<PAGE>
As filed with the Securities and Exchange Commission on July 9, 1998
REGISTRATION NO. 333-49261
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- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TRANSITION AUTO FINANCE II, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 6141 75-2753067
(State or other jurisdiction (Primary industrial (I.R.S. Employer
of incorporation or organization) classification code number) Identification No.)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
TRANSITION AUTO FINANCE II, INC. Ken Lowe
5422 Alpha Rd., Suite 100, 5422 Alpha Rd., Suite 100,
Dallas, Texas 75240 Dallas, Texas 75240
(972) 404-0042 (972) 404-0042
(Address, including zip code, and telephone number, (Name, address, including zip code,
including area code, of registrant's principal executive offices and and telephone number, including
principal place of business) area code, of agent for service)
</TABLE>
-------------------------
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
VINCE MOUER GERALD MORGAN
Kuperman, Orr, Mouer & Albers, P.C. Burdett, Morgan & Thomas
100 Congress Avenue, Suite 1400 5700 S.W. 45th Street
Austin, Texas 78701-4042 Amarillo, Texas 79114
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
<PAGE>
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Title of each Dollar Proposed maximum Proposed maximum
class of securities Amount to be offering price aggregate offering Amount of
to be registered Registered per unit price registration fee
- ------------------------------------------------------------------------------------------
PROMISSORY $10,000,000 N/A $10,000,000 $2,950
NOTES
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</TABLE>
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 404(a))
<TABLE>
<CAPTION>
ITEM NO. Item Location in Prospectus
- -------- ---- ----------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front Front of Registration Statement; Outside Front Cover Page of
Cover Page of Prospectus . . . . . . . . . . . . . . Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information and Risk Factors. . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . Underwriting
6. Dilution . . . . . . . . . . . . . . . . . . . . . . Dilution
7. Selling Security Holders. . . . . . . . . . . . . . . Not Applicable
8. Plan of Distribution. . . . . . . . . . . . . . . . . Underwriters
9. Legal Proceedings . . . . . . . . . . . . . . . . . . Not Applicable
10. Directors, Executive Officers, Promoters and Control
Persons . . . . . . . . . . . . . . . . . . . . . . . Management
11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . Principal Stockholders
12. Description of Securities To Be Registered . . . . . Description of the Securities
13. Interests of Named Experts and Counsel . . . . . . . Experts, Legal Matters
14. Disclosure of Commission's Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . Management
15. Organization Within Last Five Years . . . . . . . . . Prospectus Summary - Overview; Prospectus Summary - Use of
Proceeds; Use of Proceeds; THE BUSINESS; Security Ownership of
Certain Beneficial Owners and Management; Management - Certain
Relationships and Related Transactions
16. Description of Business . . . . . . . . . . . . . . . Available Information; Risk Factors, Management's Discussion
and Analysis of Financial Condition; Security Ownership of
Certain Beneficial Owners and Management; Management;
Description of the Notes; Index to Financial Statements
17. Management's Discussion and Analysis of Plan of The Company; Management's Discussion and Analysis of Financial
Operation . . . . . . . . . . . . . . . . . . . . . . Conditions and Results of Operation
18. Description of Property . . . . . . . . . . . . . . . The Company
<PAGE>
19. Certain Relationships and Related Transactions . . . Use of Proceeds; The Company - The Business of the Company;
Management - Certain Relationships and Transactions
20. Market for Common Equity and Related Stockholder Risk Factors; Description of Securities; Shares Eligible for
Matters . . . . . . . . . . . . . . . . . . . . . . . Future Sale
21. Executive Compensation . . . . . . . . . . . . . . . Management
22. Financial Statements . . . . . . . . . . . . . . . . Financial statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
$10,000,000
TRANSITION AUTO FINANCE II, INC.
11% Redeemable Secured Notes
Due June 30, 2002
Transition Auto Finance II, Inc., a Texas corporation (the "Company"), a
newly organized, single purpose subsidiary of Transition Leasing Management,
Inc., a Texas corporation ("Transition Leasing"), is hereby offering (the
"Offering") up to $10,000,000 of its 11% Redeemable Secured Notes due June
30, 2002 (the "Notes"). The Notes will be issued in minimum denominations of
$1,000 and integral multiples thereof. The Notes will bear interest from the
date of issuance at the rate of 11% per annum and interest only will be paid
monthly in arrears on the fifteenth (15th) day of each month. The principal
amount of the Notes will be due and payable at their maturity on June 30,
2002 (the "Maturity Date"), regardless of the date any such Note is issued.
Until the Company accepts subscriptions for Notes in an aggregate principal
amount of $250,000 (the "Mimimum Offering Amount"), all investor funds will
be held in escrow. Affiliates of the Company will not be permitted to
purchase Notes in order for the Company to secure subscriptions for the
Minimum Offering Amount.
The Notes are collateralized by (i) lease contracts (the "Contracts")
of new or late model automobiles (the "Leased Vehicles") that are not more
than three model years old (and, in a limited number of cases, four model
years old) at the time of lease (including passenger cars, minivans,
sport/utility vehicles and light trucks) with factory warranties or extended
service contracts that extend to the termination of their Contracts, (ii) the
Leased Vehicles and (iii) certain other collateral described herein (the
"Other Collateral). Funds for the repayment of principal will accumulate in a
sinking fund commencing from the twenty-fifth (25th) month following the
release of funds from escrow (the "Escrow Release Anniversary"), but the
Issuer may use the funds in the sinking fund to redeem all or a portion of
the Notes then outstanding. If less than all of the Notes then outstanding
are to be redeemed, the Trustee will determine the Notes to be redeemed by
lot or by such other method as the Trustee determines. The Notes are subject
to redemption at the option of the Company, in whole or in part, at any time
after the Escrow Release Anniversary at a redemption price equal to 100% of
the outstanding principal amount thereof, together with accrued interest,
without any premium or penalty. The Company has contracted with Transition
Leasing to provide necessary purchasing and collection services. See
"MANAGEMENT -- Certain Relationships and Related Transactions." No other
party will insure or guarantee payment of the Notes. Noteholders may look
only to the Leased Vehicles, the Contracts and the Other Collateral as a
source of payment on the Notes.
The Company's only business activities will be the purchase of the
Leased Vehicles (and contemporaneously therewith, the execution of Contracts
relative to such Leased Vehicles), the collection and servicing of the
Contracts, the remarketing of the Leased Vehicles upon termination of the
Contracts and raising of equity or debt capital to finance the acquisition of
such Contracts and Leased Vehicles. The Company's only significant assets
will be the Leased Vehicles and the Contracts. The Leased Vehicles are to be
purchased or acquired by the Company using (a) the net proceeds from the sale
of the Notes offered hereby, and (b) until the earlier of 25 months from the
release of funds from escrow or a Contract Unavailability Notice (the
"Sinking Fund Trigger Date"), so long as no Event of Default exists, the net
collection proceeds from Contracts and net proceeds from remarketing of
Leased Vehicles upon termination of the Contracts. The Company may purchase
Contracts and the associated Leased Vehicles from Transition Auto Finance,
Inc., another wholly-owned subsidiary of Transition Leasing and an affiliate
of the Company. See "RISK FACTORS -- Conflicts of Interest."
The offering will terminate twelve (12) months from the date hereof (the
"Offering
1
<PAGE>
Termination Date"), unless terminated earlier by the Company for certain
reasons. See "Plan of Distribution."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THESE ARE SPECULATIVE SECURITIES. THE SECURITIES OFFERED HEREBY INVOLVE
A HIGH DEGREE OF RISK INCLUDING RISKS OF DEFAULT ON THE CONTRACTS. SEE "RISK
FACTORS." DEBT SECURITIES OFFERED WITH HIGH INTEREST OR YIELD GENERALLY
INVOLVE MORE RISK THAN MANY OTHER MEDIUM TERM DEBT INSTRUMENTS WITH LOWER
INTEREST OR YIELD.
THERE IS CURRENTLY NO PUBLIC MARKET FOR THE NOTES AND THERE IS NO
ASSURANCE THAT ONE WILL DEVELOP. INVESTORS SHOULD EXPECT TO RETAIN OWNERSHIP
OF THE NOTES AND BEAR THE ECONOMIC RISKS OF THEIR INVESTMENT FOR THE ENTIRE
TERM OF THE NOTES.
<TABLE>
<CAPTION>
Broker's
Price to Commissions Proceeds to
Public and Expenses (1) Company (2)
<S> <C> <C> <C>
Per Note 100% 8.5% 91.5%
Total Minimum $250,000 $21,250 $228,750
Total Maximum $10,000,000 $850,000 $9,150,000
</TABLE>
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(1) The Company will pay 6% of the principal amount of the Notes sold in
this offering to the Underwriter. In addition, the Company will
reimburse the Underwriter for certain expenses incurred in connection
with its due diligence activities with regard to the offering in an
amount not to exceed 2.5% of the aggregate principal amount of the
Notes sold. The Underwriter may share a portion of its commissions
and due diligence reimbursement with licensed brokers/dealers selected
by the Underwriter to participate in the Offering. See "Plan of
Distribution." The Company and Transition Leasing have agreed,
jointly and severally, to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended.
(2) Before deduction of up to 1.5% of the offering proceeds for the
payment of offering and organization expenses incurred by Transition
Leasing and reimbursed by the Company, which is a wholly-owned
subsidiary of Transition Leasing. These amounts will range from
$3,750 for the minimum offering of $250,000 to $150,000 for the
maximum offering of $10,000,000.
- --------------------------------------------------------------------------------
The Notes are being offered on a "best efforts" basis by Great Nation
Investment Corporation (the "Underwriter") and licensed broker/dealers
selected by the Underwriter and who are members of the National Association
of Securities Dealers, Inc. (the "NASD"). No participating broker/dealers
have been selected to date. See "Plan of Distribution." Investor funds will
be held in an escrow account administered by Texas Community Bank, N.A., 8235
Douglas Avenue, Suite 100, Dallas, Texas 75255, as escrow agent, until the
2
<PAGE>
Company receives subscriptions for the Minimum Offering Amount. In the event
the Minimum Offering Amount is not subscribed on or before the Offering
Termination Date, 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 acceptance of subscriptions for the Minimum
Offering Amount of Notes, the escrowed funds will be released to the Company.
Any subsequent subscription funds with respect to the sale of additional
Notes will continue to be deposited in the subscription escrow, but will be
immediately available for use by the Company upon the Company's request.
Notes will be dated and interest will accrue as of the third business day
after subscription funds are deposited in the Underwriter's account for
remittance to the subscription escrow account or the Company's operating
account, as the case may be. All subscriptions are subject to the right of
the Company to reject any subscription in whole or in part.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form SB-2 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
(i) the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, (ii) at one of the Commission's regional offices: 500 West Madison,
Suite 1400, Chicago, Illinois 60661-2511 or 7 World Trade Center, 13th Floor,
New York, New York 10048 or (iii) at the Commission's World Wide Website at
http://www.sec.gov. The Commission's website contains proxy and information
statements and other information regarding issuers including the Company that
file electronically with the Commission. Investors can access all of this
information via the Commission's website. Copies of the Registration
Statement may be obtained from the Commission at prescribed rates.
--------------------
AVAILABILITY OF CERTAIN DOCUMENTS
Copies of the following documents filed by the Company as exhibits to
the Registration Statement of which this Prospectus is a part are available,
without charge upon request, from the Company: (i) Indenture (the
"Indenture") between the Company, Transition Leasing, Inc., and Trust
Management, Inc., as Trustee, dated as of July 8, 1998, (ii) Master Contract
Purchase Agreement (the "Master Contract Purchase Agreement") by and between
the Company and Transition Leasing dated as of July 8, 1998; and (iii)
Servicing Agreement (the "Servicing Agreement") between Transition Leasing
and the Company dated as of July 8, 1998. Requests for copies of such
documents should be sent to Ken Lowe, President and Chief Financial Officer,
Transition Auto Finance II, Inc., 5422 Alpha Road, Suite 100, Dallas, Texas
75240 (Telephone: (972) 404-0042).
--------------------
REPORTS TO NOTEHOLDERS
The Company will furnish to the Noteholders annual reports of the
Company containing audited financial statements. An IRS Form 1099 will be
mailed to each Noteholder following the end of each year.
--------------------
3
<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. 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 or the Underwriter. 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.
--------------------
THE OFFERING IS OPEN ONLY TO INVESTORS THAT MEET THE COMPANY'S MINIMUM
UNIFORM SUITABILITY STANDARD OR THE APPLICABLE STATE SUITABILITY STANDARD,
WHICHEVER IS MORE STRINGENT. IN ORDER TO MEET THE COMPANY'S MINIMUM UNIFORM
SUITABILITY STANDARD, A POTENTIAL INVESTOR MUST (A) (i) HAVE A GROSS ANNUAL
INCOME OF AT LEAST $45,000, AND HAVE A NET WORTH (EXCLUSIVE OF PERSONAL
RESIDENCE, FURNISHINGS AND AUTOMOBILES) OF AT LEAST $45,000, OR (ii) HAVE A
NET WORTH (EXCLUSIVE OF PERSONAL RESIDENCE, FURNISHINGS AND AUTOMOBILES) OF
AT LEAST $150,000, WITHOUT REFERENCE TO INCOME AND (B) HAVE A NET WORTH
(EXCLUSIVE OF PERSONAL RESIDENCE, FURNISHINGS AND AUTOMOBILES) AT LEAST TEN
TIMES THE AMOUNT OF THE INVESTOR'S SUBSCRIPTION. INVESTORS WILL BE REQUIRED
TO REPRESENT, IN WRITING, THAT THEY SATISFY THE APPLICABLE STANDARD.
--------------------
The mailing address of the Company's principal executive offices is 5422
Alpha Rd., Suite 100, Dallas, Texas 75240, and its telephone number is (972)
404-0042.
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus.
Overview . . . . . . . . . . . . The Company is a wholly-owned single
purpose subsidiary of Transition Leasing
and will be engaged in the business
of purchasing new or late model automobiles
and concurrently therewith entering into
leases of such automobiles to customers
described below (each, a "Lessee" and,
collectively, the "Lessees"). In addition,
under certain conditions, the Company may
purchase from an affiliate, Transition Auto
Finance, Inc., a Texas corporation
(hereinafter sometimes referred to as
"TAF-I"), existing automobile lease contracts
pursuant to which TAF-I is the lessor. See,
"PURCHASE, ACQUISITION AND COLLECTION OF
CONTRACTS -- General." The automobile lease
contracts that the Company proposes to enter
into, and the automobile lease contracts that
the Company may purchase from TAF-I, are
referred to herein as the "Contracts." The
automobiles acquired by the Company and
leased pursuant to the Contracts are referred
to herein as the "Leased Vehicles."
4
<PAGE>
At the time of lease, the Leased Vehicles
generally will not be more than three model
years old and will be protected by factory
warranties or extended service contracts that
extend to the termination of their respective
lease contracts. The Company expects that
the applicants who will become Lessees will
have "non-prime" credit ratings and, as such,
both will not meet the credit standards
imposed by automobile franchise retailers or
banking institutions and will not have access
to traditional sources of consumer credit for
a new or late model automobile. Frequently,
an applicant may have a "non-prime" credit
rating because, at some time in the past, he
has defaulted on one or more financial
obligations or has filed for relief under the
bankruptcy laws, or both. The Company
expects that substantially all of the
Contracts it purchases or acquires will be
originated by Transition Leasing, which takes
a more flexible approach and applies a more
subjective analysis than those taken by
traditional automobile financing sources in
determining an applicant's suitability for
credit approval. Transition Leasing
endeavors to determine whether the
applicant's prior credit problems were a
result of job displacement, financial
hardship beyond the applicant's control or
other circumstances that are not indicative
of the applicant's current financial
condition or payment performance. In
addition, Transition Leasing seeks Lessees
who have stable employment providing regular
income and possess a strong need to acquire
appropriate transportation. It is the
opinion of Transition Leasing's management
that an individual who meets these
underwriting criteria could, in most cases,
lease a new or late model automobile under
conventional terms, were it not for prior
credit problems. Transition Leasing believes
that by using subjective judgement it is able
to profitability lease new and late model
automobiles to many customers who would be
denied approval for such leases from
traditional sources. Transition Leasing
believes that the risk of loss is
substantially reduced when the leasing
customer is current on payments for the first
12 months of the lease.
Generally, the Company will acquire Contracts
in two ways. In most instances, the Company
will purchase vehicles from unaffiliated
third parties and concurrently will enter
into Contracts with the Company's lease
customers (the "Lessees"). The Company may
also purchase existing Contracts from its
affiliate, TAF-I, together with the vehicle
collateralizing such Contracts, under
certain conditions. See, "PURCHASE,
ACQUISITION AND COLLECTION OF CONTRACTS."
In the event a Leased Vehicle is
surrendered to or otherwise recovered by
the Company upon a termination of a
Contract prior to its expiration, the
Company may
5
<PAGE>
execute a Contract if the returned Leased
Vehicle is leased to a New Lessee.
The Company will purchase the vehicles
from new automobile franchise dealers,
independent automobile dealers, independent
leasing companies, at automobile auctions, or
other sources. If the Lessee is introduced
to Transition Leasing by these sources, the
vehicle will generally be purchased by the
Company at a purchase price (the "Actual
Purchase Price") equal to or less than 95%
of Manufactured Suggested Retail Price
("MSRP"). If the customer is generated by
Transition Leasing's in-house marketing
staff, and this is rarely the case, the
vehicle will generally be purchased by the
Company at a purchase price less than 95%
of MSRP. At the time the Contract is
executed, the Lessee will be required to
make a down payment to the Company of not
less than 15% of the Actual Purchase Price
(if the Leased Vehicle is a Four Year Old
Vehicle, the down payment will be at least
25% of the Actual Purchase Price).
Monthly lease payments under a Contract are
calculated on the basis of an adjusted
Purchase Price equal to 120% of the Actual
Purchase Price less the down payment amount
and plus tax, title and license fee, and an
interest rate between 16% and 18% per
annum. See, "PURCHASE, ACQUISITION AND
COLLECTION OF CONTRACTS." The Company will
pay to Transition Leasing 57.5% of each
such down payment as a marketing fee (the
"Marketing Fee"). The Company will use the
remainder of the down payment and its
funds, including the net proceeds of this
Offering, to purchase the Leased Vehicles.
In addition, at the time of purchasing a
Leased Vehicle and executing a Contract
with respect thereto, the Company will pay
to Transition Leasing a purchase
administration fee (the "Purchase
Administration Fee") of $100, and a
documentary fee (the "Documentary Fee") of
$50, per Contract.
The Company has obtained and intends to
maintain a residual value insurance policy in
order to provide the Company with protection
in certain circumstances in the event that
the proceeds from disposition of the Leased
Vehicles at the end of their scheduled lease
terms are less than the estimated projected
values of the Leased Vehicles at lease
inception. The essential purpose of the
residual value insurance is to protect the
Company in the event of a dramatic downturn
in the value of a specific automobile model
when the Leased Vehicle is returned to the
Company. It does not protect against loss
due to excessive mileage, damage, excessive
wear and tear, and lease termination
expenses; therefore, it does not guarantee
that a certain amount will be realized by the
Company when a given Leased
6
<PAGE>
Vehicle is returned. See "RISK FACTORS --
Subjective Determination of Residual
Value; Limitation of Residual Value
Protection Insurance; Reliance on
Re-marketing to Satisfy Residual Obligation"
and "THE COMPANY--Re-marketing".
The Company will use the net proceeds of this
Offering to purchase or acquire Contracts
that are originated by Transition Leasing or
by other lease facilitators. The acquisition
of Contracts originated by Transition Leasing
involves certain conflicts of interest, which
include, among other things, that the
decision as to which future contracts
originated by Transition Leasing, the parent
of the Company, will be allocated to the
Company and which will be retained by
Transition for its own purposes, including
future subsidiaries or other affiliates of
Transition Leasing that may be engaged in the
same business as the Company, will be made
unilaterally by Transition Leasing. However,
no contract will be allocated to the Company
if it fails to meet the Company's Contract
criteria. In addition, subject only to
the right of TAF-I to acquire automobile
lease contracts with proceeds realized from
repossessions of leased vehicles and
prepayments of leased contracts, any future
automobile lease contract that is originated
by Transition Leasing that meets the
Company's Contract criteria will be allocated
to the Company to the extent the Company's
funds are available therefor, and Transition
Leasing will have no discretion to purchase
or acquire such Contract or cause an
affiliated entity, including a future
subsidiary engaged in the same business as
the Company, to purchase or acquire such
Contract. See, "RISK FACTORS -- Conflicts of
Interest" and "MANAGEMENT--Certain
Relationships and Related Transactions"
Transition Leasing will administer the
collection of payments due under the
Contracts, oversee the repossession of any
Leased Vehicle that is leased under a
Contract that is in default and sell or
re-lease such Leased Vehicle, or re-market
the Leased Vehicle upon expiration of the
Contract to the original Lessee or at
wholesale through regional auctions conducted
by unaffiliated third parties or by other
means.
All collections on the Contracts will be used
first to pay the interest on the Notes and
"Allowed Expenses," which include servicing,
trustee, bank, legal and accounting fees,
taxes, repossession, re-marketing, repair,
and liquidation expenses and insurance
premiums. Until the Sinking Fund Trigger
Date, remaining collections will be used to
purchase and acquire additional Contracts.
These purchases and acquisitions will cause
the pool of Contracts that serves as
collateral for the Notes to increase. The
Company will not be allowed to use Contract
collections for any other purposes. After
the Sinking Fund Trigger Date, the Company
will be required to deposit
7
<PAGE>
the net collection proceeds in a sinking
fund trust account (the "Sinking Fund
Account") controlled by the Trustee for
payment on the Notes.
Company. . . . . . . . . . . . . Transition Auto Finance II, Inc. (the
"Company"), is a newly organized, single
purpose subsidiary of Transition Leasing.
The Company has been formed for the purpose
of purchasing or otherwise acquiring motor
vehicles and automobile lease contracts,
collecting lease payments and otherwise
servicing automobile lease contracts and
re-marketing motor vehicles upon termination
of their Contracts. Provisions of the
Indenture prohibit the Company from
engaging in any other business.
8
<PAGE>
It does not have, and does not expect to
have in the future, any significant assets
other than the Leased Vehicles and the
Contracts. While the Notes remain
outstanding, the Company will be
prohibited from engaging in any business
other than the acquisition of vehicles and
Contracts, the collection of Lease Payments
and other servicing of the Contracts
(including repossession and resale of the
Leased Vehicles) and remarketing of the
Leased Vehicles upon termination of the
Contracts, and from incurring any
additional indebtedness other than Allowed
Expenses and any other amounts incurred in
the ordinary course of its business. The
Company was incorporated under the laws of
the State of Texas on March 17, 1998. The
Company's principal executive offices are
located at 5422 Alpha Rd., Suite 100,
Dallas, Texas 75240, and its telephone
number is (972) 404-0042.
Offering Amount. . . . . . . . . Up to $10,000,000 in principal amount of the
Notes. Investor funds will be held in
escrow until subscriptions for $250,000 (the
"Minimum Offering Amount") in principal
amount of the Notes have been received. Any
subsequent subscription funds will be
immediately remitted by the underwriter to
the Company and available for use by the
Company.
Notes. . . . . . . . . . . . . . 11% Redeemable Secured Notes due June 30,
2002 (the "Notes") to be issued subject to
the terms of an Indenture between the Company
and the Trustee.
Interest Payments
to Noteholders . . . . . . . . . Each Note will bear interest from the date of
issuance at the rate of 11% per annum on the
outstanding principal balance of each Note.
Interest on the Notes will be paid monthly in
arrears on the fifteenth (15th ) day of each
month beginning with the fifteenth (15th) day
of the first full calendar month following
its issuance and upon maturity (the "Payment
Dates"). The record date for each payment of
interest on the Notes is the close of
business on the first business day of the
month of the Payment Date for that payment.
At all times while the Notes remain
outstanding, the monthly interest payments
must be fully satisfied before the collection
proceeds from the Contracts may be used to
pay any expenses or to purchase additional
Leased Vehicles and Contracts.
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 Sinking Fund Account controlled by the
Trustee. See, "COLLATERAL FOR THE ACCOUNTS
-- The Sinking Fund
9
<PAGE>
Account." (Indenture, Section 4.2) On or
prior to the Business Day immediately
preceding each Payment Date, the Company
will transfer to the Sinking Fund Account
from the Company's Operating Account an
amount that, together with any funds in
the Sinking Fund Account, is sufficient to
pay the accrued interest due on the
outstanding Notes on such Payment Date.
Such transfer must be made before any
funds remaining in the Operating Account
may be applied by the Company to any other
purpose. See "DESCRIPTION OF THE NOTES --
Source of Funds for Payment; Sinking
Fund" (Indenture, Section 4.2). Following
the Sinking Fund Trigger Date, all of the
funds in the Company's Operating Account,
less Allowed Expenses payable by the
Company, will be transferred on at least a
monthly basis to the Sinking Fund Account.
Effective Yield. . . . . . . . . Interest will be due 15 days after the end
of the month over which it accrues, meaning
that the interest will be payable monthly
in arrears. The effective interest rates of
the Notes will be lower than their stated
interest rates because each payment of
interest will be paid 15 days after the
month over which it accrued.
