liquidity to the selling entity for the
payment of principal and/or interest of notes issued by such entity, including
the Notes in the case of the Company. The purchase price for any such Contract
to the purchasing entity (including the Company) will be the Purchase
Administration Fee paid by the original purchaser plus an amount determined so
that the purchasing entity's internal rate of return on its investment in the
Contract from the remaining unpaid installments equals the original purchaser's
initial internal rate of return on its investment in the Contract, as of its
purchase from the Dealer, assuming in both cases that the Contract was paid in
full in accordance with its scheduled installments.
Affiliates of the Administrator provide floor plan or similar financing for
various automobile dealers, including Fiesta Motors. "Floor plan financing"
refers to assistance provided to dealers in financing their purchases of
inventories of automobiles held for sale to customers. The Company may purchase
Contracts from time to time from such dealers. In addition, Reliance Service
Corporation, which is owned by A. Starke Taylor, III, offers and sells
mechanical service agreements to purchasers of automobiles from Fiesta Motors.
Sales of repossessed Financed Vehicles through retail networks may be
conducted by placing the vehicle on the Dealer's lot for sale, or on a lot owned
by Fiesta Motors. In either case, the Company will pay all expenses associated
with the resale of the repossessed Financed Vehicles. In the case of resales
from a lot owned by Fiesta Motors, such expenses will include an allocable
portion of the costs of operating the lot based upon the number of cars sold,
which will include expenses for salaries for person who are also principals of
the Administrator, and repair costs to place the cars in saleable condition
charged at 20% mark-up for parts and $30 per hour for labor. Such expenses will
generally be comparable in amount to that which would be charged to the Company
for resales through unaffiliated lots owned by franchised dealerships providing
comparable services.
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LACK OF DAMAGE INSURANCE
The owners of the Financed Vehicles may fail to maintain physical damage
insurance. As a consequence, in the event any theft or physical damage to a
Financed Vehicle occurs and no such insurance exists, the Company may suffer a
loss unless the owner is otherwise able to pay for repairs or replacement or its
obligations under the related Contract. If the Company incurs significant losses
from uninsured Financed Vehicles, its ability to repay the Notes may be
adversely affected.
REDEMPTION OF NOTES; YIELD CONSIDERATIONS
The Company may elect on any Payment Date to redeem the Notes in whole or in
part, thus reducing the term of the Notes. See "Description of the
Notes--Redemption". Since prevailing interest rates are subject to fluctuation,
there can be no assurance that investors in the Notes will be able to reinvest
payments thereon at yields equaling or exceeding the yields on the Notes. It is
possible that yields on any such reinvestments will be lower, and may be
significantly lower, than the yields on the Notes.
COMPETITION
The Company will have numerous competitors engaged in the business of buying
new and used motor vehicle retail installment contracts and notes at a discount,
including affiliates of the Company. In addition, the Company competes to some
extent with providers of alternative financing services such as floor plan lines
of credit from financial institutions, lease financing and dealer
self-financing. National and regional rental car companies, auction houses,
dealer groups or other firms with greater financial resources than the Company
could elect to compete with the Company in its market. These competitive factors
could have a material adverse effect upon the operations of the Company.
SALE OF SMALL AMOUNT OF NOTES
The offering may be consummated by the Company with the sale of as little as
$500,000 in principal amount of the Notes. In the event The Company sells only a
small portion of Notes, fewer individual Contracts will be purchased by the
Company, and the performance of such smaller pool of Contracts will have a
greater effect on the ability of the Company to pay the Notes than if a large
portion of the offered Notes are sold. In addition, although most of the Allowed
Expenses of the Company will generally vary with the amount of Contracts or
Notes, certain fixed fees and expenses payable to the Trustee and for on-going
banking, accounting and legal services may not vary in proportion with the
amount of Contracts and may be relatively higher if only a small portion of the
Notes is sold than if a larger portion of the Notes is sold. Moreover, in the
event the fixed Allowed Expenses are higher than expected, the Company's ability
to repay a small amount of Notes may be adversely affected. See "Description of
the Notes--The Contract Proceeds and Operating Account".
LACK OF PARTICIPATING BROKER/DEALERS
The Company has not identified any broker/dealers who have agreed to
participate in this offering of the Notes. The failure of the Company to obtain
the agreements of a significant number of broker/dealers to participate in this
offering may increase the likelihood that less than all of the Notes will be
sold. The sale of only a small amount of the Notes may adversely affect
Noteholders. See "Sale of Small Amount of Notes" above.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 9, 1997, and as adjusted to reflect the sale of the Notes offered
hereby.
<TABLE>
<CAPTION>
AS OF OCTOBER 9, 1997
------------------------------------
AS ADJUSTED
-------------------------
ACTUAL MINIMUM MAXIMUM
--------- ---------- -------------
<S> <C> <C> <C>
LIABILITIES
Notes Due February 15, 2002................................................ -- $ 500,000 $ 10,000,000
SHAREHOLDER'S EQUITY
Common stock, $.01 par value, authorized 50,000 shares, 1,000 shares issued
and outstanding.......................................................... $ 10 $ 10 $ 10
Additional paid-in capital................................................. $ 990 $ 990 $ 990
--------- ---------- -------------
TOTAL SHAREHOLDER'S EQUITY................................................... $ 1,000 $ 1,000 $ 1,000
--------- ---------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................................... $ 1,000 $ 500,000 $ 10,000,000
--------- ---------- -------------
--------- ---------- -------------
</TABLE>
The capitalization of the Company reflects its asset based security
structure. The Company's only significant assets will be the Contracts, except
as set forth below. The costs of the Company's ongoing operations during the
term of the Notes, other than Allowed Expenses, will be borne by the
Administrator.
Sovereign Auto Finance, Inc., the Administrator of the Company, has issued
its unsecured promissory note to the Company, payable on demand, in the
principal amount of $250,000. The note bears interest at the rate of 10% per
annum, payable at maturity. Such note constitutes an asset of the Company, and
is enforceable by the Company in accordance with its terms. As of February 12,
1998, the Administrator had $350,000 in cash, no liabilities, and stockholders'
equity of $350,000.
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USE OF PROCEEDS
The following table sets forth the estimated application by the Company of
the anticipated proceeds of the sale of the Notes:
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
----------------------- --------------------------
Use of Proceeds AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------------------------------------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Sales Commissions to Broker-Dealers (1).................... $ 40,000 8.00% $ 800,000 8.00%
Offering and Organization Expenses (2)..................... $ 10,000 2.00% $ 200,000 2.00%
Administration and Management Fee (3)...................... $ 27,500 5.50% $ 545,000 5.45%
Purchase of Contracts (including the Purchase
Administration Fee)....................................... $ 422,500 84.50% $ 8,455,000 84.50%
---------- ----------- ------------- -----------
Total...................................................... $ 500,000 100.00% $ 10,000,000 100.00%
---------- ----------- ------------- -----------
---------- ----------- ------------- -----------
</TABLE>
- ------------------------
(1) The Company will pay to each participating broker-dealer sales commissions
of 8% of the principal amount of the Notes sold by such broker-dealer.
(2) The Company will use up to 2% of the gross proceeds from the sale of the
Notes to pay offering and organization expenses, including filing and
registration fees, legal fees of the Company's counsel, accounting fees,
trustee's fees, escrow agent's fees, "blue sky" expenses and printing
expenses. The Administrator has agreed to pay such expenses to the extent
they exceed 2% of the gross proceeds from the sale of the Notes.
(3) The Company will pay to the Administrator a fee equal to 5.5% of the gross
proceeds from the sale of the Notes (5.0% of the gross proceeds in excess of
$9,000,000) for administering and managing the ongoing operations of the
Company.
Other than the foregoing expenses of the Company and the Purchase
Administration Fee payable to the Servicer, no other fee, remuneration or
reimbursement of expenses will be paid by the Company to the Administrator or
the Servicer from the proceeds of this offering.
Each of the Contracts will be a retail installment sales contract or note
originated by a used motor vehicle dealer ("Dealer") and purchased by the
Company through the Servicer and will be secured by a used automobile or
light-duty truck (a "Financed Vehicle"). The Contracts will be purchased by the
Company using (i) the net proceeds from the sale of Notes, (ii) possible
Additional Borrowing from the Additional Lender, and (iii) so long as no Event
of Default exists, any remaining net collection proceeds from any previously
purchased Contracts. Although direct purchases from Dealers are expected to be
the norm, the Company may also purchase Contracts that the Servicer or a
Securitization Subsidiary has previously purchased. See "Risk Factors--Potential
Conflicts of Interest".
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to an Indenture dated as of , 1998
(the "Indenture") between the Company and Sterling Trust Company, as trustee
(the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the Indenture do not purport to be complete
and are subject to, and qualified in their entirety by reference to, the
provisions of the Indenture. However, all material terms of the Notes and the
Indenture are described in this Prospectus.
The Notes are general unsecured obligations of the Company and the holders
of the Notes will have recourse against the assets of the Company for payment of
the Notes, subject to any and all security interests granted to the Additional
Lender, if any. Substantially all of the Company's assets will be the Contracts,
except as set forth under "Capitalization". The Company has not sought, and is
not required by the Indenture or any other document to obtain a rating of the
Notes by a rating agency. No person or entity will guarantee payment of the
Notes, and the holders of the Notes will have no contractual recourse against
the Administrator or the Servicer for payment of the Notes. The Trustee will
initially act as the Paying Agent and Registrar.
ISSUANCE OF NOTES; TRANSFERS
The Notes will be issued in an aggregate principal amount of up to
$10,000,000 in fully registered form without any minimum denominations.
(Indenture, Section 2.3) The minimum subscription amount for each investor is
$4,000 (or $2,000 for Individual Retirement Accounts). The Company may charge a
reasonable fee for any transfer or exchange of a Note, except in certain limited
circumstances, or for any change of address. (Indenture, Section 2.7)
MATURITY OF THE NOTES
The Notes will mature on February 15, 2002 (the "Maturity Date"), at which
time all outstanding and accrued principal and interest will be fully due and
payable.
PAYMENTS OF INTEREST
Each Note will accrue interest on its outstanding principal balance from the
date of issuance at the rate of 11% per annum (computed on the basis of a
360-day year, comprised of twelve 30-day periods). The Company will be required
to make monthly payments of interest, paid in arrears. Payments of interest will
be due and payable on the 15th day of each successive calendar month during the
term of the Note (for interest accruing through the last day of the prior month)
commencing with the second full calendar month following the month during which
the Note was issued (the "Payment Date") and upon the Maturity Date. Any
installment of interest which is not paid when and as due will accrue interest
at the lesser of (i) 11% per annum or (ii) the highest lawful rate of interest
from the date due to the date of payment, but only to the extent payment of such
interest is lawful and enforceable. The effective interest rate of the Notes
will be lower than their stated interest rate because each payment of interest
will be paid 15 days after the month over which it accrued.
SOURCES OF FUNDS FOR PAYMENT; ACCOUNTS
The Company expects to use the amounts collected under the Contracts to make
the required payments under the Notes. All installments and other proceeds from
the Contracts will be deposited in the Collections Account maintained by the
Servicer in the Company's name (as described under "The Contract Proceeds and
Operating Account" below). (Indenture, Sections 4.1 and 12.2) The Servicer will
cause to be issued to each Obligor on a Contract a payment book together with
instructions to mail
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<PAGE>
remittances directly to the Collections Account. The Servicer has agreed to
deposit all installments and other proceeds, including proceeds from sales of
repossessed vehicles, into the Collections Account. If the Collections Account
is a lock-box account, the Indenture requires the Servicer to transfer to the
Company's Operating Account all amounts in the Collections Account on a periodic
basis. (Indenture, Section 12.2)
Payments of interest on the Notes will be made on each Payment Date by the
Trustee or the Paying Agent of the Company out of funds in the Trust Account
controlled by the Trustee (as described under "The Trust Account" below).
(Indenture, Section 4.1) On or prior to the Business Day immediately preceding
each Payment Date occurring prior to February 15, 2002, the Company will
transfer to the Trust Account from the Company's Operating Account an amount
which, together with any funds in the Trust Account, is sufficient to pay the
accrued interest due on the outstanding Notes on such Payment Date. Such
transfer must be made before any remaining funds in the Operating Account may be
applied by the Company to any other purpose, other than principal and interest
payments on Additional Borrowing, if any. (Indenture, Section 4.1)
On or prior to the business day next preceding February 15, 2002 (the
Maturity Date of the Notes), the Company shall cause to be transferred from the
Operating Account to the Trust Account an amount which, together with any funds
then held in the Trust Account, is sufficient to pay the accrued interest due,
and principal owing, on the Notes on such Payment Date. (Indenture, Section 4.1)
RECORD DATES
All principal and interest payments will be made by check mailed by the
Trustee or Paying Agent to Noteholders registered as of the close of business on
the first day of the month of the Payment Date (the "Record Dates") at their
addresses appearing on the Note Register, except that the final payment of
principal and interest on each Note will be made only upon presentation and
surrender of such Note at the office of the Paying Agent. (Indenture, Section
5.1)
REDEMPTION
On any Payment Date, the Company may exercise its right to redeem the Notes,
in whole or in part, in accordance with the Indenture. (Indenture, Section 3.1)
Any redemption of a Note will be at 100% of the outstanding principal amount
thereof, together with interest accrued to the date of redemption, without any
premium or penalty. Notice will be given to the Noteholders by first class mail,
postage prepaid, mailed not less than 30 days prior to the redemption date. The
notice will set forth the redemption date, the redemption price and the name and
address of the Paying Agent and will state that the Notes must be delivered to
the Paying Agent and that interest on the Notes ceases to accrue on and after
the redemption date. (Indenture, Section 3.1)
In the event that prior to 180 days following the termination date of the
offering the Company has been unable to invest the total net proceeds from the
sale of the Notes in suitable Contracts, the uninvested net proceeds at such
date will be utilized for a mandatory partial redemption of the Notes within 45
days following such date. In such a case, Notes will be redeemed on a random
basis, by lot.
THE TRUST ACCOUNT
The Company has established, in the name of the Trustee, a trust account at
Sterling Trust Company (the "Trust Account") into which it will deposit interest
and principal payments on the Notes. The Trust Account will relate solely to the
Notes. Funds in the Trust Account will not be commingled with any other monies
of the Servicer or the Company. All moneys deposited from time to time in the
Trust Account will be held for the benefit of the Trustee. Withdrawals of any
funds from the Trust Account will be controlled by the Trustee. All payments of
amounts due and payable with respect to the Notes which are to be made from
amounts withdrawn from the Trust Account will be made on behalf of the Company
by the Trustee or
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<PAGE>
by a Paying Agent, and no amounts so withdrawn from the Trust Account will be
paid over to the Company. The funds in the Trust Account will be employed by the
Trustee or the Paying Agent to pay interest on the Notes on each Payment Date
and to make principal payments on the Notes on February 15, 2002 (the Maturity
Date of the Notes). Funds in the Trust Account may be invested in Eligible
Investments, as directed by the Company, and, during the continuance of an Event
of Default, as determined by the Trustee, within the restrictions established in
the Indenture. (Indenture, Sections 4.1 and 4.2)
THE CONTRACT PROCEEDS AND OPERATING ACCOUNT
The Servicer has established an account (the "Collections Account") in the
name of the Company and for the sole benefit of the Company. All payments made
on or with respect to the Contracts will be deposited in the Collections
Account. The Collections Account may be a "lock-box" account at a financial
institution where all remittance checks, drafts and other instruments for the
Contracts will be deposited for collection by the financial institution as agent
for the Company. All Obligors will be requested, through correspondence and/or
delivery of payment books, to remit payments under their Contracts directly to
the Collections Account. The Servicer has also agreed to deposit in the
Collections Account any payment proceeds received directly by the Servicer,
including any proceeds from resales of returned or repossessed Financed Vehicles
and any recoveries from insurance claims on Financed Vehicles. If the
Collections Account is a lock-box account, the Indenture requires the transfer
of all of the Company's funds from the Collections Account into a commercial
bank account maintained by the Company (the "Operating Account") in its own name
for use in holding the Company's funds and in paying the Company's expenditures.
Any funds in the Operating Account may be invested daily by the Company in
Eligible Investments, subject to the Indenture. (Indenture, Section 4.1)
Subject to the requirement to pay interest and principal to any Additional
Lender, and provided that no Event of Default exists, the Company will have the
right to cause the funds contained in the Operating Account to be withdrawn or
applied for the following purposes in the following priority; first, through a
direct transfer to the Trust Account, to the payment of any interest due on the
outstanding Notes on each Payment Date; second, to any amounts due the Trustee
for its fees and expenses; third, to the payment of any other Allowed Expenses;
fourth, to the deposit to the Trust Account for payment of any principal due on
the outstanding Notes on February 15, 2002 (the Maturity Date of the Notes);
and, fifth, to the purchase of eligible Contracts, as certified by the Company
and the Servicer. The Contract proceeds must be sufficient to satisfy fully any
application having higher priority before they may be applied to a use having a
lower priority. (Indenture, Section 4.1) The Company and the Servicer will
provide monthly reports to the Trustee certifying to the Trustee as to
purchasing and servicing activities in relation to the Contracts, the amounts of
Allowed Expenses paid from the Operating Account and a reconciliation of
deposits and withdrawals from the Operating Account. (Indenture, Section 4.1,
12.9 and 12.10)
On or before the business day immediately preceding each Payment Date, the
Company will cause to be transferred directly from the Operating Account to the
Trust Account an amount which, together with any funds in the Trust Account, is
sufficient to make all interest payments on the Notes outstanding on such
Payment Date. On or prior to the business day immediately preceding February 15,
2002 (the Maturity Date of the Notes), the Company shall cause to be transferred
from the Operating Account to the Trust Account an amount which, together with
any funds then held in the Trust Account, is sufficient to pay the accrued
interest due, and principal owing, on the Notes on such Payment Date. See
"Sources of Funds for Payment; Accounts" above.
The Company may disburse funds from the Operating Account for purposes of
payment of Allowed Expenses (including fees payable to the Servicer) except
during an Event of Default, in which event only the payment of the fees and
expenses of the Trustee will be permitted. On a monthly basis, the Company must
provide a report in which it itemizes the Allowed Expenses and certifies that
any payments from the Operating Account conform with the Indenture. (Indenture,
Section 4.1)
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<PAGE>
The "Allowed Expenses" of the Company will be limited to the expenses and
fees of the Trustee under the Indenture, fees charged by the Servicer under the
Servicing Agreement (including the Contract Servicing Fee, the Purchase
Administration Fee and all repossession fees)(the "Servicing Fees"), the
Investor Administration Fee charged by the Administrator, title transfer fees,
federal, state and local taxes (including corporate franchise taxes and any
payment to any of its affiliates as reimbursements for tax payments made by such
affiliate on the Company's behalf or benefits accruing from tax losses of such
affiliate that are used to offset the taxable income of the Company), legal and
accounting fees and printing expenses (excluding offering and organization
expenses, but including those otherwise incurred to comply with reporting and
other requirements under Federal and state securities laws and for reports,
compliance certificates and opinions required by the Indenture), premiums for
vehicle value, vendor single interest (VSI), auto loan default, gap or other
insurance for the benefit of the Company, charges for vehicle warranty service
contracts (including fees paid to Dealers), bank service charges and account
fees (including such charges and fees incurred for the subscription escrow
account established for the receipt of the proceeds from the offering and sale
of the Notes, and for the Collections Account), expenses of repossessing,
repairing and liquidating motor vehicle collateral (as to each vehicle, not to
exceed the liquidation proceeds from the vehicle), and any insurance proceeds
applied to vehicle repairs or required to be refunded to Obligors (collectively
the "Allowed Expenses"). See "Management--Certain Relationships and Related
Transactions". The Administrator will pay all other general administrative and
overhead expenses incurred by the Company. The following table summarizes the
Company's estimates of its anticipated Allowed Expenses. See "Purchase and
Collection of Contracts--Collection Payments".
SUMMARY OF ESTIMATED ALLOWED EXPENSES
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
- ------------------------------------------ ----------------------------------------------------------------------
<S> <C>
Servicing Fees (paid to the Servicer)
Contract Servicing Fee $20 per month per Contract not assigned for repossession, paid to the
Servicer
Purchase Administration Fee The lesser of $500 per Contract purchased, or 5% of the total amount
of installments due under the Contract as of the date of purchase,
paid to the Servicer
Investor Administration Fee (paid to the
Administrator, an affiliate of the
Company) 1/12th of 0.5% of the aggregate outstanding principal amount of the
Notes, paid monthly to the Administrator ($208.33 or $4,166.67 per
month if minimum or maximum amount, respectively, of Notes is sold)
Trustee Fees
Acceptance Fee (payable upon execution
of Indenture) $7,000
Annual Administration Fee
(billed quarterly) $7,500
Paying Agent/Registrar
Services $4 per year per Note
Note Register Revisions, Transfers,
Exchanges and Replacement Notes
(chargeable to Noteholders) $10 each
Out-of-Pocket Costs Estimated to be minimal
Expedited Delivery (per delivery, in
addition to out-of-pocket) $10 each
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
- ------------------------------------------ ----------------------------------------------------------------------
Bank Fees
<S> <C>
Collections Account $3,000 to $4,000 (varies with volume) per month
Operating Account $2,000 per year (varies with number of transactions)
Subscription Escrow Account $5,000
Accounting Fees
Annual Audit $20,000
Annual Tax Return $3,500
Annual Compliance Certificate $3,500
Printing & Mailing $2,500
Repossession, Repair and Liquidation
Expenses $125 per Financed Vehicle paid to the Servicer, plus expenses
estimated to average from $1000 to $1500 for each repossessed vehicle
Vehicle Warranty Repair
Service Contract Average of $750 per Contract (purchased at Obligor's option and
usually financed through Contract)
Federal Income Taxes Varies with taxable income
Texas Franchise Taxes 4.5% of taxable income allocated to Texas
</TABLE>
To the extent collected funds are not needed to fund the payments on the
Notes or the Additional Borrowing, if any, the purchase of additional Contracts,
or the payment of Allowed Expenses of the Company, such funds will remain in the
Company's Operating Account.
Prepayments by Obligors on the Contracts will be treated in the same manner
as collection proceeds on the Contracts. Consequently, such prepayments may be
used to purchase additional Contracts and will not be required to be passed
through to Noteholders as principal payments. See "Risk Factors-- Collections
and Repossessions; Performance of Contracts". The Company and, consequently,
Noteholders will benefit from any prepayments because the loss of the interest
portion of any prepaid installments should be more than offset by the
substantial discounts off of principal at which the Contracts were purchased.
The following chart illustrates the flow of Contract proceeds from the
Obligors through the Collections Account and Operating Account to the
applications thereof and the priority of the various applications of such
proceeds.
FLOW OF CONTRACT PROCEEDS AND PRIORITY OF APPLICATIONS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Contract Installments Collections Weekly Operating Monthly Proceeds
Obligors >>>> Account >>>> Account >>>> Applications(1)
</TABLE>
(1) Priority of Monthly Proceeds Applications
1. Interest and principal on the Notes are paid by Company to Trust Account
from Operating Account on or before the business day immediately
preceding each Payment Date.
2. Interest and principal on the Notes are paid by Trustee to Noteholders
from transfers to Trust Account.
3. Trustee's fees and expenses are paid by Company from Operating Account.
4.* Other Allowed Expenses are paid by Company from Operating Account.
5.* Any remaining proceeds are used to purchase additional eligible
Contracts.
- ------------------------
* Applications described in 4 and 5 above are prohibited during an Event of
Default.
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<PAGE>
ADDITIONAL INDENTURE PROVISIONS
MODIFICATION OF INDENTURE. With the consent of the holders of at least a
majority of the aggregate principal amount of the outstanding Notes, the Trustee
and the Company may amend or supplement the Indenture or the Notes, except as
provided below. Notice of any such amendment of the Indenture or the Notes will
be mailed to all holders of the Notes by the Company promptly after the
effectiveness thereof. Without the additional consent of the holder of each
Outstanding Note affected, however, no supplemental indenture will, among other
things, (a) reduce the amount of Notes whose holders must consent to an
amendment, supplement or waiver, (b) reduce the rate of or extend the time for
payment of interest on any Note, (c) reduce or extend the maturity of the
principal of any Note, or (d) make any Note payable in money other than that
stated in the Note. (Indenture, Section 9.2) For the purpose of consents of
Noteholders, the term "Outstanding" excludes Notes held by the Company or its
Affiliates. (Indenture, Section 1.1)
The Company and the Trustee may also amend or supplement the Indenture or
the Notes, without obtaining the consent of Noteholders, to cure ambiguities or
make minor corrections and, among other things, to make any change that does not
materially adversely affect the interests of the Noteholders. (Indenture,
Section 9.1)
EVENTS OF DEFAULT. An event of default ("Event of Default") with respect to
the Notes is defined in the Indenture as being: (a) a failure by the Company to
make any interest payment on the Notes within 30 days after it becomes due; (b)
a failure by the Company to make any principal payment on the Notes at maturity
or otherwise within 30 days after it becomes due; (c) the impairment of the
validity or effectiveness of the Indenture, the improper amendment or
termination of the Indenture, or the failure of the Company to comply with any
of the covenants of the Company in the Indenture, and the continuance of any
such default for a period of 30 days after notice to the Company by the Trustee
or to the Company and the Trustee by the registered holders of Notes
representing at least 25% of the aggregate principal amount of the outstanding
Notes; (d) the incorrectness in any material respect of a representation or
warranty of the Company in the Indenture (exclusive of representations and
warranties as to individual Contracts that the Servicer is obligated to, and
does, repurchase from the Company) and the failure to cure such circumstances or
condition within 30 days of notice thereof to the Company by the Trustee or the
registered holders of Notes representing at least 25% of the aggregate principal
amount of the outstanding Notes; or (e) certain events of bankruptcy of the
Company. (Indenture, Section 6.1)
RIGHTS UPON EVENT OF DEFAULT. In case an Event of Default should occur and
be continuing, the Trustee may, or at the direction of the registered holders of
Notes representing at least 25% of the principal amount of the outstanding Notes
will, declare the Notes due and payable. Upon such declaration, the Notes will
immediately become due and payable in an amount equal to their remaining
principal amount plus accrued interest at such time. Such declaration may under
certain circumstances be rescinded by the registered holders of a majority of
the aggregate principal amount of the outstanding Notes. (Indenture, Section
6.2)
If, following an Event of Default, the Notes have been declared due and
payable, the Trustee may exercise one or more of its remedies including, in its
discretion, the right to make demand and institute judicial proceedings in
equity or law for the collection of all amounts then payable on the Notes, or
under the Indenture, whether by declaration or otherwise, enforce all judgments
obtained, and collect from the Company moneys adjudged due. (Indenture, Section
6.3)
The registered holders of a majority of the aggregate principal amount of
the outstanding Notes will have the right to direct the time, method, and place
of conducting any proceedings for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. The Trustee may refuse,
however, to follow any such direction that conflicts with law or the Indenture,
that is unduly prejudicial to the rights of Noteholders not joining in such
direction or that would involve the Trustee in personal liability. (Indenture,
Section 6.5) The registered holders of a majority of the aggregate principal
amount of
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<PAGE>
the outstanding Notes may also waive any default, except a default in respect of
a covenant or provision of the Indenture which cannot be modified without the
waiver or consent of each holder of Notes affected. (Indenture, Section 6.4)
No holder of Notes will have the right to pursue any remedy with respect to
the Indenture or the Notes, unless (a) such holder gives to the Trustee written
notice of a continuing Event of Default, (b) the registered holders of a
majority of the aggregate principal amount of the outstanding Notes have made a
written request to the Trustee to pursue such remedy, and have offered the
Trustee indemnity satisfactory to the Trustee against loss, liability or
expense, (c) the Trustee does not comply with the request within 60 days, and
(d) the Trustee has received no contrary direction during such 60-day period
from the registered holders of Notes representing a majority of the principal
amount of the outstanding Notes. (Indenture, Section 6.6)
RESTRICTIONS ON BUSINESS ACTIVITIES AND ADDITIONAL INDEBTEDNESS. The
Company has made certain covenants in the Indenture that restrict its business
activities and prohibit certain transactions by the Company. The Company has
agreed, among other things, that, without the consent of the registered holders
of a majority of the aggregate principal amount of the Notes then outstanding,
it will not (i) engage in any business or activity other than or in connection
with the purchase, collection and servicing of the Contracts, the repossession
and resale of the Financed Vehicles and the raising of debt and equity capital,
and any other incidental businesses or activities or (ii) create, incur, assume
or in any manner become liable in respect of any indebtedness other than the
Notes, any Allowed Expenses, and Additional Borrowing and any other amounts
incurred in the ordinary course of the Company's business. In addition, the
Company has agreed not to dissolve or liquidate in whole or in part or to merge
or to consolidate with any corporation, partnership or other entity other than
another direct or indirect wholly-owned subsidiary of an affiliate of the
Company or the Servicer whose business is restricted in the same manner as the
Company's business under clause (i) above. (Indenture, Section 5.9)
ANNUAL ACCOUNTANTS' REPORT. The Company will be required to file annually
with the Trustee a report of a firm of independent public accountants as to
their examination of the financial statements of the Company. (Indenture,
Section 5.7)
TRUSTEE'S ANNUAL REPORT. The Trust Indenture Act of 1939 requires the
Trustee to mail annually to all holders of Notes a brief report if any of
certain events occur. These events include any change in the Trustee's
eligibility and qualifications to continue as the Trustee under the Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of certain indebtedness, if any, owing by the Company to the
Trustee in its individual capacity, and any action taken by it which materially
affects the Notes and which has not been previously reported. (Indenture,
Section 7.6)
SATISFACTION AND DISCHARGE OF THE INDENTURE. The Indenture will be
discharged, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment or redemption of all of the Notes. The duties of the
Company to the holders of Notes will cease upon such deposit. (Indenture,
Section 8.1)
DUTIES OF TRUSTEE. If an Event of Default has occurred and is continuing,
the Trustee is obligated, under the Indenture, to exercise such of its rights
and powers and to use the same degree of care and skill in the exercise of such
rights and powers as a prudent man would exercise or use under the circumstances
in his own affairs. Except during an Event of Default known to the Trustee, the
Trustee may rely, in the absence of bad faith, on certificates and opinions
furnished to it. Generally, the Trustee is not relieved from liability for its
own negligence or willful misconduct except that it is not liable (i) if it
acted in good faith in accordance with a direction from the Holders of not less
than a majority in principal amount of the Notes, or (ii) for any error in
judgment made in good faith and without negligence in ascertaining the pertinent
facts. The Trustee may refuse to perform any duty or exercise any right or power
unless it receives indemnity satisfactory to it against any loss, liability or
expense. (Indenture, Section 7.1) The Trustee may refuse to exercise any right
or power at the request or direction of the holders of Notes, unless
23
<PAGE>
such holders offer to the Trustee reasonable security or indemnity against the
costs, expenses or liabilities that might be incurred by it in compliance with
such request or direction. (Indenture, Section 7.2)
THE TRUSTEE. Sterling Trust Company, a trust company organized and existing
under the laws of the State of Texas, is the Trustee under the Indenture for the
Notes. The Company is obligated to pay the fees and expenses of the Trustee
relating to the Notes. (Indenture, Section 7.7)
THE SERVICING AGREEMENT
The Company anticipates that it will grant to the Additional Lender, if any,
a security interest in all of its rights under the Servicing Agreement. In
addition, the Company anticipates that, in the event of the occurrence and
continuation of a default under the Servicing Agreement by the Servicer, the
Additional Lender may direct the Company to, and the Company will, terminate all
of the rights and powers of the Servicer under the Servicing Agreement. Upon
such termination, all rights, powers, duties, obligations and responsibilities
of the Servicer with respect to the related Contracts (except for any obligation
of the Servicer to indemnify the Company) will vest in and be assumed by the
Company or any servicing agent that the Company may designate; provided,
however, that the Servicer will continue to be obligated to transfer funds of
the Company to the Operating Account.
POSSIBLE ADDITIONAL BORROWING
In addition to the Notes, the Company intends to pursue another lending
source (the "Additional Lender") to borrow funds (the "Additional Borrowing")
with which to purchase additional Contracts. The Additional Lender may be a bank
or an institutional lender such as an insurance company. The Company anticipates
that any borrowings from the Additional Lender will be secured by first priority
security interests in all the Contracts owned by the Company, and that both
interest on and principal of such borrowings will be repaid from collection
proceeds of such Contracts. As of the date of this Prospectus, the Company has
not obtained a commitment for Additional Borrowing from an Additional Lender,
and no assurance can be made that any Additional Borrowing will be obtained.
To secure the Additional Borrowing, the Company will grant a security
interest or lien in collateral which may consist of the Company's right, title
and interest in any or all of the following: (a) the Contracts (including
Contracts purchased with the net proceeds of this offering), together with all
payments and instruments received with respect thereto, (b) the Servicing
Agreement, (c) the Operating Account and all funds (including investments)
therein, (d) all repossessed or returned Financed Vehicles, and (e) all proceeds
of the conversion, voluntary or involuntary, of any of the foregoing into cash
or other liquid property. The security interest granted to the Additional Lender
in the Contracts will be perfected by delivery of such Contracts and related
title documents to the Additional Lender, or other financial institution
appointed by the Additional Lender to act as custodian and bailee of the
Contracts and related title documents for the benefit of the Additional Lender.
Such Additional Borrowing may also be accomplished by placing the Contracts into
a wholly-owned, limited purpose subsidiary which would be formed for the sole
purpose of serving as the borrower.
24
<PAGE>
THE COMPANY
GENERAL
Sovereign Credit Finance II, Inc. (the "Company") was incorporated in the
state of Texas on October 9, 1997. The Company is a subsidiary of Sovereign Auto
Finance Holdings, Inc., a Texas corporation. The principal offices of the
Company are located at 4015 Beltline Road, Building B, Dallas, Texas 75244. The
telephone number is (972) 960-5500.
Sovereign will administer and manage the ongoing operations of the Company.
Other than the Allowed Expenses, the Administrator will pay all general
administrative and overhead expenses incurred by the Company. The Company will
pay to the Administrator a fee equal to 5.5% of the gross proceeds from the sale
of the Notes (5.0% of the gross proceeds in excess of $9,000,000) for its
services to the Company.
BUSINESS OF THE COMPANY
The Company was established for the sole purposes of purchasing, collecting
and servicing motor vehicle retail sales installment contracts and obligations,
obtaining capital through borrowings or through sale of debt or equity
securities in order to invest in such contracts and obligations, and all related
business activities. The motor vehicle retail installment contracts and notes to
be purchased by the Company (the "Contracts") will be purchased at discounts
ranging generally from 25% to 45% of the aggregate remaining unpaid installments
thereof and will be secured by used automobiles and light trucks (the "Financed
Vehicles"). The Contracts will be originated by automobile dealers ("Dealers").
The Company anticipates that it will purchase its Contracts primarily from
Fiesta Motors, a Dealer owned and operated by Fiesta Motors, LLC, a Texas
limited liability company ("Fiesta Motors"). Fiesta Motors is an affiliate of
SAFH, of which the Company is a wholly-owned subsidiary. The Contracts may also
be purchased from a network of other Dealers organized by the Servicer and
currently located primarily in metropolitan areas in Texas and in Tennessee. The
Company will not participate in or directly finance the retail sales by the
Dealers of the Financed Vehicles from which the Contracts will arise. The
Dealers generate the Contracts and offer them for sale on a non-exclusive basis
to the Company. The Dealers forego some profit on each Contract sold to the
Company in exchange for an immediate return of their invested capital.