Optional Redemption. . . . . . . The Notes will be redeemable at the option of
the Company on any Payment Date after the
eighteenth (18th) month following the release
of funds from escrow, in whole or in part, at
a redemption price equal to 100% of the
principal amount thereof, plus accrued and
unpaid interest to the redemption date.
Mandatory
Redemption of Notes. . . . . . . In the event that the Company is unable to
purchase or acquire additional Contracts
satisfying the Contract criteria, the Company
intends to elect to deliver a Contract
Unavailability Notice to the Trustee, at
which time the Company would cease purchasing
or acquiring new Contracts and all subsequent
net collection proceeds from then existing
Contracts would be deposited into the Sinking
Fund Account for payment of the Notes. At
any time after the eighteenth (18th) month
following the release of funds from escrow,
the Company may elect to redeem the Notes
prior to their stated maturity, in whole or
in part, thus reducing the overall return to
purchasers of the Notes. The redemption
price would be 100% of the outstanding
principal amount of the Notes, together with
accrued interest, without any premium or
penalty. See "DESCRIPTION OF THE NOTES --
Redemption."
Sinking Fund Account . . . . . . Commencing on the date (the "Sinking Fund
Trigger Date"), that is the earlier of 25
months from the release of funds from escrow
or the delivery of a Contract Unavailability
Notice (see "DESCRIPTION OF THE NOTES --
Redemption"), all net collection proceeds
from
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<PAGE>
the Contracts, payment of interest on the
Notes and Allowed Expenses, will be
required to be deposited into a trust
account in the name of the Company (the
"Sinking Fund Account"), for payment of
the Notes. With the exception of the
Company's deposit of funds to pay interest
due with respect to the Notes on a given
Payment Date, there is no schedule of
minimum payments into the Sinking Fund
Account. During an Event of Default (see
"ADDITIONAL INDENTURE PROVISIONS --Events
of Default") (including the failure of the
Company to pay fully the principal on the
Notes at maturity), all collection
proceeds (less fees and expenses owed to
the Trustee) will be required to be
deposited into the Sinking Fund Account
for payment of the Notes.
Principal Payments
to Noteholders . . . . . . . . . No principal payments will be made on the
Notes until the Maturity Date and there
can be no assurances that any principal
will be repaid. see "RISK FACTORS --
Limited Assets; Single Purpose Entity; No
Guarantor;" and "RISK FACTORS -- Sufficiency
of Sinking Fund" and "RISK FACTORS -- Funds
for the Repayment of Principal and Redemption
of Notes." Funds available for the repayment
of principal may be used for redemptions of
Notes prior to the Maturity Date. See
"SUMMARY -- Mandatory Redemption of Notes."
Maturity Date. . . . . . . . . . The maturity date (the "Maturity Date") shall
be June 30, 2002. The Notes provide for a
single maturity date regardless of the date
of purchase of the Notes.
Collateral for the
Notes. . . . . . . . . . . . . . The Notes will be collateralized by the
Contracts, the Leased Vehicles, the accounts
which hold the proceeds of this Offering, the
Servicing Agreement and the proceeds thereof.
THE CONTRACTS AND THE LEASED VEHICLES. The
Contracts will consist of automobile lease
contracts of the Leased Vehicles. The Leased
Vehicles will consist of new or late model
automobiles that are not more than three
model years old (and in a limited number of
instances, four model years old) at the time
of lease (including passenger cars, minivans,
sport/utility vehicles and light trucks) with
factory warranties or extended service
contracts that extend to the termination of
their respective lease contracts. The
Contracts will be originated and serviced by
Transition Leasing, on behalf of the Company,
under the terms of a Servicing Agreement (the
"Service Agreement") between the Company and
Transition Leasing.
THE CONTRACT PROCEEDS AND OPERATING ACCOUNT.
The proceeds from the Contracts also will
constitute collateral for the Notes under the
Indenture. All proceeds from the Contracts
(including all portions thereof treated for
tax or financial accounting purposes as
principal or interest) will be paid directly
by the Lessees to the Company and will be
deposited in to a commercial bank account
maintained by the
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<PAGE>
Company (the "Operating Account"). Any
funds in the Operating Account will be
subject to the Trustee's lien securing
payment of the Notes. Any interest or
other gain earned on the Company's funds
while in the Operating Account will belong
to the Company, subject to the Trustee's
lien. So long as the Notes have not been
declared due and payable as a result of an
Event of Default and subject to the
receipt by the Trustee of any required
certificates 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 order of priority: first, to the
deposit into the Sinking Fund Account for
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, except
during an Event of Default, to the payment
of any other Allowed Expenses, as
certified by the Company; fourth, after
the Sinking Fund Trigger Date or during an
Event of Default, to the deposit into the
Sinking Fund for payment or redemption of
the Notes; and fifth, prior to the Sinking
Fund Trigger Date, except during an Event
of Default, to the purchase of eligible
Contracts or automobiles to become Leased
Vehicles subject to an eligible Contract,
as certified by the Company and Transition
Leasing. Otherwise, until the Notes are
paid in full, 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. See "COLLATERAL FOR
THE NOTES--The Contract Proceeds and
Operating Account."
THE SINKING FUND ACCOUNT. Prior to the
Sinking Fund Trigger Date, and prior to a
given Payment Date, the Company will transfer
into the Sinking Fund Account sufficient
funds to pay interest due with respect to any
Notes as of such Payment Date. After the
Sinking Fund Trigger Date, all collection
proceeds (including all portions thereof
treated for tax or financial accounting
purposes as principal or interest) from the
Contracts, following deduction of Allowed
Expenses, will be transferred to the Sinking
Fund Account and retained by the Trustee for
payment of the Notes. Further, during the
continuance of an Event of Default, the
collection proceeds, without any deduction
for Allowed Expenses (other than the fees and
expenses of the Trustee), will be transferred
at least monthly from the Company's Operating
Account to the Sinking Fund Account, unless
the Trustee elects to exercise its remedies
to collect directly from the Lessees under
the Contracts. Any funds in the Sinking
Fund Account will be subject to the Trustee's
lien securing payment of the Notes.
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<PAGE>
THE SERVICING AGREEMENT. The Company has
granted a security interest to the Trustee in
all of its rights under the Servicing
Agreement.
Purchase or Acquisition
of Contracts . . . . . . . . . . The Company will purchase or acquire Leased
Vehicles and Contracts using (i) the net
proceeds from the sale of Notes and (ii)
until the Sinking Fund Trigger Date, so long
as no Event of Default exists, any remaining
net collection proceeds from previously
purchased or acquired Contracts, after
deduction for payments of interest and
Allowed Expenses. In addition to the
purchase price payable by the Company for the
Contract or Leased Vehicle (plus applicable
sales tax, title transfer and license plate
fees), the Company must also pay the Purchase
Administration Fee and the Documentary Fee to
Transition Leasing for its purchase
administration services with respect to such
Contracts and will pay the Marketing Fee to
Transition Leasing with respect to Contracts
that were originated by Transition Leasing.
The Company may acquire Leased Vehicles and
Contracts from another wholly-owned
subsidiary of Transition Leasing. See
"SUMMARY OF ESTIMATED ALLOWED EXPENSES" and
"PURCHASE, ACQUISITION AND COLLECTION OF
CONTRACTS." See also, "MANAGEMENT --
Certain Relationships and Related
Transactions."
Collection of Payments . . . . . Under the Servicing Agreement, Transition
Leasing 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.
Transition Leasing 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.A.)
Servicer . . . . . . . . . . . . Transition Leasing is the parent of the
Company. Its principal offices are located
at 5422 Alpha Road, Suite 100, Dallas, Texas
75240. Transition Leasing is obligated
pursuant to the Servicing Agreement, subject
to the limitations set forth therein, to
provide its services for the purchasing,
origination and collecting of the Contracts
on behalf of the Company, and to repurchase
certain of the Contracts under certain
circumstances. Other than the Marketing Fee,
the Purchase Administration Fee and the
Documentary Fee, the Company's payments to
Transition Leasing associated with the
purchase, origination and collection of the
Contracts during the life of the Notes will
be limited to a monthly servicing fee of $20
for each Contract that has not been assigned
for repossession (the "Contract Servicing
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<PAGE>
Fee"), and repossession, repairs and
liquidation expenses incurred by Transition
Leasing with respect to Leased Vehicles upon
termination of Contracts. See "PURCHASE,
ACQUISITION AND COLLECTION OF CONTRACTS."
Trustee . . . . . . . . . . . . Trust Management, Inc., of Fort Worth, Texas
Tax Status . . . . . . . . . . . The Company intends to treat the Notes as
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.
See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
Use of Proceeds. . . . . . . . . The Company will use at least 90.0% of the
gross proceeds from the sale of the Notes for
the purchase or acquisition of Leased
Vehicles and Contracts. No more than 10% of
such proceeds will be used to pay
commissions, fees and expenses as stated in
this Prospectus. Any excess fees and
expenses will be borne by Transition Leasing.
See "USE OF PROCEEDS."
Denominations. . . . . . . . . . The Notes will be issued in fully registered
form in denominations of $1,000 and integral
multiples thereof, subject to a minimum
purchase by each investor of at least $5,000
(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.
Risk Factors . . . . . . . . . . An investment in the Notes entails certain
risks, including the risk of default on the
Contracts. See "RISK FACTORS."
Plan of
Distribution . . . . . . . . . . The Notes will be sold on a "best efforts"
basis by Great Nations Investment
Corporation (the "Underwriter") and the
Underwriter may select one or more
participating broker/dealers that are
qualified to offer and sell the Notes in
one or more states as engaged by the Company
and that are members of the National
Association of Securities Dealers, Inc. (the
"NASD"). To date, the Underwriter has not
selected any other broker/dealer to
participate in this Offering.
Investor funds will be held
in a subscription escrow account until the
minimum of $250,000 in principal amount of
the Notes are sold. If subscriptions for
the Minimum Offering Amount are not received
on or before the Offering Termination Date,
the Offering will be terminated and the
escrow funds, plus any interest thereon, will
be promptly returned to the subscribing
investors by the escrow agent. Any
subsequent subscriptions funds will continue
to be held in the subscription escrow, but
the escrowed funds will be released to the
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<PAGE>
Company and available for use by the
Company upon the Company's request. See
"PLAN OF DISTRIBUTION."
Offering Termination
Date . . . . . . . . . . . . . . Twelve (12) months after the date hereof,
unless sooner terminated by the Company for
certain reasons. See "PLAN OF DISTRIBUTION."
RISK FACTORS
An investment in the Notes involves a number of significant risks. In
considering a purchase of these securities, prospective investors should
carefully consider the risks involved, including the following:
LIMITED ASSETS; SINGLE PURPOSE NATURE; NO GUARANTOR
The Company was incorporated on March 17, 1998, and has no prior
operating history. The Company has been formed for the sole purposes of
purchasing or acquiring Leased Vehicles and Contracts, servicing Contracts
and remarketing the Leased Vehicles upon termination of the Contracts, and
raising cash, equity or debt, to invest in such Contracts. The Company does
not have, and is not expected to have, any significant assets other than the
Leased Vehicles and the Contracts that collateralize the Notes. While the
Notes remain outstanding, the Company will be prohibited from engaging in any
business other than the purchase or acquisition of Leased Vehicles and
Contracts, the collection and servicing of the Contracts (including
repossession and resale of the Leased Vehicles) and the remarketing of the
Leased Vehicles and Contracts upon termination of the Contracts, and from
incurring any additional indebtedness other than Allowed Expenses and any
other amounts incurred in the ordinary course of its business. No other
party, including the sole shareholder of the Company, Transition Leasing,
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. If an
Event of Default under the Indenture occurs, the holders of the Notes will
have no recourse against Transition Leasing for payment of the Notes.
Consequently, Noteholders must rely primarily upon payments made on or in
respect of the Contracts and the funds received from the sale of the Leased
Vehicles upon expiration of the Contracts for the payment of interest on and
principal of the Notes. If such payments and funds are insufficient to make
the payments due on the Notes at their maturity, the Company will have no
other significant assets to apply to payment of the deficiency.
SUFFICIENCY OF SINKING FUND
Prior to the Sinking Fund Trigger Date, the Company will deposit into
the Sinking Fund Account sufficient funds to pay the monthly interest payment
due on each Payment Date with respect to the Notes. Following the Sinking
Fund Trigger Date, which is the earlier of: (i) 25 months from the release of
funds from escrow or (ii) the Company's delivery of a Contract Unavailability
Notice, the Company will be required to transfer all net collection proceeds
from the Contracts, after deduction of Allowed Expenses, to the Sinking Fund
Account. Such proceeds will be retained by the Trustee in the Sinking Fund
Account to pay the monthly interest payments on the Notes and, to the extent
of available funds in the Sinking Fund Account and at the Company's
discretion, to redeem all or some of the Notes, and to pay any principal and
accrued interest that remains outstanding at maturity on the Maturity Date.
The Maturity Date shall be June 30, 2002.
Except for the obligation to deposit funds to make monthly interest
payments prior to the Sinking Fund Trigger Date, The Company is not required
to satisfy any minimum schedule of payments into the Sinking Fund Account,
and prior to the Maturity Date, the Company is not required to satisfy any
minimum schedule of payments of principal on the Notes. The net collection
proceeds from the Contracts, any income earned on such proceeds while they
are in the Sinking Fund Account during the period from the Sinking Fund
Trigger Date to the Maturity Date, may be insufficient to pay all principal
outstanding on the Notes on the Maturity Date, 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 the Trustee may exercise any of its available remedies, which
include the right to continue to collect on the Contracts until the Notes are
paid, to foreclose on the Contracts or to seek a judgment against the
Company. There can be no assurance that the proceeds, if any, received by
the Trustee as a result of the exercise of its remedies under the Indenture
will be sufficient to repay the Notes in full or of the timing of any such
payments.
OPERATING HISTORY OF TRANSITION LEASING
Transition Leasing, the sole shareholder of the Company and with whom
the Company has contracted for the purchasing, originating and servicing of
the Contracts on the Company's behalf, was incorporated on October 17, 1994
and began purchasing and servicing automobile lease contracts thereafter. In
1994, Transition Leasing formed another single purpose subsidiary, TAF-I.
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<PAGE>
TAF-I concluded a public offering of Notes in 1997 and Transition Leasing
provides services to TAF-I similar to those which it proposes to provide to
the Company. Investors should recognize that Transition Leasing has a limited
operating history and limited financial resources. Moreover, the performance
of TAF-I may not offer assurances that the operations of the Company will
meet with any reasonable success.
PURCHASING AND AVAILABILITY OF CONTRACTS DEPENDENT ON TRANSITION LEASING
The Company's ability to purchase Contracts will be dependent on
Transition Leasing for purchasing and originating services and Transition
Leasing's contacts with automobile franchise dealers, independent automobile
dealers, and independent leasing companies from which most of the Contracts
will be purchased or originated. The Company, and, therefore, the
investors, will be highly dependent upon the judgment of Transition Leasing
with respect to the highly subjective and difficult process of leasing
automobiles to people with prior substantial credit problems and non-prime
credit ratings and making credit decisions in connection therewith.
Transition Leasing has limited experience in making such credit decisions.
See "PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS."
Based on Transition Leasing's recent, but limited experience, the
Company believes that an adequate supply of eligible Contracts will be
available for purchase. In the event that the Company is unable to purchase
or acquire additional Contracts satisfying the purchasing criteria through
Transition Leasing or other entities, the Company may elect to deliver a
Contract Unavailability Notice at the Trustee, at which time the Company
would cease purchasing or acquiring new Contracts and all subsequent net
collection proceeds from then existing Contracts, following deduction for
payment of interest on the Notes and Allowed Expenses would be deposited into
the Sinking Fund Account for payment of the Notes. See "COLLATERAL FOR THE
NOTES--The Sinking Fund Account."
INTEREST RATE RISK; YIELD CONSIDERATIONS
Because the Notes will bear interest at a fixed rate, and purchasers of
Notes will be subject to the risk that future higher interest rates, while
not affecting the yield of the Notes to an investor who purchases and holds
Notes through their maturity, will diminish or limit the yield of a
Noteholder who attempts to sell his Note prior to the Maturity Date.
Moreover, because the Notes are subject to redemption at any time after the
18th month following the release of subscription funds from escrow, if future
interest rates decline, the Company's ability to redeem the Notes may limit
the investor's ability to realize enhancements in the value of the Notes
resulting from the lower initial rates, and there can be no assurance that
investors will be able to reinvest the proceeds from any redemption of Notes
at yields equal to or exceeding the yields on the Notes.
Because the Notes all mature on the same date without regard to the date
of issuance, investors who purchase at earlier dates will earn interest over
a longer period of time and should have a higher yield with respect to their
Notes than will be achieved by investors who purchase at later dates. The
difference in yields may be exacerbated or mitigated by market interest rates
at the time of a given investor purchase Notes. In addition, because the
interest which accrues with respect to the Notes is payable in arrears (i.e.
within 15 days after the end of the month in which it accrues), the yield
will be less than the stated rate of 11% per annum.
16
<PAGE>
FUNDS FOR REPAYMENT OF PRINCIPAL AND REDEMPTION OF NOTES
The amount of funds in the Sinking Fund Account, and hence the amount of
funds that the Company will be able to repay on the Notes, whether at the
Maturity Date or upon earlier redemption of the Notes, will primarily depend on
whether Lessees make payments in accordance with the terms of their respective
Contracts. While the Company believes that the structure of its lease program
provides an incentive for timely payment of the Contracts, no assurance can be
given as to the willingness or ability of Lessees to honor the terms of their
Contracts, the amount of funds which will have accumulated in the Sinking Fund
Account at any given point in time or the timing or amount of any redemptions.
In addition, because (i) prepayments after the Sinking Fund Trigger Date may be
a significant source of redemption funds, (ii) no assurances can be given as to
the timing of any prepayments after the Sinking Fund Trigger Date, and (iii) the
Sinking Fund Trigger Date may be earlier than the 25th month after the release
of funds from escrow (see, "SUMMARY -- Sinking Fund Account" and "DESCRIPTION OF
THE NOTES -- Sinking Fund Trigger Date"), it is not possible to predict the
timing or amount of any redemptions. There can be no assurance that investors
whose Notes are redeemed prior to the Maturity Date will be able to reinvest the
redemption proceeds at yields equaling or exceeding the yields they would have
been entitled to receive had their Notes not been redeemed. It is possible that
yields on any such reinvestments will be lower, and may be significantly lower,
than the yields that could have been realized on the Notes.
COLLECTION AND REPOSSESSIONS; PERFORMANCE OF CONTRACTS; REPOSSESSIONS
The Contracts will be leases of new and late model motor vehicles.
Unlike automobile retailers or banking institutions which finance automobile
leases, but which do not typically extend credit to individuals with past
credit problems or non-prime credit ratings, Transition Leasing bases, and
the Company will base, their financing criteria on a more subjective analysis
in determining an applicant's suitability for Contract approval. The payment
experience on the Contracts is likely to be different than that on
receivables of traditional automobile financing sources and may be more
sensitive to changes in the economic climate in the areas in which the
Lessees reside. The delinquency rates on the Contracts may generally be
higher than those experienced by traditional automobile financing sources.
Although the Company believes that its method of determining suitability for
Contracts will result in a portfolio of Contracts that will perform in a
manner sufficient to make the interest and principal payments on the Notes as
they become due, there can be no assurance that such will be the case.
Transition Leasing, on which the Company will rely for purchasing and
originating services, has a limited operating history, has limited experience
entering into automobile leasing contracts with applicants with past credit
problems and non-prime credit ratings, and cannot predict the level of
charge-offs and delinquencies on the Contracts.
Although the Company believes that the net collection proceeds from the
Contracts, after deduction of Allowed Expenses, together with any proceeds
from sales of Leased Vehicles upon repossession or remarketing, will be
sufficient to make the required payments on the Notes, the actual collection
rates are impossible to predict precisely, and adverse changes in
collectibility rates caused by changes in economic conditions, or other
factors beyond the Company's control, could adversely affect the Company's
ability to collect on the Contracts and to make the required payments on the
Notes. If the Contracts do not collectively perform as expected by the
Company, the Company's ability to collect on the Contracts and to make the
required payments on the Notes could be adversely affected.
In the event that a Lease Payment is more than 30 days overdue,
Transition Leasing generally will commence repossession of a Leased Vehicle.
Transition Leasing believes that collection proceeds on the Contracts will be
maximized by permitting some latitude to work with Lessees who may be in
technical default for nonpayment of an installment but who are making
payments. If a substantial number of such Lessees make no further payments on
their Contracts, the delay in the
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<PAGE>
repossession of Leased Vehicles could result in a decrease in repossession
proceeds received by the Fund and could have an adverse impact on the Fund's
ability to pay the Notes.
SUBJECTIVE DETERMINATION OF RESIDUAL VALUE; LIMITATION ON PROTECTION PROVIDED
BY RESIDUAL VALUE INSURANCE; RELIANCE ON REMARKETING TO SATISFY RESIDUAL
OBLIGATION
The Company will face risks arising from its estimate at lease inception
of the projected value of the Leased Vehicle at the end of the scheduled
lease term (the "Residual"). The Company has obtained, and intends to
maintain, a residual value insurance policy in order to provide the Company
with protection under certain circumstances in the event that the proceeds
from the disposition of Leased Vehicles at the end of their scheduled lease
terms are less than the related Residuals. At the end of the scheduled lease
term, the Company generally will dispose of the Leased Vehicle either to the
Lessee or other related parties or in the used automobile market. To the
extent that the Company realizes proceeds from such disposition in an amount
less than the Residual, whether due to changes in the market for that Leased
Vehicle, the used automobile market in general
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<PAGE>
or otherwise, the Company will realize a loss on the disposition of the
Leased Vehicle. Significant aggregate losses on the disposition of off-lease
Leased Vehicles would have a material adverse effect on the Company. The
Company's ability to realize proceeds approximating the Residuals will be
substantially determined by (i) the accuracy of the Residuals estimated at
lease inception and (ii) the Company's ability to effectively remarket its
off-lease Leased Vehicles.
The Company has obtained and intends to maintain a residual value
insurance policy issued by an insurer rated A by A.M. Best. The essential
purpose of the policy is to protect the Company in the event of a dramatic
downturn in the value of a specific automobile model. This adverse change in
the market place for specific vehicles has occurred in situations such as the
Audi 5000, whose value dropped precipitously after information concerning the
automobiles alleged sudden acceleration problems received wide public
dissemination. The policy does not protect against loss due to (i) excessive
mileage; (ii) damage; (iii) excessive wear and tear; and (iv) lease
termination expenses. Therefore, the residual value insurance does not
guarantee that a Leased Vehicle will be remarketed for a certain amount under
all circumstances. See "THE COMPANY -- Remarketing."
Even if claims for losses on the remarketing of Leased Vehicles are
fully covered by the Company's residual value insurance policy, the making of
significant claims could result in cancellation or the non-renewal of such
policy, which could have a material adverse effect on the Company.
RELIANCE UPON NON-EXCLUSIVE RELATIONSHIPS WITH DEALERS AND INDEPENDENT
LEASING COMPANIES
The Company's business will depend in large part upon the ability to
generate leads as to individuals with past credit problems and a desire for
new automobiles from new automobile franchise dealers, independent automobile
dealers and independent leasing companies. While the Company believes that
Transition Leasing will be successful in generating leads from, and
developing and maintaining its relationships with, new automobile franchise
dealers and independent leasing companies, there can be no assurance that
Transition Leasing will be successful in doing so.
LACK OF MARKET FOR NOTES
The Notes will constitute a new issue of securities with no established
trading market. The Company does not intend to list the Notes on any
national securities exchange or to seek the admission of the Notes for
quotation and trading in the NASDAQ National Market System. Although certain
broker/dealers may determine to make a market in the Notes, there can be no
assurance that a secondary market will develop or, if one does develop, that
it will continue for the life of the Notes. 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.
Moreover, 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.
LIEN OF TRUSTEE
Under the terms of the Indenture, the Trustee is granted a lien on the
property which serves as collateral for the Notes. The Trustee's lien is
superior to that securing the Notes and secures the payment to the Trustee of
the amounts due to it under the terms of Indenture, including any amounts due
pursuant to the provisions of the Indenture pursuant to which the Company
indemnifies the Trustee. Although the Company believes that this lien is
common-place in asset-backed financings, there can be no assurances that the
Trustee's superior lien position will not have a material adverse effect on
the Noteholders' claim in the case of an event of default.
DELAYS IN CONTRACT PURCHASES OR ACQUISITIONS
19
<PAGE>
To maximize its investment yields, the Company expects to purchase or
acquire Contracts using the net proceeds from the sale of Notes as soon as
practicable following the receipt of such proceeds. Pending use to purchase
or acquire Contracts, the net proceeds will be held in an interest-bearing
bank account or invested in money market mutual funds that invest in U.S.
government obligations. Although the Company does not expect to experience
significant delays in the purchase or acquisition of sufficient numbers of
Contracts to effectively utilize investor funds, there can be no assurance
that this will be the case and, moreover, this Offering makes no provision
for cessation or suspension of the selling effort while the Company experiences
a delay in the utilization of investor funds. If unforeseen delays occur in
the investment of the net proceeds from the sale of the 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 the 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.
RELIANCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant
extent upon the efforts of the officers of the Company and Transition
Leasing. Neither the Company nor Transition Leasing have entered into an
employment or noncompetition agreement with any of such officers, nor does
either the Company or Transition Leasing currently contemplate obtaining "key
man" life insurance for any of such officers. The inability of any such
officers to perform their respective duties could have a material adverse
effect on the Company's business, results of operations and ability to repay
the Notes.
CERTAIN LEGAL MATTERS RELATING TO THE CONTRACTS
PRIORITY LIENS IN LEASED VEHICLES. Statutory liens for repairs, unpaid
storage charges or unpaid taxes may have priority even over a perfected
security interest in the Leased Vehicles, and certain state and federal laws
permit the confiscation of motor vehicles used in unlawful activity that may
result in the loss of a collateralized party's perfected security interest in
a confiscated motor vehicle. Liens for repairs or taxes, or the confiscation
of a Leased Vehicle, could arise or occur at any time during the term of a
Contract. No notice may necessarily be given to the Company in the event
such a lien arises or confiscation occurs.
BANKRUPTCY AND DEFICIENCY JUDGMENTS. Certain statutory provisions,
including federal and state bankruptcy and insolvency laws, may limit or
delay the ability of the Company to repossess, resell or re-lease Leased
Vehicles or enforce a claim for damages. In addition, the Company may
determine in its discretion that a damage claim is not an appropriate or
economically viable remedy, or may settle at a significant discount any
judgment for claims 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, form, and
collection of automobile lease contracts. State laws
20
<PAGE>
impose finance charge ceilings and other restrictions on consumer
transactions and may require certain contact 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 lessor
under certain of the Contracts and as an assignee of certain Contracts, to
enforce the Contracts. In addition, certain of these laws make an assignee
of such 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 a Lessee under one or more of the Contracts. To
attempt to minimize the foregoing risks to the Company, Transition Leasing
will warrant that consumer protection laws have not been violated. If a
Lessee has a claim or defense against the Company under such laws that
materially and adversely affects the Company's interest in a Contract,
Transition Leasing will be obligated to repurchase the Contract. See
"CERTAIN LEGAL ASPECTS OF THE CONTRACTS -- Consumer Protection Laws."
EFFECT OF GOVERNMENTAL REGULATIONS ON LEASING
Transition Leasing and the Company are subject to regulation under
federal, state and local laws and regulations concerning many aspects of its
business. In particular, there are laws and regulations that require
particular disclosure of, among other matters, lease agreement terms and many
other matters. In addition, Transition Leasing and the Company are required
to obtain and maintain certain licenses and qualifications to do business in
Texas and other states. Transition Leasing and the Company have obtained such
licenses. Numerous proposals are and have been under consideration or have
been enacted in Congress, certain state legislatures, including in Texas, and
certain regulatory agencies that would impose greater regulation and
requirements on the Company's and Transition Leasing's leasing activities in
those states. See "THE COMPANY -- Government Regulations." In the event
that the laws, rules and regulations governing the Company's business and
Transition Leasing's business are changed, or new laws, rules and regulations
are enacted, so as to make the operation and business of Transition Leasing
and the Company more difficult or more expensive, such changes could have a
material adverse effect on the Company.
COMPETITION
There is substantial competition in the business of selling and leasing
motor vehicles and the financing thereof. In addition, a number of
institutions, including banks, have entered the automobile financing business
with respect to high risk, non-prime credit borrowers and will be competing
against Transition Leasing and the Company for the best high risk borrowers.
The Company believes, however, that it currently has few competitors in the
leasing of new and late model used motor vehicles to individuals who have had
prior credit problems. The Company competes to some extent with providers of
alternative financing services, secondary finance companies such as used car
dealer groups, or other firms with greater financial and marketing resources
than the Company. These competitive factors could have a material adverse
effect upon the operations of the Company, including the inability of the
Company to charge high implicit interest rates on the Contracts. One of the
material assumptions underlying the Company's belief that the Company's
revenues will be
21
<PAGE>
sufficient to cover the Allowed Expenses and to pay all principal and
interest on the Notes even if only the Minimum Offering Amount is raised is
that the Company generally will be able to charge an implicit interest rate
of 18% per annum. See "SUMMARY -- Overview" and "PURCHASE, ACQUISITION AND
COLLECTION OF CONTRACTS -- General." Therefore, if the Company is not able
to charge this high implicit interest rate because of competitive factors or
other factors, the Company will have difficulty paying the Allowed Expenses
and all principal and interest on the Notes.
VICARIOUS TORT LIABILITY AS LESSOR FOR LIABILITIES OF LESSEES
Under the laws of certain states, vicarious tort liability could be
imposed on the Company as the owner of a Lease Vehicle involved in an
accident or otherwise causing personal injury or property damage. The
Company will attempt to mitigate this potential liability by requiring that
all Lessees carry liability insurance in specified minimum amounts naming the
Company as additional insured and loss payee. In addition, the Company will
maintain contingent and excess automobile liability policies to protect the
Company's interest in the event that a Lessee's required insurance is not
available or is inadequate in any given case. There can be no assurance that
such policies would be sufficient to protect the Company's potential exposure.
CONFLICTS OF INTEREST
Transition Leasing owns 100% of the outstanding common stock of the
Company (the "Common Stock") and 100% of the common stock of TAF-I. As of
the date hereof, Transition Leasing has no subsidiaries other than the
Company and TAF-I. Ken Lowe, President, Chief Financial Officer and a
director of the Company, is the President and a director of Transition
Leasing and TAF-I. Neither the directors nor the executive officers of the
Company anticipate receipt of any compensation to be paid directly by the
Company, other than reimbursement of their reasonable Allowed Expenses
incurred on behalf of the Company prior to satisfaction in full of the Notes.
The terms of the Servicing Agreement have not been negotiated at arms'
length. Accordingly, there are real and on-going conflicts of interest
between the Company and Transition Leasing. There are conflicts of interest
with respect to allocation of management time, services, overhead expenses
and functions. Management of Transition Leasing intends to resolve any such
conflicts in a manner that is fair and equitable to the Company. However,
there can be no assurance that Transition Leasing will not form additional
subsidiaries engaged in the same business as the Company or that any
particular conflict will be resolved in a manner that does not adversely
affect Noteholders.
In addition, Transition Leasing and the Company have conflicts of
interest with respect to the choice of automobile leasing contracts
originated by Transition Leasing that are acquired by the Company or by
parties other than the Company, including Transition Leasing and affiliates,
which may include future subsidiaries that will engage in the same business
as the Company. To minimize these conflicts, Transition Leasing has
determined that any future Contracts originated by Transition Leasing that
satisfy the Company's Contract criteria will be acquired by the Company, to
the extent that the Company has funds available for acquisition of such
Contracts, and Transition Leasing will have no discretion to purchase or
acquire it.
22
<PAGE>
Upon the execution of any Contract (including any Contract executed in
connection with remarketing of any Leased Vehicle surrendered to, or
recovered by the Company, prior to the expiration of its Contract) Contracts
originated by Transition Leasing, the Company will pay Transition Leasing the
Marketing Fee (i.e., 57.5% of the down payment with respect to the Contract),
the Purchase Administration Fee, and, in the case of new Contracts following
the repossession of a Leased Vehicle, the Releasing Fee. The Company's
payments to Transition Leasing associated with the purchase, origination and
collection of the Contracts during the life of the Notes will be limited to
the monthly Contract Servicing Fee of $20 for each Contract that has not been
assigned for repossession, the Releasing Fee, and the reimbursement of
Transition Leasing's out-of-pocket expenses in connection with the
repossession, repair, remarketing and resale of a Leased Vehicle. See,
"PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS." The amount of fees
payable to Transition Leasing hereunder may not be changed by Transition
Leasing and the Company to increase such fees without the consent of holders
of at least 75% of the aggregate principal amount of the outstanding Notes
(excluding Notes held by the Company or its affiliates). See "ADDITIONAL
INDENTURE PROVISIONS -- Modification of Indenture." There has been no
independent determination of the fairness and reasonableness of the terms of
these transactions. The Company believes, however, that the fees to be paid
to Transition Leasing, including the Marketing Fee, are reasonable based on
comparable fees paid to lease brokers (or facilitators) in automobile leasing
transactions involving customers with non-prime credit ratings. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and
"MANAGEMENT -- Certain Relationships and Related Transactions" for additional
information.
The Company may acquire Leased Vehicles, as well as the Contracts which
relate to such Leased Vehicles, from Transition Auto Finance, Inc. ("TAF-I"),
a wholly-owned subsidiary of Transition Leasing, and in the event of any such
purchase (a) will pay TAF-I a price equal to the depreciated value of the
Leased Vehicle as of the date of the Company's purchase and (b) will pay to
Transition Leasing the Purchase Administration Fee and the Documentary Fee
with respect to the Leased Vehicle. To minimize any conflicts of interest
with respect to the choice of which of TAF-I's Leased Vehicles and Contracts
may be acquired by the Company, the Company and Transition Leasing have
specified the means by which Leased Vehicles and Contracts will be selected
for sale to the Company. There has been no independent determination of the
fairness and reasonableness of the purchase price, the means by which Leased
Vehicles and Contracts will be selected or any other of the terms of these
transactions. See, "PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS" and
"MANAGEMENT -- Certain Relationships and Related Transactions" for additional
information.
LACK OF DAMAGE INSURANCE
Although most state laws, including Texas law, require owners to
maintain liability insurance for damages arising from their use of a motor
vehicle, the owners of the Leased Vehicles may fail to maintain physical
damage insurance. The Company has obtained insurance to provide protection
from losses in these events; however, there can be no assurance that such
insurance will continue to be obtainable at appropriate premium rates and
terms or will provide adequate coverage in all circumstances. As a
consequence, in the event any theft or physical damage to a Leased Vehicle
23
<PAGE>
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 Leased Vehicles, its ability to pay the Notes may be adversely
affected. See "PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS--Contract
Criteria."
SALE OF SMALL AMOUNT OF NOTES
The Offering may be consummated by the Company with the sale of as
little as $250,000 in principal amount of the Notes. If only the Minimum
Offering Amount is raised, the Company will have approximately $226,250
(after offering and organizational expenses and broker/dealer commissions) to
purchase Leased Vehicles, see "USE OF PROCEEDS," and the Company believes that
it can cover the Allowed Expenses and pay all interest and pricipal on the
Notes. The Company's belief is based on a number of assumptions which the
Company believes are reasonable, including without limitation, assumptions
(i) that 12 Leased Vehicles may be purchased at an assumed purchase price,
(ii) that the Contracts relation to such 12 Leased Vehicles will be on
specific terms including an implicit annual interest rate of 18%, and (iii)
that the estimated expenses of the Company will not exceed a specified level.
Although the Company believes these assumptions to be reasonable, such
assumptions include certain risks and uncertainties. A principal risk is
that the Company has had no operations to date, and Transition Leasing, the
Company's parent, which is responsible for the acquisition and servicing of
the Company's Contracts, and affiliated corporations have limited operating
history to date upon which to base these assumptions. Other risks and
uncertainties are set forth under this caption "RISK FACTORS". A variation
in any single assumption could materially alter the ability of the Company to
cover the Allowed Expenses and pay all principal and interest due on the
Notes. There is no assurance that these assumptions, including, without
limitation, the expected implicit interest rate of 18% per annum with respect
to the Contracts, will be achieved. Accordingly, the ability of the Company
to cover the Allowed Expenses and pay all principal and interest on the Notes
may differ materially from this forward-looking information due to such risks
and uncertainties.
In the event only a small portion of offered Notes in excess of the
Minimum Offering Amount are sold by the Company, the performance of
individual Contracts in the pool securing the Notes will have a greater
effect on the Company's ability to pay the Notes than if a larger 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, relatively small amounts of 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 large portion of the
Notes is sold. If the fixed Allowed Expenses are higher than expected or the
Company is unable to acquire the number of Contracts on the proposed terms as
projected herein, the Company's ability to repay a small amount of Notes may
be materially adversely affected. See COLLATERAL FOR THE NOTES -- The
Contract Proceeds and Operating Account."
LACK OF PARTICIPATING BROKER DEALERS
As of the date of this Prospectus, the Company and the Underwriter have
not identified other broker/dealers who are willing to participate in this
Offering of the Notes. See "PLAN OF DISTRIBUTION." 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.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 30, 1998, and as adjusted to reflect the sale of the Notes offered hereby.
<TABLE>
<CAPTION>
AS OF MARCH 30, 1998
----------------------------
ACTUAL AS ADJUSTED MINIMUM
------- -------------------
<S> <C> <C>
LIABILITIES
11% Secured Redeemable Notes Due June 30, 2002 -- 250,000(1)
------- ----------
24
<PAGE>
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, authorized 1,000
shares, issued and outstanding 1,000 shares $ 10 10
Paid-in capital 990 990
Retained earnings 0 0
------- ----------
TOTAL SHAREHOLDERS' EQUITY $ 1,000 $ 1,000
------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,000 $ 251,000
------- ----------
------- ----------
</TABLE>
__________
(1) Offering expenses related to the issuance of the Notes are
capitalized and amortized to interest expense using the effective method over
the lives of the related debt. The estimated annual offering expense to be
amortized will vary according to the amount and timing of the funding of the
Notes. If the Offering is completed prior to December 31, 1998, the
percentage of the total offering expenses that would be charged to operations
in the first four years would be 25% per year. Other organizational expenses
are capitalized and amortized over a five-year period on a straight-line
basis.
The capitalization of the Company reflects its asset-backed security
structure. The Company's only significant assets will be the Leased
Vehicles, the Contracts that are purchased or acquired from the proceeds of
this Offering, the net proceeds of this Offering, the excess collection
proceeds of the Contracts and proceeds realized from reinvestment of such net
proceeds and excess collection proceeds. See "COLLATERAL FOR THE NOTES."
The costs of the Company's ongoing operations during the term of the Notes
will be borne by Transition Leasing and will be reimbursed to Transition
Leasing through the Company's payment of monthly servicing and administration
fees, which are more fully described under "PURCHASE, ACQUISITION AND
COLLECTION OF CONTRACTS --Servicing Fees and Transition Leasing Compensation."
USE OF PROCEEDS
The Company intends to apply at least 90% of the gross proceeds from
the sale of any Notes to the purchase or acquisition of the Leased Vehicles
and the Contracts. The Company will (i) pay to the Underwriter sales
commissions of 6% of the principal amount of the Notes sold by such
Underwriter and (ii) will reimburse the Underwriter for certain expenses
incurred in connection with its due diligence activities with regard to the
Offering in an amount not to exceed 2.5% of the aggregate principal amount of
the Notes sold. The Company will also use up to 1.5% 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. These expenses have been or will be paid by Transition
Leasing, the parent of the Company, and will be reimbursed by the Company to
the extent of such 1.5%. Transition Leasing has agreed to pay expenses of
the Offering to the extent they exceed 1.5% of the gross proceeds from the
sale of the Notes. Such reimbursable expenses of the Company, the Purchase
Administration Fee, the Documentary Fee, the Marketing Fee, the Contract
Servicing Fee and the reimbursement of certain expenses incurred by
Transition Leasing in
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<PAGE>
connection with the repossession, remarketing, repair and resale of Leased
Vehicles, are the only fees, remunerations or reimbursements of expenses
which will be paid by the Company to Transition Leasing from the proceeds of
this Offering.
The Company may use certain of the offering proceeds to purchase leases
from TAF-I, an affiliate of Transition Leasing and the Company; provided,
however, no TAF-I Contracts shall be purchased by the Company if only the
minimum gross offering proceeds ($250,000) are raised. The consideration to
be paid to TAF-I will be determined by a formula set forth elsewhere in this
Prospectus, and the Leases to be so purchased will be determined by the date
executed by TAF-I on a first-in, first-out basis, meaning that the Company
will purchase those Leases which were the earliest acquired by TAF-I and
which, at the time of acquisition by the Company are not in default. See
"PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS" and "MANAGEMENT --
Certain Relationships and Related Transactions."
As a consequence, after payment of broker/dealer commissions and
organizational and offering expenses, the Company will have at least
$9,000,000 in proceeds available for purchase of Leased Vehicles and
Contracts in the event the maximum offering is achieved and $225,000 (which
does not include the TAF-I Contracts, which cannot be purchased with the
proceeds from the minimum offering) in the event of the minimum offering.
The Company will maintain the proceeds of this Offering in the Operating
Account until they have been fully used to acquired Contracts or Leased
Vehicles. Such funds may be invested in the same type of Eligible
Investments (as defined in the Indenture) as the Trustee may invest funds
that are in the Sinking Fund Account.
The use of proceeds is set forth below in tabular form below.
26
<PAGE>
<TABLE>
<CAPTION>
Minimum Maximum
$250,000 $10,000,000
<S> <C> <C>
Offering and Organizational Expenses(1) $ 3,750 $ 150,000
Broker/Dealer Commissions(2) $ 20,000 600,000
Purchase of Contracts and Leased Vehicles $226,250 9,050,000
$250,000 $10,000,000
</TABLE>
__________
(1) These offering and organizational expenses will be paid on the
Company's parent, Transition Leasing, to reimburse Transition Leasing for such
expenses.
(2) Assumes the maximum permitted amount of due diligence reimbursement is
paid.
The subscription escrow will terminate upon the receipt of subscriptions
in the aggregate amount of $250,000 and, upon such termination, the Company
will receive that portion of the proceeds to be used for the purchase of
Contracts and Leased Vehicles (estimated in the above table to be $226,250).
The Company will attempt, and anticipates being able, to use the aggregate
amount of such proceeds within 60 days of the termination of the escrow and
the release of the escrowed funds to the Company.
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to an Indenture dated as of _________
(the "Indenture"), between the Company and Trust Management, Inc. (the
"Trustee"). An example of the Notes, as well as the Indenture have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part and has been incorporated by reference herein. The Indenture is
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), and the terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act. The Notes are subject to all such terms, and holders of Notes
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summaries of certain provisions of the Notes and the
Indenture and the summaries included under "ADDITIONAL INDENTURE PROVISIONS"
do not purport to be complete and are subject to, and qualified in their
entirety by reference to, the provisions of the Notes and the Indenture.
Where particular provisions of or terms used in the Indenture are referred
to, the actual provisions (including definition of terms) are incorporated by
reference as part of such summaries.
While the Notes are general obligations of the Company and the holders
of the Notes will have recourse against the assets of the Company,
substantially all of the Company's assets will be the Contracts and the
Leased Vehicles. See "COLLATERAL FOR THE NOTES." 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. The holders of the Notes will have
no contractual recourse against Transition Leasing for payment of the Notes.
The Trustee will initially act as the Paying Agent and Registrar.
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<PAGE>
ISSUANCE OF NOTES; TRANSFERS
The Notes will be issued in an aggregate principal amount of up to
$10,000,000 in fully registered form in minimum denominations of $1,000 and
integral multiples thereof. (Indenture, Section 2.3). The minimum
subscription amount for each investor is $5,000 (or $2,000 for Individual
Retirement Accounts). The Company may require a noteholder to reimburse the
Company for any out-of-pocket costs incurred by the Company with respect to a
transfer or exchange of a Note. (Indenture, Section 2.7). Each Note will
mature on June 30, 2002 (the "Maturity Date").
PAYMENTS OF INTEREST
Each Note will accrue interest from the date of issuance at the rate of
10% per annum (computed on the basis of a 360-day year consisting of twelve
30-day monthly periods). The Company will be required to make monthly
payments of interest, paid in arrears, on the outstanding principal balance.
Payments of interest will be due and payable in arrears on the fifteenth
(15th) day of the month following the end of each successive calendar month
(for interest accruing during the prior month) commencing with the fifteenth
(15th) day of the first full calendar month following the issuance of the
Note and upon the Maturity Date (the "Payment Dates"). Any installment of
interest that is not paid when and as due will accrue interest at the lesser
of (i) 18% 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 because each payment of interest
will be paid 15 days after the month over which it accrued.
PAYMENTS OF PRINCIPAL FROM SINKING FUND
In lieu of principal payments on any Payment Date, the Company may use
funds in the Sinking Fund Account in excess of the aggregate amount of
interest payable on the Notes on such Payment Date to redeem all or any
portion of the Notes. See "-- Redemption," below.
SOURCES OF FUNDS FOR PAYMENT; PAYMENT ACCOUNT AND SINKING FUND
The Company expects to use the amounts collected under the Contracts,
INTER ALIA, to make the required payments under the Notes. All installments
and other proceeds from the Contracts will be deposited by Transition Leasing
in the Company's Master Collections Account or the Operating Account
maintained by the Company (as described under "COLLATERAL FOR THE NOTES --
The Contract Proceeds and Operating Account"). (Indenture, Section 42).
Transition Leasing will either issue to each Lessee a payment book or will
mail each Lessee monthly statements, together with instructions to mail
remittances directly to the Company's Master Collection Account. Transition
Leasing has agreed to deposit all installments and other proceeds, including
proceeds from sales of repossessed and remarketed vehicles, net of
repossession and remarketing expenses, as the case may be, into the Company's
Master Collection Account. On at least a weekly basis, all amounts in the
Company's Master Collection Account attributable to the Contracts will be
"swept"
28
<PAGE>
into the Operating Account.
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 Sinking
Fund Account controlled by the Trustee See "COLLATERAL FOR THE NOTES -- The
Sinking Fund Account"). (Indenture, Section 4.2.) Prior to each Payment
Date occurring prior to the Sinking Fund Trigger Date, the Company will
transfer to the Sinking Fund Account from the Company's Operating Account an
amount that, together with any funds in the Sinking Fund 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
(Indenture, Section 4.2 )
Following the Sinking Fund Trigger Date, all of the funds in the
Company's Operating Account or Payment Account, less Allowed Expenses payable
by the Company, will be transferred on at least a monthly basis to the
Sinking Fund Account. In addition, the Company will be required to deposit
immediately in the Sinking Fund Account any remaining net proceeds from the
sale of the Notes as of the Sinking Fund Trigger Date that have not been used
for the purchase of Contracts. (Indenture, Section 4.2.) The funds will
accumulate in the Sinking Fund Account for payment of the Notes.
During the continuance of an Event of Default, all funds in the
Operating Account less any amounts owing to the Trustee are required to be
transferred on the Business Day immediately preceding each Payment Date to
the Sinking Fund Account, and the Trustee will have the right directly to
cause such transfer. (Indenture, Section 4.2.) In addition, during the
continuance of an Event of Default, the Trustee will have all of its other
rights and remedies available for collection of the proceeds on the Contracts
for purposes of obtaining sufficient funds to satisfy the Notes. See
"ADDITIONAL INDENTURE PROVISIONS --Rights Upon Event of Default."
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 Trustee or the Paying Agent.
(Indenture, Section 5.1.).
REDEMPTION
The Maturity Date of the principal of the Notes is June 30, 2002. At any
time after the eighteenth (18th) month following the date of the issuance of
the first Note (which should be shortly after the release of the offering
proceeds from escrow), the Company may exercise its right to redeem the
Notes, in whole or in part, in accordance with the Indenture. (Indenture,
Section 3.1.)
29
<PAGE>
Any redemption of Notes will be at a redemption price equal to 100% of
the outstanding principal amount thereof, together with interest to the date
of redemption, without any premium or penalty. If less than all of the Notes
are to be redeemed pursuant to the optional redemption provisions of the
Indenture, the Trustee shall select the Notes to be redeemed among the
holders of the Notes by lot or other method selected by the Trustee. Notice
will be given to the Noteholders by first class mail, postage prepaid, mailed
not less than 20 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 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. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note. (Indenture, Article III.)
COLLATERAL FOR THE NOTES
GENERAL
To collateralize the Notes, the Indenture grants a security interest or
lien in collateral (the "Trust Estate") consisting of all of the Company's
right, title and interest in (a) the Leased Vehicles, (b) the Contracts,
together with all payments and instruments received with respect thereto, (c)
the Servicing Agreement, (d) the Operating Account and all funds (including
investments therein), (e) the Master Collections Account and all funds
(including investments therein), (f) the Sinking Fund Account and all funds
(including investments therein), (g) all repossessed or returned Leased
Vehicles (including Leased Vehicles returned upon termination of the
Contracts), and (h) all proceeds of the conversion, voluntary or involuntary,
of any of the foregoing into cash or other liquid property. (Indenture,
Granting Clauses.) Pursuant to the Indenture, the Trustee has been granted a
lien senior to the lien of the Indenture in order to collateralize payment of
its fees and expenses as Trustee under the Indenture, except that the
Trustee's lien does not apply to money held in the Trust Estate for repayment
of principal and interest on the Notes. (Indenture, Section 7.7.)
THE CONTRACTS
Each of the Contracts will be an automobile lease contract that is (i)
purchased from TAF-I or other sources or (ii) acquired by the Company in a
transaction originated by Transition Leasing. Each Contract will lease a new
or late model automobile that is not more than three model years old at the
time of lease (including passenger cars, minivans, sport/utility vehicles and
light trucks) (a "Leased Vehicle"). The Contracts will constitute a part of
the Trust Estate and will be purchased or acquired by the Company using (i)
the net proceeds from the sale of Notes, or (ii) until the Sinking Fund
Trigger Date, so long as no Event of Default exists, any net collection
proceeds from any Contracts, after deduction for payments of interest and
Allowed Expenses. See "PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS."
To minimize the conflicts of interest with respect to Contracts originated by
Transition Leasing, Transition Leasing has determined that
30
<PAGE>
any of such Contracts that satisfy the Company's Contract criteria will be
acquired by the Company to the extent that funds are available for such
purchases. See "RISK FACTORS -- Conflicts of Interest."