The funds necessary to purchase the Contracts will initially be provided
from the sale of the Notes offered hereby. Subject to the prior payment of
interest and principal due upon the Notes and the Additional Borrowing, if any,
and Allowed Expenses, the collection proceeds from the Contracts will be used to
purchase additional Contracts so long as no Event of Default exists. Upon the
payment in full of all principal and interest on the Notes, the Indenture will
terminate. While the Notes remain outstanding, the Company will be prohibited
from engaging in any business other than the purchase, collection and servicing
of the Contracts (including repossession and resale of the vehicle collateral)
and from incurring any additional indebtedness other than the Additional
Borrowing, Allowed Expenses and any other amounts incurred in the ordinary
course of its business.
The Contracts purchased by the Company will relate primarily to Financed
Vehicles in the middle range of the market for used automobiles and light-duty
trucks, where consumer retail prices range from $5,000 to $18,500. Consumer used
motor vehicle receivables are management and collection intensive and require
constant supervision, review and knowledge of repossession and resale services.
The Servicer, and its contractors, will attempt to provide this industry
expertise. In this regard, the Servicer will utilize predetermined purchasing
and collection criteria established in the Indenture and the Servicing Agreement
with respect to the Contracts.
The Company has no material properties, assets (except as set forth under
"Capitalization"), operating history or pending legal proceedings. The Company
and the Servicer intend to obtain any licenses that may be required in any state
where it purchases and collects Contracts. The Servicer has
25
<PAGE>
registered, and the Company will register, with the Texas Consumer Credit
Commissioner as a holder of motor vehicle retail installment contracts.
BUSINESS OF THE ADMINISTRATOR, THE SERVICER AND THE SECURITIZATION SUBSIDIARIES
Beginning in January 1991, Sovereign Credit Corporation ("SCC"), which prior
to February 6, 1998 was beneficially owned and managed by the beneficial owners
and management of the Administrator, organized various limited partnerships (the
"Limited Partnerships") which have engaged in the business of acquiring notes,
accounts receivable and other evidences of indebtedness from the RTC, the FDIC,
credit unions, lending institutions and other sources. Beginning in October
1993, SCC organized a number of other entities (the "Securitization
Subsidiaries") which have issued notes to investors and used the net proceeds
thereof to purchase consumer contracts and notes created by the retail sale and
financing of used automobiles and light trucks. See "Information Regarding the
Securitization Subsidiaries." SCC also served as the administrator of each of
the Limited Partnerships and Securitization Subsidiaries. As used herein, the
term "Securitization Subsidiaries" does not include the Company.
The Servicer was formed as a Texas corporation in January 1991 for the
purpose of purchasing, servicing and collecting various financial notes on
behalf of the Limited Partnerships and the Securitization Subsidiaries. As of
the date of this Prospectus, these are the only activities conducted by the
Servicer. Prior to February 6, 1998, the Servicer was also managed and
beneficially owned primarily by the management and beneficial owners of the
Administrator.
The Administrator was formed as a Texas corporation in January 1998. On
February 6, 1998, SCC transferred all the administration functions of SCC with
respect to the Limited Partnerships and Securitization Subsidiaries to the
Administrator, and the beneficial owners of SCC and the Servicer sold their
beneficial ownership interest therein to a third party. The Servicer and SCC are
both now owned and managed separately from the Administrator, the Limited
Partnerships and the Securitization Subsidiaries. The Servicer continues to
purchase, service and collect financial notes on behalf of the Limited
Partnerships and the Securitization Subsidiaries, and SCC no longer has any role
with respect to those entities.
The Administrator and the Servicer both maintain their offices at 4015 Belt
Line Road, Building B, Dallas, Texas 75244. The telephone number is (972)
960-5500.
PURCHASE AND COLLECTION OF CONTRACTS
The Contracts will be purchased and serviced on behalf of the Company by the
Servicer under the Master Contract Purchase Agreement and the Servicing
Agreement, each dated as of , 1998 (collectively, the "Servicing
Agreement"), between the Company and the Servicer. A copy of each of the
documents constituting the Servicing Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. In addition, the
Servicer has joined in the execution of the Indenture for the purpose of making
certain agreements and representations regarding the purchasing and servicing of
the Contracts with the Trustee for the benefit of Noteholders. The following
summaries do not purport to be complete and are subject to and qualified in
their entirety by reference to, the provisions of the Servicing Agreement and
the Indenture, and where particular provisions or terms used in the Servicing
Agreement or the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
References herein to the "Servicer" are to the Servicer and any successor or
permitted assignee of the Servicer performing the duties of the Servicer under
the Servicing Agreement.
GENERAL
Pursuant to the Servicing Agreement, the Company may request the Servicer to
solicit from Dealers offers to sell to the Company eligible Contracts, and the
Servicer is obligated to use reasonable efforts to solicit from Dealers offers
to sell to the Company eligible Contracts upon receiving any such request. The
26
<PAGE>
Company will be obligated to purchase all Contracts offered for sale by Dealers
through the Servicer up to the dollar amount specified in the Company's request
if the offered Contracts satisfy the purchasing criteria set forth in the
Servicing Agreement. The Company's cost for each Contract will equal the
purchase price payable to the Dealer for the Contract, including any incentives
paid to the Dealer on a per Contract basis such as a volume bonus.
The Servicing Agreement and the Indenture establish certain criteria to
govern Contract purchases. (Master Contract Purchase Agreement, Exhibit B;
Indenture, Exhibit A) The Servicing Agreement also establishes criteria to
govern Contract servicing, including the performance of certain collection and
collateral management activities. If the Servicer fails to comply with these
criteria, the Company may terminate the Servicing Agreement and may appoint
another servicer. (Servicing Agreement, Exhibit A and Section 9) The Servicing
Agreement allows the Servicer to contract with industry-qualified third parties
to perform its obligations thereunder. The performance by any third party will
not relieve the Servicer from liability for its obligations under the Servicing
Agreement. (Servicing Agreement, Section 1)
CONTRACT PURCHASE CRITERIA
The Company has designed certain criteria as to the price, purchase
discount, term, down payment, installments and interest rate for the Contracts
and the price, cost to the Dealer, average wholesale value, age, mileage and
make of the Financed Vehicles to qualify for purchase by the Company under the
Servicing Agreement and the Indenture. The Company believes that the most
significant of these criteria, in general, are as follows:
a) The purchase price for each Contract must involve an initial payment to
the Dealer (i) of no more than 90% of principal plus accrued interest (pay-off
balance) of such Contract at the time of purchase, and (ii) which does not
exceed the average retail value for the related Financed Vehicle plus tax,
title, license and warranty.
b) The Contracts generally will have original terms that are 44 months or
less, although 54 month terms will be permitted where the Financed Vehicle is a
1991 or later model, or where lower depreciation or stronger credit history
justifies a 54 month term. The Contracts will equally amortize their principal
balance over their respective terms.
c) The age of each Financed Vehicle will generally be seven years or less
for automobiles or eight years or less for trucks, although the Servicer may
purchase Contracts secured by Financed Vehicles which are older, if in its
judgement the economics justify such a purchase.
d) The mileage of each Financed Vehicle may not generally exceed 125,000
miles for automobiles or 135,000 miles for trucks, regardless of the year model.
The mileage limit will be less for later year models. In the event mileage of a
Financed Vehicle exceeds such limits, the Dealer is typically required to
guarantee payments under the applicable Contract.
e) The Obligors on the Contracts are generally required to make a down
payment in cash plus net trade-in allowance of at least approximately 10% of the
Dealers' costs (excluding sale preparation expenses) in the Financed Vehicles,
although there are no express minimum ratios of unpaid installments under the
Contracts at the time of their origination by the Dealers to the retail sale
price or the wholesale value of the Financed Vehicles.
f) The interest rate on the Contracts must not violate any applicable usury
laws.
g) The Obligors on the Contracts must have supplied certain credit
information, and credit verification procedures must have been performed by the
Servicer in a manner commensurate with standard industry practice.
Contracts may be purchased which do not meet the criteria specified in (a)
through (e) above if in the Servicer's good faith judgment, purchasing such
Contracts would be in the best interests of the Company.
27
<PAGE>
The Company may pay a higher purchase price for seasoned Contracts. The Company
will not decline to purchase Contracts offered by the Servicer that do not meet
the criteria because the relationship is not arm's length. Generally, the
"creditworthiness grade" of the Obligors on the Contracts will be "D".
With respect to the credit information to be supplied by the Obligors on the
Contracts, the Company has established certain credit criteria to be satisfied
by each Obligor. In order to satisfy these criteria, an Obligor, among other
things, must be able to provide verifiable personal references, must have a
valid driver's license, must have been a resident of the local area of
origination for a minimum of six months, and must be at least 18 years of age.
In order to verify the foregoing information in accordance with the Company's
expectations of standard industry practice, the Servicer will be required to
obtain from the Dealer a copy of the credit application executed by the Obligor
which contains the necessary information, to verify by telephone or otherwise
the Obligors' addresses, employment and personal references and to obtain a
credit report from a credit reporting agency.
The Company may purchase Contracts from Dealers subject to the requirement
that the selling Dealer repurchase any Contract that becomes overdue for more
than 60 days, although the terms of any such requirement for any particular
Dealer or group of Contracts purchased will be determined by the Servicer and
such Dealer.
The Company may also purchase Contracts which are lease agreements for
Financed Vehicles. The Servicer has not previously purchased lease agreements,
and has not established purchase guidelines therefor.
Although most state laws mandate that owners maintain liability insurance
for damages arising from their use of a motor vehicle, the owners of the
Financed Vehicles may fail to maintain physical damage insurance and the
Servicing Agreement does not require that the Obligors on the Contracts maintain
such insurance as a criterion for Contract purchase. In many cases, the Servicer
or the Company will be named as a loss payee under the Obligor's automobile
insurance policy. The Company may suffer a loss upon any theft or physical
damage of any Financed Vehicles if the Obligor does not maintain physical damage
insurance and is otherwise unable to pay for repairs or replacement or its
obligations under the related Contract. In addition, the Company may not require
verification of physical damage insurance coverage for Financed Vehicles in
connection with certain Contract packages it purchases, and may purchase some
packages knowing that some or all of the related Financed Vehicles are without
physical damage insurance coverage. See "Risk Factors--Lack of Damage
Insurance."
The Servicer represents and warrants in the Servicing Agreement and the
Indenture, among other things, that (i) each Contract met at the time of its
purchase from the originating Dealer in all material respects all purchasing
criteria set forth on Exhibit A of the Master Contract Purchase Agreement; (ii)
at the date of purchase, the Contracts are free and clear of all security
interests, liens, charges and encumbrances and no offsets, defenses, or
counterclaims against the Company or Dealers have been asserted or threatened;
(iii) at the date of purchase, each of the Contracts is or will be secured by a
first security interest in the Financed Vehicle which serves as collateral for
the Contract; and (iv) each Dealer from which the Company purchases Contracts
will be required to represent and warrant to the Company that each Contract, at
the time it was originated, complied, and at the date of purchase of the
Contract, complies in all material respects with applicable federal and state
laws, including consumer credit, truth in lending, equal credit opportunity and
disclosure laws. (Master Contract Purchase Agreement, Section 7; Indenture,
Section 12.16) If the Company, the Servicer or the Trustee discovers that any of
such representations or warranties was incorrect in any material respect with
respect to a Contract, the Servicer is required to cure the defect or purchase
the Contract from the Company. (Indenture, Section 12.17) The Servicer also
covenants in the Indenture that it will take all actions necessary or desirable
to maintain perfection and priority of the security interest granted under the
Contract in the Financed Vehicle. (Indenture, Section 12.1)
28
<PAGE>
DEALER CRITERIA
Contracts will generally be purchased from Dealers who meet the following
criteria:
- A net worth, exclusive of goodwill or other intangible values, of at least
$100,000, or a parent, affiliate or predecessor which meets the net worth
criterion;
- A minimum of one year of successful operation as an automobile dealer, as
evidenced by financial statements or prior tax returns;
- Experienced contract loss rates during the immediately preceding year
acceptable to the Servicer; and
- Verifiable banking references.
The Servicer does not specifically limit the number of Contracts originated
by any one Dealer that may be included in the Contracts inventory at any one
time.
The Company anticipates that it will purchase its Contracts primarily from
Fiesta Motors, an affiliate of SAFH. Fiesta Motors meets each of the above
criteria.
COLLECTION OF PAYMENTS
Under the Servicing Agreement, the Servicer is obligated to exercise
discretionary powers involved in the management, administration and collection
of the Contracts and to bear all costs and expenses incurred in connection
therewith, except as described below under "Servicing Fees and Expenses". The
Servicer is obligated to use the same care and apply the same policies that it
would exercise if it owned the Contracts. (Servicing Agreement, Section 1)
The Servicer is obligated to instruct all Obligors under the Contracts to
make all payments to the Collections Account. (Servicing Agreement, Section 6)
Any material extensions, modifications, or acceptances of partial payments by
Obligors, and any related necessary Contract amendments or default waivers by
the Servicer, must be approved by the chief credit officer or president of the
Servicer. (Servicing Agreement, Exhibit A) Under the Indenture and the Servicing
Agreement, the Servicer is required to pursue repossession, subject to
compliance with all state and federal laws relating thereto, of the Financed
Vehicle securing any Contract whose Obligor (i) is past due by at least three
scheduled installments in the case of bi-weekly or semi-monthly installments or
two scheduled installments in the case of monthly installments, and (ii) has
failed for 30 days, in the case of bi-weekly or semi-monthly installments, or 45
days, in the case of monthly installments, to remit any sums against the
obligations under the Contract. (Indenture, Section 12.7; Servicing Agreement,
Exhibit A) The Servicer may commence repossession sooner if it deems such
activity to be prudent and in the best interests of the Company and the
Servicer. The Servicer is also required to document the reasons for each
chargeoff of any material unpaid amount from an Obligor under any Contract.
(Servicing Agreement, Exhibit A) As indicated by the foregoing repossession
requirements, to maximize its return, the Company prefers to continue collecting
installments on the Contract despite a missed installment by the Obligor in lieu
of repossession of the vehicle. See "Risk Factors--Collections and
Repossessions; Performance of Contracts".
The Servicer is required to deliver monthly to the Company a report
certifying that all Contracts managed by the Servicer were serviced in material
accordance with the Servicing Agreement and that the Servicer is not in default
under the Servicing Agreement. The report also will contain collection
information on each Contract since the date of the last such report and a
reconciliation of the deposits into and withdrawals from the Operating Account.
(Indenture, Exhibit B) If the Servicer fails to remit collections on the
Contracts to the Collections Account when due, and continues such failure for
five business days, or to service and collect amounts due from the Obligors in
accordance with the servicing criteria established by the Servicing Agreement,
or if certain bankruptcy or insolvency proceedings occur, the Company has
29
<PAGE>
the right to terminate all rights and obligations of the Servicer under the
Servicing Agreement and to transfer servicing rights to a successor servicer.
(Servicing Agreement, Section 10)
SERVICING FEES AND EXPENSES
The Servicer is entitled under the Servicing Agreement to receive a fee (the
"Contract Servicing Fee") of $20 per month per outstanding Contract that has not
been assigned for repossession, plus all late fees. (Servicing Agreement,
Section 3) Such fee will also be paid to the Servicer with respect to Contracts
serviced or collected by third parties with which the Servicer has contracted.
The Contract Servicing Fee is intended to compensate and reimburse the Servicer
for administering the collection of the Contracts, including collecting and
posting all payments, responding to inquiries of Obligors on the Contracts,
investigating delinquencies, sending payment coupons to Obligors, reporting any
required tax information to Obligors, paying costs of collections and policing
the Financed Vehicles. The Contract Servicing Fee will also compensate the
Servicer for furnishing monthly and annual statements to the Company and the
Trustee with respect to expenditures and receipts, and generating information
necessary for the Company to prepare all required federal and state income tax
returns. The Company will reimburse the Servicer for all direct charges incurred
in connection with servicing the Contracts, perfecting the Company's security
interest in collateral securing the Contracts and protecting the interests of
the Company in the event of default on any of the Contracts, including without
limitation, amounts required to pay prior liens that must be paid, local, state
or federal taxes pertaining to the collateral, the costs of maintaining,
perfecting and obtaining liens and/or foreclosing thereon, and attorneys fees in
connection with the foregoing.
Under the Indenture, the Servicer will also be entitled to reimbursement, as
an Allowed Expense, of its expenses incurred in the repossession, repair and
sale of any Financed Vehicle to the extent of the related proceeds from its sale
or from any recovery on a related insurance policy. (Indenture, Section 12.7) In
addition, subject to prior payment of any amounts owing on the Notes or to the
Trustee, the Servicer will be paid, as an Allowed Expense, the lockbox fees,
account fees and bank service charges relating to the Collections Account.
The Servicer will receive a monthly fee (the "Purchase Administration Fee")
from the Company equal to the lesser of $500, or 5% of the total amount of
installments due under the Contract as of the date of purchase for the Company,
for each Contract purchased during the preceding calendar month period. The
Purchase Administration Fee is intended to compensate and reimburse the Servicer
for administrating the purchase of the Contracts, including receipt and approval
of dealer drafts and Contract transfer documents, monitoring compliance with
purchase criteria, creation of Contract files, communications with selling
Dealers, and other related activities.
The Servicer may charge a processing fee to the various Dealers, other than
Fiesta Motors, from which it purchases Contracts on behalf of the Company, which
fee is currently $275 per Contract purchased. The Servicer may pay a portion of
such fee, in the amount of $50 per Contract purchased, to one or more third
parties as a finder's fee in connection with the purchase of each Contract. The
Servicer eserves the right to increase the amount of the processing fee which it
charges from time to time, and to increase or decrease the amount of the
finder's fee.
In some cases, the Servicer may contract with third parties, including the
Dealers which originated the Contracts, to perform certain servicing and/or
collection services with respect to some Contracts. The Servicer may also
maintain offices for collection and servicing purposes at the premises of
Dealers from which the Company purchases Contracts.
The Servicer will make reasonable efforts to collect all payments due with
respect to the Contracts in a manner consistent with the Servicing Agreement.
Consistent with its normal procedures, the Servicer may, in its discretion,
arrange with the Obligor on a Contract to defer or modify the payment schedule.
When the Servicer determines that eventual payment in full of a Contract is
unlikely, it will follow its normal practices and procedures to realize upon the
Contract, including the repossession of the Financed Vehicle
30
<PAGE>
securing the Contract, or the taking of any other action permitted by applicable
law. In this regard, the Company will pay the Servicer a fee equal to $125 for
each repossession of a Financed Vehicle.
DEALERS
The Dealers will originate the motor vehicle retail installment contracts
and notes to be purchased by the Company. The economic incentive motivating a
Dealer to sell Contracts to the Company is maximization of return on the
Dealer's invested capital. Although the Dealer may make less profit per
transaction, because the cost of the automobile to the Dealer is recouped
immediately upon sale of the contract or note, and the Dealer does not have to
wait for future installment payments on the contract or note, the Dealer can
purchase and sell more automobiles and increase net profit through increased
inventory turnover.
The Company anticipates that it will purchase its Contracts primarily from
Fiesta Motors, a Dealer owned and operated by Fiesta Motors, LLC, a Texas
limited liability company. Fiesta Motors is an affiliate of SAFH.
The Company believes that Fiesta Motors, together with other Dealers with
which the Servicer presently conducts business, should generate sufficient
eligible Contracts for purchase by the Company. The Company believes that the
Servicer will be able to adequately handle the servicing of all Contracts
purchased by the Company with the net proceeds from the sale of the Notes.
THE SERVICER
Sovereign Associates, Inc. is the Servicer under the Servicing Agreement.
The Servicer is owned and managed separately from the Company, the
Administrator, and SAFH. See "Management--Certain Relationships and Related
Transactions". The Servicer was incorporated in January, 1991 and commenced
purchasing and servicing of motor vehicle retail installment contracts in June,
1993.
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<PAGE>
INFORMATION REGARDING
THE SECURITIZATION SUBSIDIARIES
DELINQUENCY, REPOSSESSION AND COLLECTIONS
The following table sets forth delinquency, repossession, collections, and
other information regarding the Securitization Subsidiaries from June 1, 1993
(the date the Servicer began servicing motor vehicle retail installment sales
contracts) through December 31, 1997. There can be no assurance that the future
performance of the Contracts purchased by the Company, including future
delinquency and loss experience, will be similar to that set forth in the
following tables. The information shown in the first table is for Contracts
purchased primarily from Dealers unaffiliated with the Administrator, the
Servicer, or SAFH. The Servicer no longer purchases Contracts from many of these
Dealers. The information shown in the second table is derived from the first
table, and is for Contracts purchased from Fiesta Motors. The Company intends to
purchase its Contracts primarily from Fiesta Motors.
DELINQUENCIES OF ALL MOTOR VEHICLES
RETAIL INSTALLMENT SALES CONTRACTS
AS OF DECEMBER 31, 1997 (1)
<TABLE>
<CAPTION>
NUMBER OF UNPAID
ACTIVE PERCENT INSTALLMENTS PERCENT
TOTAL DAYS PAST DUE (2) CONTRACTS OF TOTAL (3) OF TOTAL
- ---------------------------------------------- ----------- --------- --------------- ---------
<S> <C> <C> <C> <C>
0 - 30........................................ 2,987 55.21% $ 20,362,116 58.59%
31 - 60....................................... 858 15.86% $ 4,848,067 13.95%
61 - 90....................................... 405 7.49% $ 2,977,408 8.57%
over 91....................................... 1,160 21.44% $ 6,567,430 18.90%
----- --------- --------------- ---------
All Active Contracts.......................... 5,410 100.00% $ 34,755,021 100.00%
----- --------- --------------- ---------
----- --------- --------------- ---------
</TABLE>
(1) The information shown is for Contracts purchased primarily from Dealers
unaffiliated with the Administrator, the Servicer, or SAFH.
(2) It is the Servicer's general policy to initiate repossession efforts after
obligors (i) are past due by at least three scheduled installments in the
case of bi-weekly or semi-monthly installments or two scheduled installments
in the case of monthly installments, and (ii) have failed for 30 days, in
the case of bi-weekly or semi-monthly installments, or 60 days, in the case
of monthly installments, to remit any sums against the obligations under the
contract. Accordingly, some contracts are shown as active even though
repossession efforts have commenced.
(3) Includes principal and remaining finance charges.
DELINQUENCIES OF MOTOR VEHICLES
RETAIL INSTALLMENT SALES CONTRACTS PURCHASED FROM FIESTA MOTORS
AS OF DECEMBER 31, 1997 (1)
<TABLE>
<CAPTION>
UNPAID
INSTALLMENTS
TOTAL DAYS PAST DUE (2) CONTRACTS TOTAL (3) TOTAL
- ----------------------------------------- ------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
0 - 30................................... 453 75.63% $ 7,918,130 76.92%
31 - 60.................................. 64 10.68% $ 1,074,854 10.44%
61 - 90.................................. 23 3.84% $ 365,739 3.55%
over 91.................................. 59 9.85% $ 935,851 9.09%
--- ---------- --------------- ----------
All Active Contracts..................... 599 100.00% $ 10,294,573 100.00%
--- ---------- --------------- ----------
--- ---------- --------------- ----------
</TABLE>
(1) The information shown is derived from the above table, and is for Contracts
purchased from Fiesta Motors.
32
<PAGE>
ADDITIONAL SELECTED DATA FOR ALL MOTOR VEHICLE
RETAIL INSTALLMENT SALES CONTRACTS FROM
JUNE 1, 1993 THROUGH DECEMBER 31, 1997 (1)
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
NUMBER TOTAL AMOUNT TOTAL
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Writeoffs (2)................................... 2,492 17.50% $ 20,137,181 16.83%
Repossessions (3)............................... 2,768 19.44% $ 21,511,559 17.98%
Proceeds from Repossessions (4)................. 2,118 14.87% $ 12,256,602 10.24%
Inventory of Repossessions (5).................. 372 2.61% $ 458,745 0.38%
Total Contracts Purchased (6)................... 14,241 $ 119,667,606
</TABLE>
(1) The information shown is for Contracts purchased primarily from Dealers
unaffiliated with the Administrator, the Servicer, or SAFH. In addition, the
information shown is cumulative, rather than annual, because annual historic
information concerning writeoffs is unavailable without unreasonable burden
and expense
(2) "Writeoffs" are those contracts which have been written off as uncollectible
as bad debts, and include (i) those which are subject to Chapter 13
Bankruptcy proceedings (ii) those for which the vehicle serving as
collateral has been destroyed, and (iii) those where the obligor has
"skipped" (i.e., neither the obligor nor the vehicle serving as collateral
can be found). "Amount" represents the total unpaid installments of the
Contracts at the time they are classified as "Writeoffs".
(3) "Amount" represents the total unpaid installments of the related Contracts
at the time of repossession plus repossession and reconditioning fees and
expenses.
(4) "Amount" represents total unpaid installments of Contracts originated from
sales of repossessed vehicles and any insurance proceeds, if applicable,
before deduction for repossession and reconditioning fees and expenses.
(5) "Inventory of Repossessions" are repossessed vehicles in inventory awaiting
resale as of September 30, 1997. "Amount" represents wholesale values of
repossessed vehicles at the time of repossession plus repossession and
reconditioning fees and expenses.
(6) "Amount" represents the total unpaid installments of the Contracts at the
time of purchase.
The average term remaining, and the average principal amount, for Contracts
in the Servicer's servicing portfolio at December 31, 1997 is approximately 21
months and approximately $5,096, respectively. Such Contracts were originated
primarily from Dealers unaffiliated with the Administrator, the Servicer, or
SAFH. For Contracts originated by Fiesta Motors, the average term remaining, and
the average principal amount, in the Servicer's servicing portfolio at December
31, 1997 is approximately 38 months and approximately $12,229, respectively. The
Servicer expects that (a) its repossession rate, over the life of the portfolio
of all Contracts purchased on behalf of the Company through its services, will
be in the range of 25% to 35% of such Contracts, and (b) the average purchase
price payable to motor vehicle dealers will be no more than 66% of the original
total future installments payable under the Contracts.
33
<PAGE>
CERTAIN FINANCIAL INFORMATION
The following table sets forth certain information regarding the
Securitization Subsidiaries from June 1, 1993 (the date the Servicer began
servicing motor vehicle retail installment sales contracts) through December 31,
1997. There can be no assurance that the future performance of the Contracts
purchased by the Company will be similar to that set forth in the following
table.
<TABLE>
<CAPTION>
MATURITY VALUE PAYOFF BALANCE
PRINCIPAL CASH COLLECTED OF ACTIVE OF ACTIVE
DUE INVESTORS FROM CONTRACTS CONTRACTS
NAME OF SECURITIZATION AS OF 12/31/97 10/1/97 TO AS OF 12/31/97 AS OF 12/31/97
SUBSIDIARY (1) (2) DUE DATE (3) 12/31/97 (4) (5)
- ------------------------------- --------------- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
SAM 94-1....................... $ 363,850 07/15/00 $ 20,238 $ 13,999 $ 10,586
SAM 94-3....................... $ 728,142 03/31/98 $ 50,330 $ 175,106 $ 155,327
SAM 95-1....................... $ 603,036 10/15/98 $ 88,968 $ 269,941 $ 220,486
SAM 95-2....................... $ 874,959 03/15/99 $ 133,964 $ 885,209 $ 701,425
Sovereign Acceptance I......... $ 217,167 05/15/00 $ 7,737 $ 10,934 $ 7,592
Sovereign Acceptance II........ $ 401,333 07/15/00 $ 7,993 $ 0 $ 0
Sovereign Acceptance III....... $ 500,431 08/15/00 $ 30,335 $ 110,514 $ 93,618
Sovereign Acceptance IV........ $ 672,260 09/15/00 $ 49,674 $ 174,837 $ 140,736
Sovereign Acceptance V......... $ 614,537 09/30/00 $ 44,663 $ 317,775 $ 253,795
Sovereign Acceptance VI........ $ 587,000 10/15/00 $ 49,570 $ 146,994 $ 130,259
Sovereign Acceptance VII....... $ 606,276 11/15/00 $ 53,727 $ 242,098 $ 197,184
Sovereign Acceptance VIII...... $ 704,100 12/31/00 $ 61,266 $ 202,982 $ 162,025
Sovereign Acceptance IX........ $ 536,245 01/31/01 $ 56,768 $ 225,544 $ 187,840
Sovereign Acceptance X......... $ 594,000 01/31/01 $ 86,516 $ 259,649 $ 204,966
Sovereign Acceptance XI........ $ 579,000 02/28/01 $ 60,723 $ 181,221 $ 149,644
Sovereign Acceptance XII....... $ 625,000 02/28/01 $ 52,364 $ 302,137 $ 242,162
Sovereign Acceptance XIII...... $ 600,000 03/31/01 $ 68,815 $ 308,559 $ 267,894
Sovereign Acceptance XIV....... $ 544,143 03/31/01 $ 27,778 $ 97,131 $ 81,073
Sovereign Acceptance XV........ $ 612,000 04/30/01 $ 37,719 $ 167,965 $ 141,021
Sovereign Acceptance XVI....... $ 563,000 04/30/01 $ 41,568 $ 85,900 $ 77,644
Sovereign Acceptance XVII...... $ 716,000 05/31/01 $ 50,406 $ 230,816 $ 184,922
Sovereign Acceptance XVIII..... $ 733,053 05/31/01 $ 40,895 $ 212,369 $ 188,762
Sovereign Acceptance XIX....... $ 523,500 06/30/01 $ 33,874 $ 18,410 $ 17,108
Sovereign Acceptance XX........ $ 619,635 06/30/01 $ 56,870 $ 244,510 $ 214,776
Sovereign Acceptance XXI....... $ 606,000 09/15/98 $ 42,810 $ 56,431 $ 47,584
Sovereign Acceptance XXII...... $ 465,000 09/15/98 $ 19,299 $ 53,544 $ 45,172
Sovereign Acceptance XXIII..... $ 498,000 10/15/98 $ 39,556 $ 96,106 $ 75,031
Sovereign Acceptance XXIV...... $ 615,000 10/15/98 $ 69,303 $ 279,793 $ 225,591
Sovereign Acceptance XXV....... $ 531,000 11/15/98 $ 35,888 $ 171,420 $ 138,458
Sovereign Credit I............. $ 992,000 12/15/98 $ 55,276 $ 345,896 $ 276,465
Sovereign Credit II............ $ 767,350 03/15/99 $ 67,995 $ 432,688 $ 344,552
Sovereign Credit III........... $ 944,915 03/15/99 $ 136,919 $ 795,457 $ 639,522
Sovereign Credit IV............ $ 79,000 04/15/99 $ 4,334 $ 50,043 $ 39,219
Sovereign Credit V............. $ 1,171,723 05/15/99 $ 377,475 $ 846,161 $ 694,496
Sovereign Credit VI............ $ 1,018,047 06/15/99 $ 154,761 $ 853,402 $ 705,906
Sovereign Credit VII........... $ 1,189,140 06/15/99 $ 118,605 $ 674,714 $ 561,436
Sovereign Credit VIII.......... $ 925,875 07/15/99 $ 82,462 $ 405,086 $ 328,478
Sovereign Credit IX............ $ 662,500 11/15/99 $ 96,792 $ 645,066 $ 521,980
Sovereign Credit X............. $ 766,888 12/31/99 $ 90,795 $ 704,705 $ 588,496
Sovereign Credit XI............ $ 741,000 12/31/99 $ 90,277 $ 673,124 $ 547,781
Sovereign Credit XII........... $ 752,000 03/31/00 $ 104,520 $ 707,901 $ 576,896
Sovereign Credit XIV........... $ 1,040,312 03/31/00 $ 182,809 $ 908,277 $ 755,460
Sovereign Credit XV............ $ 649,449 04/30/00 $ 59,128 $ 566,901 $ 471,036
Sovereign Credit XVI........... $ 1,348,890 04/30/00 $ 208,537 $ 1,206,899 $ 945,832
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
MATURITY VALUE PAYOFF BALANCE
PRINCIPAL CASH COLLECTED OF ACTIVE OF ACTIVE
DUE INVESTORS FROM CONTRACTS CONTRACTS
NAME OF SECURITIZATION AS OF 12/31/97 10/1/97 TO AS OF 12/31/97 AS OF 12/31/97
SUBSIDIARY (1) (2) DUE DATE (3) 12/31/97 (4) (5)
- ------------------------------- --------------- ------------ --------------- --------------- ---------------
Sovereign Credit XVII.......... $ 601,000 05/31/00 $ 126,403 $ 634,060 $ 496,930
<S> <C> <C> <C> <C> <C>
Sovereign Credit XVIII......... $ 990,996 06/30/00 $ 200,082 $ 845,711 $ 705,520
Sovereign Credit XIX........... $ 1,344,025 06/30/00 $ 280,484 $ 1,449,424 $ 1,192,599
Sovereign Credit XX............ $ 1,341,092 08/31/00 $ 221,716 $ 1,196,678 $ 958,637
Sovereign Credit Acceptance I.. $ 813,000 01/15/99 $ 50,525 $ 327,486 $ 286,348
Sovereign Credit Acceptance
II........................... $ 515,000 03/15/99 $ 61,323 $ 325,072 $ 264,676
Sovereign Credit Acceptance
III.......................... $ 456,000 05/15/99 $ 56,705 $ 451,572 $ 398,668
Greenbriar Credit I............ $ 912,167 10/31/00 $ 112,901 $ 1,056,668 $ 788,833
Greenbriar Credit II........... $ 879,500 11/30/00 $ 58,085 $ 965,287 $ 685,512
Sovereign Credit Finance I..... $ 8,397,496 02/15/01 $ 940,769 $ 11,341,165 $ 8,648,360
</TABLE>
- --------------------------
(1) Each Securitization Subsidiary is a limited liability company with the
exception of Sovereign Acceptance I, which is a limited partnership, and
Greenbriar Credit I and Sovereign Credit Finance I, which are both
corporations. Of all the Securitization Subsidiaries listed, Sovereign
Credit Finance I, which publicly offered its notes to investors until
January 31, 1998, is structured most similarly to the Company. The
information shown is for Contracts purchased primarily from Dealers
unaffiliated with the Administrator, the Servicer, or SAFH, with the
exception of Greenbriar Credit I and II, both of which purchase Contracts
primarily from Fiesta Motors.
(2) The amount shown includes institutional debt in the amount of $320,672 for
Sovereign Credit V, $81,918 for Sovereign Credit XVIII, and $235,196 for
Sovereign Credit XIX.
(3) Principal on the notes issued by each program is required to be repaid in
six equal monthly installments ending on the due date.
(4) Maturity Value of Active Contracts represents the sum of all future
installments of principal and interest, less amounts owed to Dealers at
maturity of the contracts.
(5) Payoff Balance of Active Contracts represents the payoff balance of the
contracts as of the date shown.
Noteholders in certain of the Securitization Subsidiaries have been or will
be asked to reduce interest rates on such notes from 15% to 12% per annum, and
to extend the due dates of their notes for three years in order to provide the
particular Securitization Subsidiary which issued their note more time to repay
principal. Such modifications to those notes were and will be requested due to
the fact that the total assets of those Securitization Subsidiaries are less
than necessary to make all note payments as originally scheduled. In fact, some
of these Securitization Subsidiaries have already failed to make scheduled
payments of principal. In addition, some of these Securitization Subsidiaries
have been unable to make scheduled payments of interest, and the administrator
thereof has caused such payments to be made from its own funds, but has not
committed to continue to provide such payments on behalf of these or any other
Securitization Subsidiaries.
In order to induce the holders of such notes to agree to such modifications,
the administrator of each Securitization Subsidiary has assigned its interest
therein (other than Greenbriar Credit I, Greenbriar Credit II, and Sovereign
Credit Finance I) into a special purpose entity, and directed that all net
proceeds from the Contracts of each such Securitization Subsidiary, after
repayment of its debts (including amounts owed to both noteholders and senior
lenders, if any), be applied towards the repayment of the notes of the
Securitization Subsidiaries that would otherwise be in default. The net proceeds
of such Contracts, to the extent available for such purpose, will be applied on
a pro rata basis. Such net proceeds will not be available to Noteholders
purchasing Notes pursuant to this offering. There can be no assurance that the
net proceeds of such Contracts will be sufficient to repay all notes of the
Securitization Subsidiaries.