Each Contract acquired by the Company will be delivered to the Trustee
and labeled with a notice indicating the Trustee's security interest. In
addition, (i) a UCC financing statement listing such Contract, and also
covering the proceeds therefrom, will be filed in the appropriate public
office to give further notice of the Trustee's security interest, and (ii)
the Company will have each Leased Vehicle's certificate of title issued to
reflect the Company as the owner and the Trustee as a first lienholder. The
Trustee and the Company may appoint a financial institution to retain
possession of the Contracts and related title documents as custodian and
bailee for the Trustee and the Company.
THE SINKING FUND ACCOUNT
The Company has established, in the name of the trustee, a trust account
at Texas Community Bank (the "Sinking Fund Account"). Prior to the Sinking
Fund Trigger Date, all funds designated for payment of interest due with
respect to the Notes will be deposited in the Sinking Fund Account. After
the Sinking Fund Trigger Date, all funds designated for payment of interest
due or principal outstanding with respect to the Notes will be deposited in
the Sinking Fund Account. Funds in the Sinking Fund Account will not be
commingled with any other monies of Transition Leasing or the Company. All
monies deposited from time to time in the Sinking Fund Account will be held
for the benefit of the Trustee as part of the Trust Estate. Withdrawals of
amounts due and payable with respect to the Notes that are to be made from
the Sinking Fund Account will be made on behalf of the Company by the Trustee
or a Paying Agent, and no amounts so withdrawn from the Sinking Fund Account
will be paid over to the Company or Transition Leasing. The funds in the
Sinking Fund Account will be employed by the Trustee or the Paying Agent to
pay interest on the Notes on each Payment Date and to effect redemptions of
the Notes, in the Company's discretion, on any Payment Date after the Sinking
Fund Trigger Date. Funds in the Sinking Fund 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 4.2 and 4.3.)
After the Sinking Fund Trigger Date, all net collection proceeds
(including all portions thereof treated for tax or financial accounting
purposes as principal or interest) from the Contracts, following deduction
of Allowed Expenses (including fees payable to Transition Leasing), will no
longer be available to the Company for the purchase of additional Contracts
and will be deposited into and held, along with the income earned thereon, by
the Trustee in the Sinking Fund Account for repayment of the Notes. With the
exception of payments required to pay interest due and payable with respect
to the Notes, no schedule of minimum required payments into the Sinking Fund
Account will exist. See "DESCRIPTION OF THE NOTES -- Payments of Interest."
THE CONTRACT PROCEEDS AND OPERATING ACCOUNT
31
<PAGE>
The Company has established the Master Collections Account. All
payments made on or with respect to the Contracts (including all portions
thereof deemed to be principal or interest for tax or financial accounting
purposes) will be deposited in the Master Collections Account. Such funds
will be deposited into the Master Collection Account separately using code
numbers assigned to individual Contracts and separate entities to ensure
proper tracing of payments.
The Master Collection Account is an account at a financial institution,
initially Texas Community Bank, 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 Lessees will be
requested, through correspondence and delivery of payment books or monthly
statements to remit payments under their Contracts directly to the Master
Collection Account. Transition Leasing has also agreed to deposit in the
Master Collections Account any payment proceeds received directly by
Transition Leasing with respect to the Contracts, including any proceeds from
resales of returned or repossessed Leased Vehicles and any recoveries from
insurance claims on Leased Vehicles. The Indenture requires the transfer on
at least a weekly basis of all of the funds in the Master Collections Account
into the Operating Account, a commercial bank account maintained by the
Company for use in holding the Company's proceeds 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 4.2.)
Transition Leasing, as a part to the Indenture, has acknowledged that
any collections or other proceeds from the Contracts in the Company's Master
Collections Account are the Company's property and that any such collections
or other proceeds from the Contracts in its possession nor control are held
by Transition Leasing pursuant to the Indenture as custodian and bailee of
the Company and the Trustee, and, therefore, are the Company's property and
subject to the security interest of the Trustee.
Any funds in the Master Collection Account will be subject to the
Trustee's lien and will collateralize payment of the Notes. So long as the
Notes have not been declared due and payable as a result of an Event of
Default and subject to the receipt by the Trustee of any required
certificates, 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 Sinking
Fund 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, except during an Event of Default, to the payment of any
other Allowed Expenses of the Company, as certified by the Company; fourth,
after the Sinking Fund Trigger Date or during an Event of Default, to the
deposit to the Sinking Fund Account for payment of the Notes; and fifth,
prior to the Sinking Fund Trigger Date, except during an Event of Default, to
the purchase of additional eligible Contracts, as certified by the Company
and Transition Leasing. 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. The Company and Transition Leasing 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, Sections 4.2. and 4.3.)
32
<PAGE>
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 Sinking Fund Account an amount that, together with any funds in the
Sinking Fund Account, is sufficient to make all interest payments on the
Notes outstanding on such Payment Date. See "DESCRIPTION OF THE NOTES --
Payments of Principal and Interest."
The Company may disburse funds from the Operating Account for purposes
of payment of Allowed Expenses (including fees payable to Transition Leasing)
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 payment from the Operating Account conform with the
Indenture and funds in the Operating Account did not exceed $250,000 for 60
days or more. This provision does not apply to any proceeds from the sale of
the Notes by the Company if the Company elects to deposit such proceeds in
the Operating Account. (Indenture, Section 4.2.)
The "Allowed Expenses" of the Company will be limited to the expenses
and fees of the Trustee under the Indenture, fees charged by Transition
Leasing under the Servicing Agreement (including the Contract Servicing Fee
and the Purchase Administration Fee) (the "Servicing Fees"), title transfer
fees, federal, state and local taxes (including corporate franchise taxes but
excluding federal, state and local income taxes for which Transition Leasing
is responsible under the tax Sharing Agreement (as hereinafter defined),
legal and accounting fees and printing expenses for reports, compliance
certificates and opinions required by the Indenture, premiums for vehicle
value insurance, charges for vehicle warranty service contracts, bank service
charges and account fees, including a share of such charges and fees, if any,
incurred by transition Leasing for the Master Collections Account), expenses
of repossessing, repairing, remarketing and liquidating the Leased Vehicles
(as to each Leased Vehicle, not to exceed the liquidation proceeds from the
Leased Vehicle), and any insurance proceeds applied to vehicle repairs or
required to be refunded to Lessees. Transition Leasing 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, ACQUISITION AND COLLECTION OF CONTRACTS --
Collection of Payments"):
Summary of Estimated Allowed Expenses
- --------------------------------------------------------------------------------
Allowed Expenses Estimated Amount
- --------------------------------------------------------------------------------
Servicing Fees
Contract Servicing Fee (paid to $20 per month per
Transition Leasing) Contract
Purchase Administration Fee (paid to $100 per Contract
Transition Leasing) purchased
33
<PAGE>
- --------------------------------------------------------------------------------
License and Title Transfer Fee $86.80 per Contract
State Inspection Fee $19.75 per Contract
Documentary Fee $50.00 per Contract
- --------------------------------------------------------------------------------
Marketing Fee (paid to Transition Leasing) 57.5% of customer down
payment
- --------------------------------------------------------------------------------
Trustee Fees
Acceptance Fee $6,500
Annual Administration $7,500
Note Payments and Registrar Services $5 per year per Note
Note Certificate Corrections $10 each
Collateral Custodial Services $5 per year per
Contract plus $2.50 per
acceptance or release
of Contract
- --------------------------------------------------------------------------------
Bank Fees
Master Collections Account $300 to $500 (varies
Operating Account with volume) per month
Subscription Escrow Account $2,000 per year (varies
with number of
transactions)
$1,000 per year
- --------------------------------------------------------------------------------
Legal Expenses
Annual Attorneys' Opinion to Trustee $2,500
- --------------------------------------------------------------------------------
Accounting Expenses
Annual Audit $15,000
Annual Tax Return $1,750
Printing and Mailing $3,000
- --------------------------------------------------------------------------------
Insurance Premiums $500 per year, plus
Residual 1.68% of the residual
value of each Leased
Vehicle (with $100
deductible for leased
vehicles)
Contingent Liability and Physical $2.00 per Leased
Damage Vehicle per month
- --------------------------------------------------------------------------------
Total Annual Servicing, Trustee, Bank, Legal, Estimated to average
Accounting and Insurance Fees and Premiums (i) $279,650 (or $362
per Contract) if the
maximum amount of Notes
is sold, or (ii)
$38,771 (or $775 per
outstanding Contract)
if the minimum amount
of Notes is sold
- --------------------------------------------------------------------------------
Repossession, Remarketing, Repair and Resale Estimated to average
Expense (to reimburse Transition Leasing for $100 to $400 for each
such expenses) repossessed Leased
Vehicle, but limited to
the related liquidation
or insurance proceeds
- --------------------------------------------------------------------------------
Remarketing Expenses Estimated to average
$100 to $400 for each
Leased Vehicle upon
expiration of the
lease, but limited to
the related resale or
insurance proceeds
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
Releasing Fee (paid to Transition Leasing) 15% of the down payment
by the customer
(Lessee) with respect
to a new Contract
following repossession
- --------------------------------------------------------------------------------
Federal Income Taxes Varies with taxable
income (max. 35%)
- --------------------------------------------------------------------------------
Texas Corporate Franchise Taxes Greater of 4.5% of
taxable income and 1/4
of 1% of taxable
capital
- --------------------------------------------------------------------------------
PERFECTION OF TRUSTEE'S SECURITY INTEREST IN THE COLLATERAL
The Collateral includes the following: (a) the Leased Vehicles, (b) the
Contracts, together with all payments and instruments received with respect
thereto, (c) the Servicing Agreement, (d) the Operating Account and all funds
(including investments) therein, (e) the Master Collection Account and all
funds (including investments) therein, (f) the Sinking Fund Account and all
funds (including investments) therein, (g) all repossessed or returned
Leasing Vehicles (including Leased Vehicles returned upon termination of the
Contracts), and (h) all proceeds of the conversion, voluntary or involuntary,
of any of the foregoing into cash or other liquid property. Set forth below
is a description of how each of these types of property is made subject to
the Trustee's pledge or security interest in favor of the Note holders under
applicable Texas law.
(a) The Leased Vehicles will be automobiles or trucks subject to the
Texas Transportation Code. Pursuant to Section 501.021 of the Texas
Transportation Code, evidence of the Trustee's security interests against
such vehicles will be evidenced by notation on a certificate of title issued
by the Texas Department of Public Safety. Pursuant to the Indenture and the
Custodial Agreement, the Trustee will maintain actual possession of such
certificates of title.
(b) The Contracts will be leases of automobiles owned by the Company.
Article 9.105(a)(2) of the Texas Uniform Commercial Code ("UCC") defines such
Contracts as "chattel paper." Section 9.304(a) of the UCC provides that a
security interest in chattel paper may be perfected by filing a financing
statement, and Section 9.305 of the UCC provides that a security interest in
chattel paper may also be perfect by the collateralized party taking
possession of the chattel paper. The Trustee will file a UCC-1 financing
statement with respect to the Contracts and will maintain actual possession
of the Contracts pursuant to the Indenture and the Custodial Agreement.
(c) The Servicing Agreement is a contractual agreement and is
considered a "general intangible" under Section 9.106 of the UCC. Security
interests in general intangibles are perfected by filing a financial
statement. The Trustee will file a UCC-1 financial statement with respect to
the Servicing Agreement.
(d) - (f) The Operating Account, the Master Collections Account and the
Sinking Fund are deposit accounts, and pledges of such accounts are not
subject to the provisions of Article 9 of the UCC as provided in Section
9.104(12) of the UCC, except as provided with respect to proceeds (Section
9.306) and priorities in proceeds (Section 9.312). Perfection of a pledge of
these deposit bank accounts is made pursuant to Texas common law rules
covering the pledge of personal property. Pledges are made
35
<PAGE>
by the pledgor executing a pledge and assignment agreement in favor of the
pledgee and are perfected by the pledgor notifying the depositary bank in
writing of the pledge. Security interests with respect to any investments
within these accounts will be subject to applicable provisions of the UCC,
depending upon the types of investments. At present, the depository bank is
Texas Community Bank.
(f) The repossessed or returned Vehicles will already be subject to the
lien noted on the certificates of title as described in (a) above, and the
Trustee shall have actual possession of such certificates of title.
(g) The proceeds of the items above that are subject to perfection
under the UCC are subject to the provisions of Section 9.306 of the UCC, and
the Trustee's lien in such proceeds are perfected by perfection of the
underlying property as noted above, subject to Section 9.306 of the UCC.
To the extent collected funds are not needed to fund the payment on the
Notes, the purchase of additional Contracts, or the payment of Allowed
Expenses of the Company, such funds will generally remain in the Company's
Operating Account. The Company has agreed, however, to transfer to the
Sinking Fund Account the funds in the Operating Account to the extent such
funds exceed $250,000 for a period of 60 consecutive days or more. This
provision does not apply to the sale of the Notes by the Company if the
Company elects to deposit such proceeds in the Operating Account.
(Indenture, Section 4.2.)
Prepayments by Lessees 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 prior to the Sinking
Fund Trigger Date and will not be passed through to Noteholders as principal
payments. See "RISK FACTORS -- Collections and Performance of Contracts;
Repossessions."
The following chart illustrates the flow of Contract proceeds from the
Lessees through the Master 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>
<CAPTION>
Contract Installments Master Weekly Operating Monthly Proceeds
Leases Collections Account Applications(1)
- -------- ------------ ----------- ------ --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
__________
(1) Priority of Monthly Proceeds Applications
1. Interest is paid by Trustee from transfers to the Sinking Fund
Account.
2. Trustee's fees and expenses are paid by Company from Operating
Account.
3.* Other Allowed Expenses are paid by Company from Operating
Account.
4.* A. After Sinking Fund Trigger Date, any remaining proceeds are
deposited into Sinking Fund Account and held by Trustee for
payment of Notes.
B. Before Sinking Fund Trigger Date, any remaining proceeds
are used to purchase or acquire additional eligible
Contract.
36
<PAGE>
* Applications described in 3 and 4 above are prohibited during an
Event of Default.
THE SERVICING AGREEMENT
The Company has granted to the Trustee a security interest in all of its
rights under the Servicing Agreement. In addition, in the event of the
occurrence and continuation of a default under the Servicing Agreement by
Transition Leasing, the Trustee may direct, and upon the direction of the
holders of more than 25% in aggregate principal amount of the outstanding
Notes will direct, the Company to terminate all of the rights and powers of
Transition Leasing under the Servicing Agreement. Upon such termination, all
rights, powers, duties, obligations and responsibilities of Transition
Leasing with respect to the related Contracts (except for any obligation of
Transition Leasing to indemnify the Company) will vest in and be assumed by
the Company or any servicing agent that the Company may designate.
(Indenture, Section 5.10).
THE COMPANY
FORMATION
Transition Auto Finance II Inc. (the "Company") was incorporated in the
State of Texas on March 17, 1998. The Company is a subsidiary of Transition
Leasing. The principal offices of the Company are located at 5422 Alpha Road,
Suite 100, Dallas, Texas 75240. The telephone number for the Company is
(214)490-4788. As of the date of this Prospectus, Transition Leasing has no
subsidiaries other than TAF-I, and the Company.
THE BUSINESS OF THE COMPANY
The Company was established for the sole purposes of purchasing Leased
Vehicles from third parties and leasing them to Lessees pursuant to
Contracts, collecting and servicing the Contracts, obtaining capital through
borrowings or through sale of debt or equity securities to invest in such
Contracts, remarketing the Leased Vehicles upon termination of their
Contracts, and all related business activities. The Contracts may be
purchased from time to time from TAF-I.
The funds necessary to purchase the Contracts or Leased Vehicles will
initially be provided from the sale of the Notes offered hereby. Subject to
the prior payment of interest due upon the Notes and Allowed Expenses, the
collection proceeds from the Contracts will be used to purchase or acquire
additional Contracts until the Sinking Fund Trigger Date and for so long as
no Event of Default exists. Upon the payment in full of all principal and
interest on the Notes, the Contracts and the titles to the Leased Vehicles
will be released by the Trustee to the Company, and the Indenture will
terminate. While the Notes remain outstanding, the Company will be prohibited
from engaging in any business other than the purchase and acquisition of the
Leased Vehicles and the Contracts, the collection and servicing of the
Contracts (including repossession and resale of the Leased Vehicles
collateral), remarketing of the Leased Vehicles upon termination of the
Contracts, and from incurring any additional indebtedness other than Allowed
Expenses and any other amounts incurred in the ordinary course of its
business.
37
<PAGE>
The Contracts purchased or acquired by the Company will relate primarily
to Leased Vehicles in the middle range of the new and late model automobile
market, where consumer retail prices typically range from $15,000 to $30,000.
The Company expects that most of the Contracts it purchases or acquires will
be originated by Transition Leasing. Transition Leasing originates
automobile lease contracts through new automobile franchise dealers,
independent automobile dealers independent leasing companies, automobile
auctions, and other sources. Transition Leasing seeks to lease new and late
model automobiles to individuals who do not have access to other sources of
consumer credit because they do not meet the credit standards imposed by
automobile retailers or banking institutions, generally because they have
past credit problems or non-prime credit ratings. Frequently, the reason that
such an individual may have a non-prime credit rating is that, at some time
in the past, he has defaulted on one or more financial obligations, or he has
filed for relief under the bankruptcy laws, or both.
In originating the Contracts, Transition Leasing takes a more flexible
approach and applies a more subjective analysis than those taken by
traditional automobile financing sources in determining an applicant's
suitability for loan approval. Transition Leasing endeavors to determine
whether the applicant's prior credit problems were a result of job
displacement, financial hardship beyond the applicant's control or other
circumstances that are not indicative of the applicant's current financial
condition or payment performance. In addition, Transition Leasing seeks
customers that have stable employment providing regular income and possess a
strong need to acquire transportation. Transition Leasing believes that by
using subjective judgment and knowledge of local conditions, it is able to
profitably originate automobile leasing Contracts for new and late model
automobiles to many consumers who would be denied approval for such leases
from traditional sources. The Company will only purchase or acquire Contracts
that satisfy the Contract criteria established in the Indenture and the
Servicing Agreement, and believes that the quality and performance of the
Contracts will be enhanced through the consistent application by Transition
Leasing of predetermined purchasing, origination and collection criteria
established in the Indenture and the Servicing Agreement.
Transition Leasing, as the holder of the title to each Leased Vehicle,
will instruct the Tarrant County Tax Assessor/Collector to remit Vehicle
License Renewals to Transition Leasing, or to the Lessees. Transition
Leasing will require the Lessee to appear at Transition Leasing's offices to
collect the licence renewal sticker, at which time a representative of
Transition Leasing will inspect the Vehicle for damage or excess mileage and
collect any reimbursement for such damage or excess mileage, as well as the
license renewal fees.
The Company has no material properties or assets and no operating
history. Transition Leasing and the Company intend to obtain licenses that
may be required in any state where the Company purchases and collects
Contracts. Transition Leasing and the Company have filed applications with
the Texas Motor Vehicle Commission (the "Commission") to be licensed as
lessors pursuant to legislation adopted by the Texas Legislature in the 1995
legislative session as Senate Bill 921 (the "Act") amending the Texas Motor
Vehicle Commission Code, which, INTER ALIA, requires lessors and lease
facilitators to obtain a license from the Commission. No licenses have been
issued under the Act to Transition Leasing or the Company. Upon being
licensed under the Act as a lessor,
38
<PAGE>
Transition Leasing is deemed to be licensed as a lease facilitator as well.
INDUSTRY OVERVIEW
Consumers have a variety of financing alternatives available to them to
acquire the use of a new or late model automobile. These alternatives include
different types of loans (including fully amortizing, balloon payment and no
money down or low down payment loans and leases. The primary benefit of
leasing over such alternatives is that leasing typically provides a consumer
with the opportunity to acquire the use of a new or late model automobile at
a lower monthly payment and initial cash outlay. According to CNW
Marketing/Research, an automobile leasing market research firm, the number of
passenger automobiles and light trucks leased has increased from
approximately 912,000 units in 1984 to an estimated 3.1 million units in
1994. Over the same period, leasing has increased as a percentage of
comparable new vehicle deliveries from approximately 9.8% to approximately
30%.
The increase in new automobile prices in relation to annual median
family income has also significantly increased the popularity of leasing. The
following table shows the relationship between the average new automobile
expenditure and median family income for the periods indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Average New Median Family Percentage of Income
Automobile Income (2) Needed to
Expenditure (1) Purchase Automobiles
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1975 $ 4,950 $13,719 36.1%
1980 7,574 21,023 36.0
1985 12,022 27,144 44.3
1990 16,157 33,969 47.6
1992 18,078 35,776 50.5
1993 19,223 36,934 53.2
1994 19,746 37,117 53.1
1995 20,019 37,239 53.7
- -------------------------------------------------------------------------------
</TABLE>
(1) Source: U.S. Department of Commerce, Bureau of Economic Analysis
(2) Source: U.S. Department of Labor Statistics.
REMARKETING
Transition Leasing will remarket on behalf of the Company each Leased
Vehicle at the end of the scheduled lease term or in connection with early
termination of any Contract. The Company's remarketing efforts may be a
source of revenues to the extent that vehicle disposition proceeds exceed, in
the aggregate, the Residuals of such disposed Leased Vehicles.
Transition Leasing will first remarket the Leased Vehicles to the
original Lessees or to other related parties brought to the attention of
Transition Leasing by the Lessee (e.g., family members, friends, etc.).
Transition Leasing will commence its remarketing efforts approximately four
months
39
<PAGE>
prior to the end of the scheduled Contract term. At that time, the Lessee
will be contacted by a member of the remarketing department to explain the
Lessee's options upon termination. The Lessee's options will be to buy the
Leased Vehicle, extend the Contract or return the Leased Vehicle to the
Company. Generally, under the Contracts, the Lessee will have an option to
purchase the Leased Vehicle at the end of the scheduled Contract term for a
purchase price determined at Contract inception. Accordingly, the Lessee
generally will only purchase the Leased Vehicle if the fixed price is less
than its actual fair market value (generally leaving the Company, as lessor,
responsible for the balance, if any, of the residual), and will return the
Leased Vehicle to the Company, as lessor (thereby leaving the lessor with a
more difficult remarketing effort, as well as the residual obligation), if
the fixed price is in excess of the actual fair market value.
If a Leased Vehicle is returned to the Company at the end of the
scheduled Contract term, the Leased Vehicle will be inspected for excessive
wear and mileage over that permitted under the Contract and the Lessee will
be billed accordingly. Transition Leasing then will generally sell the Leased
Vehicle on behalf of the Company at wholesale through regional auctions.
The Company has purchased and intends to maintain a residual value
insurance policy issued by an insurer rated A by A.M. Best, in order to
provide the Company with certain limited protection in the event that
proceeds from the remarketing of off-lease Leased Vehicles are not sufficient
to pay the associated Residuals. The purpose of the policy is to protect the
Company in the event of a dramatic downturn in the value of a specific
automobile model. An example of such an adverse change in the market place
for a specific vehicle is the Audi 5000, which precipitously lost value when
information of its perceived "sudden acceleration" problems was widely
disseminated. Other examples are the VW diesel rabbit and the Cadillac
diesel. The residual insurance policy does not protect against loss due to
excessive mileage, excessive wear and tear, damage, and lease termination
expenses.
When the Company leases a Leased Vehicle, the Company reviews the
Automobile Lease Guide to determine the estimated value for the specific
Leased Vehicle upon termination of the Contract (typically 36 months). This
figure, which represents the residual value, is entered on a form provided by
the insurance company along with the amount of the premium that is due.
Currently, the amount of the premium is the residual value multiplied by
.0168. For example, the residual value premium for a Leased Vehicle with a
residual value of $10,000 is $10,000 x .0168 or a one-time premium of $168.
If the Leased Vehicle does not have a wholesale value at the end of the
Contract equal to or at least the residual value (in this example, $10,000),
the insurance company pays to the Company the difference between such insured
residual value and the actual wholesale value, (less a $100 deductible)
UNLESS such difference is the result of excessive mileage, excess wear and
tear, damage, and/or lease termination expenses. Coverage for each Leased
Vehicle will continue until it is disposed of. See "RISK FACTOR--Subjective
Determination of Residual Value; Limitation on Protection Provided by
Residual Value Insurance Reliance on Remarketing to Satisfy Residual
Obligation."
GOVERNMENT REGULATIONS
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Transition Leasing and the Company are subject to regulations under
federal, state and local laws and regulations concerning many aspects of
their respective businesses. See "RISK FACTORS -- Effect of Government
Regulation on Leasing." During the 1995 legislative session, the Texas
Legislature passed legislation which significantly increased Texas regulation
of motor vehicle leasing, lessors, such as the Company, and "lease
facilitators," such as Transition Leasing. The Act requires lessors and lease
facilitators to obtain a license from the Commission. Licenses will be
granted only upon a showing of compliance with the Act and the rules of the
Commission adopted pursuant to the Act. Licenses issued by the Commission are
for one year, subject to renewal at the discretion of the Commission. The
Commission has adopted regulations pursuant to the Act, which set forth the
requirements for a license application and the basis for revocation and/or
denial of licenses, including violation of the Act or the regulations
thereunder or on any law relating to the sale, leasing, distribution or
insuring of motor vehicles. The regulations provide for certain record
keeping and reporting requirements, including notification of changes in
ownership and the closing or relocation of any licensed business location.