As of the date of this Prospectus, Securitization Subsidiaries experiencing
financial difficulties include approximately 27 entities with total principal
due investors of $15.4 million. As of December 31, 1997, such
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<PAGE>
entities held Contracts with a gross receivable amount of $2.7 million. The
reasons for the financial difficulties include the following: the high interest
rate paid by these programs (15% per annum) in relation to their performance;
losses incurred on the contracts held by these programs were significantly
higher than planned; and repurchase agreements entered into between these
programs and certain unaffiliated Dealers were not honored by the Dealers,
although the programs are pursuing legal recourse against these Dealers. See
"Risk Factors--Financial Difficulties of Certain Securitization Subsidiaries".
As of the date of this Prospectus, the note modifications have been
requested for Securitization Subsidiaries with notes due during 1997 and the
first half of 1998, and it is anticipated that such note modifications will be
requested for at least some additional Securitization Subsidiaries with notes
due during 1998. The notes issued by each of these Securitization Subsidiaries
provide that default on the notes only occurs upon 30 days prior written notice
of nonpayment to the Securitization Subsidiary by the holders of at least 25% of
the aggregate principal amount of the outstanding notes issued by such
Securitization Subsidiary. In addition, such notes provide that any declaration
of default by the minimum number of noteholders may be rescinded by the holders
of a majority of the aggregate principal amount of the outstanding notes. Thus,
in the event more than 75% in principal amount of the noteholders of any
Securitization Subsidiary accept the modification offer, such acceptance will
effectively preclude any noteholders of such Securitization Subsidiary from
declaring a default during the three year extension period. As of the date of
this Prospectus, all Securitization Subsidiaries for which note modifications
have been requested and for which principal is finally due have exceeded this
75% threshold, with the exception of one Securitization Subsidiary that is at
73%.
36
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October 15, 1997 relating
to the beneficial ownership of the Company's Common Stock by any person or
"group", as that term is used in Section 13(d)(3) of the Securities and Exchange
Act of 1934 (the "Exchange Act"), known to the Company to own beneficially 5% or
more of the outstanding shares of Common Stock, and known to the Company to be
owned by each director of the Company and by all officers and directors of the
Company as a group. Except as otherwise indicated, each of the persons named
below is believed by the Company to possess sole voting and investment power
with respect to the shares of Common Stock beneficially owned by such person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(1)
-----------------------------------------
NAME OF DIRECTOR OR PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OUTSTANDING
- ----------------------------------------------------------------- ------------------ ---------------------
<S> <C> <C>
Sovereign Auto Finance Holdings, Inc. (2) ....................... 1,000 100%
4015 Beltline Road
Building B
Dallas, Texas 75244
A. Starke Taylor, III ........................................... 0(2) --
William P. Glass ................................................ 0(2) --
Diane D. Taylor, Trustee ........................................ 0(2) --
4015 Beltline Road
Building B
Dallas, Texas 75244
All officers and directors as a group (2 persons)................ 0(3) --
</TABLE>
- ------------------------
(1) The information as to beneficial ownership of Common Stock has been
furnished by the respective shareholders, directors and officers of the
Company.
(2) The directors of Sovereign Auto Finance Holdings, Inc. ("SAFH") could be
deemed to share voting and investment powers over the shares owned of record
by SAFH. The directors of SAFH are A. Starke Taylor, III and William P.
Glass. Austin Taylor Family Limited Partnership owns 90% of SAFH's common
stock, and Forestberg Partners, L.P. owns the remaining 10%. The general
partner of Austin Taylor Family Limited Partnership is AST III Corp., of
which Mr. Taylor serves as the President and sole director, and the limited
partners primarily include Mr. Taylor and various trusts of which Diane D.
Taylor, the wife of Mr. Taylor, serves as trustee. The general partner of
Forestberg Partners, L.P. is beneficially owned by Mr. Glass. The business
address for each of these entities, Mr. and Mrs. Taylor and Mr. Glass is
SAFH's address.
(3) This amount excludes shares owned directly by SAFH.
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<PAGE>
MANAGEMENT
BUSINESS BACKGROUND AND EXPERIENCE
The names, ages, backgrounds and principal occupations of the directors and
executive officers of the Company, Sovereign Auto Finance Holdings, Inc.
("SAFH"), and Sovereign Auto Finance, Inc. ("the "Administrator") are set forth
below:
<TABLE>
<CAPTION>
NAME POSITION
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
A. Starke Taylor, III.............................. President and Director: the Company, SAFH and the
Administrator
William P. Glass................................... Vice President and Director of the Company and
SAFH; Vice President of Marketing and Director: the
Administrator
</TABLE>
A. STARKE (TRACY) TAYLOR, III, age 54, has been President and a director of
the Company, SAFH, and the Administrator since the formation of such companies.
Prior to February 6, 1998, Mr. Taylor was President and a director of the
Servicer. In addition, prior to such date, Mr. Taylor was President and a
director of Sovereign Credit Corporation, which prior to such date conducted
substantially the same business as the Administrator is presently conducting.
Mr. Taylor also serves as manager of Fiesta Motors, LLC, which owns and operates
Fiesta Motors.
Mr. Taylor used his experience in the pension investment field as a
springboard into a diversified financial career. As a principal of the Watson
and Taylor Companies, he was involved in the development and management of self
storage facilities, business centers, shopping centers, real estate holdings
nationwide and real estate notes. He is a co-general partner in partnerships
holding approximately four and one-half million square feet of self storage
facilities.
Mr. Taylor was a partner in Lyco Acquisitions Number One, a company which
purchased all of the oil and gas properties of Bethlehem Steel. Later, he was a
principal in Tex-Feld Petroleum Company, which operated a significant drilling
program in the Southwest.
Mr. Taylor has been a general partner in over 100 limited partnerships which
involved real estate or oil and gas investments, with total original investor
contributions of approximately $150 million. The investment objectives of these
partnerships differed significantly from those of the Company. Many of these
partnerships have experienced adverse business developments and conditions. In
the late 1980's, real estate revenues were adversely affected by the overall
decline in the economy. The properties owned by five of the partnerships, with
aggregate investor capital of $13,525,980, were foreclosed upon or otherwise
acquired by their lenders.
Mr. Taylor has also served as a general partner or chief executive officer
for 35 partnerships formed to acquire financial notes.
Mr. Taylor is a past Chairman of the Board of Priority One, an international
missionary organization, is on the Board of Trustees of the Dallas Theological
Seminary, is a past member of the Dallas County Advisory Board of the Salvation
Army, is a board member of the Northeast Texas Regional Board of Young Life, and
was the founding Chairman of the Board of the Park Central Athletic Association.
He is past President of the Dallas Fire Fighters Association, past President of
the North Dallas Chamber of Commerce and a past member of the Board of Directors
of the MBank Lincoln Center and MBank Preston. Mr. Taylor was recognized in 1983
by D Magazine as one of Dallas' ten most outstanding young business leaders.
Mr. Taylor is married and has five children.
38
<PAGE>
WILLIAM P. GLASS, age 39, has been Vice President of Marketing and a
director of the Administrator since its formation and Vice President and a
director of the Company and SAFH since the formation of such companies. Mr.
Glass is responsible for all marketing and investor relations activities for the
Company. Prior to February 6, 1998, Mr. Glass was Vice President and a director
of Sovereign Credit Corporation, which prior to such date conducted
substantially the same business as the Administrator is presently conducting.
He attended Baylor University, and was drafted by the Cincinnati Bengals of
the National Football League in 1980. Mr. Glass began his business career in
1981 with Hank Dickerson & Co. Realtors. In his position as a Sales Associate he
led the Office Division in sales for two of the three years he was employed with
Hank Dickerson & Co.
In 1983, Mr. Glass formed BGI Commercial Real Estate Inc., specializing in
commercial real estate brokerage and the syndication and real estate properties.
Mr. Glass was Venture Manager in over 30 general partnerships. In 1989, Mr.
Glass sold BGI Commercial Real Estate and joined Cornerstone Commercial Real
Estate, Ltd., as Senior Vice President. Cornerstone is a sister company to the
Trammel Crow Development Company. In April, 1990, Mr. Glass left Cornerstone and
became a Vice President of Sovereign Credit Corporation.
Mr. Glass is on the Executive Committee of the Board of Directors of his
father's prison ministry, the Bill Glass Evangelistic Association. He is former
board member of Young Life of Southwest Dallas County. He is a member of Hope
Community Church in Cedar Hill. He is a member of Oak Cliff Country Club in
Dallas. Mr. Glass resides in DeSoto, Texas, with his wife and three children.
The directors and executive officers of the Company have served in their
respective offices since the organization of the Company. All directors hold
office until the next annual meeting of stockholders or the election and
qualification of their successors. No director or executive officer of the
Company has received any compensation from the Company since its formation, nor
will they receive any compensation from the Company prior to satisfaction in
full of the Notes. See "Description of the Notes--The Contract Proceeds and
Operating Account". However, see "Certain Relationships and Related
Transactions" below for a description of certain transactions between the
Administrator and the Company from which such persons may indirectly benefit
through indirect ownership and/or compensation from the Administrator.
Except as stated above, there are no family relationships among the
directors and any of the executive officers of the Company. None of the
Company's directors holds any directorship in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or subject to
the requirements of Section 15(d) of the Exchange Act or any company registered
as an investment company under the Investment Company Act of 1940.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a subsidiary of Sovereign Auto Finance Holdings, Inc.
("SAFH"). The Administrator is an affiliate of SAFH by virtue of common
ownership. Austin Taylor Family Limited Partnership owns 90%, and Forestberg
Partners, L.P. owns 10%, respectively, of both SAFH and the Administrator. The
general partner of Austin Taylor Family Limited Partnership is AST III Corp., of
which Mr. Taylor serves as the President and sole director, and the limited
partners primarily include Mr. Taylor and various trusts of which Diane D.
Taylor, the wife of Mr. Taylor, serves as trustee. The general partner of
Forestberg Partners, L.P. is beneficially owned by Mr. Glass.
All Contract purchasing and servicing on behalf of the Securitization
Subsidiaries is conducted by the Servicer, which is owned and managed separately
from the Company, the Administrator and SAFH. All administrative functions on
behalf of the Securitization Subsidiaries are conducted by the Administrator.
Management of the Servicer and the Administrator will devote as much of their
time to the business of the Company as in their judgment is reasonably required.
The Servicer and the Administrator may have
39
<PAGE>
conflicts of interest in allocating management time, services, overhead and
functions among the Company and the Securitization Subsidiaries. Management of
the Administrator and the Servicer intend to resolve any such conflicts in a
manner that is fair and equitable to the Company, but there can be no assurance
that any particular conflict may be resolved in a manner that does not adversely
affect Noteholders.
Under the terms of the Servicing Agreement, the Servicer will be paid the
Servicing Fees and a $125 per vehicle repossession fee, and will be entitled to
reimbursement for its expenses incurred in connection with the repossession and
resale of Financed Vehicles out of the proceeds from such resales. The Servicer
will retain the Purchase Administration Fee as compensation and reimbursement
for its services in administering the purchase of Contracts.
The Company will pay the Administrator a monthly fee (the "Investor
Administration Fee") equal to 1/12th of 0.5% of the aggregate outstanding
principal amount of the Notes, which fee shall reimburse the Administrator for
expenses incurred in the administration of Noteholder payments, communications
and relations for the Company.
The Servicer has in the past, and may in the future, purchase and service
motor vehicle retail sales installment contracts and obligations for itself, its
affiliates and the Securitization Subsidiaries and other unrelated parties. The
Company has the right to purchase additional Contracts through the Servicer from
the net collection proceeds on its existing Contracts except during the
continuance of an Event of Default. Management of the Servicer will have a
conflict of interest in determining whether to purchase any retail sales
installment contracts and notes on behalf of the Company or one or more other
parties for whom it purchases contracts and notes or to retain the contracts and
notes for its own benefit. The determination of which entity will purchase or
invest in a particular Contract package and what portion, if any, of such
Contract package will be purchased for such entity will be based upon the
respective periods of time the purchasing entities have been in existence, the
cost of the available Contract package, the amount of their unexpended funds and
the need to diversify their holdings. In such event, the Servicer intends to
exercise good faith and to deal fairly with the respective entities in deciding
which entity, if any, is to purchase or invest in a particular Contract package.
The Servicer will give priority to purchases on behalf of the Servicer or other
parties. The Company expects that the Servicer will not knowingly retain lower
risk contracts and notes for itself or its other customers and sell higher risk
contracts and notes to the Company.
The Contracts will be purchased primarily from Fiesta Motors ("Fiesta
Motors"), an automobile dealer which finances the sale of used automobiles and
light trucks. Fiesta Motors is owned by Fiesta Motors, LLC. Fiesta Motors, LLC,
a Texas limited liability company, was formed on February 2, 1995. Austin Taylor
Family Limited Partnership owns 90%, and Forestberg Partners, L.P. owns 10%,
respectively, of the membership interests, and thus voting rights, in Fiesta
Motors, LLC. The general partner of Austin Taylor Family Limited Partnership is
AST III Corp., of which Mr. Taylor serves as the President and sole director,
and the limited partners primarily include Mr. Taylor and various trusts of
which Diane D. Taylor, the wife of Mr. Taylor serves as trustee. The general
partner of Forestberg Partners, L.P. is beneficially owned by Mr. Glass. Mr.
Taylor serves as the sole manager of Fiesta Motors, LLC. The officers of Fiesta
Motors, LLC are Diane D. Taylor, President; and A. Starke Taylor, III, Chairman.
Contracts may also be purchased from unaffiliated Dealers. The economic
incentive motivating any Dealer, including Fiesta Motors, to sell Contracts to
the Company is maximization of return to the Dealer. Although the Dealer may
make less profit on the sale of an automobile by selling the related Contract,
the Dealer can purchase and sell more automobiles and increase net profit
through increased inventory turnover because the cost of the automobile to the
Dealer is recouped immediately upon sale of the Contract and the Dealer does not
have to wait for future installment payments on the Contract.
The Company may purchase Contracts from the Servicer or the Securitization
Subsidiaries, but only if such Contracts are not in default and satisfied the
purchasing criteria established in the Indenture and the Servicing Agreement at
the time of their purchase from the originating Dealer. Any qualifying Contracts
40
<PAGE>
will be sold by the Servicer or the Securitization Subsidiaries to the Company
at a price for each Contract equal to the Purchase Administration Fee paid by
the original purchaser plus an amount determined to provide the Company an
internal rate of return on its investment in the Contract from the remaining
unpaid installments equal to the original purchaser's initial internal rate of
return on its investment in the Contract, as of its purchase from the Dealer,
assuming in both cases that the Contract was paid in full in accordance with its
scheduled installments. Such seller will retain any installments received by it
prior to the purchase by the Company and any profits resulting from the
difference between such installments and the reduction in the purchase price
paid to such seller by the Company from the price paid by such seller to the
Dealer.
Affiliates of the Administrator provide floor plan or similar financing for
various automobile dealers, including Fiesta Motors. "Floor plan financing"
refers to assistance provided to dealers in financing their purchases of
inventories of automobiles held for sale to customers. The Company may purchase
Contracts from time to time from such dealers.
In addition, Reliance Service Corporation, ("Reliance"), which is owned by
A. Starke Taylor, III, offers and sells mechanical service agreements to
purchasers of automobiles from Fiesta Motors. These agreements are sold to
Obligors, at their option, and are usually financed through their Contracts. The
agreements are sold for an average of $750, with the amount actually being
remitted to Reliance being based upon the discount the Company pays for the
Contract. Reliance then remits all but $250 to Fiesta Motors as a commission.
The Company will use up to 2% of the gross proceeds from the sale of the
Notes to pay offering and organizational expenses. The Administrator has agreed
to pay any such expenses to the extent they exceed 2% of the gross proceeds from
the sale of the Notes. The Company will also pay to the Administrator a fee
equal to 5.5% of the gross proceeds from the sale of the Notes (5.0% of the
gross proceeds in excess of $9,000,000) for administering and managing the
ongoing operations of the Company.
Sales of repossessed Financed Vehicles through retail networks may be
conducted by placing the vehicle on the Dealer's lot for sale, or on a lot owned
by Fiesta Motors. In either case, the Company will pay all expenses associated
with the resale of the repossessed Financed Vehicles. In the case of resales
from a lot owned by Fiesta Motors, such expenses will include an allocable
portion of the costs of operating the lot based upon the number of cars sold,
which will include expenses for salaries for person who are also principals of
the Administrator, and repair costs to place the cars in saleable condition
charged at 20% mark-up for parts and $30 per hour for labor. Such expenses will
generally be comparable in amount to that which would be charged to the Company
for resales through unaffiliated lots owned by franchised dealerships providing
comparable services.
By way of example, the Servicer would earn the following compensation with
respect to a Contract assuming (i) the total amount of installments due under
the Contract as of the date of purchase by the Company are equal to $21,486;
(ii) the total amount of principal due under the Contract as of the date of
purchase is equal to $14,566; (iii) the Contract is for a term of 46 months;
(iv) the Contract is outstanding throughout its term; (v) the related Financed
Vehicle is not in repossession; (vi) the Contract was purchased for a price of
$12,090 (83% of principal); (vii) the Contract is purchased from Fiesta Motors;
(viii) the net proceeds from the sale of the Notes are used to purchase the
Contract rather than the collection proceeds from another Contract or the
proceeds of Additional Borrowing; and (ix) such Notes are outstanding for 48
months: the Contract Servicing Fee would be a total of $920 (46 x $20) over the
life of the Contract, together with all late fees; and the Purchase
Administration Fee would be $500. In addition, the Servicer would receive a fee
of $125 in the event the related Financed Vehicle is ever assigned for
repossession, in which event the Contract Servicing Fee would then cease
accruing. In addition, the Administrator would earn the following compensation:
the Administration Fee of up to $820 (5.5% x principal amount of Notes needed to
purchase Contract (($12,090 + $500) divided by 84.5%)) payable out of the
proceeds of the sale of the Notes (less certain expenses incurred or to be
incurred by the
41
<PAGE>
Administrator. In this regard, the Administrator has agreed to pay all general
and administrative overhead expenses incurred by the Company, other than Allowed
Expenses, and pay offering and organization expenses of the Company (other than
commissions to broker-dealers) to the extent such expenses exceed 2% of the
gross proceeds from the sale of the Notes); and the Investor Administration Fee
would be a total of $298 ( 1/12 x 0.5% x 48 x $14,899 (($12,090 + $500) divided
by 84.5%)) over the life of the Contract. In addition, since the Contract would
be purchased from Fiesta Motors, Fiesta Motors would likely receive a benefit
from the sale of the Contract to the Company equal to its profit on the sale.
The terms of the foregoing arrangements between the Company on the one hand
and the Administrator or Fiesta Motors on the other were not negotiated at arm's
length but were determined unilaterally by the management of the Administrator
and Fiesta Motors.
The Company's Board of Directors has adopted a resolution to the effect that
all transactions with officers, directors and affiliates must be on terms which
would be reasonable and appropriate with unaffiliated parties.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
GENERAL
As of the date of this Prospectus, the Company has had no operating history.
The net proceeds of the sale of the Notes will be employed to purchase the
initial Contracts. See "Use of Proceeds". While the Notes remain outstanding,
the Company will be prohibited from engaging in any business other than the
purchase, collection and servicing of the Contracts (including repossession and
resale of the vehicle collateral) and from incurring any additional indebtedness
other than the Additional Borrowing, if any, Allowed Expenses and any other
amounts incurred in the ordinary course of its business.
The Company's use of the net collection proceeds from the Contracts will be
restricted to payments on the Notes and the Additional Borrowing, if any, and,
so long as there is no Event of Default, to payments of Allowed Expenses and to
purchase of additional eligible Contracts. See "Description of the Notes--The
Contract Proceeds and Operating Account".
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of funds for repayment of the Notes will be
proceeds from the Contracts, any income on the reinvestment of such proceeds and
any proceeds from sale or refinancing of the remaining Contracts at the maturity
of the Notes. The Company does not have, nor is it expected to have in the
future, any significant source of capital for payment of the Notes and the
expenses incurred by it other than such sources. Payment of the principal or
interest on the Notes is not guaranteed by any other person or entity. See "Risk
Factors--Limited Assets; Single Purpose Nature". Although management of the
Company believes that the Company will realize sufficient proceeds from the
foregoing sources to pay all installments of interest when due on the Notes and
to repay the principal amount of the Notes in full prior to or at maturity,
there can be no assurance that such sources will be sufficient to repay the
Notes in full. See "Risk Factors--Nature of Contracts", "--Defaults on Contracts
and Repossessions" and
"--Possible Insufficient Amount in the Trust Account".
The Company anticipates that a portion of the Contracts will become
delinquent and require repossession and resale of the related vehicle. Based on
the experience of the Servicer and its employees with respect to similar
contracts, the Company and the Servicer expect that (i) the Company's portfolio
of Contracts will experience a repossession rate, over the life of the
portfolio, in the range of 25% to 35% of such Contracts and (ii) aggregate gross
collections from all Contracts will be in the range of approximately 75% to 85%
of the original total future installments for the Contracts at the time of their
purchase, including sales proceeds from repossessed vehicles, but without taking
into account costs associated with the resale of such repossessed vehicles.
However, there can be no assurance that these expectations will in
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fact be met, since actual repossession rates and collection rates on the
Contracts are impossible to predict precisely.
If an Obligor defaults under a Contract, and the Servicer must repossess and
liquidate the Financed Vehicle to recover installments due thereon and costs
associated with the repossession and resale, certain factors may limit the
ability of the Company to realize net proceeds sufficient to recover the cost of
the Contract. These factors include, without limitation, the value of the
repossessed Financed Vehicles, the costs of seeking and collecting a deficiency
judgment and limitations imposed by bankruptcy laws or other Federal or state
laws. In general, the Servicer is required to commence repossession of a
Financed Vehicle if the Obligor is delinquent on at least two monthly
installments and has made no payments for a period of 45 days. Nevertheless, the
Servicer may grant extensions or modifications to Obligors or accept partial
payments from Obligors in lieu of commencement or repossession activities. If a
substantial number of such Obligors make no further payments on their Contracts,
the delay in the repossession of the Financed Vehicles could result in a
decrease in repossession proceeds received by the Company.
The actual collection rates on the Contracts are impossible to predict
precisely and adverse changes in collectibility rates caused by changes in
economic conditions, including particularly in the Company's primary markets, or
other factors beyond the Company's control could adversely affect the Company's
ability to collect on the Contracts. If the Contracts do not collectively
perform as expected by the Company, which expectations are based on the
historical performance of similar contracts purchased and serviced by the
Servicer, the Company's ability to make the required payments on the Notes could
be adversely affected.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
SECURITY INTERESTS IN FINANCED VEHICLES
Under the UCC as adopted in most states, retail installment sale contracts
and notes such as the Contracts constitute security agreements for personal
property and contain grants of security interests in the Financed Vehicles.
Perfection of security interests in the Financed Vehicles is generally
governed by the motor vehicle registration laws of the state in which the
vehicle is located. In most states, a security interest in a motor vehicle is
perfected by notation of the secured party's lien on the vehicle's certificate
of title.
Upon the purchase of the Contracts, pursuant to the Servicing Agreement, the
originating Dealers will assign the Contracts (and the security interests
arising thereunder in the Financed Vehicles) to the Company. The originating
Dealers will also provide evidence that proper applications for certificates of
title have been made to ensure that the Company will be named as the lienholder
on the certificates of title relating to the Financed Vehicles. The Servicer
will deliver possession of the Contracts and related title documents to the
Company or, in the event there is an Additional Lender, then to the Additional
Lender or other financial institution appointed by the Company and the
Additional Lender to act as custodian and bailee for the Additional Lender and
the Company. For any Contracts (and the security interest arising thereunder in
the Financed Vehicles) purchased by the Company from the Servicer. The Servicer
will assign the Contracts to the Company and will amend any certificates of
title showing the Servicer as lienholder to identify the Company as the new
lienholder.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for certain unpaid taxes take priority over even a perfected
security interest in a vehicle. The Internal Revenue Code of 1986 also grants
priority to certain federal tax liens over the lien of a secured party. Certain
state and federal laws permit the confiscation of motor vehicles under certain
circumstances if used in unlawful activities which may result in the loss of a
secured party's perfected security interest in the confiscated motor vehicle.
Upon the purchase of each Contract by the Company, the selling Dealer will
warrant that the Contract creates a valid, subsisting and enforceable first
priority security interest in the Financed
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Vehicle. However, liens for repairs or taxes, or the confiscation of a Financed
Vehicle, could arise or occur at any time during the term of a Contract. In
addition, Fiesta Motors or any other Dealer which refurbishes repossessed
Financed Vehicles for resale will have a lien for repair expenses it may incur
in order to put repossessed Financed Vehicles into marketable condition. No
notice will be given to the Company in the event any such lien arises or
confiscation occurs.
If the owner of a Financed Vehicle relocates to another state, under the
laws of most states the perfected security interest in the Financed Vehicle
would continue for four months after such relocation and thereafter, in most
instances, until the owner re-registers the Financed Vehicle in such state.
Almost all states generally require surrender of a certificate of title to
re-register a titled vehicle. Therefore, the Company must surrender possession,
if it holds the certificate of title to such Financed Vehicle, before the
Financed Vehicle owner may effect the re-registration. In addition, the Company
should receive, absent clerical errors or fraud, notice of surrender of the
certificate of title because the Company will be listed as lienholder on its
face. Accordingly, the Company will have notice and the opportunity to
re-perfect its security interest in the Financed Vehicle in the state of
relocation. If the Financed Vehicle owner moves to one of the few states which
does not require surrender of a certificate of title for registration of a motor
vehicle, re-registration could defeat perfection. In the ordinary course of
servicing the Contracts, the Servicer takes steps to effect such re-perfection
upon receipt of notice of re-registration or other information from the Obligor
as to relocation. Similarly, when an Obligor under a Contract sells a Financed
Vehicle, the Company must surrender possession of the certificate of title or
the Company will receive notice as a result of its lien noted thereon.
Accordingly, the Company will have an opportunity to require satisfaction of the
related Contact before release of the lien. See "Transfers of Vehicles" below.
Under the Servicing Agreement and the Indenture, the Servicer is obligated to
maintain the continuous perfection of the security interest represented by each
Contract in the related Financed Vehicle.
REPOSSESSION
In the event of default by an Obligor on a Contract, the holder of the
Contract has all the remedies of a secured party under the UCC. The UCC remedies
of a secured party include the right to repossession by self-help means, unless
such means would constitute a breach of the peace. Unless the Obligor under a
Contract voluntarily surrenders a vehicle, self-help repossession, by an
individual independent repossession specialist engaged by the Servicer, is the
method usually employed by the Servicer when an Obligor defaults. Self-help
repossession is accomplished by retaking possession of the Financed Vehicle. If
a breach of the peace is likely to occur, or if applicable state law so
requires, the Servicer must obtain a court order from the appropriate state
court and repossess the vehicle in accordance with that order.
Pursuant to the Agreement, the Company will pay the Servicer a fee equal to
$125 for each repossession of a Financed Vehicle. Repossessed vehicles are
generally resold by the Servicer through retail automobile networks. Such
resales may also be conducted by utilizing wholesale automobile networks, or
auctions which are attended principally by dealers. In many cases, when a
repossessed Financed Vehicle is sold from a Dealer's lot, the balance due under
the related Contract is not repaid in cash but is replaced with a new Contract
executed by the purchaser of the Financed Vehicle.
Sales of repossessed Financed Vehicles through retail networks may be
conducted by placing the vehicle on the Dealer's lot for sale, or on a lot owned
by Fiesta Motors. In either case, the Company will pay all expenses associated
with the resale of the repossessed Financed Vehicles. In the case of resales
from a lot owned by Fiesta Motors, such expenses will include an allocable
portion of the costs of operating the lot, although such expenses will generally
be comparable in amount to that which would be charged to the Company for
resales through unaffiliated lots.
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NOTICE OF SALE; REDEMPTION RIGHTS
In the event of default by the Obligor, some jurisdictions require that the
Obligor be notified of the default and be given a time period within which the
Obligor 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.
In most jurisdictions, the UCC and other state laws require the secured
party to provide the Obligor with reasonable notice of the date, time, and place
of any public sale or the date after which any private sale of the collateral
may be held. Unless the Obligor waives his rights after default, the Obligor has
the right to redeem the collateral prior to actual sale by paying the secured
party the unpaid installments (less any required discount for prepayment) of the
Contract plus reasonable expenses for repossessing, holding, and preparing the
collateral for disposition and arranging for its sale, plus in some
jurisdictions, reasonable attorneys' fees, or, in some states, by payment of
delinquent installments.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
Fiesta Motors or any other Dealer that resells a repossessed Financed
Vehicle generally will apply the proceeds of resale of the repossessed vehicles
first to reimburse itself for its expenses of resale and repossession, together
with any expenses incurred for repairs, if necessary, to put the vehicle into
marketable condition and any commissions paid to Dealers for the resale of the
vehicle, and then to the satisfaction of the obligations of the Obligor on the
Contract. While some states impose prohibitions or limitations on deficiency
judgments if the net proceeds from resale do not cover the full amount of the
Contract obligations, most states allow a deficiency judgment to be sought. A
deficiency judgment is a personal judgment against the Obligor for the
difference between the amount of the obligations of the Obligor under the
Contract and the net proceeds from resale of the collateral. A defaulting
Obligor on a Contract typically lacks capital or income following the
repossession of the Obligor's Financed Vehicle. Therefore, the Servicer may
determine in its discretion that pursuit of a deficiency judgment is not an
appropriate or economically viable remedy or may settle at a significant
discount any deficiency judgment that it does obtain.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws, may limit or delay the ability of the Servicer to repossess and
resell the Financed Vehicles or enforce a deficiency judgment. In the event that
deficiency judgments are not obtained, are not satisfied, are satisfied at a
discount or are discharged, in whole or in part, in bankruptcy proceedings,
including bankruptcy proceedings under Chapter 13 of the Bankruptcy Reform Act
of 1978, as amended, the loss will be borne by the Company and may adversely
affect the ability of the Company to repay the Notes.
Occasionally, after resale of a vehicle and payment of all expenses and
obligations, there is a surplus of funds. In that case, the UCC requires the
secured party to remit the surplus to the former Obligor.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. These laws include, but are not limited to, the Truth-in-Lending Act,
the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair
Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's
Regulations B and Z, state adaptations of the National Consumer Act and of the
Uniform Consumer Credit Code, state motor vehicle retail installment sales acts,
retail installment sales acts, and other similar laws. Also, state laws impose
finance charge ceilings and other restrictions on consumer transactions and
require contract disclosures in addition to those required under federal law.
These requirements impose specific statutory liabilities upon creditors who fail
to comply with their provisions. In some cases, this liability could affect an
assignee's ability to enforce consumer finance contracts such as the Contracts.
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The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code, other state statutes, or the common law in certain
states, is intended to defeat the ability of the transferor of a consumer credit
contract (such as the Contracts), which transferor is the seller of the goods
that gave rise to the transaction, to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the Obligor under
the contract could assert against the seller of the goods. Most of the Contracts
will be subject to the requirements of the FTC Rule. Accordingly, the Company,
as holder of the Contracts, may be subject to any claims or defenses that the
purchaser of the Financed Vehicle may assert against the seller of the Financed
Vehicle. Such claims are limited to a maximum liability equal to the amounts
paid by the Obligor on the Contract. The Obligor, however, may also assert the
rule to offset remaining amounts due on the Contract as a defense against any
claim brought by the Company against such Obligor.
Under most state motor vehicle dealer licensing laws, sellers of motor
vehicles are required to be licensed to sell motor vehicles at retail sale.
Furthermore, federal odometer regulations promulgated under the Motor Vehicle
Information and Cost Savings Act require that all sellers of new and used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if an
odometer disclosure statement was not provided to the purchaser of a Financed
Vehicle, the Obligor may be able to assert a defense against the seller of the
vehicle.
Courts have imposed general equitable principles on secured parties pursuing
repossession of collateral or litigation involving deficiency balances. These
equitable principles may have the effect of relieving an Obligor from some or
all of the legal consequences of a default.
In several cases, obligors have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protection provided under the 14th Amendment to the Constitution of the United
States. Courts have generally upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by the
creditors do not involve sufficient state action to afford constitutional
protection to consumers.
The selling Dealers will warrant that each Contract, at the time of its
purchase by the Company, complies with all requirements of law in all material
respects. Accordingly, if an Obligor has a claim or defense against the Company
for violation of any law and such claim or defense materially and adversely
affects the Company's interest in a Contract, such violation would constitute a
breach of warranty under the purchase agreements and would create an obligation
of the Dealer to repurchase or replace the Contract unless the breach is cured.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a secured party
to realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing a motor vehicle, and, as part of the rehabilitation
plan, reduce the amount of the secured indebtedness to the market value of the
motor vehicle at the time of bankruptcy (as determined by the court), leaving
the party providing financing a general unsecured creditor for the remainder of
the indebtedness. A bankruptcy court may also reduce the monthly payments due
under a Contract or change the rate of interest and time of repayment of the
indebtedness.
TRANSFERS OF VEHICLES
The terms of each Contract prohibit the sale or transfer of the Financed
Vehicle securing the Contract without the secured party's consent and allow for
the acceleration of the maturity of the Contract upon a sale or transfer without
its consent. In most circumstances, the Servicer will not consent to a sale or
transfer of a Financed Vehicle by an Obligor unless the Obligor prepays the
Contract. Because the transfer
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may be sought by the Obligor as a result of Obligor's inability to make the
scheduled payments, such failure to consent may result in a default by the
Obligor and force the Servicer to initiate default procedures.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
SCOPE AND LIMITATIONS
The following discussion is a general summary of the federal income tax
matters of general application relating to an investment in the Notes. Frederick
C. Summers, III, a Professional Corporation, has delivered its opinion to the
Company as to all material tax consequences of an investment in the Notes. These
material tax consequences are as follows:
(i) The Notes will be taxable obligations under the Internal Revenue Code of
1986 as amended (the "Code"), and interest paid or accrued will be taxable to
non-exempt holders of the Notes.
(ii) Interest on the Notes will be excluded from the definition of unrelated
business taxable income.
There can be no assurance that the Internal Revenue Service (the "Service")
will take a similar view as to any of the tax consequences described below. The
discussion is based upon current provisions of the Code, existing Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, all of which are subject to change.
The discussion does not purport to describe all aspects of federal income
taxation that may be relevant to an investor in the Notes in light of the
investor's particular tax status and other income, deductions and credits and
does not discuss any state, local or foreign tax matters. Moreover, certain
investors (including insurance companies and foreign persons) may be subject to
special rules not discussed below. EACH POTENTIAL INVESTOR IN THE NOTES SHOULD
CONSULT THE INVESTOR'S OWN TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF AN
INVESTMENT IN THE NOTES.
STATED INTEREST
A Noteholder must report stated interest earned on a Note as ordinary income
in accordance with such Noteholder's method of tax accounting. Noteholders
reporting their income on a cash basis must include such interest in their gross
income in the taxable year in which it is received, either actually or
constructively, whereas accrual basis Noteholders must include such interest in
their gross income in the taxable year in which it is earned.
PURCHASE OF NOTES BY EXEMPT PLANS AND OTHER EXEMPT ORGANIZATIONS
Generally, organizations described in Section 401(a) of the Code (trusts
forming part of a stock bonus, pension or profit sharing plan) and Section
501(c) of the Code, individual retirement accounts and individual retirement
trusts are exempt from federal income tax (collectively, "Exempt
Organizations"). However, this exemption does not apply where "unrelated
business taxable income" is derived by the Exempt Organizations from the conduct
of any trade or business which is not substantially related to the exempt
function of the entity. If an Exempt Organization receives unrelated business
taxable income, the Exempt Organization will be subject to a tax imposed by
Section 511 of the Code as well as alternative minimum tax on the unrelated
business taxable income portion of its income.
Generally, interest, dividends, royalties and certain other income are
excluded from the definition of unrelated business taxable income ("Excluded
Income"). Thus, generally, an Exempt Organization which invests in the Notes
will not be taxed on amounts received as interest or prepayment of principal as
a result of its investment.
However, if Excluded Income constitutes "unrelated debt-financed income"
then such income would not be excluded from the computation of unrelated
business taxable income. For this purpose, a percentage of the gross income
attributable to property with "acquisition indebtedness" will be treated as
unrelated business taxable income, generally, in proportion to the ratio of such
indebtedness to the basis of
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the property. Generally, "acquisition indebtedness" is indebtedness incurred to
acquire property. Therefore, if an Exempt Organization borrows funds to acquire
or hold the Notes, the interest received on such Notes may be reclassified as
unrelated business taxable income. However, as described above, if an Exempt
Organization does not borrow money to acquire or hold the Notes, it should not
realize unrelated business taxable income by virtue of its investment in the
Notes.
This summary does not address any rules or regulations enacted or
promulgated by the Department of Labor under "ERISA". Any investor subject to
ERISA or Department of Labor regulations relating to benefit plans should make
certain that it is eligible to purchase the Notes.
PLAN OF DISTRIBUTION
The Company is offering up to $10,000,000 in aggregate principal amount of
the Notes. The Notes are being offered by participating broker-dealers which are
members of the National Association of Securities Dealers, Inc. ("NASD"). Under
selling agreements with the Company, such broker-dealers will solicit
subscriptions for the Notes on a "best efforts" basis, meaning that they will
make no legal commitment to sell to investors, or to buy as dealer, any specific
amount of the Notes. The Company will pay to each soliciting broker-dealer, in
consideration for its services, a sales commission of 8% of the principal amount
of all Notes sold through their efforts. Of that amount, a portion may
constitute an unallocated due diligence and marketing fee. The Company will
indemnify the broker-dealers against certain liabilities, including liabilities
under applicable securities laws. As of the date of this Prospectus, the Company
has not identified any broker/dealers who have agreed to participate in this
offering of the Notes.
Investor funds will be held in a subscription escrow account with Overton
Bank and Trust, N.A., as escrow agent, until a minimum of $500,000 in principal
amount of the Notes are sold. In the event that the minimum amount of Notes is
not subscribed for before April 30, 1998 (or any earlier termination of the
offering ), the offering will be terminated and the escrowed funds, plus any
interest thereon, will be promptly returned to the subscribing investors by the
escrow agent. Upon the subscription of the minimum amount of Notes, the escrowed
funds will be released to the Company. Interest on the Notes will not accrue
until the excrowed funds are released to the Company. Any subsequent sales
proceeds from the sale of additional Notes will be immediately available for use
by the Company to purchase additional Contracts. All subscriptions are subject
to the right of the Company to reject any subscription in whole or in part.
Minimum suitability requirements have been established for residents of
certain states. Arizona, Arkansas, Missouri, New Mexico, Oklahoma, Texas, and
Wisconsin subscribers must represent that they have either (a) an annual gross
income of at least $45,000 and a net worth of at least $45,000 exclusive of the
subscriber's principal residence and its furnishings and personal use
automobiles; or (b) a net worth of at least $150,000, exclusive of the
subscriber's principal residence and its furnishings and personal use
automobiles. California, Iowa, Kansas, Michigan, and North Carolina subscribers
must represent that they have either (a) an annual gross income of at least
$60,000 and a net worth of at least $60,000 exclusive of the subscriber's
principal residence and its furnishings and personal use automobiles; or (b) a
net worth of at least $225,000, exclusive of the subscriber's principal
residence and its furnishings and personal use automobiles. Indiana subscribers
must represent that they have either (a) an annual gross income of at least
$40,000, and a net worth of at least $40,000, exclusive of the subscriber's
principal residence and its furnishings and personal use automobiles; or (b) a
net worth of at least $150,000, exclusive of the subscriber's principal
residence and its furnishings and personal use automobiles. South Dakota
subscribers must represent that (a) they have either (i) an annual gross income
of at least $45,000 and a net worth of at least $45,000; or (ii) a net worth of
at least $150,000; and (b) the amount of their investment does not exceed 10% of
their net worth, such net worth to be determined in each case exclusive of the
subscriber's principal residence and its furnishings and personal use
automobiles. In the case of sales to a subscriber which is a fiduciary account,
the foregoing standards must be met by the beneficiary, the fiduciary account,
or by the donor or grantor who directly or indirectly supplies the funds to
purchase the securities if the donor or grantor is the fiduciary.
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The offering will terminate on January 31, 1999, unless sooner terminated by
the Company upon the failure to achieve the minimum subscription amount, upon
the sale of all of the Notes or if the Company believes that suitable Contracts
will not be available for purchase by the Company or that additional selling
efforts will be unsuccessful. Early termination of the offering may result in
the Company selling less than $20 million in aggregate principal amount of the
Notes and may expose prior purchasers of Notes to certain risks. See "Risk
Factors--Sale of Small Amount of Notes".
The Company intends to accept in the order received properly completed
subscriptions and payments for subscription amounts from qualified investors
meeting the applicable suitability standards. The Company may elect to treat as
accepted subscriptions from certain otherwise qualified investors (for example,
IRA's) whose subscription funds are being paid by a trustee or other institution
which has confirmed to the Company that the funds will be paid. Upon achievement
of the maximum subscription amount ($10,000,000) for the Notes, any subsequently
received subscription will not be accepted by the Company and will be promptly
returned.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 7(b) of the form of broker-dealer selling agreement to be used by
the Company provides generally that each broker-dealer will indemnify and hold
harmless the Company and its control persons against any loses, liabilities,
claims, damages or expenses they may become subject, under the Securities Act of
1933 (the "Act"), the Securities Exchange Act of 1934 or otherwise, insofar as
such losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon untrue statements of material facts in
connection with the public offering of the Notes or the omission to state a
material fact in connection with the public offering of the Notes. Article XI of
the Articles of Incorporation of the Company provides generally that no director
shall be liable to the Company or its shareholders for monetary damages for an
act or omission in such director's capacity as a director. Article VII of the
By-Laws of the Company and Section 2.02-1 of the Texas Business Corporation Act
provide generally that the Company will indemnify each director and officer in
connection with any legal proceeding in which he is a respondent or defendant by
reason of his serving or having served in such capacity.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company 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 Act and
will be governed by the final adjudication of such issue.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Belew Averitt LLP, independent certified public accountants,
whose report thereon appears elsewhere herein, and have been so included in
reliance upon the report and authority of such firm as experts in auditing and
accounting.
LEGAL MATTERS
Certain matters with respect to the validity of the Notes have been passed
upon for the Company by Frederick C. Summers, III, a Professional Corporation,
Dallas, Texas. Frederick C. Summers, III, a Professional Corporation, has also
delivered its opinion to the Company as to the federal income tax matters
discussed under "Certain Federal Income Tax Considerations".
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DEFINITIONS
ADDITIONAL LENDER. Any additional lending source from which the Company
borrows funds in order to purchase additional Contracts, which may be senior to
the Notes and which may be a bank or an institutional lender.
ADDITIONAL BORROWING. Funds borrowed from an Additional Lender in order to
purchase additional Contracts.
ADMINISTRATION FEE. A fee equal to 5.5% of the gross proceeds from the sale
of the Notes (5.0% of the gross proceeds in excess of $9,000,000) which the
Company will pay to the Administrator for agreeing to (i) administer and manage
the ongoing operations of the Company, (ii) pay all general and administrative
overhead expenses incurred by the Company, other than Allowed Expenses, and
(iii) pay offering and organization expenses of the Company (other than
commissions to broker-dealers) to the extent such expenses exceed 2% of the
gross proceeds from the sale of the Notes.
ADMINISTRATOR. Sovereign Auto Finance, Inc., a Texas corporation and an
affiliate of SAFH by virtue of common ownership, which will administer and
manage the ongoing operations of the Company.
ALLOWED EXPENSES. The expenses and fees of the Trustee under the Indenture,
fees charged by the Servicer under the Servicing Agreement (including the
Contract Servicing Fee, the Purchase Administration Fee and all repossession
fees), the Investor Administration Fee charged by the Administrator, title
transfer fees, federal, state and local taxes (including corporate franchise
taxes and any payment to any of the Company's affiliates as reimbursements for
tax payments made by such affiliate on the Company's behalf or benefits accruing
from tax losses of such affiliate that are used to offset the taxable income of
the Company), legal and accounting fees and printing expenses (excluding
offering and organization expenses, but including those otherwise incurred to
comply with reporting and other requirements under Federal and state securities
laws and for reports, compliance certificates and opinions required by the
Indenture), premiums for vehicle value, vendor single interest (VSI), auto loan
default, gap or other insurance, charges for vehicle warranty service contracts
(including fees paid to Dealers), bank service charges and account fees
(including such charges and fees incurred for the subscription escrow account
established for the receipt of the proceeds from the offering and sale of the
Notes, and for the Collections Account), expenses of repossessing, repairing and
liquidating motor vehicle collateral (as to each vehicle, not to exceed the
liquidation proceeds from the vehicle), and any insurance proceeds applied to
vehicle repairs or required to be refunded to Obligers.
COLLECTIONS ACCOUNT. A bank account maintained by the Servicer in the
Company's name for the deposit of Contract payments and collections.
COMPANY. Sovereign Credit Finance II, Inc., a Texas corporation.
CONTRACTS. Retail installment sales contracts and notes secured by the
Financed Vehicles to be purchased by the Company at a discount.
CONTRACT SERVICING FEE. A servicing fee of $20 per month per outstanding
Contract that is not assigned for repossession and a fee of $125 for each
Financed Vehicle assigned for repossession, together with all late fees, which
the Company will pay to the Servicer for its services with regards to the
collection of the Contracts.
DEALERS. The used automobile dealers which will originate the Contracts.
EVENT OF DEFAULT. An event of default with respect to the Notes, defined in
the Indenture as: (a) a failure by the Company to make any interest payment on
the Notes within 30 days after it becomes due; (b) a failure by the Company to
make any principal payment on the Notes at maturity or otherwise within 30 days
after it becomes due; (c) the impairment of the validity or effectiveness of the
Indenture, the
50
<PAGE>
improper amendment or termination of the Indenture, or the failure of the
Company to comply with any of the covenants of the Company in the Indenture, and
the continuance of any such default for a period of 30 days after notice to the
Company by the Trustee or to the Company and the Trustee by the registered
holders of Notes representing at least 25% of the aggregate principal amount of
the outstanding Notes; (d) the incorrectness in any material respect of a
representation or warranty of the Company in the Indenture (exclusive of
representations and warranties as to individual Contracts that the Servicer is
obligated to, and does, repurchase from the Company) and the failure to cure
such circumstances or condition within 30 days of notice thereof to the Company
by the Trustee or the registered holders of Notes representing at least 25% of
the aggregate principal amount of the outstanding Notes; or (e) certain events
of bankruptcy of the Company.
FIESTA MOTORS. A Dealer owned and operated by Fiesta Motors, LLC, a Texas
limited liability company and an affiliate of SAFH by virtue of common
ownership, from which the Company anticipates that it will purchase most of its
Contracts.
FINANCED VEHICLES. The used automobiles and light trucks which secure the
Contracts.
INDENTURE. The trust indenture agreement dated as of , 1998
between the Company and Sterling Trust Company, as trustee pursuant to which the
Notes will be issued.
INVESTOR ADMINISTRATION FEE. A monthly fee equal to 1/12 of 0.5% of the
outstanding principal amount of the Notes, payable on or before the 15th day of
each month, which the Company will pay to the Administrator for its services in
administering Noteholder payments, communications and relations.
MATURITY DATE. February 15, 2002, the date the Notes will mature.
NOTES. 11% Notes due February 15, 2002 to be issued subject to the terms of
the Indenture.
OBLIGORS. The obligors on the Contracts.
OPERATING ACCOUNT. A commercial bank account maintained by the Company into
which the Servicer will cause to be transferred, on a regular basis, all amounts
in the Collections Account, if the Operating Account is a separate account from
the Collections Account.
PAYMENT DATE. The 15th day of each month during the term of each Note.
PURCHASE ADMINISTRATION FEE. A fee per purchased Contract equal to the
lesser of $500, or 5% of the total amount of installments due under the Contract
as of the date of purchase which the Company will pay to the Servicer for its
purchase administration services.
RECORD DATE. The close of business on the first day of the month of any
Payment Date, on which date the registered Noteholders will be determined for
purposes of payment of principal and interest on such Payment Date.
SERVICER. Sovereign Associates, Inc., a Texas corporation, with which the
Company has contracted with to provide necessary purchasing and collecting
services.
SAFH. Sovereign Auto Finance Holdings, Inc., a Texas corporation and the
parent of the Company.
SECURITIZATION SUBSIDIARIES. A number of affiliated entities which have
issued notes to investors and used the net proceeds thereof to purchase consumer
contracts and notes created by the retail sale and financing of used automobiles
and light trucks for which the Servicer provides purchasing and collecting
services.
SERVICING FEES. The Contract Servicing Fee, the Purchase Administration Fee
and all repossession fees.
51
<PAGE>
SERVICING AGREEMENT. The Master Contract Purchase Agreement and the
Servicing Agreement between the Company and the Servicer, each dated as of
1998, pursuant to which the Contracts will be purchased and serviced
on behalf of the Company by the Servicer.
TRUST ACCOUNT. The trust account established in the name of the Trustee to
which the Company is required to transfer, on or prior to the business day
immediately preceding each Payment Date, any amounts necessary for payment of
interest and principal owing on the Notes on such Payment Date.
TRUSTEE. Sterling Trust Company, the trustee under the Indenture.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report............................................................................... F-2
Balance Sheet of the Company as of October 9, 1997......................................................... F-3
Notes to Financial Statement............................................................................... F-4
</TABLE>
F-1
<PAGE>
BELEW AVERITT LLP
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
A MEMBER OF HORWATH INTERNATIONAL
2020 PLAZA OF THE AMERICAS NORTH
DALLAS, TEXAS 75201-2867
TEL: 214-969-7007 - FAX: 214-953-0722
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Sovereign Credit Finance II, Inc.
We have audited the accompanying balance sheet of Sovereign Credit Finance
II, Inc. as of October 9, 1997. This financial statement is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We 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 also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe 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 Sovereign Credit Finance II, Inc.
as of October 9, 1997 in conformity with generally accepted accounting
principles.
October 9, 1997, except for Note, 1 as
to which the date is February 16, 1998
F-2
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
BALANCE SHEET
OCTOBER 9, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 1,000
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY
Common stock, $.01 par value, 50,000 shares authorized, 1,000 shares issued and
outstanding..................................................................... $ 10
Additional paid-in capital........................................................ 990
---------
$ 1,000
---------
---------
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
NOTES TO BALANCE SHEET
OCTOBER 9, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sovereign Credit Finance II, Inc. (Company) was incorporated in Texas on
October 9, 1997. The Company is a subsidiary of Sovereign Auto Finance Holdings,
Inc. (Parent) and was formed for the purpose of purchasing, collecting and
servicing retail installment sales, lease contracts and notes secured by motor
vehicles (Contracts). The Contracts typically involve consumers who cannot
obtain loans from local financial institutions or from the credit facilities of
major automobile manufacturers. The "creditworthiness grade" of the obligors on
the Contracts is usually "D." The Company does business primarily in the south
and southwest.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
during the reporting period. Actual results may vary from such estimates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments exposed to concentration of credit risk
consist primarily of cash maintained in Federally insured financial institutions
which are considered by the Company to be of high credit quality. Therefore,
management considers concentration of credit risk to be limited.
2. AUTOMOBILE CONTRACT NOTES OFFERING
The Company is offering on a "best efforts" basis, up to $10,000,000 in
principal amount of 11% Notes (Notes) due February 15, 2002. Interest begins to
accrue on the Notes upon release of escrowed subscription funds to the Company,
which will not occur until a minimum of $500,000 of the Notes are sold. All
unpaid principal and accrued interest are payable at maturity. The Notes are
being offered through licensed broker-dealers who will receive sales commissions
of 8% of the principal amount of the Notes sold by such broker-dealers.
The Company will also use up to 2% of the gross proceeds from the sale of
the Notes to pay offering and organizational expenses, including filing and
registration fees, legal, accounting, printing, trustee fees, escrow fees and
other fees and expenses. Sovereign Auto Finance, Inc. (SAF), also a subsidiary
of the Company's Parent, will advance some of these expenses. SAF has agreed to
pay such expenses to the extent such expenses exceed 2% of the gross proceeds
from the sale of the Notes. The Company will also pay an additional 5.5% of the
gross proceeds from the sale of the Notes (5.0% of the gross proceeds in excess
of $9,000,000) to SAF for its services in administering and managing the ongoing
operations of the Company. SAF will also administer noteholder payments,
communications and relations. For such services, the Company will pay SAF a
monthly fee equal to 1/12 of 0.5% of the outstanding principal amount of the
Notes.
Such payments to SAF are contingent upon the successful completion of the
Company's public offering. If the offering is not successful, the Company is not
obligated to reimburse SAF for any expenses incurred. The remainder of the
proceeds from the sale of the Notes (84.5% of the gross proceeds) is to be used
to acquire Contracts. No more than 15.5% of such proceeds is to be used for the
foregoing commissions, fees and expenses. Proceeds received from the sale of the
Notes will be held in escrow by a
F-4
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC.
NOTES TO BALANCE SHEET (CONTINUED)
OCTOBER 9, 1997
2. AUTOMOBILE CONTRACT NOTES OFFERING (CONTINUED)
third-party escrow agent and will not be available to the Company until
subscriptions for $500,000 in principal amounts of the Notes have been received.
The Company intends to enter into a note purchasing and servicing agreement
with Sovereign Associates, Inc. (SAI), an unrelated Company. The majority of
Contracts will be originated by Fiesta Motors LLC, an affiliate, which finances
the sale of motor vehicles. SAI will initially be entitled to a monthly
servicing fee of $20 for administering the collection of payments due under the
Contracts for each Contract that is not assigned for repossession. SAI will
receive a fee of $125 for each financed vehicle assigned for repossession. This
fee is paid for overseeing the repossession and resale of the vehicle securing
any Contract in default. SAI will also receive a purchase administration fee for
each Contract purchased, equal to the lesser of $500 or 5% of the total amount
of installments due under the Contract as of the date of purchase.
In addition, the Company intends to enter into an indenture agreement
between the Company and an unrelated trust company, which will govern collection
of the Contract proceeds and repayment of the Notes.
3. SUBSEQUENT EVENT
Effective February 6, 1998, Sovereign Credit Holdings, Inc., the Company's
original parent corporation, sold its investment in the Company to a new
corporation, Sovereign Auto Finance Holdings, Inc. (SAFH). Sovereign Auto
Finance, Inc., an affiliate of SAFH, replaced Sovereign Credit Corporation as
the administrator and manager of the operations of the Company. SAI, the
Company's servicing agent, is no longer an affiliate of the Company. The
financial statements have been restated to reflect these changes in ownership.
F-5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION ON OR TO MAKE ANY
REPRESENTATIONS ABOUT THE COMPANY, THE NOTES OR ANY OTHER MATTER REFERRED TO
HEREIN, OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS AND ANY SUPPLEMENTS OR AMENDMENTS THERETO. IF ANY OTHER INFORMATION
OR REPRESENTATION IS GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MAY NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
AN OFFER WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 9
Capitalization............................................................ 15
Use of Proceeds........................................................... 16
Description of Notes...................................................... 17
The Company............................................................... 25
Purchase and Collection of Contracts...................................... 26
Information Regarding the Securitization Subsidiaries..................... 32
Security Ownership of Certain Beneficial Owners and Management............ 37
Management................................................................ 38
Management's Discussion and Analysis of Financial Condition............... 42
Certain Legal Aspects of the Contracts.................................... 43
Certain Federal Income Tax Considerations................................. 47
Plan of Distribution...................................................... 48
Commission Position on Indemnification for Securities Act Liabilities..... 49
Experts................................................................... 49
Legal Matters............................................................. 49
Definitions............................................................... 50
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 199 , ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SOVEREIGN CREDIT
FINANCE II, INC.
$10,000,000
11% NOTES
DUE FEBRUARY 15, 2002
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 7(b) of the Broker-Dealer Selling Agreement (Exhibit 10.4) provides
generally that each broker-dealer will indemnify and hold harmless the
registrant and its control persons against any loses, liabilities, claims,
damages or expenses they may become subject, under the Securities Act of 1933,
the Securities Exchange Act of 1934 or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon untrue statements of material facts in connection with
the public offering of the Notes or the omission to state a material fact in
connection with the public offering of the Notes. Article XI of the Articles of
Incorporation of registrant provides generally that no director shall be liable
to the registrant or its shareholders for monetary damages for an act or
omission in such director's capacity as a director. Article VII of the By-Laws
of registrant and Section 2.02-1 of the Texas Business Corporation Act provide
generally that the registrant will indemnify each director and officer in
connection with any legal proceeding in which he is a respondent or defendant by
reason of his serving or having served in such capacity.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee.................................................. $ 3,031
NASD Fee.......................................................... 1,500
Escrow Agent Fees................................................. 5,000
Printing Expenses................................................. 25,000*
Blue Sky Fees and Expenses........................................ 20,000*
Legal Fees and Expenses........................................... 25,000*
Accountants' Fees and Expenses.................................... 2,500*
Miscellaneous..................................................... 5,000*
---------
TOTAL........................................................... $ 87,031*
---------
---------
</TABLE>
- ------------------------
* All items except Registration Fee and NASD Fee are estimates.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None
ITEM 27. EXHIBITS.
<TABLE>
<C> <S>
3.1 Articles of Incorporation of Sovereign Credit Finance II, Inc.*
3.2 Bylaws of Sovereign Credit Finance II, Inc.*
4.1 Indenture between Sovereign Credit Finance II, Inc. and Sterling Trust Company, as
Trustee
4.2 Form of 11% Note Due February 15, 2002 (included in Article Two of Indenture filed
as Exhibit 4.1)*
5.1 Opinion of Frederick C. Summers, III, P.C.
8.1 Opinion of Frederick C. Summers, III, P.C., regarding tax matters
10.1 Master Contract Purchase Agreement between Sovereign Credit Finance II, Inc. and
Sovereign Associates, Inc.
10.2 Servicing Agreement between Sovereign Credit Finance II, Inc. and Sovereign
Associates, Inc.
10.3 Subscription Escrow Agreement between Sovereign Credit Finance II, Inc. and Overton
Bank and Trust, N.A. as Escrow Agent*
10.4 Form of Broker-Dealer Selling Agreement*
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.5 Form of Subscription Agreement
10.6 Form of Promissory Note of Sovereign Auto Finance, Inc.
23.1 Consent of Belew Averitt LLP
23.2 Consent of Frederick C. Summers, III, P.C. (included in its opinions as Exhibits 5.1
and 8.1 herein)
25.1 Form T-1: Statement of eligibility of Sterling Trust Company (submitted separately
from other exhibits)*
27 Financial Data Schedule*
</TABLE>
- ------------------------
*Previously filed
ITEM 28. UNDERTAKINGS.
The undersigned registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-2
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Dallas, State of Texas on February 16, 1998.
<TABLE>
<S> <C> <C>
SOVEREIGN CREDIT FINANCE II, INC.
By: /s/ A. STARKE TAYLOR, III
-----------------------------------------
A. Starke Taylor, III
PRESIDENT
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, (principal
executive officer,
/s/ A. STARKE TAYLOR, III principal financial
- ------------------------------ officer and principal February 16, 1998
A. Starke Taylor, III accounting officer) and
director
/s/ WILLIAM P. GLASS
- ------------------------------ Director February 16, 1998
William P. Glass
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation of Sovereign Credit Finance II, Inc.*
3.2 Bylaws of Sovereign Credit Finance II, Inc.*
4.1 Indenture between Sovereign Credit Finance II, Inc. and Sterling Trust Company, as Trustee
4.2 Form of 11% Note Due February 15, 2002 (included in Article Two of Indenture filed as Exhibit 4.1)*
5.1 Opinion of Frederick C. Summers, III, P.C.
8.1 Opinion of Frederick C. Summers, III, P.C., regarding tax matters
10.1 Master Contract Purchase Agreement between Sovereign Credit Finance II, Inc. and Sovereign Associates,
Inc.*
10.2 Servicing Agreement between Sovereign Credit Finance II, Inc. and Sovereign Associates, Inc.*
10.3 Subscription Escrow Agreement between Sovereign Credit Finance II, Inc. and Overton Bank and Trust,
N.A. as Escrow Agent*
10.4 Form of Broker-Dealer Selling Agreement*
10.5 Form of Subscription Agreement
10.6 Form of Promissory Note of Sovereign Auto Finance, Inc.
23.1 Consent of Belew Averitt LLP
23.2 Consent of Frederick C. Summers, III, P.C. (included in its opinions as Exhibits 5.1 and 8.1 herein)
25.1 Form T-1: Statement of eligibility of Sterling Trust Company (submitted separately from other
exhibits)*
27 Financial Data Schedule*
</TABLE>
- ------------------------
*Previously filed
<PAGE>
Exhibit 4.1
SOVEREIGN CREDIT FINANCE II, INC.
AND
STERLING TRUST COMPANY,
TRUSTEE
NOTES
DUE FEBRUARY 15, 2002
--------------------
INDENTURE
--------------------
DATED AS OF __________, 1998
<PAGE>
CROSS-REFERENCE TABLE
TRUST INDENTURE
ACT SECTION INDENTURE SECTION
--------------- -----------------
310 (a)(1) 7.10
(a)(2) 7.10
(a)(3) N/A
(a)(4) N/A
(a)(5) 7.10
(b) 7.8; 7.10; 11.2
(c) N/A
311 (a) 7.11
(b) 7.11
(c) N/A
312 (a) 2.6
(b) 11.3
(c) 11.3
313 (a) 7.6
(b) 7.6
(c) 11.2
(d) 7.6
314 (a) 5.7; 11.2
(b) N/A
(c)(1) 11.4
(c)(2) 11.4
(c)(3) N/A
(d) N/A
(e) 11.4
(f) N/A
315 (a) 7.1(b)
(b) 7.5; 11.2
(c) 7.1(a)
(d) 7.1(c)
(e) 6.11
316 (a)(1)(A) 6.5
(a)(1)(B) 6.4
(a)(2) N/A
(a)(last sentence) 1.1(Defn. of
"Outstanding
Notes")
(b) 6.7
(c) N/A
i
<PAGE>
317 (a)(1) 6.8
(a)(2) 6.9
(b) 5.2
318 (a) 11.1
- ------------------------
"N/A" means Not Applicable
ii
<PAGE>
TABLE OF CONTENTS
PAGE
HEADING NUMBER
- ------- ------
RECITALS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE ONE - DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Incorporation by Reference of Trust Indenture Act. . . . .10
Section 1.3 Rules of Construction. . . . . . . . . . . . . . . . . . .11
ARTICLE TWO - THE SECURITIES
Section 2.1 Forms Generally. . . . . . . . . . . . . . . . . . . . . .11
Section 2.2 Form of Note . . . . . . . . . . . . . . . . . . . . . . .12
Section 2.3 Denominations. . . . . . . . . . . . . . . . . . . . . . .15
Section 2.4 Execution and Authentication . . . . . . . . . . . . . . .15
Section 2.5 Registrar and Paying Agent . . . . . . . . . . . . . . . .16
Section 2.6 Holder Lists . . . . . . . . . . . . . . . . . . . . . . .16
Section 2.7 Transfer and Exchange. . . . . . . . . . . . . . . . . . .16
Section 2.8 Replacement Notes. . . . . . . . . . . . . . . . . . . . .17
Section 2.9 Temporary Notes. . . . . . . . . . . . . . . . . . . . . .17
Section 2.10 Cancellation . . . . . . . . . . . . . . . . . . . . . . .17
Section 2.11 Defaulted Interest . . . . . . . . . . . . . . . . . . . .17
Section 2.12 Persons Deemed Owners. . . . . . . . . . . . . . . . . . .18
ARTICLE THREE - REDEMPTION
Section 3.1 General. . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 3.2 Notice of Redemption . . . . . . . . . . . . . . . . . . .18
Section 3.3 Effect of Notice of Redemption . . . . . . . . . . . . . .19
Section 3.4 Deposit of Redemption Amount . . . . . . . . . . . . . . .19
ARTICLE FOUR - ACCOUNTS, DISBURSEMENTS AND RELEASES
Section 4.1 Trust Account; Operating Account . . . . . . . . . . . . .19
Section 4.2 General Provisions Regarding Trust Account . . . . . . . .22
Section 4.3 Reports by Trustee . . . . . . . . . . . . . . . . . . . .23
iii
<PAGE>
PAGE
HEADING NUMBER
- ------- ------
ARTICLE FIVE - COVENANTS
Section 5.1 Payment of Principal and Interest. . . . . . . . . . . . .23
Section 5.2 Money for Note Payments to be Held in Trust. . . . . . . .24
Section 5.3 Payment of Taxes and Other Claims. . . . . . . . . . . . .25
Section 5.4 Maintenance of Properties. . . . . . . . . . . . . . . . .25
Section 5.5 Limitation on Investment Activities. . . . . . . . . . . .26
Section 5.6 Compliance Certificates. . . . . . . . . . . . . . . . . .26
Section 5.7 Reporting. . . . . . . . . . . . . . . . . . . . . . . . .26
Section 5.8 Performance of Obligations; Servicing Agreement. . . . . .27
Section 5.9 Negative Covenants . . . . . . . . . . . . . . . . . . . .27
ARTICLE SIX - DEFAULTS AND REMEDIES
Section 6.1 Events of Default. . . . . . . . . . . . . . . . . . . . .29
Section 6.2 Acceleration . . . . . . . . . . . . . . . . . . . . . . .30
Section 6.3 Remedies . . . . . . . . . . . . . . . . . . . . . . . . .30
Section 6.4 Waiver of Past Defaults. . . . . . . . . . . . . . . . . .31
Section 6.5 Control by Majority. . . . . . . . . . . . . . . . . . . .31
Section 6.6 Limitation on Suits. . . . . . . . . . . . . . . . . . . .31
Section 6.7 Rights of Holders to Receive Payment . . . . . . . . . . .31
Section 6.8 Collection Suit by Trustee . . . . . . . . . . . . . . . .32
Section 6.9 Trustee may File Proofs of Claim . . . . . . . . . . . . .32
Section 6.10 Priorities . . . . . . . . . . . . . . . . . . . . . . . .32
Section 6.11 Undertaking for Costs. . . . . . . . . . . . . . . . . . .32
Section 6.12 Stay, Extension or Usury Laws. . . . . . . . . . . . . . .33
ARTICLE SEVEN - TRUSTEE
Section 7.1 Duties of Trustee. . . . . . . . . . . . . . . . . . . . .33
Section 7.2 Rights of Trustee. . . . . . . . . . . . . . . . . . . . .34
Section 7.3 Individual Rights of Trustee . . . . . . . . . . . . . . .35
Section 7.4 Trustee's Disclaimer . . . . . . . . . . . . . . . . . . .35
Section 7.5 Notice of Default. . . . . . . . . . . . . . . . . . . . .35
Section 7.6 Reports by Trustee to Holders. . . . . . . . . . . . . . .35
Section 7.7 Compensation and Indemnity . . . . . . . . . . . . . . . .36
Section 7.8 Replacement of Trustee . . . . . . . . . . . . . . . . . .36
Section 7.9 Successor Trustee by Merger, etc.. . . . . . . . . . . . .37
Section 7.10 Eligibility; Disqualification. . . . . . . . . . . . . . .37
Section 7.11 Preferential Collection of Claims Against Company. . . . .37
Section 7.12 Withholding Taxes. . . . . . . . . . . . . . . . . . . . .38
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HEADING NUMBER
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ARTICLE EIGHT - DISCHARGE OF INDENTURE
Section 8.1 Satisfaction and Discharge of Indenture. . . . . . . . . .38
Section 8.2 Application of Trust Money . . . . . . . . . . . . . . . .39
Section 8.3 Repayment to Company . . . . . . . . . . . . . . . . . . .39
ARTICLE NINE - AMENDMENTS, SUPPLEMENTS AND WAIVERS
Section 9.1 Without Consent of Holders . . . . . . . . . . . . . . . .39
Section 9.2 With Consent of Holders. . . . . . . . . . . . . . . . . .40
Section 9.3 Compliance with Trust Indenture Act. . . . . . . . . . . .40
Section 9.4 Revocation and Effect of Consents. . . . . . . . . . . . .40
Section 9.5 Notation on or Exchange of Notes . . . . . . . . . . . . .41
Section 9.6 Trustee to Sign Amendments, etc. . . . . . . . . . . . . .41
ARTICLE TEN - MEETINGS OF HOLDERS
Section 10.1 Purposes for Which Meetings may be Called. . . . . . . . .41
Section 10.2 Manner of Calling Meetings . . . . . . . . . . . . . . . .42
Section 10.3 Call of Meetings by Company or Holders . . . . . . . . . .42
Section 10.4 Who may Attend and Vote at Meetings. . . . . . . . . . . .42
Section 10.5 Regulations may be Made by Trustee; Conduct of the
Meeting; Voting Rights . . . . . . . . . . . . . . . . . .42
Section 10.6 Exercise of Rights of Trustee or Holders may not be
Hindered or Delayed by Call of Meeting . . . . . . . . . .43
Section 10.7 Evidence of Actions by Holders . . . . . . . . . . . . . .43
ARTICLE ELEVEN - MISCELLANEOUS
Section 11.1 Trust Indenture Act Controls . . . . . . . . . . . . . . .43
Section 11.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . .43
Section 11.3 Communication by Holders with Other Holders. . . . . . . .44
Section 11.4 Certificate and Opinion as to Conditions Precedent . . . .44
Section 11.5 Rules by Paying Agent and Registrar. . . . . . . . . . . .45
Section 11.6 Legal Holidays . . . . . . . . . . . . . . . . . . . . . .45
Section 11.7 Governing Law. . . . . . . . . . . . . . . . . . . . . . .45
Section 11.8 No Adverse Interpretation of Other Agreements. . . . . . .45
Section 11.9 No Recourse Against Others . . . . . . . . . . . . . . . .45
Section 11.10 Successors . . . . . . . . . . . . . . . . . . . . . . . .45
Section 11.11 Duplicate Originals. . . . . . . . . . . . . . . . . . . .45
Section 11.12 Severability . . . . . . . . . . . . . . . . . . . . . . .46
Section 11.13 Headings . . . . . . . . . . . . . . . . . . . . . . . . .46
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ARTICLE TWELVE - AGREEMENTS OF SERVICER
Section 12.1 General. . . . . . . . . . . . . . . . . . . . . . . . . .46
Section 12.2 Master Collections Account . . . . . . . . . . . . . . . .46
Section 12.3 Servicer Acting as Custodian . . . . . . . . . . . . . . .47
Section 12.4 Records. . . . . . . . . . . . . . . . . . . . . . . . . .47
Section 12.5 Payment of Fees and Expenses of Trustee. . . . . . . . . .47
Section 12.6 Servicing Compensation . . . . . . . . . . . . . . . . . .48
Section 12.7 Realization upon Defaulted Contracts . . . . . . . . . . .48
Section 12.8 Appointment of Custodian for Contract Documents. . . . . .48
Section 12.9 Purchase of Eligible Contracts . . . . . . . . . . . . . .49
Section 12.10 Reporting by the Servicer. . . . . . . . . . . . . . . . .51
Section 12.11 Annual Accountants' Reports. . . . . . . . . . . . . . . .51
Section 12.12 Representations and Warranties Concerning the Servicer . .52
Section 12.13 Corporate Existence; Status as Servicer; Merger. . . . . .53
Section 12.14 Performance of Obligations . . . . . . . . . . . . . . . .53
Section 12.15 The Servicer Not to Resign; Assignment . . . . . . . . . .53
Section 12.16 Representations and Warranties as to the Contracts . . . .54
Section 12.17 Purchase of Certain Contracts. . . . . . . . . . . . . . .56
Section 12.18 Indemnification. . . . . . . . . . . . . . . . . . . . . .56
Section 12.19 Termination. . . . . . . . . . . . . . . . . . . . . . . .57
Section 12.20 Amendment. . . . . . . . . . . . . . . . . . . . . . . . .57
Section 12.21 Inspection and Audit Rights. . . . . . . . . . . . . . . .57
ARTICLE THIRTEEN - ADDITIONAL LENDER
Section 13.1 Indenture Subject to Terms of Additional Borrowing . . . .58
EXHIBIT A - CONTRACT PURCHASE CRITERIA . . . . . . . . . . . . . . . . . . . A-1
EXHIBIT B - MONTHLY REPORT CERTIFICATE . . . . . . . . . . . . . . . . . . . B-1
EXHIBIT C - TRUSTEE'S FEE. . . . . . . . . . . . . . . . . . . . . . . . . . C-1
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THIS INDENTURE, dated as of _______, 1998 is between SOVEREIGN CREDIT
FINANCE II, INC., a Texas corporation (the "Company"), having its principal
office at 4015 Beltline Road, Building B, Dallas, Texas 75244 and Sterling
Trust Company, as Trustee (the "Trustee"), a trust company organized and
existing under the laws of the State of Texas and having its principal office
at 7901 Fish Pond Road, Waco, Texas 76710.