Transition Leasing and the Company have obtained such licenses.
The Act prohibits an automobile dealer from, directly or indirectly,
paying a fee to a lessor or lease facilitator. Similarly, a lessor may not,
directly or indirectly, accept a fee from a dealer. Moreover, a lessor may
not pay a fee to any person for the solicitation of a prospective lessee of
motor vehicles unless the person receiving the fee is a duly licensed lease
facilitator. The lessor may appoint one or more duly licensed lease
facilitators pursuant to the terms of the Act to represent the lessor and
obtain lease customers. The Act also prohibits lease facilitators from
accepting a fee from a dealer. The Act also requires that lease Contracts
procured by a lease facilitator contain certain required disclosures,
including notice of the complaint procedure under the Code. The regulations
require a lessor or a lease facilitator to conduct its business from an
established and permanent place of business that meets certain requirements.
The regulations require a lessor or a lease facilitator to be independent of
financial institutions and dealerships in such location and in business
activities; however, the Act does not require a lessor to be independent of
its lease facilitators. The regulations provide that upon a change in the
majority ownership interest, the license will be canceled, and the Company
must qualify for a new license. While the Company has not begun operations as
a lessor, including compliance with the office requirements, sign
requirements, lease requirements, and record keeping requirements, of the
Act, the Company has received an opinion of counsel to the effect that the
Company's intended method of business is in compliance with the Act. A copy
of this opinion has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
While the Company believes that it and Transition Leasing will be able
to comply with the requirements of the Act and the regulations, the Company
is unable to predict the extent to which the terms of future regulations
promulgated by the Commission under the Act and/or the administration of the
Act by the Commission will make the operation of the business of Transition
Leasing and the Company significantly more difficult and/or costly or
otherwise have a material adverse effect on the Company.
The Federal Reserve Board has published final revisions to Regulation M,
which implements the Consumer Leasing Act. New requirements under Regulation
M include (i) a uniform format for
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<PAGE>
lease Contracts that requires certain disclosures to be segregated in the
document and written in "plain English;" (ii) a calculation of the lease
payments that itemizes, among other things, the gross capitalized cost of the
lease, the vehicle's residual value, the rent charge and depreciation; (iii)
disclosure of the total amount the lessee will pay by the end of the lease;
and (iv) certain warnings and disclosures. Management of the Company and
Transition Leasing does not believe that these requirements will materially
and adversely impact the Company's or Transition Leasing's leasing activities.
As the Act and revised Regulation M reflect, the area of automobile
leasing has been the recent subject of legislative and regulatory scrutiny,
and numerous proposals are under consideration that, if enacted, would impose
greater regulation and requirements on the Company's and Transition Leasing's
activities. See "RISK FACTORS -- Effect of Governmental Regulations on
Leasing." Certain of these proposals, which have been prompted by consumers
allegedly being charged unfair prices in leasing transactions with inadequate
disclosure of the leased vehicle prices, imputed interest rates and other
charges, would require greater disclosure in leasing contracts with respect
to these matters. Management of the Company and Transition Leasing is not in
a position to predict the effect of any such legislation or regulation on the
Company's activities or Transition Leasing's activities.
PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS
The Contracts will be purchased, acquired and serviced on behalf of the
Company by Transition Leasing under the Servicing Agreement, dated as of
__________, 1998 (the "Servicing Agreement"), between the Company and
Transition Leasing. A copy of the Servicing Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
The Company has granted a security interest in the Servicing Agreement to the
Trustee as collateral for the Notes and for the obligations of the Company
under the Indenture. In addition, Transition Leasing 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 discussions of the Servicing
Agreement and the Indenture set forth within this Prospectus 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 of the Servicing Agreement or the
Indenture are referred to in such discussions, the actual provisions
(including definitions of terms) are incorporated by reference as part of
such discussions.
GENERAL
Pursuant to the Servicing Agreement, the Company, by delivery of a
written notice specifying the maximum amount of funds (the "Available Funds
Limit") the Company has available for the purchase of Contracts or Leased
Vehicles, may require Transition Leasing to use reasonable efforts to
originate Contracts or Leased Vehicles representing funds not in excess of
the Available Funds Limit from new automobile franchise dealers, independent
automobile dealers and independent leasing companies. The Company will be
obligated to purchase all Contracts or Leased Vehicles offered for sale by
such dealers and leasing companies through Transition Leasing if the
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<PAGE>
offered Contracts satisfy the Contract criteria set forth in the Servicing
Agreement and then only to the extent that such Contracts and Leased Vehicles
do not exceed the Available Funds Limit. The Purchase Price paid by the
Company for any Leased Vehicle (the "Actual Purchase Price") will vary
generally with the method by which the customer, the Lessee of the Leased
Vehicle, is introduced to Transition Leasing. If such dealers or leasing
companies introduce the customer to Transition Leasing, the Actual Purchase
Price will generally be equal to 95% of Manufacturer's Suggested Retail Price
("MSRP"). If the customer is generated by Transition leasing's in-house
marketing staff, the Actual Purchase Price will generally be less than 95% of
MSRP. The Lessee will be required to make a down payment to the Company of
not less than 15% of the Actual Purchase Price. The Lessee's monthly payment
will be computed by applying an implicit interest rate factor of 16% to 18%
per annum to an adjusted purchase price (the "Net Capitalized Cost") equal to
120% of the Actual Purchase Price for the Vehicle, less the amount of the
Lessee's down payment. The Company will pay Transition Leasing (i) a Marketing
Fee of 57.5% of the down payment made by the Lessee to the Company with respect
to such Contracts, (ii) the Purchase Administration Fee and (iii) the
Documentary Fee. The Company will use that portion of the Lessee's down payment
remaining after payment of the Marketing Fee and the Purchase Administration
Fee to pay a portion of the Actual Purchase Price of such Lessee's Leased
Vehicle.
With respect to any Leased Vehicle (and the Contract related thereto)
the Company may acquire from TAF-I, the Purchase Price for such Leased
Vehicle payable by Company shall be an amount equal to the depreciated value of
the Leased Vehicle as of the date of the Company's purchase. The Company
calculates depreciation by amortizing over the term of the lease the difference
between the Net Capitalized Cost of the vehicle and the TAF-I's estimate,
at the inception of the lease, of the residual value of the leased vehicle at
the expiration of the lease. The Company will pay Transition Leasing (i) the
Purchase Administration Fee and (ii) the Documentary Fee with respect to such
Leased Vehicle, and related Contract, purchased from TAF-I. The Purchase
Price to be paid by the Company to TAF-I has not been negotiated at arms'
length. See "MANAGEMENT -- Certain Relationships and Related Party
Transactions." The Company anticipates that it will not purchase a Leased
Vehicle (and the Contract related thereto) from TAF-I unless the Company has
substantial funds in the Operating Account and Transition Leasing is
experiencing difficulty in originating Contracts in sufficient numbers to
fully utilize such funds. The Leases to be so purchased will be determined
by the date executed by TAF-I on a first-in, first-out basis, meaning that
the Company will purchase those Leases which were the earliest acquired by
TAF-I and which, at the time of acquisition by the Company, are not in
default.
The Servicing Agreement and the Indenture establish certain criteria to
govern Contract purchases and acquisitions. The Servicing Agreement also
establishes criteria to govern Contract servicing, including the performance
of certain collection and collateral management activities. If Transition
Leasing fails to comply with these criteria, the Company may terminate the
Servicing Agreement and may appoint another servicer; however, it is not
likely that the Company, whose Board of Directors is controlled by directors
of Transition Leasing, would terminate the Servicing Agreement with
Transition Leasing, its parent. (Servicing Agreement, Exhibit A and Sections
8 and 9.) In the event of a default under the Indenture, the Trustee may, or
at the direction of the holders of Notes representing 25% of the aggregate
principal amount of the Outstanding Notes will, terminate the Servicing
Agreement. The Servicing Agreement allows Transition Leasing to contract with
industry-qualified third parties to perform its obligations thereunder. The
performance by any third party will not relieve Transition Leasing from
liability for its obligations under the Servicing Agreement. (Servicing
Agreement, Section 9.)
CONTRACT CRITERIA
The Company has designed certain criteria as to the price, down payment,
and length of lease
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<PAGE>
term for the Contracts and make of the Leased Vehicles to qualify for
purchase or acquisition by the Company under the Indenture. The Company
believes that the most significant of these criteria, in general, are as
follows:
The Contracts generally have original terms that are typically 36 months
but may be as high as 42 months;
With respect to Contracts that will be originated by Transition Leasing,
customers will be required to make a down payment of not less than 15% of
the purchase price of the vehicle. If the vehicle is four model years old,
the required down payment will not be less than 20% of the purchase price
of the vehicle.
As a Marketing Fee, Transition Leasing will receive 57.5% of each down
payment;
The Lessees on the Contracts must have supplied certain credit information,
and credit verification procedures must have been performed by Transition
Leasing in a manner commensurate with standard industry practice;
The Actual Purchase Price of Leased Vehicles are marked up by a factor of
20% to determine the amount of the Lessee's monthly payments with respect
to the Contract; and
The annual interest rate implicit in the calculation of the Lessee's
monthly payments with respect to the Contract generally will range from 16%
to 18% and will be applied against the net capitalized cost of the Leased
Vehicle
With respect to the credit information to be supplied by the Lessees on
the Contracts, the Company has established certain credit criteria to be
satisfied by each Lessee. The Company believes that the most significant of
these criteria, in general, are as follows:
Verifiable home telephone number in Lessee's residence;
Residence: a) Evidence of purchase, lease, or rental agreement in
Lessee's name; or
b) Stability-Review time at last two addresses, as well as
time in area;
Employment: At least one year with last two employers;
Lessee has verifiable income (check stub, W-2, 1099, tax return, or bank
statements)
Lessee's net disposable income should generally be at least 2.5 times his
total monthly debt service (home, car, etc.);
References: a) Five relatives; and
b) Five personal;
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Valid driver's license;
If a Lessee has a previous bankruptcy, must have been discharged, or if
open, need letter of permission from bankruptcy trustee; and
Certain exceptions for first time automobile "buyers" are permitted.
To verify the foregoing information, Transition Leasing will obtain a
copy of the credit application executed by the Lessee, which application
should contain the necessary information to verify by telephone or otherwise
the Lessee's addresses, employment and personal references and authorization
to obtain a credit report from a credit reporting agency.
Although most state laws, including Texas law, mandate that owners
maintain liability insurance for damages arising from their use of a motor
vehicle, the owners of the Leased Vehicles may fail to maintain physical
damage insurance. The Company will maintain vehicle single interest insurance
that will insure the Company against liability and physical insurance for
damages arising from an Lessee's use of a Leased Vehicle in the event that
the Lessee's coverage lapses or is inadequate. The making of significant
claims could result in the non-renewal of such policy, which could have a
material adverse effect on the Company. In addition, the Company will be
named as a loss payee under the Lessee's automobile insurance policy.
The Master Contract Acquisition Agreement ("Contract Acquisition
Agreement") and the Indenture require the Company and Transition Leasing to
make certain representations, warranties and covenants with respect to any
Contracts to be purchased or acquired, including, but not limited to, the
conformity of each Contract with, and compliance by the Company in all
material respects with, federal, state and local laws, and the validity and
enforceability of the Contract and the security interest created thereby in
the Leased Vehicle. (Contract Acquisition Agreement, Section 6; Indenture,
Section 4.4). If the Company, Transition Leasing or the Trustee discovers
that any of such representations or warranties was incorrect in any material
respect with regard to a given Contract (the "Impaired Contract"), Transition
Leasing is required to cure the defect or purchase the Impaired Contract from
the Company. (Servicing Agreement, Section 5.Q).
COLLECTION OF PAYMENTS
Under the Servicing Agreement, Transition Leasing is obligated to
exercise discretionary powers in the management, administration and
collection of the Contracts and to bear all costs and expenses incurred in
connection therewith. Transition Leasing 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.)
Transition Leasing is obligated to instruct all Lessees under the
Contracts to make all payments to the Company's Master Collections Account.
(Servicing Agreement, Section 5.) Transition Leasing generally will contact
any Lessee on a past due Contract within fifteen (15) days after the payment
due date to pursue collections. Any material extensions, modifications or
acceptances of partial payments by Lessees, and any related necessary
Contract amendments or default waivers by Transition Leasing, must be
approved by the Chief Credit Officer or President of Transition Leasing.
(Servicing Agreement, Exhibit A). Transition Leasing is also required to
document the reasons for each chargeoff of any material unpaid amount from a
Lessee under any Contract. (Servicing Agreement, Exhibit A.) To maximize its
return, the Company anticipates that
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it will prefer to continue collecting installments on the Contract despite a
missed installment by the Lessee in lieu of repossession of the Leased
Vehicle. A failure to make any payments for more than 30 days will, however,
generally result in repossession action. By paying his current payment and
his past due payment plus repossession charges, the Lessee may be allowed to
retain his Leased Vehicle pursuant to the Contract. If default occurs a
second time, the Leased Vehicle will be repossessed without further
opportunity for the Lessee to cure the default under the Contract and retain
possession of the Leased Vehicle, unless otherwise required by applicable law.
Upon repossession, Transition Leasing will either re-lease the Leased
Vehicle or sell the Leased Vehicle at wholesale at an automobile auction and
use the proceeds thereof to arrange for the purchase and lease of another
Leased Vehicle. The process by which a Leased Vehicle is sold at wholesale is
referred to herein as Wholesaling.
If a vehicle is re-leased, the Company will pay to Transition Leasing a
Marketing Fee equal to that paid to Transition Leasing with respect to
vehicles leased for the first time.
In addition to its obligation to purchase Impaired Contracts, Transition
Leasing has agreed to repurchase from the Company any Contracts ("Defaulted
Contracts") with respect to which (i) the Lessee is in default thereunder and
(ii) the Leased Vehicle has not been re-leased or Wholesaled within two (2)
months following the default under the Defaulted Contract. The purchase
price for a Defaulted Contract shall be the purchase price paid for the
Leased Vehicle (plus applicable sales tax and title transfer and license
plate fees) by the Company minus (i) 42.5% of the down payment on the
Defaulted Contract made by the Lessee (which is that portion of the down
payment retained by the Company and not paid to Transition Leasing as the
Marketing Fee) and (ii) any monthly lease payments received by the Company
under such Defaulted Contract. There can be no assurances that Transition
will have the many financial resources to repurchase a substantial number of
Defaulted Contracts.
Transition Leasing is required to deliver to the Company a report
certifying that all Contracts managed by Transition Leasing were serviced in
material accordance with the Servicing Agreement and that Transition Leasing
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. (Servicing Agreement, Section 5 and Exhibit A.) If
Transition Leasing fails to service and collect amounts due from the Lessees
in accordance with the servicing criteria established by the Servicing
Agreement or if certain bankruptcy or insolvency proceedings occur, the
Company has the right to terminate all rights and obligations of Transition
Leasing under the Servicing Agreement and to transfer servicing rights to a
successor servicer. (Servicing Agreement, Section 9.) As the Company is a
wholly-owned subsidiary of the Transition Leasing and has common management,
it is unlikely that the Company will exercise its right to terminate
Transition Leasing's rights and obligations under the Servicing Agreement.
See "MANAGEMENT--Certain Relationship and Related Transactions." Under the
Indenture, during the continuance of a default by Transition Leasing of any
of its material obligations under the Servicing Agreement or the Indenture,
the Trustee or holders of at least 25% of the aggregate principal amount of
the outstanding Notes have the right to direct the Company to terminate the
rights and obligations of Transition Leasing under the Servicing Agreement.
(Indenture, Section 5.10.)
SERVICING FEES AND TRANSITION LEASING COMPENSATION
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Transition Leasing 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. (Servicing Agreement,
Section 3.) The Contract Servicing Fee is intended to compensate and
reimburse Transition Leasing for administering the collection of the
Contracts, including collecting and posting all payments, responding to
inquiries of Lessees on the Contracts, investigating delinquencies, sending
payment coupons to Lessees, reporting any required tax information to
Lessees, paying costs of collections and policing the Leased Vehicles. The
Contract Servicing Fee will also compensate Transition Leasing for furnishing
monthly and annual statements to the Company and the Trustee with respect to
collections and proceeds, and generating certain information necessary to
permit the Company to prepare its required federal and state income tax
returns.
Monthly, Transition Leasing will receive a purchase administration fee
(the "Purchase Administration Fee") equal to $100 and a documentary fee (the
"Documentary Fee") equal to $50, per Contract purchased or acquired by the
Company during the preceding calendar month period. The Purchase
Administration Fee and the Documentary Fee is intended to compensate and
reimburse Transition Leasing for administering the purchase of the Contracts,
including receipt and approval of dealer drafts and Contract transfer
documents, monitoring compliance with purchase criteria, preparing,
organizing and delivering certificates, UCC financing statements and other
documents to the Trustee, creation of Contract files, communications with
dealers and independent leasing companies, and other related activities.
Under the Indenture, the Company's payment to Transition Leasing of the
Contract Servicing Fee and the Purchase Administration Fee (collectively, the
"Servicing Fees") is subject to the prior payment of any amounts owing on the
Notes or to the Trustee. (Indenture, Section 4.2.)
Under the Indenture, Transition Leasing will also be entitled to
reimbursement, as an Allowed Expense, of its expenses incurred in the
repossession, remarketing, repair and sale of any Leased Vehicle to the
extent of the related proceeds from its sale or from any recovery on a
related insurance policy. (Servicing Agreement, Section 5.J.)
TRANSITION LEASING
The Company expects that substantially all of the Contracts that it will
purchase or acquire will be originated by Transition Leasing, the sole
shareholder of the Company. Transition Leasing was founded on October 17,
1994, to lease new and late model automobiles with factory warranties or
extended service contracts that extend to the termination of their lease
contracts. Transition Leasing is engaged in the business of leasing such
automobiles to individuals who do not have access to other sources because
they do not meet the credit standards imposed by automobile retailers or
banking institutions, generally because these individuals have past credit
problems or non-prime credit ratings.
Transition Leasing has been granted a license under the Act as of the
date hereof. In leasing automobiles to its customers, Transition Leasing
first determines the dollar amount that the customer is able to pay on a
monthly basis, and then assists the customer in selecting an automobile
within his price range. After an automobile has been selected by the
customer, Transition Leasing arranges for the purchase of the automobile and
the entering into of a lease with the customer (i.e., the lessee) with
respect to the automobile.
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Transition Leasing has determined that any Contracts originated by
Transition Leasing that satisfy the Company's purchase criteria will be made
available to the Company, to the extent that funds are available for such
purchases and subject to the right of TAF-I to acquire vehicles and lease
contracts with proceeds that TAF-I realizes from repossessions and
prepayments. See "RISK FACTORS-Conflicts of Interest" and
"MANAGEMENT--Certain Relationships and Related Transactions."
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1998,
relating to the beneficial ownership of the Company's Common Stock by any
person monthly or "group," as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (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 EXECUTIVE OFFICER PERCENTAGE OF CLASS
OR NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES OUTSTANDING
- --------------------------------------- ---------------- -------------------
<S> <C> <C>
Transition Leasing Management, Inc. 1,000(2) 100%
5422 Alpha Road, Suite 100
Dallas, Texas 75240
Terry Scharig 0 0%
Ken Lowe 0(2) 0%
Rick Causey 0 0%
Robert Kyker 0 0%
All current executive officers and 0(2) 0%
directors as a group (4 persons)
</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 Transition Leasing could be deemed to share voting and
investment powers over the shares of Common Stock owned of record by
Transition Leasing. The directors of Transition Leasing are Ken Lowe and
Richard Gibson. Mr. Gibson is not an officer or director of the Company.
The shareholders of Transition Leasing are Ken Lowe, Richard Gibson, and
Patrick Walsh.
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MANAGEMENT
BUSINESS BACKGROUND AND EXPERIENCE
The names, ages, backgrounds and principal occupations of the directors
and executive officers of the Company are set forth below:
Ken Lowe, age 62, has served as a director and as President of the
Company since its formation. Mr. Lowe has served as a director, Vice
President and Secretary of Transition Leasing from October 1994 until July
1996 and as a director, President and Secretary of Transition Leasing since
July 1996. Since 1993, Mr. Lowe has been Vice President of Young & Lowe,
Inc., a private investment banking firm. From 1990 to 1992, Mr. Lowe was
President of Custom Data Services, a company that specialized in financial
data processing and from 1988 to 1990, Mr. Lowe was President of Westside
Communications, which provided telephone equipment service to commercial
customers. Mr. Lowe has a Master's of Business Administration from Southern
Methodist University and over 20 years of experience in investment banking.
Terry Scharig, age 42, has served as Vice President of the Company
since its inception and Transition Leasing since April 1998. From 1994 to
1997 Mr. Scharig was employed by CKS Securities as a wholesaler of syndicated
public offerings. From 1985 to 1994 Mr. Scharig was employed by A.B.
Culbertson as a licensed representative specializing in the sale of fixed
income securities. Mr. Scharig holds a Bachelors Degree of Science from
Kansas State University.
Robert P. Kyker, age 46, has served as Vice President Sales and
Marketing for Transition Leasing since July 1996 and for the Company since
its inception. From 1982 Mr. Kyker has been the owner of R&D Sales & Leasing,
which is engaged in the sale and leasing of automobiles, includes sales and
leases to people with non-prime credit ratings. Mr. Kyker will assist the
Company and Transition Leasing in developing business with independent
automobile dealers. Mr. Kyker has a Masters of Education from Abilene
Christian University.
Rick Causey, age 45, has served as Vice President Sales and Marketing
for Transition Leasing since 1997 and for the Company since its inception.
From 1996 to 1997 Mr. Causey was self-employed in the travel industry. From
1995 to 1996 he served as Manager Sales and Finance for Autoflex Automobile
Leasing. Mr. Causey was Director of Used Vehicle Sales for Reliable
Chevrolet in Richardson, Texas from 1986 to 1994.
Neither the directors nor the executive officers anticipate receipt of
any compensation to be paid directly by the Company, other than reimbursement
of their reasonable Allowed Expenses incurred on behalf of the Company (see
"COLLATERAL FOR THE NOTES -- The Contract Proceeds and Operating Account"),
prior to satisfaction in full of the Notes.
There are no family relationships among the directors and any of the
executive officers of the Company. Except as disclosed above, the Company's
directors do not hold 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,
as amended. Except for the officers set forth above, there are no employees
of the Company.
INDEMNIFICATION
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The Company's Articles of Incorporation provide that, to the fullest
extent permitted by Texas law, directors and former directors of the Company
shall not be liable to the Company or its shareholders for monetary damages
occurring in their capacity as a director. Texas law does not currently
authorize the elimination or limitation of the liability of a director to the
extent the director is found liable (i) for any breach of the director's duty
of loyalty to the Company or its shareholders, (ii) for acts or omissions not
in good faith that constitute a breach of duty of the director of the Company
or which involve intentional misconduct or a knowing violation of law, (iii)
for transactions from which the director received an improper benefit,
whether the benefit resulted from an action taken within the scope of the
director's office or (iv) for acts or omissions for which the liability of a
director is expressly provided by law.
The Company's Articles of Incorporation and its Bylaws grant mandatory
indemnification to directors and officers of the Company to the fullest
extent authorized under the Texas Business Corporation Act. In general, a
Texas corporation may indemnify a director or officer who was, is or is
threatened to be made a named defendant or respondent in a proceeding by
virtue of his position in the corporation if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the corporation, and, in the case of criminal proceedings, had no
reasonable cause to believe his conduct was unlawful. A Texas corporation may
indemnify an officer or director in an action brought by or in the right of
the corporation only if such director or officer was not found liable to the
corporation, unless or only to the extent that a court finds him to be fairly
and reasonably entitled to indemnity for such expenses as the court deems
proper.
Insofar as indemnification for liabilities arising under the Securities
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 Securities
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
Securities Act and will be governed by the final adjudication of such issue.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transition Leasing owns l00% of the Company's Common Stock. The officers
of the Company (except for Mr. Lowe) are also vice presidents of TAF-I and
Transition Leasing. Mr. Lowe is President and Secretary and a director of
TAF-I and Transition Leasing and a director, the Chief Financial Officer and
Secretary of the Company. These officers will devote as much of their time to
the business of the Company as, in their judgment, is reasonably required.
The Company, TAF-I and Transition Leasing have real and ongoing conflicts of
interest in allocating management time, services, overhead and functions
among the Company, TAF-I and Transition Leasing. Management of TAF-I and
Transition Leasing intends to resolve any such conflicts in a manner that is
fair and equitable to the Company. However, there can be no assurance that
Transition Leasing will not form additional subsidiaries engaged in the same
business as the Company or that any particular conflict may be resolved in a
manner that does not adversely affect Noteholders. Neither TAF-I nor
Transition Leasing has guaranteed or is otherwise liable for the debts and
liabilities of the Company.
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The terms of the Servicing Agreement were not negotiated at arm's-length
but were determined unilaterally by the management of Transition Leasing.
Thus, there are real and ongoing conflicts of interest with respect to the
Servicing Agreement. The Company did not and does not intend to seek
competitive bids from other providers of lease purchasing, administration and
collection services. There has been no independent determination of the
fairness and reasonableness of the terms of these transactions and
relationships. Thus, there is no assurance that such services could not have
been obtained from an unaffiliated third party in arm's-length negotiations
on terms more favorable to the Company. Under the terms of the Servicing
Agreement, Transition Leasing will be paid the Purchase Administration Fees,
the Servicing Fees and the Re-leasing Fee and be entitled to reimbursement
for its expenses incurred in connection with the repossession, remarketing,
repair and resale of Leased Vehicles out of the proceeds from such resales.