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture and the issuance of its Notes Due February 15, 2002 in the maximum
aggregate principal amount of $10,000,000 (the "Notes").
All acts necessary to make the Notes, when executed by the Company,
authenticated and delivered hereunder and duly issued by the Company, the
valid obligations of the Company and to make this Indenture a valid agreement
of the Company, in accordance with their and its terms, have been
accomplished.
Therefore, for and in consideration of the premises and the purchase or
acceptance of the Notes by the Holders (as herein defined) thereof, it is
mutually covenanted and agreed, for the equal and proportionate benefit of
all Holders, as follows:
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.1 Definitions.
"Accounts" means the Trust Account and the Operating Account established
by the Company under the provisions of Section 4.1.
"Additional Lender" means the Additional Lender as defined by the final
prospectus filed with the SEC pursuant to which the Notes are offered and
sold on behalf of the Company.
"Additional Borrowing" means any one or more loans, and the proceeds
thereof, made by the Additional Lender to the Company and subject to any
restrictions set forth in the final prospectus filed with the SEC pursuant to
which the Notes are offered and sold on behalf of the Company.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by,
such Person. As used in this definition "control" (including, with its
correlative meanings, "controlled by" and "under common control with") means
possession, directly or indirectly, of power to direct or cause the direction
of management or policies (whether through ownership of capital stock,
partnership interests, by contract or otherwise), provided that, in any
event, any Person which owns directly or indirectly 10% or more of the
securities having ordinary voting power for the election of directors or
other governing body of a corporation or 10% or more of the partnership or
other ownership interests of any other Person (other than as a limited
partner of such other Person) will be deemed to control such other Person for
the purposes of this definition; and provided further that no individual
shall be an Affiliate of a corporation or partnership solely by reason of his
being an officer, director or partner of such entity.
"Allowed Expenses" means any amounts due the Trustee under Section 7.7,
any Servicing Fees, any fees payable for the transfer of the lien reflected
in the Title Documents into and out of the Company's name, any federal, state
and local taxes and assessments incurred by the Company (including corporate
franchise taxes and any payments by the Company to any of its Affiliates as
reimbursements for tax payments made by such Affiliate for the Company's
benefit or the benefit obtained by the Company from use of tax losses
employed by such Affiliate to offset taxable
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income of the Company), any bank service charges and account fees relating to
the Accounts and the subscription escrow account established for the receipt
of the proceeds from the offering and sale of the Notes, the lockbox fees,
account fees and bank service charges relating to the Collections Account,
any legal and accounting fees and printing expenses (excluding Offering
Expenses, but including those otherwise incurred to comply with reporting and
other requirements under Federal and state securities laws and for reports,
compliance certificates and opinions required by the Indenture), premiums for
vehicle value, vendor single interest (VS1), auto loan default, gap or other
insurance, charges for vehicle warranty repair service contracts (including
fees paid to vehicle dealers), any Liquidation Expenses (as to each Financed
Vehicle, limited to the related Liquidation Proceeds), any Insurance Expenses
(as to each Financed Vehicle, limited to the related Insurance Proceeds), and
any other Allowed Expenses as described in or defined by the prospectus which
offers the Notes for sale.
"Assignment" means the original instrument of assignment of a Contract
and all other documents securing such Contract made by the Servicer to the
Company (or in the case of any Contract acquired by the Company from another
Person, from such other Person to the Company), which is in a form sufficient
under the laws of the jurisdiction under which the security interest in the
related Financed Vehicle arises to permit the assignee to exercise all rights
granted by the Obligor under such Contract and such other documents to the
obligee and to exercise all rights available under applicable law under such
Contract and which may, to the extent permitted by the laws of such
jurisdiction, be an assignment constituting a part of the form of the
Contract itself or a blanket instrument of assignment covering other
Contracts as well.
"Bankruptcy Law" shall have the meaning provided in Section 6.1.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a Legal Holiday.
"Collection Period" means with respect to any Payment Date or Report
Date, the calendar month immediately preceding the Payment Date or Report
Date.
"Collections Account" means the lockbox account created and maintained
by the Servicer in the Company's name and designated as such pursuant to
Section 12.2.
"Company" means the Person named as the "Company" in the first paragraph
of this instrument until a successor Person replaces it pursuant to the
applicable provisions of this Indenture, and thereafter "Company" means such
successor Person.
"Company Order" or "Company Request" means a written order or request
signed in the name of the Company by its Chairman, President or a Vice
President, Treasurer, Assistant Treasurer, Controller, Assistant Controller,
Secretary or an Assistant Secretary, and delivered to the Trustee.
"Contract" means each retail installment sales or lease contract (or
other obligation) and security agreement which has been executed by an
Obligor and pursuant to which such Obligor purchased or leased the Financed
Vehicle described therein, agreed to pay the remaining unpaid portion of the
purchase price or the lease payments, as therein provided in connection with
such purchase or lease, granted a security interest in such Financed Vehicle,
and undertook to perform certain other obligations as specified in such
Contract and which is granted to the Trustee pursuant to this Indenture as
security for the Notes.
"Contract Documents" means with respect to each Contract, (i) the
original Contract; (ii) either the original Title Document for the related
Financed Vehicle showing the Obligor (or the originating dealer, in the case
of a lease) as the owner and the Servicer or the Company as first lienholder
or an official receipt from the responsible state or local governmental
authority showing that an application has been made (and the required fees
have been paid) for registration of the Title Documents for such Financed
Vehicle in the names of the Obligor (or the originating dealer, in the case
of a lease) as owner and the Servicer or the Company as first lienholder (or
such other evidence of perfection of the security interest in the related
Financed Vehicle granted by such Contract, as determined by the Company to be
permitted or required to perfect such security interest under the laws of the
applicable jurisdiction, or a guarantee from
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the dealer selling such Financed Vehicle that the Title Document for such
Financed Vehicle showing the Servicer or the Company as first lienholder has
been applied for); (iii) the related Assignment; and (iv) any agreement(s)
modifying the Contract (including, without limitation, any extension
agreement(s)).
"Defaulted Contract" means with respect to any Collection Period, a
Contract (a) whose Obligor, at the end of such Collection Period, (i) in the
case of Contracts requiring biweekly or semi-monthly installments, is past
due with respect to at least three consecutive scheduled installments and has
failed for 30 days to remit any sums against the obligations under the
Contract, or (ii) in the case of Contracts requiring monthly installments, is
past due with respect to two scheduled installments and has failed for 60
days to remit any sums against the obligations under the Contract, or (b)
with respect to which the related Financed Vehicle has been repossessed and,
in the case of either (a) or (b), in respect of which Liquidation Proceeds,
which, in the Servicer's judgment, would constitute the final amounts
recoverable in respect of such Contract, have not yet been collected as of
the end of such Collection Period.
"Due Date" means as to any installment payable by an Obligor on a
Contract, the date upon which such installment is due.
"Eligible Account" means an account that is either (i) maintained with a
depository institution subject to supervision or examination by federal or
state authority and having a combined capital and surplus of at least
$15,000,000, (ii) an account or accounts the deposits in which are fully
insured by the Federal Deposit Insurance Corporation, or (iii) maintained
with the Trustee or its successor.
"Eligible Contract" means a Contract hereafter acquired by the Company
that, as of the date of such acquisition, satisfies the representations and
warranties contained in Section 12.16 of this Indenture.
"Eligible Investments" means any one or more of the following
obligations or securities:
(i) United States Obligations;
(ii) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by, or federal funds sold by any depository
institution or trust company (including the Trustee) incorporated under
the laws of the United States of America or any state thereof and subject
to supervision and examination by federal and/or state banking authorities,
so long as such institution or company has a combined capital and surplus
of at least $15,000,000;
(iii) repurchase obligations with respect to any security described
in clause (i) entered into with a depository institution or trust company
(including the Trustee), acting as principal, whose obligations having the
same maturity as that of the repurchase agreement and would be Eligible
Investments under clause(ii) above;
(iv) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or
any state thereof which at the time of such investment have long-term,
unsecured debt rated by Standard & Poor's as "AA-" or better; provided,
however, that securities issued by any particular corporation will not be
Eligible Investments to the extent that investment therein will cause the
then outstanding principal amount of securities issued by such corporation
to exceed 10% of the aggregate outstanding balances and amounts of all
Contracts and Eligible Investments;
(v) commercial paper given the highest rating by Standard & Poor's
at the time of such investment; and
(vi) pooled or common trust funds of the Trustee or of any publicly
traded money market mutual fund that are invested in the above-mentioned
Eligible Investments.
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"Event of Default" shall have the meaning provided in Section 6.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financed Vehicle" means as to any Contract, the automobile or
light-duty truck that constitutes security for the obligations of the Obligor
thereunder.
"Full Prepayment" means any of the following: (i) payment to the
Servicer of 100% of the outstanding installments of a Contract (exclusive of
any Contract referred to in clause (ii) or (iii) of the definition of the
term "Liquidated Contract"), less any discount on such installments to which
the Obligor shall be entitled under the terms of such Contract and applicable
law by virtue of early payment of any installment, or (ii) payment by the
Servicer into the Collections Account of the purchase price of a Contract in
connection with the purchase by Servicer of a Contract pursuant to Section
12.17.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Independent" means with respect to any specified Person, that such
Person (i) is in fact independent, (ii) does not have any direct financial
interest or any material indirect financial interest in the Company or in any
other obligor upon the Notes or in any Affiliate of the Company or of such
other obligor, and (iii) is not connected with the Company or such other
obligor as an officer, employee, promoter, underwriter, trustee, partner,
director or Person performing similar functions. Whenever it is herein
provided that any Independent Person's opinion or certificate shall be
furnished to the Trustee, such Person shall be appointed by a Company Order
and approved by the Trustee in the exercise of reasonable care and such
opinion or certificate shall state that the signer is Independent within the
meaning hereof.
"Insurance Expenses" means, with respect to a Financed Vehicle, any
expenses incurred by the Servicer and recoverable out of the Insurance
Proceeds from the related insurance policy and any portion of such Insurance
Proceeds applied to the repair of such Financed Vehicle or required to be
released to the related Obligor.
"Insurance Proceeds" means the proceeds paid by any insurer pursuant to
any Physical Damage Insurance Policy, any credit or life insurance policy
covering payments owing under any Contract, or any other insurance policy for
damage or repair of a Financed Vehicle or for liability for confiscated,
converted or "skipped" Financed Vehicles.
"Legal Holiday" shall have the meaning provided in Section 11.6.
"Liquidated Contract" means a Contract which (i) has been the subject of
a Full Prepayment, (ii) was a Defaulted Contract and with respect to which
Liquidation Proceeds which, in the Servicer's judgment, constitute the final
amounts recoverable in respect of such Contract have been realized and
deposited in the Collections Account, or (iii) has been paid in full on or
after its Maturity Date.
"Liquidation Expenses" means the reasonable out-of-pocket expenses
incurred by the Servicer in connection with the liquidation of any Contract
(including the attempted liquidation of a Contract which is brought current
and is no longer in default during such attempted liquidation), the
repossession, holding and repair of any Financed Vehicle related thereto and
the sale of any repossessed or returned Financed Vehicle related thereto,
which expenses may include Insurance Expenses.
"Liquidation Proceeds" means the amounts received by the Servicer
(before reimbursement for Liquidation Expenses) in connection with the
liquidation of any Defaulted Contract and the sale of any repossessed or
returned Financed Vehicle related thereto, whether through repurchase by the
motor vehicle dealer who originated the Contract, receipt of Insurance
Proceeds, repossession, sale or otherwise.
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"Majority Holders" means the Holders of Notes representing more than 50%
of the aggregate principal amount of Notes which are then Outstanding Notes.
"Maturity Date" means with respect to any Contract, the date on which
the last scheduled installment of such Contract shall be due and payable
(after giving effect to all prepayments received prior to the date of
determination).
"Monthly Report" means a combined Officer's Certificate of the Company
and the Servicer relating to the purchasing and servicing of the Contracts,
interest payments on the Notes and disbursements from the Operating Account
and required to be delivered to the Trustee under this Indenture. The
Monthly Report shall be substantially in the form of Exhibit B attached
hereto, as amended from time to time, and shall have attached or included all
lists, data and information required to be attached or included hereunder.
"Net Insurance Proceeds" means the amount derived by subtracting from
the Insurance Proceeds of a Financed Vehicle the related Insurance Expenses.
"Net Liquidation Proceeds" means the amount derived by subtracting from
the Liquidation Proceeds of a Contract the related Liquidation Expenses.
"Note Register" means the register for the Notes maintained by the
Registrar pursuant to Section 2.5.
"Notes" means the Notes Due February 15, 2002, as amended or
supplemented from time to time, that are issued under this Indenture.
"Obligor" means each Person who is indebted under a Contract or who has
acquired or leased a Financed Vehicle subject to a Contract.
"Offering Amount" shall mean the $10,000,000 in aggregate principal
amount of the Notes that may be issued under this Indenture.
"Offering Expenses" shall mean the fees, commissions and expenses that
the Company will pay from the proceeds of the sale of the Notes, as disclosed
in the final prospectus relating to the offering of the Notes filed with the
SEC pursuant to which the Notes are offered and sold on behalf of the Company.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary or the Controller of any Person.
"Officer's Certificate" when used with respect to any Person, means a
certificate signed by the Chairman of the Board, President, any Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of such Person, or any other officer of such Person
customarily performing functions similar to those performed by any of the
above designated officers.
"Operating Account" means the commercial bank account created and
maintained by the Company and denominated as such pursuant to Section 4.1.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Outstanding Contracts" as of any date means all Contracts other than
Liquidated Contracts.
"Outstanding Notes" means, with respect to the Notes, as of the date of
determination, all the Notes theretofore authenticated and delivered under
this Indenture except:
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(i) the Notes theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(ii) the Notes or portions thereof for whose payment or redemption
money in the necessary amount has been theretofore deposited with the
Trustee or any Paying Agent in trust for the Holders of such Notes;
provided that, if such Notes or portions thereof are to be redeemed, notice
of such redemption has been duly given pursuant to this Indenture or
provision therefor satisfactory to the Trustee has been made; and
(iii) Notes in exchange for or in lieu of which other Notes have
been authenticated and delivered pursuant to this Indenture unless proof
satisfactory to the Trustee is presented that any such Notes are held by a
holder in due course;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company or any Affiliates of the Company shall be disregarded and deemed
not to be Outstanding Notes, except that, in determining whether the Trustee
shall be protected in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Notes with respect to which the
Trustee has received written notice of such ownership or otherwise has actual
knowledge of such ownership shall be so disregarded. Notes so owned which
have been pledged in good faith may be regarded as Outstanding Notes if the
pledgee establishes to the satisfaction of the Trustee the pledgee's right so
to act with respect to such Notes and that the pledgee is not the Company or
any other obligor upon the Notes or any Affiliates of the Company or such
other obligor.
"Paying Agent" means the Trustee or any other Person that meets the
eligibility standards for the Trustee specified in Section 7.10 and is
authorized by the Company to pay the principal or any interest which may
become payable on any Notes on behalf of the Company.
"Payment Date", with respect to any Note, means the (i) 15th day of each
calendar month (unless such day is not a Business Day in which event the next
preceding Business Day) commencing with the second calendar month following
the month in which the Note is issued, and (ii) the Stated Maturity.
"Person" means any individual, any corporation, partnership, joint
venture, trust or other entity, any unincorporated organization or any
government or agency or political subdivision thereof.
"Physical Damage Insurance Policy" means with respect to a Financed
Vehicle, any policy of physical damage, comprehensive or collision insurance
covering the Financed Vehicle pursuant to which the Servicer may obtain
recoveries for loss or damage to the Financed Vehicle.
"Price/Payments Ratio" means with respect to any Contract, the ratio of
the original purchase price paid by the Company for the purchase of a
Contract to the aggregate unpaid installments on the Contract, as of the date
of the purchase by the Company.
"Purchase Date" means the date on which the Company remits funds from
the Operating Account to pay the purchase price for an Eligible Contract.
"Record Date" for the interest and any principal payable on any Payment
Date means the first day (whether or not a Business Day) of the month in
which such Payment Date occurs.
"Redemption Date" has the meaning set forth in Section 3.1(a).
"Redemption Price" has the meaning set forth in Section 3.1(a).
"Registrar" means the office or agency of the Company or its designee
where the Notes may be presented for registration of transfer or exchange, as
established under Section 2.5.
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"Registrar of Titles" means the agency, department or office having the
responsibility for maintaining records of titles to motor vehicles and
issuing documents evidencing such titles in the jurisdiction in which a
particular Financed Vehicle is registered.
"Report Date" means the 20th day (or the Business Day next succeeding
such day if such day is not a Business Day) of each month during the
existence of this Indenture.
"Responsible Officer" when used with respect to the Trustee means the
Chairman or Vice Chairman of the Board of Directors or Trustees, the Chairman
or Vice Chairman of the Executive Committee of the Board of Directors or
Trustees, the President, any Vice President, any Assistant Vice President,
any Trust Officer or Assistant Trust Officer, the Secretary, any Assistant
Secretary, the Treasurer, any Assistant Treasurer, or any other officer of
the Trustee customarily performing functions similar to those performed by
any of the above designated officers and also means, with respect to a
particular corporate trust matter, any other officer to whom such matter is
referred because of his or her knowledge of an familiarity with the
particular subject.
"SAFH" means Sovereign Auto Finance Holdings, Inc., of which the Company
is a wholly-owned subsidiary.
"SEC" means the Securities and Exchange Commission.
"Servicer" means Sovereign Associates, Inc. as servicer under the
Servicing Agreement, and its permitted successors and assigns.
"Servicer Request" means a written request signed in the name of the
Servicer by a Servicing Officer and delivered to the Trustee.
"Servicing Agreement" means the Master Contract Purchase Agreement and
the Servicing Agreement, each dated as of _______, 1998, by and between the
Company and the Servicer, providing among other things, for the purchasing,
collecting and servicing of the Contracts, as said agreements may be amended
or supplemented from time to time as permitted hereby and thereby. Such term
shall also include any purchasing and servicing agreements entered into with
a successor servicer and any separate servicing agreement for the servicing
of Contracts.
"Servicing Fee" means the servicing, purchasing, investor administration
and repossession fees and other fees payable by the Company to the Servicer
under the Servicing Agreement.
"Servicing Officer" means any officer of the Servicer involved in, or
responsible for, the administration and servicing of the Contracts whose name
appears on a list of Servicing Officers furnished to the Company and the
Trustee by the Servicer, as such list may be amended or supplemented from
time to time.
"Special Record Date" means the date determined pursuant to Section 2.11.
"Stated Maturity" means February 15, 2002.
"TIA" means the Trust Indenture Act of 1939, as amended.
"Title Document" means with respect to any Financed Vehicle, the
certificate of title for, or other evidence of ownership of, such Financed
Vehicle issued by the Registrar of Titles in the jurisdiction in which such
Financed Vehicle is registered.
"Trust Account" means the trust account controlled by the Trustee and
designated as such pursuant to Section 4.1, which account may be a
sub-account (for accounting purposes) of a general account maintained by the
Trustee.
"Trust Officer" means any Responsible Officer assigned by the Trustee to
administer its corporate trust matters.
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"Trustee" means the party named as such in this Indenture until a
successor replaces it and thereafter means the successor.
"UCC" means the Uniform Commercial Code as in effect in the relevant
jurisdiction.
"United States Obligations" means direct obligations of the United
States of America or any agency or instrumentality of the United States of
America, or other obligations the principal of and interest on which are
unconditionally guaranteed or insured by Unites States of America.
Section 1.2 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, such provision
is incorporated by reference in and made a part of this Indenture. If this
Indenture is qualified under the TIA, any provision that is required by the
TIA to be incorporated herein shall be so incorporated and shall supersede
any conflicting provision hereof. The following TIA terms have the following
meanings in this Indenture:
"Commission" means the SEC.
"indenture securities" means the Notes.
"indenture securityholder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company (or any other
obligor on the Notes).
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them.
Section 1.3 Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principals as of the
date of this Indenture;
(3) "or" is not exclusive; and
(4) words in the singular include the plural, and in the plural include
the singular.
ARTICLE TWO
THE SECURITIES
Section 2.1 Forms Generally.
The Notes and the Trustee's certificate of authentication shall be in
substantially the forms set forth in this
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Article, with such appropriate insertions, omissions, substitutions and other
variations as are required by this Indenture, and may have such letters,
numbers or other marks of identification and such legends or endorsements
placed thereon as may be required to comply with the rules of any securities
exchange on which the Notes may be listed, or as may, consistently herewith,
be determined by the officers executing such Notes, as evidenced by their
execution thereof. Any portion of the text of any Note may be set forth on
the reverse thereof, in which case the following reference to the portion of
the text appearing on the reverse of the Notes shall be inserted on the face
of the Notes, immediately prior to the paragraph stating that the certificate
of authentication on the Note must be executed by manual signature of the
Trustee as a condition to the validity of such Note:
"Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof which provisions shall for all purposes have
the same effect as if set forth at this place."
The definitive Notes shall be printed, lithographed or engraved or produced
by any commercially reasonable manner, all as determined by the officers
executing such Notes, as evidenced by their execution thereof.
Section 2.2 Form of Note.
(a) The form of Note is as follows:
SOVEREIGN CREDIT FINANCE II, INC.
NOTES DUE FEBRUARY 15, 2002
$ No.
--------------- -------------
Sovereign Credit Finance II, Inc., a corporation duly organized and
existing under the laws of the State of Texas (herein referred to as the
"Company"), for value received, hereby promises to pay to _____________________
or registered assigns, the principal sum of _____________________ dollars, and
to pay interest (computed on the basis of a 360-day year consisting of 12
months of 30 days each) on the unpaid portion of said principal sum outstanding
from time to time from the date of issue, until the principal amount of this
Note is paid in full, at the rate of eleven percent (11.0%) per annum, which
interest shall be due and payable upon the 15th day of each calendar month (for
such interest accruing through the last day of the prior calendar month) during
the term of this Note commencing with the second calendar month following the
calendar month in which this Note is issued (each a "Payment Date"). The
principal sum hereof shall be due and payable on February 15, 2002 (the "Stated
Maturity"), at which time all then unpaid principal and accrued interest
hereunder shall be due and payable.
The principal of and interest on this Note are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts. All payments made by the
Company with respect to this Note shall be applied first to interest due and
payable on this Note as provided above and then to the unpaid principal of
this Note. This Note represents a general obligation of the Company.
This Note is one of a duly authorized issue of Notes of the Company,
designated as its Notes Due February 15, 2002 (herein called the "Notes"),
all issued and to be issued under an Indenture dated as of _______, 1998
(herein called the "Indenture"), between the Company and Sterling Trust
Company (the "Trustee", which term includes any successor Trustee under the
Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights thereunder
of the Company, the Trustee and the Holders of the Notes, and the terms upon
which the Notes are, and are to be, authenticated and delivered. All
capitalized terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
Payment of the outstanding principal of and accrued interest on this
Note at the Stated Maturity or of the Redemption Price payable on any
Redemption Date as of which this Note has been called for redemption shall be
made upon presentation of this Note to the Paying Agent appointed by the
Company for such purpose. Payments of all
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installments of interest due and payable on any Payment Date (other than the
Stated Maturity) shall be made by check mailed to the Person whose name
appears as the Holder of this Note on the Note Register as of the first day
of the month in which such Payment Date occurs (the "Record Date") without
requiring that this Note be submitted for notation of payment. Checks
returned undelivered will be held for payment to the Person entitled thereto,
subject to the terms of the Indenture, at the office or agency in the United
States of America designated by the Company for such purpose pursuant to the
Indenture.
If an Event of Default shall occur and be continuing with respect to the
Notes, the Notes, and all principal and unpaid accrued interest, may be
declared due and payable in the manner and with the effect provided in the
Indenture.
The Notes are redeemable, at any time, at the option of the Company on
any Payment Date, in whole or in part, at 100% of the unpaid principal amount
thereof, together with accrued interest thereon; provided, however, that the
Paying Agent shall be required to redeem the Notes at such time only to the
extent that the Company has theretofore deposited with the Paying Agent money
sufficient to effect such redemption. At least ten days prior to the
Redemption Date, the Company is required to mail a notice of redemption to
the registered owner of this Note specifying the Redemption Date, the
Redemption Price, the name and address of the Paying Agent, that this Note
must be delivered to the Paying Agent and that interest on this Note ceases
to accrue on and after the Redemption Date.
If provision is made for the redemption and payment of this Note in
accordance with the Indenture, this Note shall thereupon cease to bear
interest from and after the Redemption Date.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Note may be registered on the Note Register
of the Company, upon surrender of this Note for registration of transfer at
the office or agency designated by the Company pursuant to the Indenture,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder
hereof or such Holder's attorney duly authorized in writing, and thereupon
one or more new Notes of authorized denominations and for the same aggregate
principal amount will be issued to the designated transferee or transferees.
The Company may charge a reasonable fee for the registration of such
transfer, or for any change of address of a Holder (or of any other Person to
whom the Holder directs that payments under this Note are to be made).
Prior to the due presentment for registration of transfer of this Note,
the Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note be overdue, and neither the
Company, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Notes under the Indenture at any
time by the Company with the consent of the Majority Holders. The Indenture
also contains provisions permitting the Majority Holders, on behalf of the
Holders of all the Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by the Holder of this Note
shall be conclusive and binding upon such Holder and upon all future holders
of this Note and of any Note issued upon the registration of transfer hereof
or in exchange hereof or in lieu hereof whether or not notation of such
consent or waiver is made upon this Note. The Indenture also permits the
Trustee to amend or waive certain terms and conditions set forth in the
Indenture without the consent of Holders of the Note issued thereunder.
The Notes are issuable only in registered form in denominations as
provided in the Indenture and subject to certain limitations therein set
forth. The Notes are exchangeable for a like aggregate principal amount of a
different authorized denomination, as requested by the Holder surrendering
same. The Company may charge a reasonable fee for such exchange.
This Note and the Indenture shall be construed in accordance with, and
governed by, the laws of the State of
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Texas applicable to agreements made and to be performed therein.
The Indenture and this Note are hereby expressly limited so that in no
contingency or event, whether by reason of acceleration of the maturity of
this Note or otherwise, shall the amount paid, or agreed to be paid by the
Company for the use, forbearance, or detention of the money loaned under this
Note or otherwise or for the payment or performance of any covenant or
obligation contained herein or the Indenture or in any other document
evidencing, securing or pertaining hereto, exceed the maximum amount
permissible under applicable law, as now or as hereafter amended. If from
any circumstances whatsoever fulfillment of any provision hereof or any of
such other documents, at the time performance of such provision shall be due,
shall involve transcending the limit of validity prescribed by law, then IPSO
FACTO, the obligation to be fulfilled shall be reduced to the limit of such
validity, and if from any such circumstances the Holder of this Note shall
ever receive interest or anything which might be deemed interest under
applicable law which should exceed the highest lawful rate, such amount which
would be excessive interest shall be applied to the reduction of the
principal of this Note and not to the payment of interest, or if such
excessive interest exceeds the unpaid balance of principal of this Note such
excess shall be refunded to the Company. All sums paid or agreed to be paid
to the Holder of this Note for the use, forbearance or detention of the
indebtedness of the Company to the Holder of this Note shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so that
the actual rate of interest on account of such indebtedness is uniform, or
does not exceed the maximum rate permitted by applicable law as now or
hereafter amended, throughout the term thereof. The terms and provisions of
this paragraph shall control and supersede every other provision of this Note
and the Indenture. The Company hereby waives, to the extent permitted by
applicable law, all of its rights or protections afforded by any applicable
usury or interest limitation law.
Unless the certificate of authentication hereon has been executed by the
Trustee by manual signature, this Note shall not be entitled to any benefit
under the Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, Sovereign Credit Finance II, Inc. has caused this
instrument to be duly executed under its corporate seal.
Dated:
--------------------------
SOVEREIGN CREDIT FINANCE II, INC.
By:
------------------------------
[SEAL] (Authorized Officer)
Attest:
- -----------------------------------
(Authorized Officer)
(b) The form of the Trustee's certificate of authentication is as follows:
This is one of the Notes referred to in the withinmentioned Indenture.
STERLING TRUST COMPANY, as Trustee, Paying Agent and
Registrar
By:
-------------------------------
Authorized Signatory
Section 2.3 Denominations.
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The Notes shall be issuable only in registered form. The Notes shall be
issuable in any denomination, with no minimum denomination.
Section 2.4 Execution and Authentication.
(a) The Notes shall be executed on behalf of the Company by its
Chairman of the Board, President or any Vice President of the Company and
attested to by an Officer of the Company other than an Officer who has
executed the Notes. The signature of any of such individuals on the Notes
may be manual or facsimile.
(b) Notes bearing the manual or facsimile signatures of individuals who
at any time held one or more of the offices set forth in subsection (a) above
shall bind the Company, notwithstanding that such individuals or any of them
have ceased to be such prior to the authentication and delivery of such Notes.
(c) A Note shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Note on
behalf of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.
(d) The Trustee shall authenticate Notes from time to time for original
issue up to the aggregate Offering Amount upon a Company Order; provided,
however, Trustee shall not be required to so authenticate more often than
once in a calendar month.
Section 2.5 Registrar and Paying Agent.
(a) The Company shall maintain or cause to be maintained an office or
agency where Notes may be presented for registration of transfer or for
exchange (the "Registrar"). The Registrar shall keep a register of the Notes
and of their transfer and exchange (the "Note Register"). The Company may
have one or more co-registrars.
(b) Subject to the provisions of Section 5.2, the Company may designate
one or more Paying Agents, within the United States of America, at which
Notes may be presented or surrendered for payment or which may make payments
of accrued interest on the Notes on behalf of the Company with funds
withdrawn from the Sinking Fund Account.
(c) The Company shall notify the Trustee of the name and address of any
such Registrar or Paying Agent and may appoint successors thereof.
(d) The Company initially appoints the Trustee as Registrar and Paying
Agent.
Section 2.6 Holder Lists.
The Trustee shall preserve a list of the names and addresses of Holders
in as current a form as is reasonably practicable. If the Trustee is not the
Registrar, the Company shall cause the Registrar to furnish to the Trustee on
or before June 30 and December 31 of each year during the term of the Notes
and at such other times as the Trustee may request in writing a list in such
form and as of such date as the Trustee may reasonably require of the names
and addresses of Holders. The Company may charge its expenses for any
changes to the Note register requested by Noteholders.
Section 2.7 Transfer and Exchange.
Where a Note is presented to the Company or the Registrar with a request
to register a transfer of such Note, the Company shall cause the Registrar to
register the transfer as requested if the requirements for a transfer
pursuant to the Uniform Commercial Code, as enacted in the State of Texas,
are met. Where a Note is presented to the Company or the Registrar with a
request to exchange it for an equal principal amount of Notes of other
denominations, the
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Company shall cause the Registrar to make the exchange as requested if the
same requirements are met. To permit transfers and exchanges, the Trustee
shall authenticate Notes upon Company Request or upon request of the
Registrar. The Company may charge its expenses to the Holder for any
transfer or exchange other than an exchange pursuant to Section 2.9 or 9.5,
and may charge a reasonable fee to the Holder for any change of address.
Section 2.8 Replacement Notes.
If a Holder claims that a Note has been lost, destroyed or wrongfully
taken, the Company shall issue and the Trustee shall authenticate a
replacement Note if the requirements for the issuance of replacement
securities pursuant to the Uniform Commercial Code, as enacted in the State
of Texas, are met. An indemnity bond must be sufficient in the judgment of
the Company and the Trustee to protect the Company, the Trustee, the Paying
Agent and the Registrar from any loss which any of them may suffer if a Note
is replaced. The Company may charge for its expenses in replacing a Note.
Section 2.9 Temporary Notes.
Until definitive Notes are ready for delivery, the Company may prepare
and the Trustee shall authenticate temporary Notes. Temporary Notes shall be
substantially in the form of definitive Notes but may have variations that
the Company considers appropriate for temporary Notes. Without unreasonable
delay, the Company shall prepare and the Trustee shall authenticate
definitive Notes in exchange for temporary Notes.
Section 2.10 Cancellation.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar, the Paying Agent and the Company shall forward
to the Trustee any Notes surrendered to them for transfer, exchange or
payment. The Trustee and no one else shall cancel all Notes surrendered for
transfer, exchange, payment or cancellation and shall dispose of canceled
Notes as the Company directs. The Company may not issue new Notes to replace
Notes it has paid or delivered to the Trustee for cancellation.
Section 2.11 Defaulted Interest.
If the Company defaults in a payment of interest on the Notes, it shall
pay the defaulted interest and, to the extent permitted by law, interest on
defaulted interest at the rate of 11% per annum. Such interest shall be paid
to Holders of record as of a subsequent date designated as a "Special Record
Date" for such payment. The Trustee shall establish the Special Record Date
if and when funds for the payment of such interest have been received by the
Paying Agent from the Company. At least 15 days before the Special Record
Date, the Trustee shall mail to each Holder a notice that states the Special
Record Date, the payment date for such interest, and the amount of such
interest (including any permitted interest thereon) to be paid.
Section 2.12 Persons Deemed Owners.
Prior to due presentment for registration of transfer of any Note, the
Company, the Trustee, and Paying Agent, the Registrar and any agent of the
Company or of the Trustee may treat the Person in whose name a Note is
registered on the Note Register as the owner of such Note for the purpose of
receiving payments of the principal of and interest on such Note and for all
other purposes whatsoever, whether or not such Note be in default, and
neither the Company, the Trustee, nor any agent of the Company shall be
affected by notice to the contrary.
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ARTICLE THREE
REDEMPTION
Section 3.1 General.
(a) On any Payment Date, the Notes may be called for redemption, in
whole or in part, at the option of the Company at a price equal to 100% of
the unpaid principal amount of such Notes together with accrued and unpaid
interest on the unpaid principal amount thereof to the applicable Redemption
Date (the "Redemption Price") for such Notes. If the Company elects to
redeem the Notes, it shall, not later than 30 days prior to the Payment Date
selected for redemption (the "Redemption Date"), deliver notice of such
election to the Trustee, together with a Company Order directing the Trustee
to effect such redemption. Any such redemption shall be without premium or
penalty.
(b) If the Company wishes to credit Notes it has not previously
delivered to the Trustee for cancellation against the principal amount of
Notes to be redeemed, it shall so notify the Trustee and it shall deliver the
Notes duly endorsed with the notice.
Section 3.2 Notice of Redemption.
(a) At least ten days but not more than 60 days before the Redemption
Date, the Company shall mail a notice of redemption by first-class mail to
each Holder of Notes, with a copy thereof to the Trustee.
(b) The notice shall identify the Notes to be redeemed and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the name and address of the Paying Agent;
(iv) that the Notes must be delivered to the Paying Agent at the
address stated in the notice for the Holder to receive the
Redemption Price; and
(v) that interest on the Notes ceases to accrue on and after the
Redemption Date.
(c) At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. Failure to
give notice of redemption, or any defect therein, to any Holder shall not
impair or affect the validity of the redemption of any Note.
Section 3.3 Effect of Notice of Redemption.
Once notice of redemption has been given, the Notes shall be redeemed on
the designated Redemption Date. Upon surrender to the Paying Agent, such
Notes shall be paid at the Redemption Price. Unless the Company shall fail
to deposit the Redemption Price as provided in Section 3.4, no interest shall
accrue on the Notes for any period after the Redemption Date.
Section 3.4 Deposit of Redemption Amount.
Prior to the Redemption Date, the Company shall deposit with the Paying
Agent money sufficient to pay the Redemption Price on the Notes on that date.
Such moneys shall be segregated by the Paying Agent for the purpose of
application to such redemption on the Redemption Date. If such deposit shall
be made, the amount payable on the Notes shall be limited to the Redemption
Price therefor, without any premium or penalty, and no interest shall accrue
on the Notes to be redeemed or the Redemption Price thereof for any period
after the Redemption Date.
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ARTICLE FOUR
ACCOUNTS, DISBURSEMENTS AND RELEASES
Section 4.1 Trust Account; Operating Account.
(a) Prior to the initial authentication and delivery of any Notes, the
Trustee shall open, at one or more depository institutions (which may be the
Trustee), a trust account which shall have a sub-account denominated "Trust
Account--Sterling Trust Company, as trustee in respect of Notes Due February
15, 2002" (such sub-account is hereinafter referred to as the "Trust
Account"). The Trust Account shall be an Eligible Account, and funds in the
Trust Account shall not be commingled with any other moneys of the Company or
the Servicer. The Company shall also open, at one or more depository
institutions, an account in its own name for use in holding the Company's
funds and in paying the Company's expenditures (the "Operating Account").
The Trust Account and the Operating Account are sometimes collectively
referred to as the "Accounts" or individually as an "Account". The Company
shall give the Trustee at least five Business Days' written notice of any
change in the location of the Operating Account and any related account
identification information.
(b) The Company shall direct or cause to be directed all Obligors to
remit all collections and payments on the Contracts directly to the
Collections Account maintained by the Servicer under Section 12.2. The
Company agrees that all cash, money orders, checks, notes, drafts and other
items which it otherwise receives and which are attributable to the Contracts
shall be promptly deposited into the Collections Account. The Company shall
likewise deposit or cause to be deposited in the Collections Account within
two Business Days of receipt all Liquidation Proceeds and Insurance Proceeds.
(c) If the Collections Account is a lock-box account, the Company shall
cause the Servicer to transfer to the Operating Account, on a periodic basis,
all funds (except any minimum sum necessary to avoid bank service charges) in
the Collections Account.
(d) The Company agrees that it shall not draw any funds from the
Operating Account except for an investment, transfer or payment of such funds
in accordance with the provisions of this Section 4.1 and Section 12.9.
(e) Except as otherwise permitted by this Indenture with respect to
purchases of Contracts and payments of Allowed Expenses and Offering
Expenses, the Company may invest the funds in the Operating Account but only
in Eligible Investments and only if sufficient funds are available in the
Operating Account, through maturations of Eligible Investments or otherwise,
on the Business Day next preceding the next Payment Date to pay the interest
to be paid on such Payment Date on the Notes.
(f) Subject to the requirement to pay interest and principal to any
Additional Lender, and provided that the Notes have not been declared due and
payable pursuant to Section 6.2, the Company shall have the right to cause
the funds in the Operating Account to be withdrawn or applied, to the extent
necessary and in the amounts required, for the following purposes in the
following order of priority:
FIRST, to the transfer to the Trust Account of the amount that,
together with any amounts held in the Trust Account, is sufficient for the
payment, PRO RATA, of all interest due on the Outstanding Notes on each
Payment Date;
SECOND, to the payment to the Trustee of any unpaid amount due the
Trustee pursuant to Section 7.7;
THIRD, to the payment of any unpaid Allowed Expenses, except that
during the continuance of an Event of Default, no such payments of unpaid
Allowed Expenses shall be made (except for payments of amounts due to the
Trustee under Section 7.7);
FOURTH, to the transfer to the Trust Account for the PRO RATA payment
of principal owing on the Notes
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on the Stated Maturity; and
FIFTH, except during the continuance of an Event of Default, to the
purchase of Eligible Contracts in accordance with Section 12.9.
All of the foregoing applications of the funds in the Operating Account that
have higher priority must be fully satisfied before any of the foregoing
applications having lower priority may be satisfied with such funds.
(g) On or prior to the Business Day next preceding each Payment Date
occurring prior to the Stated Maturity, the Company shall cause to be
transferred from the Operating Account to the Trust Account in immediately
available funds an amount which, together with any funds then held in the
Trust Account, is sufficient to pay the accrued interest due on the
Outstanding Notes on such Payment Date. On or prior to the Business Day next
preceding the Stated Maturity, the Company shall cause to be transferred from
the Operating Account to the Trust Account in immediately available funds an
amount which, together with any funds then held in the Trust Account, is
sufficient to pay the accrued interest due, and principal owing, on the
Outstanding Notes on such Payment Date.
(h) On or prior to each Report Date, the Company agrees to provide to
the Trustee the Monthly Report which shall set forth the following
information:
(A) the amounts by category of any Allowed Expenses paid through
draws from the Operating Account during the preceding calendar month;
(B) a reconciliation of the deposits and withdrawals to and from the
Operating Account during the preceding calendar month together with
beginning and ending balances for the Operating Account; and
(C) attached to the Monthly Report shall be a copy of the bank
statement for the Operating Account for the preceding calendar month and
supporting documentation for the Allowed Expenses paid by the Company
during the preceding month.
(i) During the continuance of an Event of Default, no draws from the
Operating Account to pay any Allowed Expenses, other than amounts due to the
Trustee under Section 7.7, may be made. Subject to the foregoing, and
subject to subsection (f) above, the Company agrees to pay promptly any
Allowed Expenses for which sums are available in the Operating Account by
check or wire transfer drawn on the Operating Account.
(j) Subject to the requirements of any Additional Lender, during the
continuance of an Event of Default, upon the written request of a Trust
Officer from time to time but in any event not less often than the Business
Day next preceding each Payment Date, the Company shall cause to be
transferred from the Operating Account to the Trust Account all of the funds
in the Operating Account, less any amounts due the Trustee under Section 7.7.
(k) All payments of principal or accrued interest with respect to the
Notes shall be made from amounts held in the Trust Account. All payments to
be made from time to time to the Holders of Notes out of funds in the Trust
Account pursuant to this Indenture shall be made by the Trustee as the Paying
Agent of the Company or by any other Paying Agent appointed by the Company,
subject to Section 5.2. No amounts contained in the Trust Account shall be
paid over to or at the direction of the Company, except as otherwise provided
by the provisions of this Indenture.
(l) So long as no Event of Default shall have occurred and be
continuing, any funds in the Trust Account shall be invested and reinvested
by the Trustee at the Company's direction in one or more Eligible
Investments. All income or other gain from investment of moneys deposited in
the Trust Account shall be deposited therein immediately upon receipt, and
any loss resulting from such investment shall be charged to such Account.
(m) Notwithstanding any other provision of this Indenture, the Company
may elect, in its sole discretion, to deposit the proceeds from the sale of
Notes into the Operating Account. In that event, the Company may, without
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the consent of the Trustee or any Holder, withdraw from the Operating Account
the funds necessary to pay (i) the Offering Expenses, but not to exceed the
limits set forth in the Company's final prospectus filed with the SEC
pursuant to which the Notes are offered and sold on behalf of the Company,
and (ii) the administration fee payable to Sovereign Auto Finance, Inc. as
described in such prospectus, equal to 5.5% of the gross proceeds from the
sale of the Notes (5.0% of the gross proceeds in excess of $9,000,000).
Section 4.2 General Provisions Regarding Trust Account.
(a) The Company shall not direct the Trustee to make any investment of
any funds in the Trust Account or to sell any investment held in the Trust
Account except under the following terms and conditions: (i)(A) each such
investment shall be made in the name of the Trustee (in its capacity as such)
or its nominee (or, if applicable law provides for perfection of pledges of
an investment not evidenced by a certificate or other instrument through
registration of such pledge on books maintained by or on behalf of the issuer
of such investment, such pledge may be so registered), (B) the Trustee shall
have sole investment control over such investment, the income thereon and the
proceeds thereof, and (C) any instrument evidencing such investment shall be
delivered directly to the Trustee or its agent; and (ii) the proceeds of each
sale of such investment shall be remitted by the purchaser thereof directly
to the Trustee for deposit in the Trust Account.
(b) If any amounts are needed for disbursement from the Trust Account
and sufficient uninvested funds are not available to make such disbursement,
in the absence of a Company Order for the liquidation of investments in an
amount sufficient to provide the required funds, the Trustee may cause to be
sold or otherwise converted to cash a sufficient amount of the investments in
the Trust Account.
(c) The Trustee shall not in any way be held liable by reason of any
insufficiency in the Trust Account resulting from any loss on any Eligible
Investment included therein except that Trustee shall remain liable on
Eligible Investments which are obligations of the Trustee in its commercial
capacity.
(d) All investments of funds in the Trust Account and all sales of
Eligible Investments held in the Trust Account shall, except as otherwise
expressly provided in this Indenture, be made by the Trustee in accordance
with a Company Order. Such Company Order may specify actions (including,
without limitation, that such funds shall not be invested, in which case such
funds shall remain deposited in the Trust Account) or may be a general,
standing order authorizing the Trustee to act within certain general
parameters or to act on written, telegraphic or telephonic instructions of
specified personnel or agents of the Company. In order to insure that the
Trustee can invest funds in the Trust Account or sell any investment in the
Trust Account, the Company Order with respect thereto must be received by the
Trustee no later than 9:00 a.m. on the date specified in the Company Order
for effecting such transaction.
(e) In the event that the Company shall have failed to give investment
directions to the Trustee by 9:00 a.m. Dallas, Texas Time on any Business Day
authorizing the Trustee to invest the funds then in the Trust Account, the
Trustee may invest and reinvest the funds then in the Trust Account to the
fullest extent practicable, in such manner as the Trustee shall from time to
time determine, but only in one or more Eligible Investments. All
investments made pursuant to this subsection shall mature on the next
Business Day following the date of such investment.
Section 4.3 Reports by Trustee.
The Trustee shall report and account to the Company with respect to the
Trust Account and the identity of the investments included therein on a
monthly basis and more frequently as the Company may from time to time
reasonably request, including accountings of deposits into and payments from
the Trust Account.
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ARTICLE FIVE
COVENANTS
Section 5.1 Payment of Principal and Interest.
(a) Interest and any principal payable on any Note shall be paid to the
Person in whose name such Note (or one or more predecessor Notes) is
registered at the close of business on the Record Date for the applicable
Payment Date by check mailed to such Person's address as it appears in the
Note Register on such Record Date, except for the final payment of principal
of and interest on a Note, which shall be payable only upon presentation and
surrender as provided in subsection (b) of this Section 5.1. For payments
made on any Note prior to the final payment of principal and interest, such
Note need not be submitted for notation of payment. Checks returned
undelivered will be held by the Paying Agent for payment to the Person
entitled thereto, subject to the terms of Section 5.2. Payments made on any
Payment Date shall be binding upon all future Holders of such Notes and of
any Notes issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof, whether or not noted thereon.
(b) Each installment of interest on the Notes is due and payable as
specified on the form of Note set forth in Section 2.2. Any installment of
interest which is not paid when and as due shall bear interest at the rate of
11% per annum from the date due to the date of payment thereof. Unless such
Note becomes due and payable at an earlier date by declaration of
acceleration, call for redemption or otherwise, the principal of each Note
shall be due and payable at the Stated Maturity; provided, however, the final
payment of principal of and interest on each Note (or the Redemption Price
thereof if the Notes called for redemption) shall be payable only upon
presentation and surrender thereof to the Paying Agent. The Trustee shall
notify the Person in whose name a Note is registered at the Record Date for
the Payment Date next preceding the Payment Date on which the Company expects
that the final payment of principal and interest on such Note will be paid.
Such notice shall be mailed no earlier than the 60th day, and no later than
the 20th day, prior to such Payment Date and shall specify that such final
payment will be payable only upon presentation and surrender of such Notes
and shall specify the name and address of the Paying Agent where such Notes
may be presented and surrendered for payment of such final payment. Notices
in connection with redemptions of Notes shall be mailed to Holders as
provided in Section 3.2.
(c) All computations of interest due with respect to any Notes shall be
based on a 360-day year consisting of 12 months of 30 days each and on the
amount of principal outstanding on the Notes from time to time.
(d) On or prior to each Report Date, the Company shall transmit to the
Trustee the Monthly Report which shall set forth, with respect to the next
three succeeding Payment Dates, the amount of interest and any principal
payable on such Payment Dates on each Outstanding Note. Each Monthly Report
shall state that the computations of interest were made in conformity with
the requirements of this Indenture. Notwithstanding the foregoing, the
Trustee may rely on its own calculations for purposes of paying interest on
the Notes.
(e) The Company at any time may terminate, by written notice to the
Trustee, its obligation to pay an installment of interest if it deposits with
the Trustee, or the Trustee holds in the Trust Account as of the related
Payment Date, money sufficient to pay the installment when due.
(f) Subject to the foregoing provisions of this Section 5.1, each Note
delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Note shall carry the rights to unpaid
principal and interest, if any, that were carried by such other Note.
Section 5.2 Money for Note Payments to be Held in Trust.
(a) Whenever the Company shall have a Paying Agent other than the
Trustee, it will, by Company Order delivered on or before the Business Day
next preceding each Payment Date, direct the Trustee to deposit with such
Paying Agent on or before such Payment Date a sum sufficient to pay the
amounts then becoming due, and the Trustee shall, to the extent it has
received such amount from the Company, deposit such amount with the Paying
Agent as directed. Such sum shall be held in trust for the benefit of the
Persons entitled to such payments.
(b) The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the
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Trustee an instrument in which such Paying Agent shall agree with the
Trustee, subject to the provisions of this Section, that such Paying Agent,
in acting as Paying Agent, will:
(i) hold all sums held by it for the payment of amounts due with
respect to the Notes in trust for the benefit of the Persons entitled
thereto until such sums shall be paid to such Persons or otherwise disposed
of as herein provided, and pay such sums to such Persons as herein
provided;
(ii) give the Trustee notice of any default by the Company (or any
other obligor upon the Notes) in the making of any payment required to be
made with respect to the Notes; and
(iii) at any time during the continuance of any such default, upon
the written request of the Trustee, forthwith pay to the Trustee all sums
so held in trust by such Paying Agent.
(c) For the purpose of obtaining the satisfaction and discharge of this
Indenture or for any other purpose, the Company may at any time direct by
Company Order any Paying Agent to pay to the Trustee all sums held in trust
by such Paying Agent, such sums to be held by the Trustee upon the same
trusts as those upon which such sums were held by such Paying Agent; and,
upon such payment by any Paying Agent to the Trustee, such Paying Agent shall
be released from all further liability with respect to such money.
Section 5.3 Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged
before the same shall become delinquent (1) all taxes, assessments and
governmental charges levied or imposed upon the Company, and (2) all lawful
claims for labor, materials and supplies which, if unpaid, might by law
become a lien upon the property of the Company; provided, however, that the
Company shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings; and provided further, that the Company shall not be required to
cause to be paid or discharged any such tax, assessment, charge or claim if
the Company shall determine such payment is not advantageous to the conduct
of the business of the Company and that the failure so to pay or discharge is
not disadvantageous in any material respect to the Holders.
Section 5.4 Maintenance of Properties.
The Company will cause all properties used or useful in the conduct of
its business to be maintained and kept in good condition, repair and working
order and will cause to be made all necessary repairs, renewals,
replacements, betterment and improvements thereof, all as in the judgment of
the Company may be necessary, so that the business carried on in connection
therewith may be properly and advantageously conducted at all times;
provided, however, that nothing in this Section shall prevent the Company
from discontinuing the operation or maintenance of any of such properties, or
disposing of any of them, if such discontinuance or disposal is, in the
judgment of the Company, desirable in the conduct of the business of the
Company and not disadvantageous in any material respect to the Holders.
Section 5.5 Limitation on Investment Activities.
The Company will not register as, or conduct its business or take any
action which shall cause it to become, or to be deemed to be, an "investment
company" as defined under the provisions of and subject to registration under
the Investment Company Act of 1940, as amended.
Section 5.6 Compliance Certificates.
(a) The Company will deliver to the Trustee an Officer's Certificate
stating whether or not the signee knows of any default by the Company in
performing its covenants under this Indenture within 15 days of a written
request by the Trustee. The Company will perform, execute, acknowledge and
deliver all such further acts, instruments,
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and assurances in this regard as may reasonably be requested by the Trustee.
The certificates required under this Section shall comply with Section
11.4(b).
(b) The Company will deliver to the Trustee within 15 days after the
occurrence thereof written notice of the occurrence of any Event of Default.
Section 5.7 Reporting.
(a) Commencing with fiscal year ending December 31, 1998, the Company
shall file with the Trustee copies of any annual reports and other
information, documents, and statements (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) which the
Company may be required to file with the SEC pursuant to Section 13 or 15(d)
of the Securities Exchange Act, which filing shall be made within 15 days
after the Company makes such filing with the SEC. The Company also shall
comply with the other provisions of TIA Section 314(a).
(b) If the Company is not subject to Section 13 or 15(d) of the
Exchange Act, then the Company shall file with the Trustee such of the
supplementary and periodic information, documents and reports which would be
required under Section 13 of the Exchange Act if the Notes were listed or
registered on a national securities exchange, which filing shall be made
within 15 days after the Company would otherwise have been required to make
such filing with the SEC.
(c) To the extent reasonably requested by the Trustee, the Company
shall provide to the Trustee information in the Company's possession to
assist the Trustee in complying with its reporting duties specified in
Section 7.6.
(d) On or before 120 days after the end of each fiscal year of the
Company, the Company shall deliver to the Trustee a report, prepared by a
firm of independent accountants selected by the Company, that they have
examined the balance sheet of the Company as of the last day of said fiscal
year and the related statements of operations, retained earnings and changes
in financial position for such fiscal year and have issued an opinion
thereon, specifying the date thereof.
Section 5.8 Performance of Obligations; Servicing Agreement.
(a) The Company will punctually perform and observe all of its
obligations and agreements contained in the Servicing Agreement.
(b) The Company will not take any action or permit any action to be
taken by others which would release any Person from any of such Person's
covenants or obligations under any of the Contract Documents, or which would
result in the amendment, hypothecation, subordination, termination or
discharge of, or impair the validity or effectiveness of, any of the Contract
Documents or any such instrument, except as expressly provided in this
Indenture, the Servicing Agreement or such Contract Document or other
instrument.
(c) If the Company shall have knowledge of the occurrence of a default
by the Servicer of any of its material obligations under the Servicing
Agreement or Article Twelve hereof, the Company shall promptly notify the
Trustee thereof, and shall specify in such notice the action, if any, the
Company is taking in respect of such default. If such default arises from
the failure of the Servicer to perform any of its obligations under the
Servicing Agreement or Article Twelve hereof with respect to the Contracts,
the Company may remedy such failure. Unless directed or permitted by the
Trustee or the Majority Holders, the Company may not waive any such default
under the Servicing Agreement or Article Twelve hereof or terminate the
rights and powers of the Servicer under the Servicing Agreement and Article
Twelve hereof.
Section 5.9 Negative Covenants.
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The Company will not:
(i) engage in any business or activity other than in connection with
the purchase, collection and servicing of retail installment sales or lease
contracts and consumer obligations secured by motor vehicles, the
repossession and resale of motor vehicles, the dealing in all respects with
such Contracts and obligations and their motor vehicle collateral, and the
raising of capital, both debt and equity, and any other incidental
businesses or activities, without the consent of the Majority Holders;
(ii) without the consent of the Majority Holders create, incur,
assume or in any manner become liable in respect of any indebtedness other
than (1) the Notes, (2) any Allowed Expenses, (3) the Additional Borrowing,
and (4) any other amounts incurred in the ordinary course of the Company's
business;
(iii) dissolve or liquidate in whole or in part;
(iv) merge or consolidate with any corporation, partnership or other
entity other than an Affiliate of the Company or the Servicer. Any such
merger or consolidation with an Affiliate of the Company or the Servicer
shall be subject to the following conditions:
(1) the surviving or resulting entity shall be a corporation
organized under the laws of the United States or any state thereof
whose business and activities shall be limited as set forth in
paragraph (i) above,
(2) the surviving or resulting corporation (if other than the
Company) shall expressly assume by an indenture supplemental hereto
all of the Company's obligations hereunder,
(3) the surviving or resulting corporation shall have the same
fiscal year as the Company, and
(4) immediately after consummation of the merger or
consolidation no Event of Default shall exist with respect the Notes;
(v) (to the extent that it may lawfully so covenant and to the
extent that such covenant is lawfully enforceable) institute any
bankruptcy, insolvency or receivership proceedings with respect to itself
or its properties;
(vi) permit the validity or effectiveness of this Indenture to be
impaired, or permit any Person to be released from any covenants or
obligations under this Indenture, except as may be expressly permitted
hereby; or
(vii) originate or acquire any Contract of an Obligor located in
any jurisdiction unless at the time of such origination or acquisition of
such Contract by the Company or the Servicer, both the Company and the
Servicer shall have obtained all licenses, permits and governmental
approvals, if any (1) necessary to comply with the laws of such
jurisdiction with respect to their respective operations and businesses,
(2) necessary to perform their respective obligations as contemplated by
this Indenture and the Servicing Agreement with respect to such Contract,
(3) necessary to maintain the enforceability of such Contract and the
security interest in the related Financed Vehicle and to prevent such
Contract or any portion thereof from becoming void or voidable by the
Obligor or any other person, and (4) if such Contract has been assigned to
the Company, necessary for such assignment to be a lawful and binding
assignment on the assignor and the Obligor.
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ARTICLE SIX
DEFAULTS AND REMEDIES
Section 6.1 Events of Default.
An "Event of Default" shall occur if:
(1) the Company defaults in the payment of interest on any Note when the
same becomes due and payable and the default continues for a period of
30 days;
(2) the Company defaults in the payment of the principal of any Note when
the same becomes due and payable and the default continues for a
period of 30 days;
(3) the Company fails to comply with any of its other agreements in the
Notes or this Indenture (other than a covenant or warranty, a default
in the observance of which is elsewhere in this section specifically
dealt with) and the default continues for a period of 30 days after
receipt by the Company of written notice of such default from the
Trustee specifying such default and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder or after
receipt by the Company and the Trustee of such notice from the Holders
of Notes representing at least 25% of the aggregate principal amount
of the Notes which are then Outstanding Notes;
(4) if any representation or warranty of the Company made in this
Indenture or in any certificate or other writing delivered pursuant
hereto or in connection herewith shall prove to be incorrect in any
material respect as of the time when the same shall have been made
(excluding, however, any representation or warranty to which Section
12.16 shall be applicable so long as the Servicer shall be in
compliance with Section 12.17(a)) and, within 30 days after receipt by
the Company of written notice from the Trustee specifying such
inaccuracy and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder or after receipt by the
Company and the Trustee of such notice from the Holders of Notes
representing at least 25% of the aggregate principal amount of the
Notes which are then Outstanding Notes, the circumstance or condition
in respect of which such representation or warranty was incorrect
shall not have been eliminated or otherwise cured;
(5) if the validity or effectiveness of this Indenture shall be impaired,
or this Indenture shall be amended, hypothecated, subordinated,
terminated or discharged, or any Person shall be released from any
covenants or obligations under this Indenture or the Servicing
Agreement, in each case except as may be expressly permitted hereby
and thereby;
(6) the Company, pursuant to or within the meaning of title 11, U.S. Code
or any similar Federal or State law for the relief of debtors (the
"Bankruptcy Law"):
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an
involuntary case;
(C) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official of it or for all or substantially
all of its property; or
(D) makes a general assignment for the benefit of its creditors; or
(7) a court of competent jurisdiction enters an order or decree, which
remains unstayed and in effect for 60 days, under any Bankruptcy Law
against the Company:
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(A) for relief in an involuntary case;
(B) appointing a receiver, trustee, assignee, liquidator or similar
official for all or substantially all of its property; or
(C) ordering its liquidation.
Section 6.2 Acceleration.
If an Event of Default occurs and is continuing, the Trustee may, and at
the direction of the Holders of Notes representing at least 25% of the aggregate
principal amount of Notes which are then Outstanding Notes shall, by written
notice to the Company, declare the principal amount of all the Notes together
with accrued interest thereon to be due and payable immediately. The Majority
Holders may, by written notice to the Trustee, rescind an acceleration and its
consequences.
Section 6.3 Remedies.
(a) If an Event of Default shall have occurred and be continuing, the
Trustee may, subject to Section 6.2, make demand and institute judicial
proceedings in equity or law for the collection of all amounts then payable on
the Notes, or under this Indenture, whether by declaration or otherwise, enforce
all judgments obtained, and collect from the Company moneys adjudged due.
(b) The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceedings. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or an acquiescence in the Event of Default. No remedy is exclusive of
any other remedy. All available remedies are cumulative.
(c) Upon the institution of legal proceedings by the Trustee pursuant to
subsection (a) above, then, in addition to any and all other amounts due
hereunder, the Company shall be liable for any and all costs and expenses of
collection, including the reasonable expenses, disbursements and advances of the
Trustee, its agents and counsel.
Section 6.4 Waiver of Past Defaults.
Subject to Section 9.2, the Majority Holders may, by written notice to the
Trustee, waive a continuing Event of Default and its consequences. When an
Event of Default is waived in accordance herewith, it is cured and shall no
longer be considered continuing.
Section 6.5 Control by Majority.
The Majority Holders may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture, that is unduly prejudicial
to the rights of Holders not joining in such direction, or that would involve
the Trustee in personal liability.
Section 6.6 Limitation on Suits.
(a) A Holder may not pursue any remedy with respect to this Indenture or
the Notes unless:
(i) an Event of Default has occurred and is continuing, and the
Holder gives to the Trustee written notice of such continuing Event of
Default;
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(ii) the Majority Holders have made a written request to the Trustee
to pursue the remedy;
(iii) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expenses;
(iv) the Trustee does not comply with the request within 60 days after
receipt of the request;
(v) the Event of Default has not been waived or cured; and
(vi) the Trustee has received no contrary direction from the Majority
Holders during such 60-day period.
(b) A Holder may not use this Indenture to prejudice the rights of another
Holder or to obtain a preference or priority over another Holder.
Section 6.7 Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Note to receive payment of principal and interest on the Note, on or
after the respective due dates, or to bring suit for the enforcement of any such
payment on or after such respective dates, shall not be impaired or affected
without the consent of the Holder.
Section 6.8 Collection Suit by Trustee.
If an Event of Default specified in Section 6.1(1) or (2) occurs and is
continuing, the Trustee may recover judgment in its own name and as trustee of
an express trust against the Company for the whole amount of principal and
interest remaining unpaid.
Section 6.9 Trustee may File Proofs of Claim.
(a) The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee and the Holders allowed in any judicial proceedings relative to the
Company, its creditors or its property.
(b) Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
Section 6.10 Priorities.
If the Trustee collects any money pursuant to this Article, it shall pay
out the money in the following order:
FIRST, to the Trustee for the amounts due under Section 7.7;
SECOND, to Holders for amounts due and unpaid on the Notes for
principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for principal
and interest, respectively;
THIRD, to the Servicer for any unpaid Allowed Expenses owed to or
incurred by it with respect to the Contracts; and
FOURTH, to the Company.
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The Trustee may fix a record date and payment date for any payment to Holders.
Section 6.11 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section does
not apply to a suit by the Trustee, or a suit by the Majority Holders.
Section 6.12 Stay, Extension or Usury Laws.
The Company agrees (to the extent that it may lawfully do so) that it will
not at any time insist upon, or plead, or in any manner whatsoever claim, and
will resist any and all efforts to be compelled to take the benefits or
advantage of any stay or extension law or any usury or other law, wherever
enacted, now or at any time hereafter in force, which would prohibit or forgive
the Company from paying all or any portion of the principal of and/or interest
on the Notes as contemplated herein, or which may affect the covenants or
performance of this Indenture, and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and agrees that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of any
such power as though no such law has been enacted.
ARTICLE SEVEN
TRUSTEE
Section 7.1 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in the exercise of such rights and powers
as a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
(b) Except during the continuance of an Event of Default known to the
Trustee:
(i) the Trustee need perform only those duties that are specifically
set forth in this Indenture and no implied covenants or obligations shall
be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
(i) this paragraph does not limit the effect of paragraph (b) of this
Section;
(ii) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts;
(iii) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith
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in accordance with a written direction received by it from the Majority
Holders relating to the time, method, and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred upon the Trustee, under this Indenture; and
(iv) the Trustee shall not be required to expend or risk its own funds
or otherwise incur any financial liability in the performance of any of its
duties hereunder, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured
to it.
(d) Each provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree with the Company. Money held in trust by the
Trustee need not be segregated from other funds except to the extent required by
law.
(f) The Trustee shall not be liable for any action or omission taken by or
not taken by the Servicer of any kind or nature.
Section 7.2 Rights of Trustee.
(a) The Trustee may rely and shall be protected in acting or refraining
from acting upon any document reasonably believed by it to be genuine and to
have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officer's Certificate or an Opinion of Counsel or both. The Trustee shall not
be liable for any action it takes or omits to take in reliance on such
Certificate or Opinion, in the absence of bad faith on its part.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders of Notes, unless such Holders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that might be incurred by it in compliance with such request or direction.
(e) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document, but the
Trustee, in its discretion, may make such further inquiry or investigation into
such facts or matters at it may see fit.
(f) The permissive right of the Trustee to do things enumerated in this
Indenture shall not be construed as a duty.
Section 7.3 Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the owner or
pledgee of Notes and may otherwise deal with the Company or its Affiliates with
the same rights it would have if it were not Trustee. Any Paying Agent,
Registrar or co-registrar may do the same with like rights. However, the
Trustee must comply with Sections 7.10 and 7.11.
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Section 7.4 Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no representation as to
the validity or adequacy of this Indenture or the Notes. It shall not be
accountable for the Company's use of the proceeds from the sale of the Notes and
shall not be responsible for any statement (i) in the Notes, other than its
certificate of authentication, or (ii) in any prospectus used in the sale of the
Notes, other than statements provided in writing by the Trustee for use in such
prospectus.
Section 7.5 Notice of Default.
If an Event of Default occurs and is continuing and if it is known to the
Trustee, the Trustee shall mail to each Holder notice of the Event of Default
within 90 days after it obtains actual knowledge thereof. Except in the case of
an Event of Default resulting from the failure to pay principal or interest on
any Note, the Trustee may withhold the notice if and so long as the Board of
Directors, the executive committee or a trust committee of the directors and/or
Responsible Officers of the Trustee in good faith determines that withholding
notice is in the interests of Holders.
Section 7.6 Reports by Trustee to Holders.
(a) Within 60 days after each December 31 beginning with December 31,
1998, the Trustee shall, to the extent required by TIA Section 313(a), mail to
each Holder a brief report dated as of such December 31 that complies with TIA
Section 313(a). The Trustee shall also, to the extent required by TIA Section
313(b), comply with TIA Section 313(b)(1) and (2).
(b) If this Indenture is qualified with the SEC under the TIA, a copy of
each report at the time of its mailing to the Holders shall be filed with the
SEC and each national securities exchange on which the Notes are listed, to the
extent required by the TIA. The Company shall notify the Trustee if and when
the Notes are listed on any national securities exchange (as defined in the
Exchange Act) or quoted on the National Association of Securities Dealers
Automated Quotation system.
(c) Within 60 days after each December 31 beginning with December 31,
1998, the Trustee shall provide a report to the Noteholders which indicates
whether the Trustee has fulfilled its obligations under this Indenture and
whether there have been any known uncured defaults hereunder.
Section 7.7 Compensation and Indemnity.
(a) (i) The Company shall pay to the Trustee from time to time as
compensation for its services the amounts set forth on the Trustee's Fee
Schedule attached hereto as EXHIBIT C, as may be agreed upon from time to
time by the Trustee and the Company. In addition, the Company shall
reimburse the Trustee upon request for all reasonable out-of-pocket
expenses incurred by it, as set forth in Exhibit C. Such expenses may
include the reasonable compensation and expenses of the Trustee's agents
and counsel.
(ii) The Company and SAFH shall indemnify and hold harmless the
Trustee and its successors and their respective officers, directors,
employees, agents and attorneys against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs (including the costs and expenses of defending itself), expenses and
disbursements of any kind or nature whatsoever which may be imposed on,
incurred by or asserted against the Trustee and such other Persons, in
connection with the performance by the Trustee of its duties hereunder.
The Trustee and such other Persons shall notify the Company and SAFH
promptly of any claim for which it or they may seek indemnity, but failure
to so notify the Company and SAFH shall not relieve the Company or SAFH of
their obligations hereunder. Neither the Company nor SAFH shall be
required to pay for any settlement made without their consents, such
consents not to be unreasonably withheld. Neither the Company nor SAFH
shall be required to reimburse any expense or indemnify against any loss or
liability incurred by the Trustee or any such other Person through the
Trustee's or such other Person's gross negligence, bad faith, breach of
contract or misconduct.
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(b) The obligations set forth in this Section 7.7 shall survive the
satisfaction and discharge of this Indenture.
(c) When the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in Section 6.1(6) or (7), the
expenses and the compensation for the services are intended to constitute
expenses of administration under any Bankruptcy Law.
Section 7.8 Replacement of Trustee.
(a) The Trustee may resign at any time upon 30 days prior written notice
to the Company. The Majority Holders may remove the Trustee at any time upon 30
days prior written notice to the removed Trustee and may appoint a successor
Trustee with the Company's consent. The Company shall remove the Trustee if:
(i) the Trustee fails to comply with Section 7.10;
(ii) the Trustee is adjudged a bankrupt or an insolvent; or
(iii) a receiver or other public officer takes charge of the
Trustee or its property.
(b) If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. The resignation or removal of the Trustee shall not be
effective until a successor Trustee has been appointed and has assumed the
responsibilities of Trustee hereunder.
(c) A successor Trustee shall deliver a written acceptance of this
appointment to the retiring Trustee and to the Company. Immediately thereafter,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee. Upon delivery of such written acceptance, the resignation or
removal of the retiring Trustee shall become effective and the retiring Trustee
shall cease to be Trustee hereunder and shall be discharged from any
responsibility or obligations for actions taken by any successor Trustee. The
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. A successor Trustee shall mail notice of its succession
to each Holder.
(d) If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Majority Holders may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(e) If the Trustee fails to comply with Section 7.10, any Holder who has
been a bona fide Holder for at least six months may petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee.