Transition Leasing will retain the Purchase Administration Fees, the
Documentary Fees, and Servicing Fees as compensation and reimbursement for
its services in administering the purchase of Contracts and Noteholder
relations. The Company may terminate the Servicing Agreement, but it is
unlikely that the Company will do so in light of the control of the Company
by Transition Leasing. See "COLLATERAL FOR THE NOTES -- The Servicing
Agreement."
The Company may purchase Leased Vehicles and the Contracts related
thereto from TAF-I if it has substantial funds in its Operating Account and
Transition Leasing is experiencing difficulty originating sufficient
Contracts to fully utilize such funds. The terms of the TAF-I Contracts that
may be purchased by the Company from TAF-I have not been negotiated at arm's
length but have been determined unilaterally by the Transition Leasing. The
terms under which the Company will purchase the TAF-I Contracts have not been
negotiated at arm's length but have been determined by a formula determined
unilaterally by Transition Leasing. For more information, see "PURCHASE,
ACQUISITION AND COLLECTION OF CONTRACTS." No TAF-I Contracts shall be
purchased by the Company if only the minimum gross offering proceeds
($250,000) are raised.
In addition, the terms of the new Contracts that are originated by
Transition Leasing with respect to Leased Vehicles acquired from independent
vehicle dealers will not be negotiated at arm's-length but will be determined
unilaterally by Transition Leasing. With respect to such new Contracts
originated by Transition Leasing, Transition Leasing will receive 57.5% of
each customer's down payment with respect to the Contract as a Marketing Fee.
Transition Leasing currently provides purchase and collection services
for TAF-I, but does not provide such services to any other party, including
affiliates. Transition Leasing, however, may agree in the future, to purchase
and service Contracts for itself, its affiliates and other unrelated parties.
The Company has the right to purchase additional Contracts originated by
Transition Leasing from the net collection proceeds on its existing Contracts
until an Event of Default or the Sinking Fund Trigger Date. Management of
Transition Leasing will have real and ongoing conflicts of interest in
determining whether to make available to the Company any automobile lease
contracts that it originates or to retain or acquire the contracts for its
own benefit or for the benefit of affiliated parties, including future
subsidiaries to be engaged in the same business as the Company. Transition
Leasing has determined that all vehicle lease contracts purchased or
originated by it that satisfy the Company's contract criteria will be made
available to the Company, to the extent that the Company has funds available
for such purchases and subject only to right of TAF-I to acquire vehicle
lease contracts and vehicles with proceeds from repossession of its leased
vehicles or prepayments of its lease contracts. See "RISK FACTORS --
Potential Conflicts of Interest."
The Company will use up to 1.5% of the gross proceeds from the sale of
the Notes to reimburse Transition Leasing, the Company's parent, for offering
and organizational expenses paid by it. The maximum reimbursement will range
from $3,750 for the minimum offering of $250,000 to $150,000 for the maximum
offering of $10,000,000. Transition Leasing has agreed to pay any
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such expenses to the extent they exceed 1.5% of the gross proceeds from the
sale of the Notes. It is expected that such expenses will exceed 1.5% of the
gross proceeds from the sale of the Notes, even if the maximum offering is
achieved.
The Company believes that the transactions between the Company and
Transition Leasing, including the Marketing and other fees to be paid to
Transition Leasing, are reasonable, based on comparable fees paid to lease
brokers (or facilitators) in automobile leasing transactions involving
customers with non-prime credit ratings. The amount of fees payable to
Transition Leasing by the Company with respect to the Notes may not be
increased without the consent of holders of at least 75% of the aggregate
principal amount of the Notes (excluding Notes held by the Company or its
affiliates). See "ADDITIONAL INDENTURE PROVISIONS -- Modification of
Indenture" and "RISK FACTORS --Potential Conflicts of Interest" for
additional information.
The Company has joined in a Tax Sharing Agreement with Transition
Leasing. In general, under the terms of this agreement, Transition Leasing is
responsible for making all payments of federal income taxes due with respect
to the Affiliated Group to the Internal Revenue Service and all payments of
state and local consolidated, combined and unitary income taxes due with
respect to the Affiliated Group to the applicable state and local
authorities. "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS -- Certain Federal
Income Tax Liability of the Company and Transition Leasing." Under applicable
federal tax laws; however, if Transition Leasing fails to make such payments
of tax, the other members of the Affiliated Group, including the Company,
would be responsible for making such payments. See "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS -- Uncertain Federal Income Tax Liability of the Company
and Transition Leasing."
The Company has adopted a policy pursuant to which the Company will not
make loans to officers, directors, stockholders or affiliates of such persons.
All ongoing and future transactions with affiliates of the Company will
be or entered into on terms that are no less favorable to the Company than
those that can be obtained from unaffiliated third parties and must be
approved by a majority of the directors.
LITIGATION
Neither the Company nor Transition Leasing is the subject of any pending
litigation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
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 Leased Vehicles and Contracts. See "USE OF PROCEEDS." While the
Notes remain outstanding, the Company will be prohibited from engaging in any
business other than the purchase or other acquisition of Leased Vehicles and
Contracts, collection and servicing of the Contracts (including possession
and resale of the Leased Vehicles) and the remarketing of the Leased Vehicles
upon termination of the Contracts, and from incurring any additional
indebtedness other than Allowed Expenses and any other amounts incurred in
the ordinary course of its business.
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The Company's use of the net collection proceeds from the Contracts will
be restricted to payments on the Notes and, so long as there is no Event of
Default, to payments of Allowed Expenses and, until the Sinking Fund Trigger
Date, to the purchase or acquisition of additional eligible Contracts. See
"COLLATERAL FOR 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, any proceeds from sale or refinancing of the remaining Contracts at
the maturity of the Notes and the Reserve. 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 satisfy 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.
Moreover, management's belief is based on a number of assumptions, believed
by management to be reasonable. Should any of such assumptions prove to be
inaccurate, it could have a material adverse effect on the Company's ability
to pay the Notes in accordance with their terms.
The Company intends to invest at least 90% of the gross proceeds from
the sale of Notes to purchase or acquire upon the release of funds from
escrow Contracts and Leased Vehicles, which may include the purchase from
time to time, of certain of the existing Contracts from TAF-I, an affiliate
of Transition Leasing. The Company expects that substantially all of these
Contracts and Leased Vehicles will be acquired in transactions originated by
Transition Leasing. None of the offering proceeds will be used to pay
interest on the Notes. Any cash proceeds from existing Contracts in excess of
interest payments and payments of Allowed Expenses will be reinvested in the
purchase of additional Contracts and the acquisition of Contracts through the
purchase of Leased Vehicles and the entering into of related Contracts prior
to the Sinking Fund Trigger Date, thereby causing the total amount of funds
invested in the Contracts to exceed the amount of the proceeds from the sale
of Notes. The Company believes that by purchasing and acquiring Contracts
that meet the Contract criteria, the total future installments required to be
paid under the Contracts should be greater than the outstanding principal of
the Notes. All of the Leased Vehicles and Contracts purchased or acquired
with proceeds from the sale of the Notes or with the collection proceeds from
previously purchased or acquired Contracts will serve as collateral for the
Notes.
The Company believes that the amount of the collateral for the Notes
will increase until the Sinking Fund Payment Date. As a result of the
reinvestment by the Company of the net collection proceeds from existing
Contracts, after deduction for payments of interest and Allowed Expenses,
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in additional Contracts, the Company believes that the ratio of the total
unpaid installments of the Contracts securing the Notes to the aggregate
principal of the outstanding Notes will generally increase until the Sinking
Fund Payment Date.
The foregoing paragraph contains forward-looking information that is
based on a number of assumptions and these assumptions include certain risks
and uncertainties. A principal risk is that the Company has had no operations
to date, and Transition Leasing, the Company's parent, which is responsible
for the acquisition and servicing of the Company's Contracts, has limited
operating history to date upon which to base these assumptions. Other risks
and uncertainties are set forth under the caption "RISK FACTORS" elsewhere in
this Prospectus. A variation in any single assumption could materially alter
the ability of the Company to cover the Allowed Expenses and pay all
principal and interest due on the Notes. There is no assurance that these
assumptions, including, without limitation, the expected implicit interest
rate of 18% per annum with respect to the Contracts, will be achieved.
Accordingly, the ability of the Company to cover the Allowed Expenses and pay
all principal and interest on the Notes may differ materially from this
forward-looking information.
ADDITIONAL INDENTURE PROVISIONS
The following material describes certain provisions of the Indenture.
The descriptions do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the Indenture,
and where particular provisions or terms used in the Indenture are referred
to, the actual provisions (including definitions of terms) are incorporated
by reference as part of such summaries. Certain provisions of the Indenture
are also described under "DESCRIPTION OF THE NOTES" and "COLLATERAL FOR THE
NOTES."
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, (d) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture or terminate the lien of the Indenture
on any property at any time subject thereto or deprive the holder of any Note
of the collateral afforded by the lien of the Indenture, or (e) make any Note
payable in money other than that stated in the Note. (Indenture, Section
9.2.) Without the consent of the holders of at least 75% of the aggregate
principal amount of the Outstanding Notes, no supplemental indenture may
increase the amount of fees payable to Transition Leasing. 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 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 adversely affect the interests of the Noteholders. (Indenture, Section
9.1.)
EVENTS OF DEFAULT
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An Event of Default with respect to the Notes is defined in the
Indenture as being: (a) the failure of the Company to make any interest
payment on the Notes within 30 days after it becomes due; (b) a failure by
the Company to pay when due the principal of any Notes; (c) the impairment of
the validity or effectiveness of the Indenture or of the security interest
granted thereby, the improper amendment or termination of the Indenture, (d)
the creation of a lien on the Trust Estate, the failure of the Indenture to
create a valid first priority security interest in the Trust Estate or the
failure of the Company to comply with any of the covenants of the Company in
the Indenture (including the failure to purchase Impaired Contracts and
Defaulted Contracts), and the continuance of any such default for a period of
thirty (30) days after notice of such default is delivered to the Company by
the Trustee or to the Company and the Trustee by the 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 Transition
Leasing is obligated to, and does, repurchase from the Company) and the
failure to cure such circumstances or condition within thirty (30) days of
notice thereof to the Company by the Trustee or the 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 holders of Notes representing at least 25% of
the principal amount of the 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. Under such circumstances, such declaration may be rescinded by the
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 retain the Trust Estate and apply all amounts
received with respect to the Trust Estate, first, to payment of its fees and
expenses and then, to the payment of the principal of and interest on the
Notes, ratably with respect to the Noteholders. (Indenture, Sections 6.3,
6.10 and 6.13.) Alternatively, the Trustee may, in its discretion, sell the
Trust Estate and apply the proceeds, first, to payment of its fees and
expenses and then, to the amounts due on the Notes. (Indenture, Sections 6.3,
6.10 and 6.14.) Upon an Event of Default, the Trustee will also have the
right to cause a transfer of all funds in the Company's Operating Account
directly to the Sinking Fund Account. (Indenture, Section 4.2.) In the
event of a continuing default by Transition Leasing with respect to its
obligations under the Servicing Agreement, the Trustee will also have the
right to direct the Company to terminate the duties and rights of Transition
Leasing under the Servicing Agreement and to cause Transition Leasing to turn
over to the Trustee all records and data pertaining to the Contracts in its
possession. (Indenture, Section 5.10; Servicing Agreement, Section 9.)
The 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
conduct of any proceedings for any remedy available to the Trustee to
exercise 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 holders of a majority of the
aggregate principal amount of the Outstanding Notes may also waive any
default, except a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of each
holder of Notes affected. (Indenture, Section 6.4.)
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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 holders of at least
25% 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
Trust indemnity satisfactory to the Trustee against loss, liability or
expense, (c) the Trustee does not comply with the request within sixty (60)
days, and (d) the Trustee has received no contrary direction during such
60-day period from the holders of a majority of the principal amount of the
Outstanding Notes. (Indenture, Section 6.6.)
Notwithstanding the foregoing, the Indenture prohibits the Trustee from
reselling any portion of the Trust Estate upon the occurrence of an Event of
Default to the Company, Transition Leasing, the shareholders, officers or
directors of Transition Leasing or the Company, or any other affiliates of
the Company or Transition Leasing.
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
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 or other acquisition of Leased Vehicles and
Contracts, collection and servicing of the Contracts, the repossession and
resale of the Leased Vehicles, the remarketing of Leased Vehicles upon
termination of the Contracts and the raising of 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 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 entity other than another direct or indirect
wholly-owned subsidiary of the Company or any affiliate thereof whose
business is restricted in the same manner as the Company's business under
clause (i) above. (Indenture, Section 5.11.)
COMPLIANCE STATEMENTS AND ANNUAL ACCOUNTANTS' REPORTS
The Company and Transition Leasing will be required to file quarterly with
the Trustee officer's certificates as to fulfillment of their respective
obligations under the Indenture. (Indenture, Section 5.7.) In addition, the
Company and Transition Leasing annually must file with the Trustee a report
of a firm of independent public accountants as to their examination of the
financial statements of the Company and Transition Leasing and the documents
and records relating to the Contracts and deliver a certificate with respect
to the compliance by the Company and Transition Leasing, in all material
respects, with their respective obligations arising under the Indenture.
(Indenture, Section 5.6.)
TRUSTEE'S ANNUAL REPORT
The Trust Indenture Act 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, any change to the property and funds, if any, physically held by
the Trustee as such, any change in or any release, or release and
substitution, of property subject to the lien of the Indenture, and any
action taken by it that materially affects the Notes and that has not been
previously reported. (Indenture, Section 7.6.)
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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
The Trustee is obligated, under the Indenture, to use the same degree of
care and skill in the exercise of such rights and powers as the Trustee may
have under the Indenture as a prudent man would exercise or use under the
circumstances in his own affairs. Except during an Event of Default, 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
Trust Management, Inc. will be 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. To collateralize the Company's payment of such fees and
expenses, the Trustee has a lien prior to the Notes on the Trust Estate except
any money held in trust to pay principal and interest on the Notes. (Indenture,
Section 7.7.)
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
THE LEASES AS TRUE LEASES
The Contracts are leases of personal property. Under the Texas Uniform
Commercial Code (the "UCC"), a transaction involving the lease of personal
property may create either a lease or a security interest. If the
transaction creates a lease, the lessor remains the owner of the personal
property subject to the lease and the lessee has the right to possess and use
the leased property during the term of the lease. The rights and remedies of
the lessor and lessee under a true lease of personal property are determined
primarily under Article 2A of the UCC (Leases). If the transaction creates a
security interest, (a) the transaction is in effect a credit sale under which
the lessor has in effect sold the personal property to the lessee on an
installment payment basis and holds a security interest in the subject
personal property to secure payment of the purchase price, (b) the lessee is
the purchaser and owner of the personal property, and (b) the lease payments
are in effect payments of the purchase price for the subject personal
property. The rights and remedies of the parties to a lease which is
actually a sale coupled with a security interest are determined primarily
under Article 2 of the UCC (Sales) and Article 9 of the UCC (Secured
Transactions).
The determination of whether of a lease transaction creates a true lease
or a sale coupled with a security interest is very important and will
determine the respective rights, obligations and duties of the Company and
the Lessee and will have particular impact on the remedies available to the
Company upon a default by the Lessee. The following are some of the
significant differences between a true lease and a lease which is in effect a
sale coupled with a security interest:
a. A true lease is exempt from Texas usury laws; a credit sale is
not.
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b. A lessor under a true lease generally has a better chance than
a secured creditors of obtaining current payments, as well as
repossession of the goods, when the lessee is in bankruptcy.
c. In the case of default, a true lessor has different and often
more favorable remedies than those available to a secured creditor.
d. A security interests, unlike a lease, is subject to priority
rules with respect to the claims of competing secured creditors. If
the parties to a lease which is actually a sale coupled with a
security interest never contemplate that their transaction would be
characterized as creating security interest, and no steps are taken
to perfect the security interest created in the transaction, a trustee
in bankruptcy or some other third party may claim that a purported
lessor is actually an unperfected secured creditor and may be able to
void, or otherwise take priority over, the security interest and leave
the lessor/seller with an unsecured obligation to pay the lease
payments.
e. A transaction that is truly a security interest, and not a
lease, may result in exclusion of the leased goods from insurance
coverage under some policies.
Whether a transaction creates a lease or a security interest depends on
the particular terms and facts on which the transaction is based. If the
transaction, however labeled, is actually a transaction under which the
lessee is acquiring ownership, or the equivalent of ownership, of the leased
goods, the transaction is a sale coupled with a security interest. The
transaction will be considered a security interest if the lessee's
obligation to pay the consideration under the lease (the rent payments) is
not subject to termination by the lessee and one or more of the following
factors are also present:
a. The original lease term is equal to or greater than the
remaining economic life of the goods.
b. The lessee is required to renew the lease for the remaining
economic life of the goods or is required to become the owner of the
goods.
c. The lessee has an option to renew the lease for the remaining
economic life of the goods for no additional consideration or for
nominal additional consideration on compliance with the terms of the
lease agreement.
d. The lessee has an option to become the owner of the goods for
no additional consideration or nominal additional consideration on
compliance with the terms of the lease agreement.
Additional consideration is nominal if it is less than the lessee's
"reasonably predictable" cost of performing under the lease agreement if
the option is not exercised. Additional consideration given for an option to
renew or an option to purchase is not nominal if :
a. When the option to renew the lease is granted, the rent is
stated to be the fair market rent for the use of the goods for the
term of the renewal determined at the time the option is to be
performed.
b. When the option to become the owner of the goods is granted,
the price is stated to be the fair market value of the goods
determined at the time the option is to be performed.
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A transaction does not create a security interest merely because it
provides for any of the following:
a. The "present value"' of the consideration to be paid for the
right to possession and use of the goods is substantially equal to or
greater than the fair market value of the goods at the time the lease
agreement is made. In this context, present value means the amount, as
of a date certain, of one or more sums payable in the future,
discounted to the date certain. The discount is determined by the
interest rate specified by the parties, if that rate is not manifestly
unreasonable at the time the transaction is consummated. Otherwise,
the discount is determined by a commercially reasonable rate that
takes into account the facts and circumstances of each case.
b. The lessee assumes the risk of loss of the goods or agrees to
pay taxes, insurance, filing, recording, or registration fees or
service or maintenance costs with respect to the goods.
c. The lessee has an option to renew the lease or become the
owner of the goods.
d. The lessee has an option to renew the lease for a fixed rent
that is equal to or greater than the reasonably predictable fair
market rent for the use of the goods for the term of the renewal at
the time the option is to be performed.
e. The lessee has an option to become the owner of the goods for
a fixed price that is equal to or greater than the reasonably
predictable fair market value of the goods at the time the option is
to be performed.
Because (i) each of the Contracts will provide for the lease of a
Vehicle for a term which is considerably shorter than the expected useful
life of the Vehicle, (ii) the lease payments required under each Contract are
in an aggregate amount less than the payments which would be made if the
transaction was in essence a sale of the Leased Vehicle, and (iii) at the
expiration of the lease term, the Lessee can either return the Leased Vehicle
to the Company with no further payment obligations to the Company or purchase
the Leased Vehicle at a fixed purchase price which, based on the Company's
policies, should be equal to or greater than the reasonably predictable fair
market value of the Leased Vehicle, the Company has determined that the
Contracts create true leases and will be governed by the laws and regulations
applicable to the lease of personal property rather than the laws and
regulations applicable to credit sales of motor vehicles. In documenting and
servicing the Contracts, the Company will follow the rules and procedures
required for true lease transactions.
SECURITY INTEREST IN CONTRACTS
To secure payment of the Notes, the Company will grant a security
interest in and to each of the Contracts. Pursuant to the provisions of
Article 9 the UCC governing security interests, a lease is designated as
chattel paper. A security interest in chattel paper may be perfected either
by taking possession of the Contract or by the filing of a UCC financing
statement with the Secretary of State of the state in which a corporate
debtor's principal place of business is located. In the case of the Company,
its principal place of business is located in the State of Texas and a
security interest in a Contract owned by the Company may be perfected by
filing a UCC financing statement with the Secretary of State of the State of
Texas.
Upon any purchase of Contracts by the Company, the original Contracts
and related title documents for the Leased Vehicles will be delivered to the
Trustee. Possession of such Contracts
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and related title documents will be retained by the Trustee or other
financial institution appointed by the Trustee and the Company to act as
custodian and bailee of the Contracts and related title documents for the
benefit of the Trustee and the Company. Upon its purchase, each Contract will
be physically labeled to indicate the security interest therein of the
Trustee. In addition, a UCC financing statement will be filed in the
appropriate public office to perfect by filing and give notice of the
Trustee's security interest in the Contracts and all proceeds therefrom. See
"COLLATERAL FOR THE NOTES -- The Contracts."
SECURITY INTERESTS IN LEASED VEHICLES
The Leased Vehicles subject to the Contracts will be owned by the
Company. To secure payment of the Notes, the Company will grant a security
interest in and to each of the Leased Vehicles subject to a Contract.
Perfection of security interests in the Leased Vehicles is generally governed
by the motor vehicle registration laws of the state in which a corporate
debtor's principal place of business is located. As stated above, the
Company's principal place of business is located in the State of Texas and a
security interest in a Leased Vehicle will be perfected according to the
requirements of Article 9 of the UCC and the motor vehicle registration laws
of the State of Texas. In Texas, a security interest in a motor vehicle is
perfected by notation of the secured party's lien on the vehicle's
certificate of title.
With respect to Contracts purchased by the Company, the originating
entities will sell and assign the Contracts and the Leased Vehicles to the
Company upon purchase of the Contracts. The originating entities will also
provide evidence that proper applications for certificates of title have been
made to ensure that the Company will be named as the owner and the Trustee as
the first lienholder on the certificates of title relating to the Leased
Vehicles. The Company will deliver possession of the Contracts (originated or
purchased) and related title documents to the Trustee or other financial
institution appointed by the Company and the Trustee to act as custodian and
bailee for the Trustee and the Company. The Company will supplement its
description in the Indenture of the Contracts and confirm its grant to the
Trustee of a security interest in all Contracts that it purchases.
OTHER MATTERS AFFECTING MOTOR VEHICLES AND CONTRACTS
Under the laws of Texas, 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 Code 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 that may result in the loss of a collateralized
party's perfected security interest in the confiscated motor vehicle. Upon
the purchase of each Contract purchased by the Company, the Company will
receive a warranty from Transition Leasing that the Contract creates a valid,
subsisting and enforceable first priority security interest in the Leased
Vehicle. However, liens for repairs or taxes or the confiscation of a Leased
Vehicle could arise or occur at any time during the term of a Contract No
notice will be given to the Company in the event such a lien arises or
confiscation occurs.
If the Lessee of a Leased Vehicle relocates to another state, under the
laws of most states, the perfected security interest in the Leased Vehicle
would continue for four months after such relocation and thereafter, in most
instances, until the Lessee re-registers the Leased Vehicle in such state.
Almost all states generally require surrender of a certificate of title to
re-register a titled vehicle. Therefore, the Trustee or other appointed
custodian must surrender possession, if it holds the certificate of title to
such Leased Vehicle, before the Leased Vehicle owner may effect the
re-registration. In addition, the Company should receive, absent clerical
errors or fraud, notice of
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surrender of the certificate of title because the Company will be listed as
lienholder on its face. Accordingly, the Company should have notice and the
opportunity to re-perfect its security interest in the Leased Vehicle in the
state of relocation. If a Lessee moves to one of the few states that does not
require surrender of a certificate of title for registration of a motor
vehicle, re-registration could defeat perfection or loss of the Trustee's
security interest in such Leased Vehicle. The loss of the Trustee's security
interest in a number of Leased Vehicles under these circumstances could have
a material adverse effect on the Noteholder's collateral for the Notes. In
the ordinary course of servicing the Contracts, the Company will take steps
to effect such re-perfection upon receipt of notice of re-registration or
other information from the Lessee as to relocation. Under the Service
Agreement and the Indenture, the Company is obligated to maintain the
continuous perfection of the security interest represented by each Contract
in the related Leased Vehicle.
REPOSSESSION
In the event of default by an Lessee on a Contract, the Company, as
lessor, has all the remedies of a lessor under Article 2A of the UCC. The UCC
remedies of a lessor include the right to repossession by self-help means,
unless such means would constitute a breach of the peace. Unless the Lessee
under a Contract voluntarily surrenders a vehicle, self-help repossession, by
an individual independent repossession specialist engaged by Transition
Leasing, will be the method usually employed by Transition Leasing when an
Lessee defaults. Self-help repossession is accomplished by retaking
possession of the Leased Vehicle. If a breach of peace is likely to occur, or
if applicable state law so requires, Transition Leasing must obtain a court
order from the appropriate state court and repossess the vehicle in
accordance with that order. Most of the states in which the Company intends
to purchase Contracts have state laws that would not require Transition
Leasing, in the absence of a probable breach of the peace, to obtain a court
order before it attempts to repossess a Leased Vehicle.
DISPOSAL OF LEASED VEHICLES AND DAMAGES AGAINST DEFAULTING LESSEES
Upon default by a lessee, the UCC permits the lessor to take possession
of the leased goods, either by self-help methods or by judicial process.
Upon repossession of leased goods, a lessor may dispose of the leased goods
(either by releasing the leased goods or selling the leased goods) and seek
recovery of damages from the lessee. Damages of a lessor upon default by a
lessee include payment of all unpaid lease payments due and owing on the date
of disposition of the leased goods, recovery of the expenses incurred by the
lessor in pursuing its remedies against the lessee, and damages for the
unpaid installments of rent due under the lease. The damages to which a
lessor is entitled for the unpaid installments of rent due under a lease
after default by a lessee will be determined by whether the disposition of
the leased goods is by releasing or by sale. If the leased goods are
re-leased, damages are based on the present value of the remaining lease
payments under the lease which is in default, less the present value of lease
payments due under the new lease created when the goods are re-leased. If
the leased goods are resold, damages will be based on the difference between
(a) the sum of estimated value of the leased goods at the expiration of the
lease which is in default plus the present value (or other similar
adjustment) of the remaining lease payments, less (b) the amount realized
upon the sale of the leased goods. Motor Vehicles repossessed by the
Company will be generally be released to a new lessee or sold by Transition
Leasing through wholesale automobile networks or auctions that are attended
principally by dealers.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws, may limit or delay the ability of the Company to repossess
and re-lease or sell a Leased Vehicle subject to a Contract under which the
lessee has defaulted or enforce a judgment for the damages to which the
Company is entitled upon repossession and release or sale of the Motor
Vehicle. In the event that damages are not obtained, are not satisfied, are
satisfied at a discount or are discharged,
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in whole or in party, in bankruptcy proceedings, including bankruptcy
proceedings under Title 11 United States Code (the Federal bankruptcy law),
the loss will be borne by the Company and may adversely affect the ability of
the Company to repay the Notes.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lessors and servicers
involved in consumer leases. These laws include, but are not limited to, the
Consumer Leasing 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 M, state adaptations of the
National Consumer Act and of the Uniform Consumer Credit Code, and other
similar laws. These laws require the Company to provide certain disclosures
to prospective lessees, prohibit misleading advertising and protect against
discriminating financing or unfair credit practices. The Federal Reserve
Board has published final revisions to Regulation M under the Consumer
Leasing Act that are applicable to automobile lease contracts. See "THE
COMPANY--Government Regulations." The Equal Credit Opportunity Act prohibits
creditors from discriminating against lease applicants on the bases of race,
color, sex, age or marital status. Under the Equal Credit Opportunity Act,
creditors are required to make certain disclosures regarding consumer rights
and advise consumers whose credit applications are not approved of the
reasons for the rejection. The Fair Credit Reporting Act requires the Company
to provide certain information to consumers whose credit applications are not
approved on the basis of a report obtained from a consumer reporting agency.
In addition to the foregoing, 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.
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
lessor 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 the
FTC rule is to subject the assignee of such a contract to all claims and
defenses that the lessee under the contract could assert against the lessor
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 Lessee of the Leased Vehicle may
assert against the lessor of the Leased Vehicle. Such claims are limited to
a maximum liability equal to the amounts paid by the Lessee on the Contract.
The Lessee, however, may also assert the FTC rule to offset remaining amounts
due on the Contract as a defense against any claim brought by the Company
against such Lessee.
Several states and the federal government have enacted "lemon laws" and
similar statutes containing warranty protections for consumers who purchase
or lease new or used motor vehicles. The application of these statutes may
give rise to a claim or defense by a consumer against the manufacturer of a
purchased vehicle or the dealer from or through whom such consumer purchased
or leased such vehicle. The Company may be required to cancel a lease with a
consumer who successfully asserts such a claim or defense, and while the
Company would have a claim against the manufacturer or such dealer, there can
be assurance that the Company will be made whole in every case in which the
consumer successfully asserts such rights.
Under most state motor vehicle dealer licensing laws, sellers of motor
vehicles are required
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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 lessee of a Leased Vehicle, the
lessee may be able to assert a defense against the seller of the vehicle.
OTHER LIMITATIONS
In addition to the limitations discussed above, numerous other statutory
provisions, including federal bankruptcy laws and related state laws, may
interfere with or affect the ability of a lessor to realize upon leased goods
or collect all damages to which the lessor is entitled upon default by the
lessee. For example, in a proceeding under the federal bankruptcy law, a
claim for damages may be treated as an unsecured claim and pay not be paid in
full is the particular bankruptcy proceeding does not result in payment in
full of other similar unsecured claims. The federal bankruptcy laws,
however, do require the debtor or trustee in a bankruptcy proceeding to
perform all obligations of the lessee under the lease (including payment of
the installments of rent due under the lease) and to cure any outstanding
defaults if the leased goods are to remain in the possession of the debtor or
trustee subject to the provisions of the lease.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
SCOPE AND LIMITATIONS
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Notes by the holders acquiring the Notes on their original issuance for cash.
The discussion is based upon the current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury regulations promulgated
thereunder and judicial or ruling authority as of the date hereof, all of
which may be repealed, revoked or modified retroactively in a manner that
could adversely affect a holder of the Notes.
The discussion deals only with the Notes held as capital assets
(generally property held for investments and not for the sale to customers in
the ordinary course of a trade or business) by holders who or which are (i)
citizens or residents of the United States, (ii) domestic corporations,
partnerships or other entities or (iii) otherwise subject to U.S. federal
income taxation on a net income basis in respect of income or gain from the
Notes. The discussion does not purport to deal with federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Moreover, the Internal Revenue Service (the
"Service") may disagree with all or a part of the discussion below. This
summary does not address tax consequences of holding Notes under state, local
or foreign tax laws.
No ruling on any of the issues discussed below will be sought from the
Service.
EACH PURCHASER SHOULD CONSULT WITH HIS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OF PURCHASING, OWNING OR DISPOSING OF THE
NOTES, INCLUDING THE EFFECT OF STATE, LOCAL OR FOREIGN LAWS.
TAX CONSEQUENCES TO NOTEHOLDERS
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Company will agree, and the
Noteholders will
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agree by their purchase of Notes, to treat the Notes as debt for federal
income tax purposes, unless an adverse determination dictates otherwise. If,
however, it is determined for tax purposes that the Notes represent an equity
investment, a substantial portion of the discussion set forth below will be
inapplicable and the tax consequences of the holders of the Notes will
change, possibly with adverse tax consequences. The discussions below assume
this characterization of the Notes as debt is correct. The Company has not
received an opinion of counsel with respect to the classification of the
Notes as debt for federal income tax purposes.
INTEREST INCOME ON THE NOTES. As a general rule, interest paid or
accrued on the Notes will be treated as ordinary income to the holders of the
Notes. A holder of the Notes using the accrual method of accounting for
federal income tax purposes is required to include stated interest earned on
the Notes in ordinary income as such interest accrues, while a Noteholder
using the cash receipts and disbursements method of accounting for federal
income tax purposes must include such interest in ordinary income when
payments are received (or made available for receipt) by such Noteholder.
MARKET DISCOUNT. The resale of Notes may be affected by the market
discount provisions of the Code. These rules generally provide that if a
Noteholder purchases, subsequent to the original issuance of the Notes, a
Note at a market discount that exceeds a DE MINIMIS amount, any gain
recognized by the holder upon the sale, redemption at maturity or other
disposition of the Note will be taxable as ordinary income to the extent of
the portion of market discount that accrued on the Note while held by such
Noteholder. Market discount will be treated as accruing ratably over the
term of such Noteholder or, at the election of the Noteholder (which election
may not be revoked without the consent of the IRS), under a constant yield
method. Also, a Noteholder may elect to include market discount into income
as it accrues in which case gain realized on the sale, exchange or retirement
of a Note will not be treated as ordinary income under the market discount
rules. Such an election by a Noteholder (which election may not be revoked
without the consent of the IRS) will apply to all debt instruments with
market discount acquired by the Noteholder on or after the day of the first
taxable year to which such election applies.
Market discount is defined generally as the excess, if any, of the
stated redemption price of the Note at maturity over the basis of the Note in
the hands of such holder immediately after its acquisition.
Limitations imposed by the Code which are intended to match deductions
with the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry
a Note with accrued market discount. As noted above, a Noteholder may elect
to include market discount in gross income on a current basis and, if such
Noteholder makes such an election, is exempt from this rule. The adjusted
basis of a Note subject to such election will be increased to reflect market
discount included in gross income, thereby reducing any gain or increasing
any loss on a sale or taxable disposition.
AMORTIZATION BOND PREMIUM. The resale of Notes may be affected by the
bond premium rules of the Code. In general, if a Noteholder purchases a Note
at a premium, (I.E., an amount in excess of the amount payable upon the
maturity thereof), such Noteholder will be considered to have purchased such
Note with "amortized bond premium" equal to the amount of such excess. Such
Noteholder may elect to deduct the amortizable [amortized] bond premium as it
accrues under a constant-yield method over the remaining term of the Note.
Amortizable bond premium is treated as an offset to interest income rather
than as a separate interest deduction. Such Noteholder's tax basis in the
Note will be reduced by the amount of the amortizable bond premium deduction.
Any such election shall apply to all debt instruments (other than
instruments the interest on which is excludable from gross income) held by
the Noteholder at the beginning of the first taxable year to which the
election applies or thereafter acquired and is irrevocable without the
consent of the
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Service. Bond premium on a Note held by a Noteholder who does not elect to
deduct the premium will decrease the gain or increase the loss otherwise
recognized on the disposition of the Note.
SALE OR OTHER DISPOSITION. In general, the holder of a Note will
recognize gain or loss upon the sale, redemption, retirement or other
disposition in an amount equal to the difference between the amount realized
on the sale and the Noteholder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder generally will equal
the Noteholder's cost for the Note, increased by market discount, if any,
previously included by such Noteholder in income with respect to the Note and
decreased by principal payments previously received by such Noteholder and
the amount of bond premium, if any, previously amortized with respect to the
Note. Any such gain or loss will be capital gain or loss if the Note was
held as a capital asset, except for gain representing accrued interest and
accrued market discount not previously included in income, and will be
long-term capital gain or loss if the Note was held for more than one year.
Capital losses generally may be used only to offset capital gains.
TAX ADMINISTRATION AND REPORTING. The Trustee will furnish to each
Noteholder with each a statement setting forth the amount of such
distribution allocable to principal and to interest. Such payment of
principal or interest reports will be made annually to the Service and to
holders of record that are not excepted from the reporting requirements
regarding such information as may be required with respect to interest with
respect to the Notes.
BACKUP WITHHOLDING. Under certain circumstances, a Noteholder may be
subject to "backup withholding" at a 31% rate. Backup withholding may apply
to a Noteholder who is a United States person if the holder, among other
circumstances, fails to furnish his Social Security number or other taxpayer
identification number to the Trustee. Noteholders should consult their tax
advisors for additional information concerning the potential application of
backup withholding to payments received by them with respect to a Note.
CERTAIN FEDERAL INCOME TAX LIABILITIES OF THE COMPANY AND TRANSITION LEASING
Transition Leasing and the Company will file a consolidated federal
income tax return. Because of the consolidated filing and the closely-held
corporation status of Transition Leasing, additional federal income tax
consequences may arise. Certain of these are summarized below.
The Company and Transition Leasing (the "Affiliated Group") intend to
file consolidated federal income tax returns and, as a result, each will be
severally liable for the federal income tax liability of the Affiliated
Group. The Company and Transition Leasing believe that there will be
sufficient assets available to timely pay the Affiliated Group's federal
income tax liability as it becomes due and payable. Also, under a tax
allocation agreement signed by the Company and Transition Leasing, Transition
Leasing has agreed to pay all federal income tax liability of the Affiliated
Group as it becomes due and payable, although there can be no assurance that
Transition Leasing will have the ability to pay such obligations. Under
applicable federal tax laws, if Transition Leasing fails to make such
payments of tax, the other members of the Affiliated Group, including the
Company, would be responsible for making such payments.
Also, the Affiliated Group will be subject to the passive loss rules
under Section 469 of the Code. As a result, any portfolio-type income earned
by the Affiliated Group (E.G., interest and dividends) may not be able to be
offset by passive losses of the Affiliated Group. The Company does not
anticipate that either it or Transition Leasing will have significant amounts
of portfolio-type income during the period the Notes are outstanding. If
portfolio-type income is realized, however, federal income tax may be owed
with respect to such income even though the Affiliated Group otherwise has
incurred passive losses. In addition, the Affiliated Group may be subject to
the
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personal holding company rules of the Code which may, in certain
circumstances, impose an additional tax liability on the Affiliated Group.
PLAN OF DISTRIBUTION
The Company is offering up to $10,000,000 in aggregate principal amount
of the Notes. The Notes will be sold on a "best efforts" basis by Great
Nation Investment Corporation (the "Underwriter"), and the Underwriter is not
obligated to purchase the Notes. The Underwriter may, but is not obligated
to, select participating soliciting broker/dealers that are qualified to
offer and sell the Notes in one or more states as engaged by the Underwriter
and that are members of the NASD. As of the date of this Prospectus, the
Underwriter has not engaged any soliciting broker/dealers to participate in
the offering. The Company anticipates that the Underwriters and any
broker/dealers engaged to participate in the offering will solicit those
investors and customers for whom they believe this investment would be
suitable. The Underwriters and such other broker/dealer selling Notes will be
responsible for determining the Notes' suitability as an investment for a
given investor.
The Company shall pay to the Underwriter in consideration for its
services, a sales commission of 6% the principal amount of Notes sold to
investors. In addition, the Company will reimburse the Underwriter for
certain expenses incurred in connection with its due diligence activities
with regard to the offering in an amount not to exceed 2-1/2% of the
aggregate principal amount of the Notes sold. In addition to the
compensation set forth above, the Underwriter shall also receive common stock
in Transition Leasing as follows: the Underwriter shall receive shares of
common stock equal to 3.558% of the outstanding stock of Transition Leasing
in the event the Underwriter sells at least $7,117,000 in Notes. In the
event that less than $7,117,000 in Notes are sold by the Underwriter, then
the Underwriter shall receive a percentage of the outstanding common stock of
Transition Leasing equal to the product of .03558 and the fraction, the
numerator of which is the principal amount of the Notes actually sold by the
Underwriting Group and the denominator is $7,117,000. The value of the
Transition Leasing common stock to be issued to the Underwriter is uncertain
but the Company, Transition Leasing and the Underwriter believe that such
value will not exceed 10% of the aggregate principal amount of the Notes sold
in this Offering. If the value of such Transition Leasing common stock is
found to exceed 10% of the aggregate principal amount of the Notes sold in
this Offering, the Underwriter will return to Transition Leasing a sufficient
number of shares to cause the value to not exceed 10% of the aggregate
principal amount of the Notes sold in this Offering.
The Company may terminate the Underwriting Agreement in the event that
the Underwriting Group is unable to sell at least $750,000 of the Notes
within 45 days of the date hereof and at least $250,000 of the Notes each
calendar month after the month in which the 45th day after the date hereof
occurs. The Underwriter may terminate the Underwriting Agreement because of
a material breach of the Underwriting Agreement by the Company or if the
Underwriter reasonably determines that the Notes are not marketable.
Generally, the Underwriter will bear all of its expenses; provided, however,
that if the Underwriter terminates the Underwriting Agreement because of a
material breach of this Agreement by the Company, the Company shall be
obligated to pay to the Underwriter an amount equal to all of the
Underwriter's accountable out-of-pocket expenses Transition Leasing and the
Company have agreed, jointly and severally, to indemnify the Underwriter
against certain liabilities, including liabilities under applicable
securities laws. The Underwriting Agreement provides that the obligations of
the Underwriter pursuant to the Underwriting Agreement are subject to the
approval of certain legal matters by Underwriter's counsel and various other
conditions.
The Company will pay Transition Leasing up to 1.5% of the gross offering
proceeds to reimburse Transition Leasing for offering and organizational
expenses paid by Transition Leasing on the Company's behalf. No part of
these payments will be paid by Transition Leasing to brokers to engage in
sales efforts for the Company (sometimes called wholesale fees).
Investor funds will be held in a subscription escrow account with Texas
Community Bank, N.A., as escrow agent, until a minimum of $250,000 in
principal amount of the Notes are sold. In the event that the minimum amount
of Notes is not subscribed before the Offering Termination Date (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.
Any subsequent subscription funds with respect to the sale of additional
Notes will be immediately released to the Company and
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available for use by the Company upon the Company's request. All
subscriptions are subject to the right of the Company to reject any
subscription in whole or in part. Notes will be dated and interest will
accrue as of the third business day after subscription funds are deposited in
the Underwriter's account for remittance to the subscription escrow account
or the Company's operating account, as the case may be.
The offering will terminate on the Offering Termination Date, unless
sooner terminated by the Company (i) upon the failure to achieve the minimum
subscription amount, (ii) upon the sale of all of the Notes, (iii) if the
Company believes that suitable Contracts will not be available for purchase
by the Company, or (iv) if the Company believes that additional selling
efforts will be unsuccessful. Early termination of the offering may result in
the Company selling less than $10,000,000 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."
To allow the Company to make an orderly investment of all proceeds from
the sale of the Notes in the purchase of Contracts, the Company may limit the
dollar amount of subscriptions for Notes that it is willing to accept during
any month of the offering period. To attempt to minimize the effects of the
delay in the purchase or acquisition of Contracts, the Company will monitor
the receipt of subscriptions.
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 for purposes of any monthly limit on subscriptions from certain
otherwise qualified investors (for example, IRA's) whose subscription funds
are being paid by a trustee or other institution that has confirmed to the
Company that the funds will be paid. Upon the achievement of the maximum
subscription amount ($10,000,000) for the Notes, any subsequently received
subscriptions will not be accepted by the Company and will be promptly
returned.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Sprouse & Winn, L.L.P., independent certified public
accountants, whose report thereon appears elsewhere herein, and have been so
included in reliance upon the report and authority of such firms 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 Kuperman, Orr, Mouer & Albers, a Professional
Corporation, Austin, Texas. Kuperman, Orr, Mouer & Albers, a Professional
Corporation, has also delivered its opinion to the Company as to certain
compliance matters relating to the Act discussed under "THE COMPANY
- --Government Regulations." Drenner & Stuart, L.L.P. a Texas limited
liability partnership, has also delivered to the Company its opinion as to
the federal income tax matters discussed under "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS."
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TRANSITION AUTO FINANCE II, INC.
AUSTIN, TEXAS
INDEX TO FINANCIAL STATEMENTS
PAGE
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<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENT
Balance Sheet 2
Notes to Financial Statement 3-4
</TABLE>
<PAGE>
To the Board of Directors and Stockholder
of Transition Auto Finance II, Inc.
Dallas, Texas
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Transition Auto Finance II,
Inc., a Texas corporation, as of March 30, 1998. This financial statement is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We 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 that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Transition Auto Finance II, Inc.
as of March 30, 1998, in conformity with generally accepted accounting
principles.
SPROUSE & WINN, L.L.P.
Austin, Texas
March 31, 1998
-1-
<PAGE>
FINANCIAL STATEMENT
<PAGE>
TRANSITION AUTO FINANCE II, INC.
BALANCE SHEET
MARCH 30, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash $1,000
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TOTAL ASSETS $1,000
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</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
STOCKHOLDERS' EQUITY
Common stock $.10 par value: 1,000 shares
authorized, issued, and outstanding $ 100
Additional paid-in capital 900
------
Total Stockholders' Equity 1,000
------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,000
------
------
</TABLE>
SEE ACCOMPANYING NOTES TO THIS FINANCIAL STATEMENT
-2-
<PAGE>
TRANSITION AUTO FINANCE II, INC.
NOTES TO FINANCIAL STATEMENT
MARCH 30, 1998
NOTE 1: GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Transition Auto Finance II, Inc. (the Company) is a Texas
corporation organized on March 17, 1998. The Company was
established to purchase motor vehicles and automobile lease
contracts, collecting and servicing automobile lease
contracts and remarketing motor vehicles upon termination of
their leases. Transition Leasing Management, Inc.
(Transition Leasing) owns 100% of the Company's common stock.
Through March 30, 1998, the Company has had no activity. The
Company has adopted a December 31 year end.
Income Taxes
The Company is a corporation subject to federal and state
income taxes. The Company and its parent intend to file a
consolidated tax return. Each company in the consolidated
group determines its taxable income or loss, on a separate
company basis, and the consolidated tax liability is
allocated to each company with taxable income in proportion
to the total of the taxable income amounts. Through March
30, 1998, the Company has had no federal taxable income.
NOTE 2: NOTES OFFERING
The Company is intending to offer (the "Notes Offering") on a
"best efforts basis" up to $10,000,000 of 11% Redeemable
Secured Notes (the "Notes"). The Notes will have a term of
forty-eight months and will bear interest at a fixed rate of
11%. The Notes are to be sold through an underwriter. The
Company will be required to make monthly payments of
interest, paid in arrears, on the outstanding principal
balance at the floating rate. The Notes will bear interest
from the date of issuance at a fixed rate set at 11% fixed
per annum.
The underwriter will receive fees totaling 6% of the gross
offering proceeds of the Notes Offering, and up to an
additional 2% for their due diligence activities. The Company
will reimburse Transition Leasing for organizational and
offering expenses up to a maximum amount equal to 1.5% of the
gross offering proceeds.
-3-
<PAGE>
TRANSITION AUTO FINANCE II, INC.
NOTES TO FINANCIAL STATEMENT
(Continued)
MARCH 30, 1998
NOTE 2: NOTES OFFERING (Continued)
The remainder of the Notes Offering proceeds will be used to
acquire automobile lease contracts backed by new automobiles
and automobiles with remaining factory warranties or extended
service contracts that extend to the termination of their
lease contracts (the "Contracts"). The Contracts and the
leased vehicles will be the asset-backed security for the
Notes. A minimum of $250,000 of Notes must be sold before
any funds will be released for use by the Company.
The Company will enter into contracts originated by, or will
purchase certain existing Contracts owned by Transition
Leasing or Prime Choice Incorporated. The Company intends to
enter into a Servicing Agreement with Transition Leasing.
Transition Leasing will be entitled to a servicing fee of $20
per month Contract and a payment of $150 per Contract
purchased. Transition Leasing will receive, as a marketing
fee, 57.5% of the down payment made the customers with
respect to contracts it originates. The Company intends to
enter into an Indenture between the Company and a bank, as
trustee, which will govern collection of the Contract
proceeds and repayment of the Notes.
-4-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that, to the fullest
extent permitted by Texas law, directors and former directors of the Company
shall not be liable to the Company or its shareholders for monetary damages
occurring in their capacity as a director. Texas law does not currently
authorize the elimination or limitation of the liability of a director to the
extent the director is found liable (i) for any breach of the director's duty
of loyalty to the Company or its shareholders, (ii) for acts or omissions not
in good faith that constitute a breach of duty of the director of the Company
or which involve intentional misconduct or a knowing violation of law, (iii)
for transactions from which the director received an improper benefit,
whether the benefit resulted from an action taken within the scope of the
director's office or (iv) for acts or omissions for which the liability of a
director is expressly provided by law.
The Company's Articles of Incorporation and its Bylaws grant mandatory
indemnification to directors and officers of the Company to the fullest
extent authorized under the Texas Business Corporation Act. In general, a
Texas corporation may indemnify a director or officer who was, is or is
threatened to be made a named defendant or respondent in a proceeding by
virtue of his position in the corporation if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the corporation, and, in the case of criminal proceedings, had no
reasonable cause to believe his conduct was unlawful. A Texas corporation may
indemnify an officer or director in an action brought by or in the right of
the corporation only if such director or officer was not found liable to the
corporation, unless or only to the extent that a court finds him to be fairly
and reasonably entitled to indemnity for such expenses as the court deems
proper.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred in connection with the issuance
and distribution of the Notes covered by this Registration Statement, all of
which will be paid by Transition Leasing Management, Inc. ("Transition
Leasing") the sole shareholder of the Company, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee. . . . . . . . . . $ 2,950
NASD Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500*
Printing and Engraving . . . . . . . . . . . . . . . . . . . . . . . . 30,000+
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 50,000+
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 5,000+
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 20,000+
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000+
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,450*
</TABLE>
_______________
* To be furnished by amendment.