Section 7.9 Successor Trustee by Merger, etc.
If the Trustee consolidates with, merges or converts into, or transfers all
or substantially all of its corporate trust assets to, another Person, the
resulting, surviving or transferee Person without any further act shall be the
successor Trustee.
Section 7.10 Eligibility; Disqualification.
This Indenture shall always have a Trustee who satisfies the requirements
of TIA Section 310(a)(1) and (5). The Trustee shall have a combined capital and
surplus of at least $1 million as set forth in its most recent published annual
report of condition. The Trustee shall comply with TIA Section 310(b).
Section 7.11 Preferential Collection of Claims Against Company.
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The Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated.
Section 7.12 Withholding Taxes.
Whenever it is acting as a Paying Agent for the Notes, the Trustee shall
comply with all requirements of the Internal Revenue Code of 1986, as amended
(or any successor or amendatory statutes), and all regulations thereunder, with
respect to the withholding from any payments made on such Notes of any
withholding taxes imposed thereon and with respect to any reporting requirements
in connection therewith.
ARTICLE EIGHT
DISCHARGE OF INDENTURE
Section 8.1 Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect, except as to surviving
rights of transfer or exchange of Notes herein expressly provided for, and the
Trustee, on demand of and at the expense of the Company, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) all Notes theretofore authenticated and delivered (other than
Notes which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 2.8) have been delivered to the
Trustee for cancellation; or
(B) all such Notes not theretofore delivered to the Trustee for
cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity within
one year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Company,
and the Company, in the case of (i), (ii) or (iii) above, has deposited or
caused to be deposited with the Trustee as trust funds in trust for such
purpose an amount sufficient to pay and discharge the entire indebtedness
on such Notes not theretofore delivered to the Trustee for cancellation,
the principal at Stated Maturity of such Notes, or the applicable
Redemption Price with respect thereto upon redemption;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officer's Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company under Sections 7.7 and 8.3 shall survive.
Section 8.2 Application of Trust Money.
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All money deposited with the Trustee pursuant to Section 8.1 shall be held
in trust and applied by it, in accordance with the provisions of the Notes and
this Indenture, to the payment, either directly or through any Paying Agent as
the Trustee shall be directed by Company Order, to the Persons entitled thereto,
of the principal at Stated Maturity, or the Redemption Price, of the Notes for
whose payment such money has been deposited with the Trustee; but such money
need not be segregated from other funds except to the extent required by law.
Section 8.3 Repayment to Company.
The Trustee and the Paying Agent shall promptly pay to the Company upon
request any money or securities held by them at any time in excess of the
amounts needed to pay and discharge the Notes in full. The Trustee and the
Paying Agent shall pay the Company upon request for any money or securities held
by them for the payment of principal or interest that remains unclaimed for two
years. After such payment to the Company, Holders entitled to such funds must
look to the Company for the payment of such unclaimed principal or interest.
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
Section 9.1 Without Consent of Holders.
(a) The Company and the Trustee may amend or supplement this Indenture or
the Notes without notice to or consent of any Holder:
(i) to cure any ambiguity, defect or inconsistency in this Indenture
or the Notes;
(ii) to effect a merger or consolidation in conformance with Section
5.9(iv);
(iii) to provide for uncertificated Notes in addition to or in
place of certificated Notes;
(iv) to make any change that does not materially adversely affect the
rights of any Holder; or
(v) to modify or add to the provisions of this Indenture to the
extent necessary to qualify it under the TIA or under any similar federal
statute hereafter enacted.
(b) The Trustee may waive compliance by the Company with any provisions of
this Indenture or the Notes without notice to or consent of any Holder if the
waiver does not materially adversely affect the rights of any Holder.
Section 9.2 With Consent of Holders.
(a) The Company and the Trustee may amend or supplement this Indenture or
the Notes without notice to any Holder but with the written consent of the
Majority Holders. The Majority Holders may waive compliance by the Company with
any provision of this Indenture or the Notes without notice to any Holder.
However, without the consent of each Holder adversely affected, an amendment,
supplement or waiver, including a waiver pursuant to Section 6.4, may not:
(i) reduce the amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(ii) reduce the rate of or extend the time for payment of interest on
any Note;
(iii) reduce the principal of or extend the Stated Maturity of any
Note; or
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(iv) make any Note payable in money other than that stated in the
Note.
(b) After an amendment under this Section becomes effective, the Company
shall mail to Holders a notice briefly describing the amendment. The Trustee
may in its discretion determine whether or not any Notes would be adversely
affected, materially or otherwise, by any supplemental indenture and any such
determination shall be conclusive upon the Holders of all Notes, whether
theretofore or thereafter authenticated and delivered hereunder. The Trustee
shall not be liable for any such determination made in good faith.
Section 9.3 Compliance with Trust Indenture Act.
Every amendment to or supplement of this Indenture or the Notes shall
comply with the TIA as then in effect so long as this Indenture shall then be
qualified under the TIA.
Section 9.4 Revocation and Effect of Consents.
(a) A consent to an amendment, supplement or waiver by a Holder shall bind
the Holder and every subsequent Holder of a Note or portion of a Note that
evidences the same debt as the consenting Holder's Note, even if notation of the
consent is not made on any Note. However, any such Holder or subsequent Holder
may revoke the consent as to such Holder's Note or portion of a Note. The
Trustee must receive the notice of revocation before the date the amendment,
supplement or waiver becomes effective.
(b) After an amendment, supplement or waiver becomes effective, it shall
bind every Holder unless it makes a change described in clause (ii), (iii), (iv)
or (v) of Section 9.2(a). In that case the amendment, supplement or waiver
shall bind each Holder who has consented to it and every subsequent Holder of a
Note or portion of a Note that evidences the same debt as the consenting
Holder's Note.
Section 9.5 Notation on or Exchange of Notes.
If an amendment, supplement or waiver changes the terms of a Note, the
Trustee may require the Holder to deliver it to the Trustee. The Trustee may
place an appropriate notation on the Note concerning the changed terms and
return it to the Holder. Alternatively, if the Company or the Trustee so
determines, the Company in exchange for the Note shall issue, and the Trustee
shall authenticate, a new Note that reflects the changed terms.
Section 9.6 Trustee to Sign Amendments, etc.
The Trustee shall sign any amendment, supplement or waiver authorized
pursuant to this Article if the amendment, supplement or waiver does not
adversely affect the rights of the Trustee. If it does, the Trustee may but
need not sign it. The Company may not sign an amendment or supplement until
such amendment or supplement is approved by the Chairman of the Board, President
or any Vice President of the Company or any other officer of the Company
customarily performing functions similar to those performed by any of the above
designated officers, and such approval shall evidence the Company's
determination that such amendment, supplement or waiver is authorized pursuant
to this Article.
ARTICLE TEN
MEETINGS OF HOLDERS
Section 10.1 Purposes for Which Meetings may be Called.
A meeting of Holders may be called for the following purposes:
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(a) to give any notice to the Company or to the Trustee, or to give any
direction to the Trustee, or to waive or to consent to the waiving of any Event
of Default hereunder and its consequences;
(b) to remove the Trustee, appoint a successor Trustee or apply to a court
for a successor Trustee;
(c) to consent to the execution of a supplemental indenture; or
(d) to take any other action (i) authorized to be taken by or on behalf of
the Holders of any specified aggregate principal amount of the Notes under this
Indenture, or authorized or permitted by law, or (ii) which the Trustee deems
necessary or appropriate in connection with the administration of the Indenture.
Section 10.2 Manner of Calling Meetings.
(a) The Trustee may call a meeting of Holders to take any action specified
in Section 10.1. Notice setting forth the time and place of, and the action
proposed to be taken at, such meeting shall be mailed by the Trustee to the
Company and to the Holders not less than ten or more than 60 days prior to the
date fixed for the meeting.
(b) Any meeting shall be valid without notice if the Holders of all Notes
are present in person or by proxy, or if notice is waived before or after the
meeting by the Holders of all Notes, and if the Company and the Trustee are
either present and not objected to holding the meeting without notice or have,
before or after the meeting, waived notice.
Section 10.3 Call of Meetings by Company or Holders.
In case at any time the Company or the Holders of not less than 10% in
aggregate principal amount of the Outstanding Notes shall have requested in
writing that the Trustee call a meeting of Holders to take any action specified
in Section 10.1, and the Trustee shall not have mailed the notice of such
meeting within 20 days after receipt of such request, then the Company or the
Holders of Notes in the amount above specified may determine the time and place
for such meeting and may call such meeting by mailing notice thereof.
Section 10.4 Who may Attend and Vote at Meetings.
To be entitled to vote at any meetings of Holders, a person shall (a) be a
Holder, or (b) be a person appointed by an instrument in writing as proxy for a
Holder. The only persons who shall be entitled to be present or to speak at any
meeting of Holders shall be the persons entitled to vote at such meeting and
their counsel and any representatives of the Trustee and the Company and their
counsel.
Section 10.5 Regulations may be Made by Trustee; Conduct of the Meeting;
Voting Rights.
(a) The Trustee may make such reasonable regulations as it may deem
advisable for any meeting of Holders, to prove the registered holding of Notes,
the appointment of proxies, and other evidence of the right to vote, to fix a
record date and to provide for such other matters concerning the conduct of the
meeting as it shall deem appropriate.
(b) At any meeting each Holder or proxy thereof shall be entitled to one
vote for each $1,000 principal amount of Notes registered in such Holder's name;
provided, however, that the Company shall not be entitled to vote with respect
to any Notes held of record by it. At any meeting of Holders, the presence of
persons holding or representing any number of Notes shall be sufficient for a
quorum.
Section 10.6 Exercise of Rights of Trustee or Holders may not be Hindered or
Delayed by Call of Meeting.
Nothing in this Article shall be deemed or construed to authorize or
permit, by reason of any call of a meeting of Holders or any rights expressly or
impliedly conferred hereunder to make such call, any hindrance or delay in the
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exercise of any rights conferred upon or reserved to the Trustee or to the
Holders by this Indenture or the Notes.
Section 10.7 Evidence of Actions by Holders.
Whenever the Holders of a specified percentage in aggregate principal
amount of the Notes may take any action, the fact that the Holders of such
percentage have acted may be evidenced by (a) instruments of similar tenor
executed by Holders in person or by attorney or written proxy, or (b) the
Holders voting in favor thereof at any meeting of Holders called and held in
accordance with the provisions of this Article, or (c) by a combination thereof.
The Trustee may require proof of any matter concerning the execution of any
instrument by a Holder or the Holder's attorney or proxy as it shall deem
necessary.
ARTICLE ELEVEN
MISCELLANEOUS
Section 11.1 Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies, or conflicts with the
duties imposed on any Person by Sections 310 through 317, inclusive, of the TIA,
the duties imposed under such Sections of the TIA shall control.
Section 11.2 Notices.
(a) Any notice or communication shall be sufficiently given if in writing
and delivered in person or mailed by first class mail addressed as follows:
if to the Company: Sovereign Credit Finance II, Inc.
4015 Beltline Road, Building B
Dallas, Texas 75244
Attn: A. Starke Taylor, III, President
if to SAFH: Sovereign Auto Finance Holdings, Inc.
4015 Beltline Road, Building B
Dallas, Texas 75244
Attn: A. Starke Taylor, III, President
if to the Trustee: Sterling Trust Company
7901 Fish Pond Road
Waco, Texas 76710
Attn: Paul E. Skretny, President
if to the Servicer: Sovereign Associates, Inc.
4015 Beltline Road, Building B
Dallas, Texas 75244
Attn: A. Starke Taylor, III, President
(b) The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
(c) Any notice or communication mailed to a Holder shall be mailed first
class, postage prepaid to such Person at such Person's address as it appears on
the Note Register of the Registrar and shall be sufficiently given to such
Person if so mailed within the time prescribed. If the Company mails a notice
or communication to Holders, it shall mail
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a copy to the Trustee at the same time.
(d) Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above, it is duly given,
whether or not the addressee receives it.
Section 11.3 Communication by Holders with Other Holders.
Holders may communicate pursuant to TIA Section 312(b) with other Holders
with respect to their rights under this Indenture or the Notes. The Company,
the Trustee, the Registrar and anyone else shall have the protection of TIA
Section 312(c).
Section 11.4 Certificate and Opinion as to Conditions Precedent.
(a) Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(i) an Officer's Certificate stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with; and
(ii) an Opinion of Counsel stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
(b) Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include (i) a
statement that the person making such certificate or opinion has read such
covenant or condition; (ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based; (iii) a statement that, in the opinion of
such person, he has made such examination or investigation as is necessary to
enable him to express an informed opinion as to whether or not such covenant or
condition has been complied with; and (iv) a statement as to whether or not, in
the opinion of such person, such condition or covenant has been complied with.
Section 11.5 Rules by Paying Agent and Registrar.
The Paying Agent or Registrar may make reasonable rules for its functions.
Section 11.6 Legal Holidays.
A "Legal Holiday" is a Saturday, a Sunday, or a day on which banking
institutions are not required to be open in the State of Texas. If a Payment
Date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday.
Section 11.7 Governing Law.
The laws of the State of Texas shall govern this Indenture and the Notes.
Section 11.8 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or an Affiliate of the Company. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.
Section 11.9 No Recourse Against Others.
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No recourse may be taken, directly or indirectly, against any incorporator,
subscriber to the capital stock, stockholder, officer, director, agent or
employee of the Company or the Servicer or of any predecessor or successor of
the Company or the Servicer with respect to the obligations of the Company or
the Servicer with respect to the Notes or under this Indenture or any
certificate or other writing delivered in connection herewith or therewith, and
all such liability is waived and released by the Trustee and all Holders.
Section 11.10 Successors.
All agreements of the Company and the Servicer in this Indenture and the
Notes shall bind their respective successors. All agreements of the Trustee in
this Indenture shall bind its successor.
Section 11.11 Duplicate Originals.
The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement.
Section 11.12 Severability.
If any provision of this Indenture is held to be illegal, invalid, or
unenforceable under the present or future laws effective during the term of this
Indenture, such provision shall be fully severable; this Indenture shall be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part of this Indenture; and the remaining provisions of
this Indenture shall remain in full force and effect and shall not be affected
by the illegal, invalid, or unenforceable provision or by its severance from
this Indenture. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision, there shall be added automatically as a part of this Indenture a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and still be legal, valid, and enforceable.
Section 11.13 Headings.
The headings contained herein are for purposes of convenience only, and
shall not be deemed to constitute a part of this Indenture or to affect the
meaning or interpretation of this Indenture in any way.
ARTICLE TWELVE
AGREEMENTS OF SERVICER
Section 12.1 General.
(a) The Servicer agrees that all covenants, representations and warranties
made by the Servicer in the Servicing Agreement with respect to the Contracts
shall also be for the benefit of the Trustee and the Holders.
(b) In carrying out its servicing obligations with respect to the
Contracts, the Servicer agrees that it will use its customary and usual
procedures in servicing motor vehicle retail installment contracts and
obligations and, to the extent more exacting, the procedures used by the
Servicer in respect of such contracts serviced by it for its own account. After
the execution and delivery of this Indenture, the Servicer shall deliver to the
Company and the Trustee a list of officers of the Servicer involved in, or
responsible for, the administration and servicing of the Contracts, which list
shall from time to time be updated by the Servicer on request of the Trustee or
the Company. The Servicer shall take all actions that are necessary or
desirable to maintain continuous perfection and priority of the security
interests granted by the Obligors in the Financed Vehicles, including, but not
limited to, obtaining the execution by the Obligors on, and the filing of, all
security agreements, financing statements, continuation statements or other
instruments as are necessary to maintain the security interests granted by the
Obligors under the respective Contracts.
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Section 12.2 Collections Account.
(a) The Servicer shall maintain, in the Company's name, at a depository
institution (which may be the Trustee), a lock box account (the "Collections
Account"). The Collections Account shall be an Eligible Account. The Servicer
shall give the Trustee and the Company at least five Business Days' written
notice of any change in the location of the Collections Account and any related
account identification information.
(b) The Servicer agrees to direct all Obligors to remit all collections
and payments directly to, or otherwise cause all payments on the Contracts to be
deposited in, the Collections Account. The Servicer agrees and covenants to
provide payment books to all Obligors with remittance instructions directing all
payments to be remitted directly to the Collections Account and that all cash,
checks, notes, drafts and other items which it otherwise receives and which are
attributable to the Contracts shall be promptly deposited into the Collections
Account. The Servicer shall likewise deposit in the Collections Account within
two Business Days of receipt all Liquidation Proceeds and Insurance Proceeds.
The Servicer shall cause to be transferred to the Operating Account, at least
weekly, all funds in the Collections Account that are attributable to the
Contracts.
Section 12.3 Servicer Acting as Custodian.
The Servicer acknowledges that any collections or proceeds from the
Contracts in the Collections Account, or otherwise in the possession or control
of the Servicer, are the Company's property. In holding such proceeds and
collections, the Servicer agrees to act as custodian and bailee of the Company
and the Additional Lender, if any, at all times.
Section 12.4 Records.
The Servicer shall retain all data (including, without limitation,
computerized records) relating directly to or maintained in connection with the
servicing of the Contracts at its office in Dallas, Texas, or at the office of
any party with whom the Servicer may subcontract for the performance of its
duties and obligations arising under the Servicing Agreement and this Indenture.
Within 15 days after the change in the servicing office where such data is
located, the Servicer shall give the Trustee notice of the location of the new
servicing office of the Servicer or its subcontractor. The Servicer shall give
the Trustee access to all data (including, without limitation, computerized
records) at all reasonable times.
Section 12.5 Payment of Fees and Expenses of Trustee.
(a) The Servicer shall, if the Company does not so pay, pay the fees and
expenses of the Trustee under the Indenture as such fees and expenses become
payable from time to time pursuant to Section 7.7 of this Indenture. The
Servicer shall be entitled to seek reimbursement for such fees and expenses from
any funds of the Company.
(b) Prior to the termination of this Indenture, the obligations of the
Servicer under this Indenture shall not be subject to any defense, counterclaim
or right of offset which Servicer has or may have against the Company or the
Trustee, whether in respect of this Indenture, any Contract, or otherwise.
Section 12.6 Servicing Compensation.
As compensation for the performance of its obligations under the Servicing
Agreement and subject to the terms of this Section, the Servicer shall be
entitled to receive payment of the Servicing Fees from the Company, out of
amounts available for that purpose in the Operating Account. Payment of such
Servicing Fees shall be conditioned upon the availability in the Operating
Account of amounts intended for such purpose after satisfaction of all higher
priority applications of such funds under Section 4.1(f), any deficiency being
carried over and not payable (without accountability for interest) until
sufficient amounts become available for that purpose in the Operating Account.
The Servicer shall pay all expenses incurred by it in connection with its
servicing activities under the Servicing Agreement
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and shall not be entitled to reimbursement of such expenses except to the
extent they constitute Liquidation Expenses and can be reimbursed out of
related Liquidation Proceeds.
Section 12.7 Realization upon Defaulted Contracts.
In accordance with the servicing procedures specified in the Servicing
Agreement, the Servicer shall repossess, or otherwise comparably convert the
ownership of, any Financed Vehicle securing a Defaulted Contract and as to which
no satisfactory arrangements can be made for collection of delinquent payments
pursuant to the Servicing Agreement. In connection with such repossession or
other conversion, the Servicer shall follow such practices and procedures as it
shall deem necessary or advisable and as shall be normal and usual for
responsible holders of retail installment sales contracts and obligations and as
shall be in compliance with all applicable laws, and, in connection with the
repossession of any Financed Vehicle or other proceedings with respect to any
Defaulted Contract, may commence and prosecute any judicial proceedings in
respect of such Contract in its own name, or if the Servicer deems it necessary,
in the name of the Company, on behalf of the Company. The Servicer's
obligations under this Section are subject to the provision that, in the case of
damage to a Financed Vehicle from an uninsured cause, the Servicer shall not be
required to expend its own funds in repairing such motor vehicle unless it shall
determine (i) that such restoration will increase the Liquidation Proceeds of
the related Contract, after reimbursement to itself for such expenses, and (ii)
that such expenses will be recoverable by it either as Liquidation Expenses or
as expenses recoverable under an applicable insurance policy. The Servicer
shall be responsible for all other costs and expenses incurred by it in
connection with any action taken in respect of a Defaulted Contract, provided,
however, that it shall be entitled to reimbursement of such costs and expenses
to the extent they constitute Liquidation Expenses or expenses recoverable under
an applicable insurance policy.
Section 12.8 Collecting Title Documents Not Delivered at the Closing Date.
(a) If the Title Document for a Financed Vehicle does not reflect the
Company as lienholder at the time of the Company's purchase direct from a Dealer
of the related Contract, the Servicer shall confirm, prior to the Company's
purchase, that an appropriate application has been made to transfer the lien on
the Title Document to the Company. If the Title Document for a Financed Vehicle
reflects the Servicer as lienholder at the time of the Company's purchase of the
related Contract, the Servicer shall, in connection with the Company's purchase,
make an appropriate application to transfer the lien on the Title Document to
the Company.
(b) In the case of any Contract in respect of which the Title Document for
the related Financed Vehicle showing the Servicer as first lienholder has been
applied for in connection with the purchase of the Contract, the Servicer shall
use reasonable efforts to obtain such Title Document and promptly upon receipt
thereof to make application for the transfer of the lien noted thereon to the
Company. In the case of any Contract in respect of which the Title Document for
the related Financed Vehicle showing the Company as first lienholder has been
applied for in connection with the purchase of the Contract or thereafter, the
Servicer shall use reasonable efforts to obtain such Title Document and to
deliver it to the Company (or other Person appointed as custodian for the
Contract Documents) as promptly as possible. If such Title Document showing the
Company as first lienholder is not received by the Company (or custodian) within
120 days after the Purchase Date, then the representation and warranty in
Section 12.16 in respect of such Contract shall be deemed to have been incorrect
in a manner that materially and adversely affects the Holders.
(c) The Servicer shall deliver to the Trustee on a monthly basis a listing
of Contracts which as of the date prior to such delivery do not show the
Servicer or the Company as first lienholder on the Title Documents for such
Contracts.
(d) Any fees charged for the transfer of liens on the Title Documents for
the Financed Vehicles into or out of the Company's name shall be paid by the
Company as an Allowed Expense.
Section 12.9 Purchase of Eligible Contracts.
(a) Eligible Contracts shall be purchased on behalf of the Company by the
Servicer (or its subcontractors)
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pursuant to the terms of the Servicing Agreement and this Indenture. In
carrying out its purchase obligations, the Servicer agrees that it will use
its customary and usual procedures in purchasing motor vehicle retail
installment contracts (and obligations) and, to the extent more exacting, the
procedures used by the Servicer in respect of such contracts (and
obligations) purchased by it for its own account. The Company and the
Servicer shall agree from time to time as to which Eligible Contracts are to
be purchased by the Company from or through Servicer. The purchase prices
for any such purchases shall be payable from the funds in the Operating
Account. On or prior to each Report Date, the Company and the Servicer shall
deliver to the Trustee the Monthly Report of the Company and the Servicer
which shall set forth the following:
(i) information regarding the terms and conditions of each Eligible
Contract (and the related Financed Vehicle) for which the purchase price was
paid by the Company during the month covered by the Monthly Report, including at
least the following: the number assigned to such Contract by the Servicer, the
name of the Obligor, the purchase price paid by the Company for such Contract,
the dealer's sales price for the Financed Vehicle (in the case of a vehicle
sale), the vehicle identification number for the Financed Vehicle, the date on
which the Contract was originated by the motor vehicle dealer selling or leasing
the Financed Vehicle, the number of unpaid installments (or term), and the
aggregate unpaid installments (including lease payments) in dollar amount;
(ii) a confirmation of the accuracy of the representations and warranties
set forth in Section 12.16 of this Indenture with respect to such Contracts;
(iii) a confirmation that the Servicer has performed all of its
obligations under the Servicing Agreement with respect to such Contracts, that
there is no Event of Default under this Indenture and that such Contracts
conform to the purchasing criteria set forth in the Servicing Agreement and in
EXHIBIT A attached hereto;
(iv) a confirmation that the fair value of the Contracts purchased during
the month covered by the Monthly Report is at least equal to the purchase price
paid therefor by the Company;
(v) a confirmation of the month-ending balance in the Operating Account
and that the funds remaining in the Operating Account will be sufficient to pay
the interest owing on the Notes on the next Payment Date and any anticipated
Allowed Expenses during the current month;
(vi) a confirmation that the provisions of Section 5.9(vii) of this
Indenture requiring the Company and the Servicer to obtain all necessary
licenses, permits and governmental approvals in any jurisdiction related to the
Eligible Contracts covered by the Monthly Report have been satisfied; and
(vii) such other information reasonably requested by the Trustee.
(b) The Company acknowledges that the Servicer also purchases motor
vehicle retail installment contracts (or obligations) on behalf of various other
parties. Servicer agrees that any motor vehicle retail installment contracts
(or obligations) purchased by it shall be assigned to the various parties for
which the Servicer purchases such contracts, including the Company, on a basis
which takes into account the respective periods of time the purchasing parties
have been in existence, the cost of the available contract package, the amount
of their unexpended funds, and the need to diversify their holdings.
(c) The purchase price payable by the Company for each Contract shall
equal the actual out-of-pocket price payable by the Servicer for the purchase of
the Contract (inclusive of any incentives paid to dealers on a per Contract
basis, such as a volume bonus). Notwithstanding the foregoing, with respect to
any Contract which has been purchased by the Company from the Servicer or any of
its Affiliates and for which the Servicer or such Affiliate has received one or
more installments from the Obligor prior to the purchase of the Contract by the
Company and is retaining such installments for its own account rather than
transferring them to the Company's account, the purchase price payable by the
Company shall be determined to provide the Company an internal rate of return on
its investment in the Contract from the remaining unpaid installments equal to
the original purchaser's initial internal rate of return on
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<PAGE>
its investment in the Contract, as of its purchase from the originating
dealer, assuming in both cases that the Contract was paid in full in
accordance with its scheduled installments. In addition, no Contract
purchased by the Company from the portfolio of the Servicer or any of its
Affiliates may be in default at the time of purchase by the Company or have
violated the purchasing criteria set forth in EXHIBIT A attached hereto (with
all references to the Company deemed to refer to the Servicer or such
Affiliate) or in the Servicing Agreement at the time of its purchase by the
Servicer or such Affiliate.
(d) Servicer and the Company may amend the purchasing criteria set forth
in the Servicing Agreement with the exception of the purchasing criteria set
forth on EXHIBIT A to this Indenture, for which the prior written consent of the
Trustee or the Majority Holders must be obtained.
(e) Without the prior consent of the Trustee, neither the Servicer nor the
Company shall make any payments or withdrawals from funds in the Operating
Account for the purchase of any Contracts during the continuance of an Event of
Default.
Section 12.10 Reporting by the Servicer.
On or prior to each Report Date, the Servicer shall render to the Trustee
the Monthly Report in respect of the immediately preceding Collection Period,
which shall set forth the following:
(a) A confirmation that all proceeds (including all written installments,
Full Prepayments, Net Liquidation Proceeds or Net Insurance Proceeds) received
by Servicer during such Collection Period and attributable to the Contracts (and
any related Financed Vehicles) owned by the Company have been deposited into the
Collections Account;
(b) A confirmation that all funds that were deposited into the Collections
Account during such Collection Period and that were attributable to the
Contracts and related Financed Vehicles owned by the Company have been
transferred to the Operating Account;
(c) Attached to the Monthly Report should be detailed collection,
receivables and delinquency reports listing, by Contract, the proceeds received
and applied for each Contract during such Collection Period and deposited in the
Collections Account (including any Net Liquidation Proceeds and Net Insurance
Proceeds and any prepayments by Obligors) and the unpaid installment balance and
the past due installments as of the end of the Collection Period for each
Contract;
(d) Attached to the Monthly Report should be a detailed repossession,
liquidation and loss report listing, by Contract, Contracts assigned for
repossession, the repossessions of Financed Vehicles, the sales of repossessed
Financed Vehicles and resulting proceeds, any Net Insurance Proceeds and any
other Net Liquidation Proceeds during the Collection Period; and
(e) Any other information relating to the Contracts reasonably requested
by the Trustee.
Section 12.11 Inspection and Audit Rights.
The Servicer agrees that, upon reasonable prior notice, it will permit any
representative of the Trustee, during the Servicer's normal business hours, to
examine all of the books of account, records, reports and other papers of the
Servicer relating to the Contracts, to make copies and extracts therefrom, to
cause such books to be audited by independent accountants selected by the
Trustee, and to discuss the affairs, finances and accounts relating to the
Contracts with the Servicer's officers, employees and independent accountants
(and by this provision the Servicer hereby authorizes said accountants to
discuss with such representatives such affairs, finances and accounts), all at
such reasonable times and as often as may be reasonably requested. Any expense
incident to the reasonable exercise by the Trustee of any right under this
Section shall be borne by the Trustee and reimbursed to it by the Company under
Section 7.7.
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Section 12.12 Representations and Warranties Concerning the Servicer.
The Servicer represents and warrants to the Company and the Trustee as
follows:
(a) The Servicer (i) has been duly organized and is validly existing and
in good standing as a corporation organized and existing under the laws of the
State of Texas, (ii) has qualified to do business as a foreign corporation and
is in good standing in each jurisdiction where the character of its properties
or the nature of its activities makes such qualification necessary, and (iii)
has full power, authority and legal right to own its property, to carry on its
business as presently conducted, and to enter into and perform its obligations
under this Indenture.
(b) The execution and delivery by the Servicer of this Indenture are
within the corporate power of the Servicer and have been duly authorized by all
necessary corporate action on the part of the Servicer. Neither the execution
and delivery of this Indenture, nor the consummation of the transactions herein
contemplated, nor compliance with the provisions hereof, will conflict with or
result in a breach of, or constitute a default under, any of the provisions of
any law, governmental rule, regulation, judgment, decree or order binding on the
Servicer or its properties or the charter or bylaws of the Servicer, or any of
the provisions of any indenture, mortgage, contract or other instrument to which
the Servicer is a party or by which it is bound or result in the creation or
imposition of any lien, charge or encumbrance upon any of its property pursuant
to the terms of any such indenture, mortgage, contract or other instrument.
(c) The Servicer is not required to obtain the consent of any other party
or consent, license, approval or authorization of, or registration or
declaration with, any governmental authority, bureau or agency in connection
with the execution, delivery, performance, validity or enforceability of this
Indenture.
(d) This Indenture has been duly executed and delivered by the Servicer
and the provisions of Article Twelve hereof constitute legal, valid and binding
covenants enforceable against the Servicer in accordance with their terms
(subject to applicable bankruptcy and insolvency laws and other similar laws
affecting the enforcement of creditors' rights generally).
(e) There are no actions, suits or proceedings pending or, to the
knowledge of the Servicer, threatened against or affecting the Servicer, before
or by any court, administrative agency, arbitrator or governmental body with
respect to any of the transactions contemplated by the Servicing Agreement or
this Indenture.
Section 12.13 Corporate Existence; Status as Servicer; Merger.
(a) The Servicer shall keep in full effect its existence, rights and
franchises as a corporation under the laws of the State of Texas, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of the Contract Documents, this
Indenture and the Servicing Agreement.
(b) The Servicer shall not consolidate with or merge into any other
corporation or convey, transfer or lease substantially all of its assets as an
entirety to any person unless the corporation formed by such consolidation or
into which the Servicer has merged or the person which acquires by conveyance,
transfer or lease substantially all the assets of the Servicer as an entirety is
an entity organized and existing under the laws of the United States or any
state or the District of Columbia and executes and delivers to the Company and
the Trustee an agreement in form and substance reasonably satisfactory to the
Company and the Trustee, which contains an assumption by such successor entity
of the due and punctual performance and observance of each covenant and
condition to be performed or observed by the Servicer under this Indenture and
the Servicing Agreement.
Section 12.14 Performance of Obligations.
(a) The Servicer shall punctually perform and observe all of its
obligations and agreements contained in
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this Indenture and the Servicing Agreement.
(b) The Servicer shall not take any action, or permit any action to be
taken by others, which would excuse any person from any of its covenants or
obligations under any of the Contract Documents, or which would result in the
amendment, hypothecation, subordination, termination or discharge of, or impair
the validity or effectiveness of, any of the Contract Documents or any such
instrument, except as expressly provided herein and therein.
Section 12.15 The Servicer Not to Resign; Assignment.
(a) The Servicer shall not resign from the duties and obligations hereby
imposed on it unless, by reason of change in applicable legal requirements, the
continued performance by the Servicer of its duties under this Indenture would
cause it to be in violation of such legal requirements in a manner which would
result in a material adverse effect on the Servicer or its financial condition.
No such resignation shall become effective unless and until a new industry
qualified servicer acceptable to the Company is willing to service the Contracts
and enters into a servicing agreement with the Company in form and substance
substantially similar to the Servicing Agreement and assumes, pursuant to a
written instrument reasonably satisfactory to the Trustee, the obligations and
duties of the Servicer arising under this Indenture. No such resignation shall
affect the obligation of the Servicer to repurchase any Contract pursuant to
Section 12.17.
(b) The Servicer may not assign this Indenture or the Servicing Agreement
or any of its rights, powers, duties or obligations hereunder, provided that the
Servicer may assign this Indenture and the Servicing Agreement in connection
with a consolidation, merger, conveyance, transfer or lease made in compliance
with Section 12.13(b), and provided further that the Servicer may contract with
industry qualified third parties for the performance of its duties under the
Servicing Agreement and this Indenture, except that any such contract shall not
relieve the Servicer from liability for its obligations under the Servicing
Agreement and this Indenture.
Section 12.16 Representations and Warranties as to the Contracts.
With respect to each Contract, the Servicer represents and warrants to the
Company, effective as of the Purchase Date for such Contract, which
representations and warranties shall be reaffirmed by delivery of the Assignment
for such Contract signed by the Servicer, as follows:
(a) All of the representations and warranties with respect to the Servicer
set forth in Section 12.12 continue to be true and correct;
(b) In acting with respect to each Contract, Servicer shall comply in all
material respects with, all applicable Federal, state and local laws,
regulations and official rulings;
(c) Each Contract (i) shall have been originated in the United States of
America by a dealer for the retail sale or lease of a Financed Vehicle in the
ordinary course of such dealer's business, shall have been fully and properly
executed by the parties thereto and shall have been validly assigned by such
dealer to Servicer in accordance with its terms, (ii) shall have created or
shall create a valid, subsisting, and enforceable first priority security
interest in favor of Servicer or the Company in the Financed Vehicle, (iii)
shall contain customary and enforceable provisions such that the rights and
remedies of the holder thereof shall be adequate for realization against the
collateral of the benefits of the security, (iv) shall provide for, in the event
that such Contract is prepaid, a prepayment that fully pays the principal
balance, (v) met at the time of its purchase from the originating dealer in all
material respects all purchasing criteria set forth on EXHIBIT A attached hereto
and in the Servicing Agreement, and (vi) shall not be a Defaulted Contract.
(d) (i) The Title Document for the related Financed Vehicle shows (or if
a new or replacement Title Document is applied for with respect to such Financed
Vehicle, the official receipt from the responsible state or local governmental
authority indicating that an application has been made and that the Title
Document, when issued, will show) the Servicer or the Company as the holder of a
first priority security interest in such Financed Vehicle, (ii) within
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120 days after the Purchase Date for the Contract relating to the Financed
Vehicle, the Title Document for such Financed Vehicle will show the Company
as the holder of a first priority security interest in such Financed Vehicle,
and (iii) the Company, upon delivery of the Assignment, will have a valid and
enforceable security interest in the Financed Vehicle to the same extent as
the security interest of the Person named as the original secured party under
the related Contract.
(e) Each dealer from whom the Contract is purchased shall be required to
represent and warrant that each Contract and the sale or lease of the Financed
Vehicle shall have complied at the time it was originated in all material
respects with all requirements of applicable federal, state, and local laws, and
regulations thereunder, including without limitation, usury laws, the Federal
Truth-In-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Fair Debt Collection Practices Act, the Federal Trade
Commission Act, the Federal Reserve Board's Regulations B and Z, and state
adaptations of the National Consumer Act and of the Uniform Consumer Credit
Code, and other consumer laws and equal credit opportunity and disclosure laws.
(f) Each Contract shall represent the genuine, legal, valid, and binding
payment obligation in writing of the Obligor, enforceable by the holder thereof
in accordance with its terms subject to the effect of bankruptcy, insolvency,
reorganization, or other similar laws affecting the enforcement of creditor's
rights generally.
(g) No provision of a Contract shall have been waived, amended or
modified, except as disclosed in writing by Servicer.
(h) No right of rescission, set off, counterclaim, or defense shall have
been asserted or threatened with respect to any Contracts.
(i) The Assignment constitutes an enforceable sale and transfer of the
Contract from the Servicer (or other Person from whom the Contract is purchased)
to the Company and it is the intention of the Servicer that the beneficial
interest in and title to the Contracts not be part of Servicer's estate in the
event of the filing of a bankruptcy petition by or against Servicer under
bankruptcy law.
(j) Immediately prior to the Assignment herein contemplated, Servicer (or
other Person from whom such Contract is purchased by the Company) had good and
marketable title to each Contract free and clear of all liens, encumbrances,
security interests, and rights of others and, immediately upon the transfer
thereof pursuant to the Assignment, the Company shall have good and marketable
title to each Contract, free and clear of all liens, encumbrances, security
interest, and right of others.
(k) No Contract shall have been originated in, or shall be subject to the
laws of, any jurisdiction under which the sale, transfer, and assignment of such
Contract to the Company or the Trustee would be unlawful, void, or voidable.
Section 12.17 Purchase of Certain Contracts.
(a) The representations and warranties of the Servicer set forth in
Section 12.16 with respect to each Contract shall survive delivery of the
Contract Documents to the Company and shall continue so long as such Contract
remains outstanding. Upon discovery by the Company, the Servicer or the Trustee
that any of such representations or warranties was incorrect as of the time made
or that any of the Contract Documents relating to any such Contract has not been
properly executed by the Obligor or the Servicer or contains a material defect
or has not been received by the Company, the party making such discovery shall
give prompt notice to the Trustee (other than in cases where the Trustee has
given notice thereof) and to the other party (or parties in cases where the
Trustee has given notice thereof). If any such defect, incorrectness or
omission materially and adversely affects the interest of the Holders in and to
the related Contracts, the Servicer shall, within 90 days after discovery
thereof or receipt of notice thereof, cure the defect or eliminate or otherwise
cure the circumstances or condition in respect of which the representation or
warranty was incorrect as of the time made. If the Servicer is unable to do so,
it shall purchase such Contract from the Company through a deposit into the
Collections Account no later than the end of the calendar month after which such
90-day
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period expired of an amount equal to the product of (x) the Price/Payments
Ratio multiplied by (y) the aggregate unpaid installments on the Contract.
Upon any such purchase, the Company shall execute and deliver such
instruments of transfer or assignment, in each case without recourse, as
shall be necessary to vest in the Servicer any Contract purchased hereunder.
(b) It is understood that, without limiting the meaning of the term
"materially and adversely affects", the interest of the Holders shall be deemed
materially and adversely affected if (i) the Company, the Trustee or any of such
Holders are put under any obligation to pay any other Person any sum of money as
a result of a defect or misrepresentation described in subsection (a) above, or
(ii) the Trustee or the Majority Holders, acting reasonably, determine, by
written notice to the Company, that such defect or misrepresentation materially
and adversely affects the interests of the Holders in and to a Contract.
Section 12.18 Indemnification.
Servicer hereby indemnifies and holds harmless Trustee and its successors
and their respective officers, directors, employees, agents and attorneys
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature whatsoever which may be imposed on, incurred by or asserted against
Trustee or its successors, or their respective officers, directors, employees,
agents or attorneys, due to (i) any breach by Servicer of its representations,
warranties or covenants provided for in the Servicing Agreement or this
Indenture, or (ii) any action or inaction of Servicer, or through Servicer, in
any way relating to, or arising out of, the Servicing Agreement or this
Indenture, any and all transfers or assignments of the Contracts, or any of the
transactions contemplated herein or therein or the creation or collection or
enforcement of any of the Contracts. Servicer, however, does not assume the
risk of uncollectibility and does not indemnify Trustee and/or its successors,
or their officers, directors, employees, agents or attorneys, against the
uncollectibility of all or any part of the Contracts as against the Obligor
thereof, except for uncollectibility resulting from a breach by Servicer of any
warranty, representation or covenant contained herein. The indemnities
contained in this Section shall survive any termination of this Indenture or the
Servicing Agreement.
Section 12.19 Termination.
The respective duties and obligations of the Servicer under this Article
Twelve shall terminate upon the earlier of (i) the satisfaction and discharge of
this Indenture pursuant to Article Eight, or (ii) the latest to occur of (A) the
final payment or other liquidation of the last Outstanding Contract owned by the
Company, and (B) the disposition of all property acquired upon repossession or
comparable conversion of any Financed Vehicle securing a Contract.
Section 12.20 Amendment.
(a) The provisions of this Article Twelve may be amended from time to time
by the Company, the Servicer and the Trustee, without the consent of any Holder,
provided that such action shall not adversely affect in any material respect the
interests of any Holder.
(b) The provisions of this Article Twelve may also be amended from time to
time by the Company, the Servicer and the Trustee, with the consent of the
Majority Holders for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Article, provided, however,
that no such amendment shall, without consent of each Holder, (i) alter the
priorities with which any allocation of funds shall be made under this Article;
(ii) deprive any such Holder of the benefit of this Indenture; or (iii) modify
this Section.
(c) Promptly after the execution of any amendment pursuant to Section
12.20(b), the Company shall cause to be sent to each Holder a notice setting
forth in general terms the substance of such amendment. Any failure to do so
shall not affect the validity of such amendment.
(d) It shall not be necessary, in any consent of Holders under this
Section, to approve the particular form
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of any proposed amendment, but it shall be sufficient if such consent shall
approve the substance thereof. The manner of obtaining such consents and of
evidencing the authorization of the execution thereof by Holders shall be
subject to such reasonable regulations as the Trustee may prescribe.
(e) Any amendment or modification effected contrary to the provisions of
this Section shall be void.
ARTICLE THIRTEEN
ADDITIONAL LENDER
Section 13.1 Indenture Subject to Terms of Additional Borrowing.
In addition to the Notes, the Company intends to pursue an Additional
Lender to borrow funds with which to purchase additional Contracts. The Company
anticipates that any Additional Borrowings from the Additional Lender will be
secured by first priority security interests in all the Contracts owned by the
Company and all other assets of the Company. The provisions of this Indenture,
and the rights and duties of the Company, the Servicer and the Trustee
hereunder, shall at all times, anything else herein to the contrary
notwithstanding, be subject to the terms and provisions of the Additional
Borrowing.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, as of the day and year first above written.
STERLING TRUST COMPANY,
as Trustee
By:
---------------------------------
______________, President
Attest:
- ---------------------------------
______________________, Secretary
SOVEREIGN CREDIT FINANCE II, INC.
By:
---------------------------------
A. Starke Taylor, III, President
Attest:
- ---------------------------------
___________________, Secretary
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The undersigned Sovereign Associates, Inc. joins in this Indenture for the
sole purpose of evidencing its agreement to the covenants, representations and
warranties pertaining to it that are set forth in Article Twelve of this
Indenture and not for the purpose of guarantying or otherwise covenanting to pay
the Notes or to perform any of the Company's obligations.
SOVEREIGN ASSOCIATES, INC.
By:
-------------------------------
_____________, President
Attest:
- ------------------------------
_________________, Secretary
The undersigned Sovereign Auto Finance Holdings, Inc. joins in this
Indenture for the sole purpose of evidencing its agreement to the indemnity and
hold harmless provisions pertaining to it that are set forth in Section
7.7(a)(ii) of this Indenture and not for the purpose of guarantying or otherwise
covenanting to pay the Notes or to perform any of the Company's obligations.
SOVEREIGN AUTO FINANCE HOLDINGS, INC.
By:
---------------------------------
A. Starke Taylor, III, President
Attest:
- ------------------------------
_________________, Secretary
45
<PAGE>
THE STATE OF TEXAS )
)
COUNTY OF MCLENNAN )
BEFORE ME, the undersigned authority, on this day personally appeared
_____________________, President of Sterling Trust Company, a Texas corporation,
known to me to be the person and officer whose name is subscribed to the
foregoing instrument, and acknowledged to me that he or she executed the same
for the purposes and consideration therein expressed, in the capacity therein
stated and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of
______________________, 199_.
[SEAL] -------------------------------------------
Notary Public in and for the
State of Texas
Print Name:
----------------------------
My Commission Expires:
----------------
THE STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned authority, on this day personally appeared A.
Starke Taylor, III, President of Sovereign Credit Finance II, Inc., a Texas
corporation, known to me to be the person and officer whose name is subscribed
to the foregoing instrument, and acknowledged to me that he executed the same
for the purposes and consideration therein expressed, in the capacity therein
stated and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of
______________________, 199_.
[SEAL] -------------------------------------------
Notary Public in and for the
State of Texas
Print Name:
----------------------------
My Commission Expires:
----------------
46
<PAGE>
THE STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned authority, on this day personally appeared
____________, President of Sovereign Associates, Inc., a Texas corporation,
known to me to be the person and officer whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for the
purposes and consideration therein expressed, in the capacity therein stated and
as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of
______________________, 199_.
[SEAL] -------------------------------------------
Notary Public in and for the
State of Texas
Print Name:
----------------------------
My Commission Expires:
----------------
THE STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned authority, on this day personally appeared A.
Starke Taylor, III, President of Sovereign Auto Finance Holdings, Inc., a Texas
corporation, known to me to be the person and officer whose name is subscribed
to the foregoing instrument, and acknowledged to me that he executed the same
for the purposes and consideration therein expressed, in the capacity therein
stated and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of
______________________, 199_.
[SEAL] -------------------------------------------
Notary Public in and for the
State of Texas
Print Name:
----------------------------
My Commission Expires:
----------------
47
<PAGE>
EXHIBIT A
CONTRACT PURCHASE CRITERIA
SOVEREIGN CREDIT FINANCE II, INC.
The following purchasing criteria shall govern all purchases of Eligible
Contracts by the Company and no Contract shall be purchased that does not
materially meet such criteria.
I. PURCHASE PRICE AND COLLATERAL RATIOS
A. The purchase price for a Contract must involve an initial payment to
the Dealer which does not exceed the average retail value of a Financed Vehicle
plus tax, title, license and warranty. Average retail value shall be measured
by the MANNHEIM GOLD BOOK, NATIONAL AUTO RESEARCH BLACK BOOK or the NATIONAL
AUTOMOBILE DEALERS USED CAR GUIDE used car market guides, or other nationally
published used car market guides. If measured by the MANNHEIM GOLD BOOK, the
retail value of a Financed Vehicle shall be adjusted upward to reflect the
generally lower values provided by this publication when compared to other
publications.
B. The purchase price for a Contract must involve an initial payment to
the Dealer of no more than 90% of the principal plus accrued interest (pay-off
balance) of such Contract.
C. The age of each Financed Vehicle must be 7 years or less for
automobiles or 8 years or less for trucks.
D. Miles may not exceed 125,000 for automobiles or 135,000 for trucks,
unless the Dealer guarantees payments under the applicable Contract.
II. DOWN PAYMENT RATIO
A. Obligors on all Contracts must be required to have made a down payment
(cash plus net trade-in allowance) of at least 10% of the Dealer's cost
(excluding sale preparation expenses) in the Financed Vehicle.
III. CONTRACT TERMS
A. All Contracts must have an original term of 44 months or less although
54 month terms will be permitted where the Financed Vehicle is a 1991 or later
model, or where lower depreciation or stronger credit history justifies a 54
month term.
B. No Contract may violate any applicable usury laws of any state or of
the United States.
C. Each Contract shall be in the form of industry-standard consumer
automobile retail installment contracts or notes issued by the Texas Independent
Automobile Dealers Association if the Contract originated in Texas or by any
similar association of dealers in any other state in which the Contract
originated.
IV. CREDIT CRITERIA
Obligors on all Contracts purchased by Company must have supplied the
following credit information and meet the following requirements, and Servicer
shall perform verification procedures in an industry-standard manner observing
due care and procedure:
A. Personal reference with address and telephone number.
A-1
<PAGE>
B. Copy of credit application executed by Obligor which contains the
necessary information to verify by telephone or otherwise the Obligor's address,
employment and personal references and to obtain a credit report from a credit
reporting agency.
C. Obligor must have a valid driver's license.
D. No cosigners, except immediate family members.
E. Obligor must be at least 18 years old.
To the extent that, in the Servicer's good faith judgement, Contracts which
do not satisfy the criteria specified in I(A) through III(A) above may be
purchased for a purchase price which would be beneficial to the Company,
Servicer may purchase such Contracts.
A-2
<PAGE>
EXHIBIT B
MONTHLY REPORT CERTIFICATE
For Month: _________, 199__ (the "Collection Period")
Company: Sovereign Credit Finance II, Inc.
Servicer: Sovereign Associates, Inc.
Indenture: Dated as of _______, 1998
Trustee: Sterling Trust Company
I. PURCHASING ACTIVITIES (INDENTURE, SECTION 12.9)
A. EXHIBIT I hereto lists each Contract for which the purchase price was
paid by Company during the Collection Period and includes for each Contract (and
related Financed Vehicle) at least the following information:
1. Contract number
2. Name of Obligor
3. Purchase price paid by Company
4. Dealer's sales price for Financed Vehicle
5. Vehicle identification number (VIN) for Financed Vehicle
6. Origination date
7. Number of unpaid installments in dollar amount
8. Aggregate unpaid installments in dollar amount
B. Servicer and Company confirm with respect to such Contracts that:
1. The representations and warranties set forth in Section 12.16 of
the Indenture are accurate;
2. The aggregate fair value of such Contracts is at least their
aggregate purchase price paid by Company;
3. Servicer has performed all of its obligations under the Servicing
Agreement; there is no Event of Default under the Indenture; and the
purchased contracts conform to the purchasing criteria set forth in the
Servicing Agreement and Exhibit A to the Indenture; and
4. The provisions of Section 5.9(vii) of the Indenture requiring
Company and Servicer to obtain all necessary licenses, permits and
governmental approvals in any required jurisdiction have been satisfied.
C. Servicer hereby assigns and transfers to Company any such purchased
Contracts for which it holds title, without recourse or warranty except as
otherwise provided in the Indenture or Servicing Agreement.
D. Servicer and Company confirm that the available funds in the Operating
Account will be sufficient to pay the total interest installments due on the
Notes at the next Payment Date, which amount is $_________, and anticipated
Allowed Expenses during the current month.
II. SERVICING ACTIVITIES (INDENTURE, SECTION 12)
A. Servicer confirms that:
B-1
<PAGE>
1. All proceeds (including all installments, Full Prepayments, Net
Liquidation Proceeds and Net Insurance Proceeds) received by it during the
Collection Period attributable to Contracts (and any related Financed
Vehicles) owned by Company have been deposited into the Collections
Account;
2. All funds that were deposited into the Collections Account during
the Collection Period and that were attributable to the Contracts (and
related Financed Vehicle) owned by Company have been transferred to the
Operating Account; and
3. A review of the activities of Servicer during the Collection
Period has been made under the supervision of the officer executing this
Certificate with a view to determining whether during such period Servicer
has performed and observed, in all material respects, its obligations under
the Indenture and the Servicing Agreement, and, to such officer's
knowledge, no default by Servicer under the Indenture or the Servicing
Agreement has occurred and is continuing.
B. EXHIBIT II hereto lists, by each Contract owned by Company, the daily
proceeds received from such Contracts and deposited in the Collections Account,
including any Net Liquidation Proceeds and Net Insurance Proceeds and any
prepayments by Obligors.
C. EXHIBIT III hereto lists, as of month end, the unpaid installment
balance and any past due installments for each Contract owned by Company.
D. EXHIBIT IV hereto lists, by each Contract owned by the Company, the
Contracts assigned for repossession, the repossessions of Financed Vehicles, the
sales of repossessed Financed Vehicles and resulting proceeds, any Insurance
Proceeds and any other Liquidation Proceeds during the month.
III. DISBURSEMENT ACTIVITIES (INDENTURE, SECTION 4.1)
A. Reconciliation of Operating Account
1. Balance of beginning of month: $______
2. Total Deposits: $______
3. Withdrawals $______
Offering Expenses: $______
Interest on Notes: $______
Allowed Expenses paid: $______
Contracts purchased: $______
Subtotal: $______
4. Balance at end of month: $______
B. Allowed Expenses paid during month from Operating Account:
1. Servicing Fees (______ Contracts x $20): $______
2. Investor Administration Fees: $______
3. Purchase Administration Fees
(Contracts x $500, or 5% of
installments due): $______
4. Bank Fees: $______
5. Accounting Fees: $______
6. Legal Fees: $______
7. Income Taxes: $______
8. Corporate Franchise Taxes: $______
B-2
<PAGE>
9. Trustee Fees: $______
10. Liquidation Expenses: $______
11. Vehicle Warranty Repair Service Contracts: $______
12. Repossession Fees (Repossessions x $125): $______
Total: $______
C. Company confirms that:
1. All withdrawals and payments from the Operating Account during
the month conformed to the requirements of the Indenture;
IV. INTEREST PAYMENTS ON NOTES (INDENTURE, SECTION 5.1)
A. EXHIBIT V hereto sets forth a listing of the interest and any
principal payable to each Holder on the next Payment Date. The Company
certifies that computation of interest has been made in conformance with the
Indenture.
All capitalized terms used herein and not otherwise herein defined shall
have the same meaning as set forth in the Indenture.
Company and Servicer certify that, to the best of their knowledge, the
foregoing and attached information is true and correct.
Dated: ___________________, 199__.
SOVEREIGN ASSOCIATES, INC.
By:
----------------------------------
_________________, President
SOVEREIGN CREDIT FINANCE II, INC.
By:
----------------------------------
A. Starke Taylor, III, President
B-3
<PAGE>
EXHIBITS DESCRIPTION
- -------- -----------
I Purchased Contract Information
II Daily Contract Collections Journal
III Contract Receivables Report
IV Repossession and Liquidation Report
V Holder Interest Report
B-4
<PAGE>
EXHIBIT C
TRUSTEE'S FEES
Sovereign Credit Finance II, Inc.
Notes
Due February 15, 2002
Acceptance Fee (payable upon execution
of Indenture) $7,000.00
Annual Administration Fee
(billed quarterly) $7,500.00
Paying Agent/Registrar Services $4.00 per year per Note
Interest Checks $1.00 per month per Note
Note Register Revisions, Transfers,
Exchanges and Replacement Notes $25.00 each
Expedited Deliveries (per delivery, in
addition to out-of-pocket) $10.00 each
All out-of-pocket expenses such as postage, overnight mail costs, etc. will be
billed at cost to the Company. The Trustee understands that the closing of the
Note issuance will be completed in Dallas and there will not be any travel
expenses charged to the Company. If Trustee's duties are modified beyond a DE
MINIMUS extent, Trustee reserves the right to reevaluate its fees.
C-1
<PAGE>
FREDERICK C. SUMMERS, III
A PROFESSIONAL CORPORATION
ATTORNEY AT LAW
1400 St. Paul Place
750 North St. Paul Street
Dallas, Texas 75201
Telephone (214) 981-3816
Facsimile (214) 981-3839
February 16, 1998
Sovereign Credit Finance II, Inc.
4015 Beltline Road
Building B
Dallas, Texas 75244
Re: 11% Notes Due February 15, 2002
Gentlemen:
We refer to the Form SB-2 Registration Statement (the "Registration
Statement") of Sovereign Credit Finance II, Inc., a Texas corporation (the
"Company"), filed with the Securities and Exchange Commission under file number
333-40321 for the purpose of registering under the Securities Act of 1933, as
amended, the Company's 11% Notes Due February 15, 2002 in the aggregate
principal amount of $10,000,000 (the "Notes"), the Prospectus contained therein
(the "Prospectus"), and the form of Indenture (the "Indenture") relating to the
Notes attached as Exhibit 4.1 to the Registration Statement.
We have examined copies, certified or otherwise identified to our
satisfaction, of the Articles of Incorporation and Bylaws of the Company, as
amended to date, and minutes of applicable meetings of the shareholders and the
Board of Directors of the Company, together with such other corporate records
and certificates of public officials and of officers of the Company as we have
deemed relevant for the purposes of this opinion. Based upon the foregoing, and
having regard to the legal considerations which we deem relevant, it is our
opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Texas.
2. Upon issuance of the Notes in accordance with the provisions of the
Indenture and for the consideration and in the manner set forth in the
Prospectus, the Notes will be legally issued and binding obligations of the
Company.
We hereby consent to the references to this firm under the caption "Legal
Matters" in the Prospectus and the filing with the Securities and Exchange
Commission of this letter as an exhibit
<PAGE>
to the Registration Statement.
Very truly yours,
FREDERICK C. SUMMERS, III
A PROFESSIONAL CORPORATION
By: /s/ Frederick C. Summers, III
------------------------------------
Frederick C. Summers, III
<PAGE>
FREDERICK C. SUMMERS, III
A PROFESSIONAL CORPORATION
ATTORNEY AT LAW
1400 St. Paul Place
750 North St. Paul Street
Dallas, Texas 75201
Telephone (214) 981-3816
Facsimile (214) 981-3839
February 16, 1998
Sovereign Credit Finance II, Inc.
4015 Beltline Road
Building B
Dallas, Texas 75244
Re: 11% Notes Due February 15, 2002
Gentlemen:
We refer to the Form SB-2 Registration Statement (the "Registration
Statement") of Sovereign Credit Finance II, Inc., a Texas corporation (the
"Company"), filed with the Securities and Exchange Commission under file number
333-40321 for the purpose of registering under the Securities Act of 1933, as
amended, the Company's 11% Notes Due February 15, 2002 in the aggregate
principal amount of $10,000,000 (the "Notes"), and the Prospectus contained
therein (the "Prospectus"). The purpose of this letter is to advise you that
the discussion under the caption "Certain Federal Income Tax Considerations" in
the Prospectus reflects the opinion of Frederick C. Summers, III, A Professional
Corporation, as to the tax matters discussed therein.
We hereby consent to the references to this firm under the captions
"Certain Federal Income Tax Considerations" and "Legal Matters" in the
Prospectus and the filing with the Securities and Exchange Commission of this
letter as an exhibit to the Registration Statement.
Very truly yours,
FREDERICK C. SUMMERS, III
A PROFESSIONAL CORPORATION
By: /s/ Frederick C. Summers, III
------------------------------------
Frederick C. Summers, III
<PAGE>
SOVEREIGN CREDIT FINANCE II, INC. SUBSCRIPTION
11% AUTOMOBILE CONTRACT NOTES DUE FEBRUARY 15, 2002
- -------------------------------------------------------------------------------
BY COMPLETING AND EXECUTING THIS PAGE, THE INVESTOR HEREBY ACKNOWLEDGES READING
AND UNDERSTANDING THE MATERIAL ON THE REVERSE SIDE, AND OR REPRESENTS WARRANTS,
ACKNOWLEDGES AND AGREES TO ALL PROVISIONS SET FORTH BELOW AND ON THE REVERSE
SIDE.
- -------------------------------------------------------------------------------
Amount Subscribed Check here if Subscriber
$4,000 min. purchase has previously subscribed
($2,000 for IRA's) in THIS offering
- -------------------- -------------------------
$_______________________ Yes / / No / /
- ----------------------------------------------------------------
1. INVESTOR DATA - (Please print or type):
(1) Name (Mr./Mrs./Ms.) ___________________
Social Security or Tax ID #__________
U.S. Resident? Yes / / No / /
Non-Resident Alien? Yes / / No / /
(2) Name (Mr./Mrs./Ms.) ___________________
Social Security or Tax ID #__________
U.S. Resident? Yes / / No / /
Non-Resident Alien? Yes / / No / /
PERSONS WHO RESIDE IN FOREIGN COUNTRIES, INCLUDING U.S.
CITIZENS AND NON-RESIDENT ALIENS, ARE NOT PERMITTED TO INVEST
IN THE NOTES.
Residence Address:
________________________________________________________________
Street (Please do not use P.O. Box)
________________________________________________________________
City & State Zip Code
________________________________________________________________
Home Phone Business Phone
________________________________________________________________
Mailing Address
________________________________________________________________
City & State Zip Code
- ----------------------------------------------------------------
2. PAYMENTS- Complete this to direct payment checks if to a
retirement account. Must go to custodian unless other
authorization is attached hereto:
________________________________________________________________
Custodian Address
________________________________________________________________
City and State Zip Code
________________________________________________________________
Account No. for payment to a retirement account
- ----------------------------------------------------------------
3. REGISTERED REPRESENTATIVE STATEMENT - I hereby represent on
recommending the purchase of 11% Automobile Contract Notes Due
February 15, 2002 that I, the Registered Representative, have
responsible grounds to believe that the investment is suitable
for the subscriber based upon information available to me as
conveyed by the subscriber or his/her agent.
________________________________________________________________
Registered Representative's Signature Date
- ----------------------------------------------------------------
DISTRIBUTION OF COPIES
White - Sovereign Credit Finance II, Inc.
Yellow - Broker-Dealer
Pink - Registered Representative
Gold - Investor
- ----------------------------------------------------------------
4. OWNERSHIP - CHECK ONE: (REFER TO THE SIGNATURE
REQUIREMENTS AND SUBSCRIPTION INSTRUCTIONS ON REVERSE
SIDE)
/ / Individual / / Trust
/ / Joint Tenant with right / / IRA
of survivorship / / Keough Plan
/ / Tenants in Common / / Pension or Profit
/ / Custodian-Uniform Gifts to Minors / / Other ___________
/ / Corporation _____________________
/ / General Partnership
/ / Limited Partnership
- ----------------------------------------------------------------
5. SIGNATURES
Signature must be identical to subscriber name.
Subscribers must sign the Subscription Agreement;
Purchaser representatives and investment advisors may
not sign on behalf of subscriber.
________________________________________________________________
Signature Date
________________________________________________________________
Print Name
________________________________________________________________
Signature Date
________________________________________________________________
Name
(Fiduciary signature line below applies only to Custodians,
IRA's, Keough, pension or profit sharing plans. Fiduciary
represents that the beneficiary meets the suitability
standards).
________________________________________________________________
Fiduciary Signature on behalf of Beneficiary Date
- ----------------------------------------------------------------
6. BROKER-DEALER INFORMATION
________________________________________________________________
Print Name of Registered Representative or Principal of Firm
________________________________________________________________
Broker-Dealer Firm Name Firm Phone Number
________________________________________________________________
Branch Office Name
________________________________________________________________
Street Address Branch Office
________________________________________________________________
City & State Zip Code
FOR USE OF SOVEREIGN CREDIT FINANCIE II, INC.
Amount: $___________________ Acceptance Date: __________________
<PAGE>
SUBSCRIPTION AGREEMENT
The investor signatory hereto ("Subscriber") represents, warrants, acknowledges
and agrees as follows:
1. Subscriber hereby subscribes for the principal amount of 11% Automobile
Contract Notes (the "Note") issued by Sovereign Credit Finance II, Inc.
("Issuer"), as specified on the reverse side hereof, encloses and hereby tenders
the amount set forth on the reverse side hereof ($4,000 minimum, $2,000 for
IRA's), as full payment for the Note for which he is subscribing, and hereby
agrees, subject to the Issuer's acceptance of his subscription, to become a
Noteholder in an amount equal to the amount tendered. Subscriber agrees that he
may not revoke, cancel, terminate or withdraw his subscription or this
Subscription Agreement without the prior written consent of the Issuer, and
acknowledges that the Issuer may reject his subscription for any reason
whatsoever.
2. Subscriber hereby acknowledges receipt of a copy of the current prospectus
for the offering and sale of the Notes ("Prospectus") and understands that the
Note being acquired will be governed by the terms of the Indenture referenced in
such Prospectus and such other documents as may be referenced therein.
Subscriber further understands and agrees that, following Issuer's acceptance of
his subscription, he shall receive a Note which shall evidence his status as a
Noteholder of Issuer, such Note to be in the form specified in the Indenture.
The information set forth on the reverse side hereof is true and accurate and
Subscriber has proper authority to execute this Subscription Agreement and make
this investment.
3. Subscriber hereby represents that this purchase is made for the
Subscriber's own account and not with a view toward distribution. Subscriber
understands that it is not anticipated that an active market will ever develop
for the Notes, and that accordingly it may be impossible for Subscriber to
liquidate his investment in the Note, even in the event of an emergency. Any
transfer of the Note must comply with the requirements of the Prospectus, the
Note and with any additional requirements imposed by law or by any governmental
authorities.
4. TAX REPRESENTATIONS: Under penalties of perjury, I certify that (i) the
number shown on this form is my correct taxpayer identification number, and (ii)
that I am not subject to backup withholding because (A) I have not been notified
that I am subject to backup withholding as a result of a failure to report all
interest or dividends or (B) the Internal Revenue Service has notified me that I
am no longer subject to backup withholding. Under penalties of perjury, I
certify that I am not a non-resident alien individual, a foreign partnership, a
foreign corporation, or a foreign estate or trust, which would be a foreign
person within the meaning of Sections 1441, 1446 and 7701(a) of the Internal
Revenue Code of 1986, as amended, and that I will notify the Issuer before a
change in my foreign status.
5. SUITABILITY. If an Arizona, Arkansas, Missouri, New Mexico, Oklahoma,
Texas, or Wisconsin subscriber, the subscriber represents that he/she/it has
either (a) an annual gross income of at least $45,000 and a net worth of at
least $45,000 exclusive of the subscriber's principal residence and its
furnishings and personal use automobiles; or (b) a net worth of at least
$150,000, exclusive of the subscriber's principal residence and its furnishings
and personal use automobiles. If a California, Iowa, Kansas, Michigan, or North
Carolina subscriber, the subscriber represents that he/she/it has either (a) an
annual gross income of at least $60,000 and a net worth of at least $60,000
exclusive of the subscriber's principal residence and its furnishings and
personal use automobiles; or (b) a net worth of at least $225,000, exclusive of
the subscriber's principal residence and its furnishings and personal use
automobiles. If an Indiana subscriber, the subscriber represents that
he/she/it has either (a) an annual gross income of at least $40,000 and a net
worth of at least $40,000 exclusive of the subscriber's principal residence and
its furnishings and personal use automobiles; or (b) a net worth of at least
$150,000, exclusive of the subscriber's principal residence and its furnishings
and personal use automobiles. South Dakota subscribers must represent that (a)
they have either (i) an annual gross income of at least $45,000 and a net worth
of at least $45,000; or (ii) a net worth of at least $150,000; and (b) the
amount of their investment does not exceed 10% of their net worth, such net
worth to be determined in each case exclusive of the subscriber's principal
residence and its furnishings and personal use automobiles. If a subscriber is
a fiduciary account, the subscriber represents that the foregoing standards are
met by the beneficiary, the fiduciary account, or by the donor or grantor who
directly or indirectly supplies the funds to purchase the securities if the
donor or grantor is the fiduciary.
The capitalized terms used have the meanings assigned to them in the Prospectus
unless the context otherwise requires.
- -------------------------------------------------------------------------------
SUBSCRIPTION INSTRUCTIONS
1. Complete all items and sign and date this Subscription Agreement in the
places indicated. Subscribers should use full names (not initials). If you
have previously subscribed for a Note in this offering and wish to subscribe for
an additional Note, please check the appropriate box and complete the entire
Subscription Agreement. NO SUBSCRIPTION AGREEMENT WILL BE PROCESSED UNLESS
FULLY COMPLETED AND ACCOMPANIED BY THE APPROPRIATE PAYMENT.
2. Make your subscription check payable to "Overton Bank and Trust, N.A., as
Escrow Agent," for the amount entered under "Amount Enclosed" in the
Subscription Agreement. After the Minimum Offering has been achieved,
subscription checks should be made payable to "Sovereign Credit Finance II,
Inc." NO SUBSCRIPTION AGREEMENT WILL BE PROCESSED UNLESS FULLY COMPLETED AND
ACCOMPANIED BY THE APPROPRIATE PAYMENT.
3. Mail or deliver your signed Subscription Agreement and your check to your
Registered Representative.
4. Registered Representatives: Please forward signed Subscription Agreements
and checks to Sovereign Credit Finance II, Inc., 4015 Beltline Road, Building B,
Dallas, Texas 75244.
The following signature and other documentation requirements have been
established for the following forms of ownership of the Notes:
JOINT TENANTS AND TENANTS IN COMMON: The signatures of all joint tenants
and tenants in common investors are required unless a separate document, signed
by all parties and designating one as the agent of the other(s) for purposes of
signing the Subscription Agreement, accompanies the Subscription Agreement.
CORPORATION: The signature(s) of an officer(s) authorized to sign on
behalf of the corporation is(are) required.
PARTNERSHIP: Specify whether the subscriber is a general or limited
partnership. If it is a general partnership, the signatures of all partners are
required. If it is a limited partnership, the signatures of all general
partners are required.
TRUST: The Subscription Agreement must be signed by the trustee.
UNIFORM GIFTS TO MINORS ACT: The required signature is that of the
custodian, not of the parent (unless the parent has been
<PAGE>
designated as the custodian). Only one child is permitted in each investment
under the Uniform Gifts to Minors Act. Different requirements may apply in
your state. Please consult your attorney for information regarding these
requirements.
<PAGE>
PROMISSORY NOTE
$250,000.00 February 12, 1998
AS HEREINAFTER STATED, for value received, the undersigned, as Maker,
hereby promises to pay on demand to Sovereign Credit Finance II, Inc., as
Holder, at 4015 Beltline Road, Building B, Dallas, Texas 75244, or such other
place in the State of Texas as Holder may hereafter designate in writing, the
entire principal sum of $250,000.00, together with interest at the rate of 10%
per annum.
If at any time fulfillment of any provision hereof shall involve
transcending the limit of validity prescribed by law, then IPSO FACTO, the
obligation to be fulfilled shall be reduced to the limit of such validity and if
the Holder shall ever receive as interest or otherwise an amount which would
exceed the highest lawful rate, any excessive amount shall be used to reduce the
principal.
If this Note is placed in an attorney's hands for collection, or collected
by a suit or through a bankruptcy, or probate, or any other court or proceeding,
either before or after maturity, then in any of said events, the Holder hereof
shall have the right to recover all attorney's fees, litigation expenses, and
collection costs, necessary to recover the sums owed hereunder.
The Maker of this Note waives all demand, presentment, notice of dishonor,
diligence in collection, notice of protest, and notice of acceleration, and
agrees to all extensions and partial payments before or after maturity without
prejudice to Holder.
No delay or omission on the part of the holder in exercising any right
under this Note shall operate as a waiver of such right or of any other right
under this Note. A waiver on any one occasion shall not be construed as a bar
to or waiver of any right or remedy on any future occasion.
"Maker":
SOVEREIGN AUTO FINANCE, INC.
By: /s/ A. Starke Taylor, III
---------------------------------
A. Starke Taylor, III, President
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of our
report dated October 9, 1997, on our audit of the financial statements of
Sovereign Credit Finance II, Inc. as of October 9, 1997. We also consent to the
reference to our firm in the prospectus.
/s/ Belew Averitt LLP
---------------------------------
Belew Averitt LLP
Dallas, Texas
February 16, 1998