+ estimates
The Company is obligated to reimburse Transition Leasing for the expenses
described above, but such reimbursement will be limited to 1.5% of the gross
offering proceeds.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Other than the issuance of 1,000 shares of its common stock to
Transition Leasing Management, Inc. upon its formation, the Company has not
issued any securities.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The following documents are filed as exhibits to this registration
statement:
1.1 - Best Efforts U.A. by and between Transition Auto Finance
II, Inc. and Great Nation Investment Corporation*
3.1 - Articles of Incorporation of Transition Auto Finance-II,
Inc.**
3.2 - Bylaws of Transition Auto Finance-II, Inc.**
4.1 - Form of Indenture between Transition Auto Finance, Inc. and
Trust Management, Inc., as Trustee*
4.2 - Form of Secured Note Due June 30, 2002 (included in
Article Two of Indenture filed as Exhibit 4.1)
5.1 - Opinion of Kuperman, Orr, Mouer & Albers, a Professional
Corporation, regarding validity of Notes**
8.1 - Opinion of Drenner & Stuart, L.L.P., a limited liability
partnership, regarding tax matters**
8.2 - Opinion of Kuperman, Orr, Mouer & Albers regarding certain
regulatory matters**
10.1 - Form of Master Contract Purchase Agreement between
Transition Auto Finance-II, Inc. and Transition Management
Leasing, Inc.**
10.2 - Form of Servicing Agreement between Transition Leasing
Management, Inc. and Transition Auto Finance II, Inc.**
10.3 - Form of Subscription Escrow Agreement between Transition
Auto Finance II, Inc. and Texas Community Bank, as Escrow
Agent**
10.4 - Form of Broker-Dealer Selling Agreement**
10.5 - Form of Subscription Agreement**
10.6 - Form of Tax Sharing Agreement by and between Transition
Leasing Management, Inc., Transition Auto Finance, Inc. and
Transition Auto Finance II, Inc.**
24.1 - Consent of Drenner & Stuart, L.L.P., a limited liability
partnership*
24.2 - Consent of Kuperman, Orr, Mouer & Albers, a Professional
Corporation*
24.3 - Consent of Sprouse & Winn, L.L.P.*
II-2
<PAGE>
26.1 - Form T-1: Statement of eligibility of Trust Management, Inc.*
- --------------
* filed electronically herewith
** previously filed
(b) Financial Statement Schedules.
None.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of 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.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
A. To include any prospectus required by Section l0(a)(3) of the
Securities Act of 1933;
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant hereby certifies that it has reasonable grounds to believe that it
meets the requirements for filing on Form SB-2 and has 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 July 9,
1998.
TRANSITION AUTO FINANCE II, INC.
By: /s/ Kenneth C. Lowe
--------------------------------------
Kenneth C. Lowe, President and Chief
Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below hereby designates and
appoints Terry Scharig and Ken Lowe, and each of them, as such person's true
and lawful attorney-in-fact and agent (the "Attorney-in-Fact") with full
power of substitution and re-substitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration
statement, which amendments may make such changes in this registration
statement as the Attorney-in-Fact deems appropriate and requests to
accelerate the effectiveness of this registration statement, and to file each
such amendment with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
Attorney-in-Fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that such Attorney-in-Fact, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Kenneth C. Lowe Director, President (Principal July 9, 1998
- ------------------- Executive Officer) and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
II-4
<PAGE>
BEST EFFORTS UNDERWRITING AGREEMENT
TRANSITION AUTO FINANCE II
This UNDERWRITING AGREEMENT made and entered into this _____ day of
_____________, 1998, by and between Transition Auto Finance II, Inc., a Texas
corporation, whose address is 5422 Alpha Road, Suite 100, Dallas, Texas
75240, (the "Company"), Transition Leasing Management, Inc., a Texas
corporation, ("Transition Leasing"), the parent company of Transition Auto
Finance, Inc., and Great Nation Investment Corporation, a Texas corporation,
whose address is 5408 A Bell Street, Amarillo, Texas 79109 (the
"Underwriter").
Recitals
1. The Company desires to offer and sell up to $10,000,000 in 11%
Redeemable Secured Notes to the public through the Underwriter.
2. The offering and sale will be made pursuant to a registration
statement and prospectus hereinafter referred to.
3. The Underwriter is willing to assist the Company in connection with
the proposed issuance and sale of these securities on a best efforts basis on
the terms and conditions herein contained.
Agreement
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants, agreements, undertakings, representations, and warranties herein
contained, the Company and the Underwriter agree as follows:
I. Representations and Warranties
The Company represents and warrants to, and agrees with the Underwriter that:
1. The Company is a corporation duly organized and validly existing as
a corporation in good standing under the laws of the State of Texas.
2. The Company shall issue consistent with the terms and conditions of
the Registration Statement (defined below) up to $10,000,000.00 in 11%
Redeemable Secured Notes ("the Notes"). The Notes shall:
(a) Bear interest at the rate of 11% per annum;
(b) Pay interest monthly in arrears on the fifteenth (15th) day of
the month of each successive calendar month (except as provided
in the prospectus); and
1
<PAGE>
(c) Pay principal at maturity on the fourth anniversary of the
issuance of the First Note.
3. The Notes will be issued pursuant to the terms and conditions of a
Trust Indenture entered into between the Company and Trust Management, Inc.
("Trustee"), as Indenture Trustee.
4. There will be delivered to the counsel to the Underwriter, upon
request at any time prior to the Delivery Date (defined below), certified
copies of the Articles of Incorporation and the bylaws of the Company,
together with all amendments, if any, certified copies of whatever
resolutions the counsel may request, and copies of all material contracts to
which the Company is a party. There will also be made available to the
counsel for inspection minutes of all meetings of incorporators, directors
and stockholders of the Company from the date of incorporation of the Company
to the Delivery Date.
5. The Company has no subsidiaries, except as set forth in the
Prospectus (defined below).
6. A Registration Statement on the appropriate form as prescribed by
the Securities and Exchange Commission (the "Commission"), together with a
related Prospectus with respect to the Notes, has been filed with the
Commission under the Securities Act of 1933, as amended, (the "Act"). The
Company will use its best efforts to cause the Registration Statement and the
Prospectus to become effective as soon as possible after the filing. As used
in this Agreement, the term "Registration Statement" refers to and means the
Registration Statement and any and all amendments to the Registration
Statement, including exhibits and financial statements, when the Registration
Statement becomes effective and, in the event of any amendments after the
effective date of the Registration Statement, the Registration Statement as
so amended; and the term "Prospectus" refers to and means the related
Prospectus in final form, and in the event of any amendment or supplement to
the Prospectus after the effective date of the Registration Statement, also
refers to and means the Prospectus as so amended or supplemented.
7. The Notes shall also be registered or qualified for sale with the
state regulatory agencies of any and all states where the Securities shall be
offered.
8. All expenses of registration and qualification shall be paid by the
Company.
9. Notwithstanding the above, to the extent possible, the Effective
Date of the offering shall be at a date mutually agreed to by the Company and
the Underwriter, subject to the requirements of applicable law.
2
<PAGE>
10. The purchase price of the Notes shall be in minimum denominations
of $1,000.00 and integral multiples thereof with a minimum purchase amount of
$5,000.00 (or $2,000.00 for Individual Retirement Accounts).
11. When the Registration Statement becomes effective, it and the
accompanying Prospectus will comply in all material respects with the
requirements of the Act and with the rules and regulations of the Commission
promulgated under the Act; provided, however, the Company makes no
representations or warranties as to information contained or omitted from the
Registration Statement or the Prospectus in reliance upon written information
furnished to the Company by the Underwriter specifically for inclusion in the
Registration Statement or the Prospectus.
12. The Company has the requisite corporate power and authority to
enter into this Underwriting Agreement.
13. The financial statements to be filed with the Registration
Statement will reflect all material liabilities of the Company on a
consolidated basis, contingent or otherwise, and will include adequate
reserves for all federal and state tax liabilities incurred to their
respective dates.
14. All of the Notes to be sold under and pursuant to this Agreement,
when issued and delivered, will be validly issued and enforceable in
accordance with their terms and conditions and free and clear of all claims
and encumbrances, except as described in the Indenture.
15. The certified public accountants who will certify to the financial
statements to be filed with the Commission as a part of the Registration
Statement and to the financial statements incorporated in the Prospectus, and
who, as experts, may certify or review other information of a financial or
accounting nature contained in the Registration Statement and the Prospectus,
will be independent certified public accountants as required by the Act and
the rules and regulations promulgated under the Act.
16. The Company will deliver to the Underwriter financial statements as
of March 31, 1998. The Company represents that such financial statements will
fairly present in all material respects the financial condition of the
Company, computed in accordance with generally accepted accounting principles
applied on a consistent basis and the rules and regulations of the Commission
relating to financial statements.
17. The Company will furnish the Underwriter, at least one day before
the filing of the Registration Statement, with the financial statements
included in the Registration Statement and prepared in accordance with the
rules and regulations of the Commission. Such financial statements will
fairly present the
3
<PAGE>
position of the Company in all material respects on the dates shown and will
reflect all material liabilities of the Company, contingent or otherwise.
18. The certificate or certificates that the Company is required to
furnish to the Underwriter pursuant to the provisions of paragraphs 8, 9 and
10 of Article VIII of this Agreement will be true and correct.
19. All of the foregoing representations, warranties and agreements
shall survive delivery of, and payment for, all of the securities covered by
this Agreement.
II. Retention of the Underwriter
Based upon the foregoing representations, warranties and agreements, and
subject to the terms and conditions herein contained:
1. The Company hereby retains the Underwriter as its agent to sell for
its account the Notes. The Underwriter shall use their best efforts as
agent, promptly following the receipt of written notice of the effective date
of the Registration Statement, to sell the Notes subject to the terms,
provisions and conditions set forth below. There is no assurance that any or
all of the Notes to be offered by the Company will be sold, and the
Underwriter is under no obligation to purchase or take down any of the Notes
on its own behalf or on behalf of others.
2. Underwriter acknowledges that the Company may limit its acceptance
of subscriptions in any manner it deems prudent in order to provide for the
timely use of subscriber funds and may reject any subscriptions for any
reason, and Underwriter agrees that any such rejection of a subscription
obtained by the Underwriter or by the Underwriting Group shall be deemed not
to be a sale made by the Underwriter or by the Underwriting Group.
Underwriter further acknowledges that (i) all subscription funds will be
deposited in escrow and if the minimum amount of Notes is not subscribed on
or before the Offering Termination Date (as defined in the Prospectus), 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; (ii)
upon the subscription of the minimum amount of the Notes, the escrowed funds
will be released to the Company; (iii) any subsequent subscription funds with
respect to the sale of additional Notes will be deposited in an account
maintained by the Underwriter and be immediately available for use by the
Company upon the Company's request; (iv) all Subscriber's checks shall be
made payable to the Underwriter; and (v) shall be deposited with the escrow
agent in accordance with applicable NASD regulations. Subscriber's funds
will be held in escrow and invested in compliance with SEC Rule 15c2-4.
Until the minimum amount of Notes is subscribed, all subscriber's checks will
be transmitted directly
4
<PAGE>
to the escrow agent by noon of the next business day after receipt by
Underwriter.
3. As its compensation, the Underwriter shall receive a commission of
eight percent (8.5%) of the full amount of all Notes sold by the Underwriter
(including the Underwriting Group, as hereinafter defined) and for which
payment is made to the Company. Such amount is comprised of a 6% sales
commission and a 2.5% due diligence fee.
4. The Underwriter may associate with themselves whatever other
underwriters they may desire. The Underwriter may offer the Notes through
registered securities dealers selected by them and to pay such dealers out of
the commissions received by the Underwriter whatever compensation the
Underwriter may determine. The Underwriter, such other underwriters and such
securities dealers shall be collectively referred to herein as the
"Underwriting Group".
5. In addition to the compensation set forth above, the Underwriter
shall also receive common stock in Transition Leasing as follows: the
Underwriter shall receive shares of common stock equal to 3.558% of the
outstanding stock of Transition Leasing in the event the Underwriter sells at
least $7,117,000 in Notes. In the event that less than $7,117,000 in Notes
are sold by the Underwriter, then the Underwriter shall receive a percentage
of the outstanding common stock of Transition Leasing equal to the product of
.03558 and the fraction, the numerator of which is the principal amount of
the Notes actually sold by the Underwriting Group and the denominator is
$7,117,000.
Pursuant to paragraph 5 of Article II of that certain Best Efforts
Underwriter's Agreement between Transition Auto Finance, Inc., a Texas
corporation, Transition Leasing and the Underwriter dated December 17, 1996
("the December 17, 1996 Agreement"), as additional compensation for the sale
of the Notes which were the subject of the December 17, 1996 Agreement, the
Underwriter was to receive as much as 5% of the outstanding common stock of
Transition Leasing, all as more particularly set forth in said paragraph 5 of
Article II of the December 17, 1996 Agreement. Pursuant to the December 17,
1996 Agreement, the Underwriter sold $2,883,000 of Notes and therefore earned
1.442% of the outstanding common stock of Transition Leasing.
The parties agree that the sale of such $2,883,000 of Notes under the
December 17, 1996 Agreement shall be credited against the shares of
Transition Leasing to be issued pursuant to this Agreement so that the total
shares of common stock of Transition Leasing which can be earned by the
Underwriter pursuant to this Agreement, after adjustment for the shares
earned pursuant to the December 17, 1996 Agreement, shall be 3.558% of all
issued and outstanding Transition Leasing common stock.
Any stock in Transition Leasing to which the Underwriter shall be
entitled shall be issued to the Underwriter, free and clear of
5
<PAGE>
any liens or encumbrances, within 30 days of termination of the offering.
If the value of such Transition Leasing common stock to be issued to
the Underwriter pursuant to this paragraph 5 is found to exceed 10% of the
aggregate principal amount of the Notes sold by the Underwriter, the
Underwriter will return to Transition Leasing a sufficient number of shares
to cause the value to not exceed 10% of the aggregate principal amount of
the Notes sold by the Underwriter.
6. The Company may terminate this Agreement in the event that the
Underwriting Group is unable to sell at least $750,000.00 of the Notes within
45 days of the Effective Date and at least $250,000.00 of the Notes each
calendar month after the month in which the 45th day after the Effective Date
occurs.
7. Underwriter represents that it is appropriately registered as a
broker-dealer with the Commission and in all states in which it conducts or
will conduct business in connection with this offering and is a member in
good standing of the National Association of Securities Dealers, Inc.
Underwriter also agrees not to solicit subscriptions for the Notes that will
result in a violation of the securities laws of the United States, or of any
state, or any rule or regulation thereunder, or of any rules of the NASD or
any securities exchange.
8. Underwriter represents that there is not now pending or threatened
against the Underwriter any action or proceeding of which Underwriter has
been advised, either in any court of competent jurisdiction, before the
Commission or any state securities commission concerning activities as a
broker or dealer, nor has the Underwriter been named as a "cause" in any such
action or proceeding.
9. In the event any action or proceeding of the type referred to in
paragraph 8 above shall be instituted or threatened against the Underwriter
at any time, or in the event there shall be filed by or against the
Underwriter in any court pursuant to any federal, state, local or municipal
statute a petition in bankruptcy or insolvency or for reorganization or for
the appointment of a receiver or trustee of assets, or the Underwriter makes
an assignment for the benefit of creditors, the Company shall have the right
to terminate this Agreement.
10. Upon request, the Company will inform the Underwriter as to the
states in which the Company has been advised by counsel that the Notes have
been qualified for sale under the respective state securities laws, but the
Company does not assume any responsibility or obligation as to the
Underwriter's right to sell the Notes in any state. Underwriter understands
and agrees that under no circumstances will Underwriter engage in any
activities hereunder in any jurisdiction (a) in which the company has not
informed the Underwriter that the Notes are qualified for sale under the
applicable securities laws, or (b) in which the Underwriter may not lawfully
so engage.
11. Underwriter confirms that its commitment to use its best efforts to
solicit subscriptions for the Notes will not result in a violation of the
securities laws of the United States, including
6
<PAGE>
but not limited to the Act or any rule or regulation thereunder, or the
securities laws of any state in which the Underwriter will conduct business
and the rules and regulations thereunder, or of any rules of any securities
exchange to which the Underwriter is subject or of any restriction imposed
upon the Underwriter by the NASD or any such exchange or governmental
authority and agrees to indemnify the Company, its shareholders, directors,
officers, employees or agents for any and all damages, liabilities and costs
(including reasonable attorneys' fees and expenses) resulting from the same.
12. Underwriter represents that in connection with the offering:
A. Underwriter will comply in all respect with the provisions of
this Agreement.
B. Underwriter shall use its best efforts to obtain the approval of
the NASD pursuant to Article III, Section 44 of the Rules of Fair
Practice of the NASD with respect to the compensation
arrangements set forth herein.
C. Underwriter will comply with any applicable limitations on the
manner of offering as required by the Act, applicable state
securities laws, and the NASD;
D. Prior to making any sale, Underwriter will have reasonable
grounds to believe, after making reasonable inquiry, that each
subscriber meets the requirements of the Act, the NASD and
applicable state securities laws as to the suitability of the
investment for such subscriber.
E. Except as otherwise disclosed to the Company, no owner, partner,
director or officer of Underwriter has within the last five years
been subject to any of the following administrative or judicial
actions (by the commission or any state securities commission):
1. Registration Stop Order (Issuance of Securities);
2. Securities related felony conviction;
3. Securities related administrative order;
4. Any administrative order involving fraud or deceit;
7
<PAGE>
5. Securities related injunction;
F. Underwriter has no current effective administrative order
revoking a securities exemption; and
G. Underwriter has not been suspended, censured or expelled by the
NASD.
Underwriter agrees to indemnify and hold the Company, its shareholders,
officers, directors, employees, and agent harmless from any liabilities and
costs (including reasonable attorneys' fees and expenses) associated with claims
arising or alleged to arise out of a breach of the foregoing representations.
13. Underwriter and any members of the Underwriting Group do hereby
undertake to comply with Sections 8, 24, 25 and 36 of Article III of the NASD
Rules of Fair Practice. Furthermore, any and all Selling Group Agreement or
Selected Dealer Agreement shall provide that any member of the Underwriting
Group shall agree to comply with said sections of Article III of the NASD Rules
of Fair Practice.
III. Further Agreements of the Company
The Company agrees, at its expense and without expense to the Underwriter, as
follows:
1. To give and to continue to give and supply whatever financial
statements and other information that may be required by the Commission or the
proper public bodies in the states in which the Notes may be qualified.
2. As soon as the Company is informed, to advise the Underwriter and to
confirm the advice in writing:
(a) When the Registration Statement becomes effective;
(b) When any amendment to the Registration Statement filed subsequent
to the effective date of the Registration Statement becomes
effective;
(c) Of any request of the Commission for amendments to the
Registration Statement or the related Prospectus, or for
additional information;
(d) Of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or of the
initiation of any proceeding for that purpose;
(e) Of any material adverse change in its financial position or
operating condition and of any
8
<PAGE>
development materially affecting the Company or rendering untrue
or misleading any material statement in the Registration
Statement or the Prospectus.
3. To make every reasonable effort to prevent the issuance of any stop
order suspending the effectiveness of the Registration Statement, and, if a
stop order is entered at any time, to use its best efforts to obtain
withdrawal of the order at the earliest possible moment.
4. To deliver to the Underwriter, without charge, (a) prior to the
effective date of the Registration Statement, copies of each preliminary
prospectus filed with the Commission bearing in red ink the statement
required by the rules of the Commission, (b) on and from time to time after
the effective date of the Registration Statement, copies of the Prospectus
and of any amended or supplemented Prospectus, and (c) as soon as they are
available and from time to time after they are available, copies of each
Prospectus prepared for the purpose of permitting compliance with Section 10
of the Act and of any amended or supplemented Prospectus. The number of
copies to be delivered in each case shall be the number the Underwriter may
reasonably request.
5. To furnish, without cost, to the Underwriter one executed copy of
the Registration Statement, including all exhibits and amendments, and a
reasonable number of copies of the Registration Statement and amendments.
6. For the period after the effective date of the Registration
Statement during which the Prospectus is required by law to be used, but not
after the Delivery Date, except in accordance with Article XII hereof, if any
change occurs so that the Prospectus includes an untrue statement of a
material fact or omits to state a material fact necessary in order to make
the statements in the Prospectus, in the light of the circumstances under
which they are made, not misleading, forthwith to prepare and furnish to the
Underwriter, without cost, supplements to the Prospectus or an amended
Prospectus correcting the untrue statement or supplying the omission.
7. If revision of the Prospectus pursuant to the provisions of Section
10 of the Act becomes necessary, to review the Prospectus, to file copies of
the Prospectus with the Commission, and to furnish copies of the revised
Prospectus to the Underwriter in whatever reasonable quantity they request.
8. To use its best efforts to cause the Notes to be qualified for sale
on terms consistent with those stated in the effective Registration Statement
under the Blue Sky laws in whatever states may be agreed upon.
9
<PAGE>
9. Until the Delivery Date hereunder or the earlier termination hereof,
except with the approval of the Underwriter, not to:
(a) Undertake or authorize any change in its capital structure or
authorize or issue or permit any public offering of any shares of
capital stock or additional Notes, except as provided in this
Agreement;
(b) Authorize, create, issue, or sell any funded obligations, notes
or other evidences of indebtedness, except in the ordinary course
of business and maturing not more than nine months from the date
of this Agreement and except as provided in this Agreement; or
(c) Consolidate or merge with or into any other corporation or create
any mortgage or lien upon any of its properties or assets except
in the ordinary course of its business and except as provided in
this Agreement.
10. To provide to Underwriter any reasonable additional information or
documentation deemed by the Underwriter to be necessary in the performance of
the Underwriter's due diligence.
11. To provide Underwriter:
(i) at least twenty-four (24) hours prior to dissemination to
Noteholders, a facsimile of any letter, notice or other similar
communication, provided that the foregoing in no way obligates
the Company to await Great Nation approval of such letter, notice
or similar communication prior to dissemination, and
(ii) from time to time, access to review operations and such other
public information concerning the Company as Underwriter may
reasonably request.
IV. Indemnity Provisions
1. The Company shall indemnify, defend and hold the Underwriter
(including any underwriter, dealer or securities dealer associated with the
Underwriter), and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act, free and harmless from and against any and all
losses, claims, demands, liabilities, and expenses (including reasonable legal
or other expense incurred by each Underwriter and controlling person in
connection with defending any claims or liabilities, whether or not resulting in
any liability to the Underwriter (or to any
10
<PAGE>
controlling person), which the Underwriter or controlling person may incur
under the Act or at common law or otherwise, but only to the extent that the
losses, claims, demands, liabilities, and expenses arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or in the Prospectus, or in any
amendment or amendments to the Registration Statement or the Prospectus, or
in any application or other papers executed by any underwriter or dealer with
the written approval of the Company for filing in any state or states in
order to qualify the securities covered by this Agreement under the
securities laws of those state (the "Blue Sky Application"), or arise out of
or are based upon any omission or alleged omission to state in these
documents a material fact required to be stated in them or necessary to make
the statements in them not misleading, provided, however, that this indemnity
agreement shall not apply to any losses, claims, demands, liabilities, or
expenses arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or the
Prospectus or in any amendment or amendments to them or in any Blue Sky
Application, or arising out of or based upon the omission or alleged omission
to state in these documents a material fact required to be stated in them or
necessary to make the statements in them not misleading, which statement or
omission was made in reliance upon information furnished to the Company by
the Underwriter in writing expressly for use in the Registration Statement or
the Prospectus or in any amendment or amendments to them, or was made by the
Underwriter in a Blue Sky Application not in reliance upon information
furnished by the Company.
2. The foregoing indemnity of the Company in favor of the Underwriter
shall not be deemed to protect the Underwriter against any liability to the
Company or its noteholders to which the Underwriter would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of their duties, or by reason of their reckless disregard of
their obligations and duties under this Agreement.
3. The Underwriter shall give the Company an opportunity to
participate in the defense or preparation of the defense of any action
brought against the Underwriter or controlling person of the Underwriter to
enforce any claim or liability, and the Company may so participate. The
Company's agreement under the foregoing indemnity is expressly conditioned
upon notice of any action being sent by the Underwriter or controlling
person, as the case may be, to the Company, by letter or facsimile (addressed
as provided herein), promptly after the commencement of the action against
the Underwriter or controlling person. Such notice must either be accompanied
by copies of papers served or filed in connection with the action or by a
statement of the nature of the action to the extent known to the Underwriter.
Failure to notify the Company within a reasonable time of an action shall
relieve the Company of
11
<PAGE>
its respective liabilities under the foregoing indemnity, but failure to
notify the Company shall not relieve the Company from any liability that the
Company may have to the Underwriter or controlling person other than on
account of the indemnity agreement contained in this Article IV.
4. The Underwriter likewise shall indemnify, defend and hold harmless
the Company against any and all losses, claims, expenses, and liabilities to
which it may become subject arising out of or based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or in any amendment or amendments to the
Registration Statement or the Prospectus, or in any Blue Sky Application, or
arising out of or based upon the omission or alleged omission to state in
these documents a material fact required to be stated in them or necessary to
make the statements in them not misleading, resulting from the use of written
information furnished to the Company by the Underwriter expressly for use in
the preparation of the Registration Statement or the Prospectus, or in any
amendment or amendments to the Registration Statement or the Prospectus, or
in any Blue Sky Application.
5. The Company shall give the Underwriter an opportunity to
participate in the defense or preparation of the defense of any action
brought against the Company to enforce any claim or liability, and the
Underwriter shall have the right so to participate. The agreement of the
Underwriter under the foregoing indemnity is expressly conditioned upon
notice of any action being sent by the Company to the Underwriter, by letter
or by facsimile (addressed as provided in this Agreement), promptly after the
commencement of the action against the Company. The notice must either be
accompanied by copies of papers served or filed in connection with the action
or by a statement of the nature of the action to the extent known to the
Company. Failure to notify the Underwriter of any action shall relieve the
Underwriter of its liability under the foregoing indemnity, but failure to
notify the Underwriter shall not relieve the Underwriter from any liability
which the Underwriter may have to the Company or its stockholders otherwise
than on account of the indemnity agreement contained in this Article IV.
6. The provisions of this Article IV shall not in any way prejudice
any right or rights that the Underwriter may have against the Company, or
that the Company may have against the Underwriter, under any statute other
than the Act, at common law or otherwise.
7. The indemnity agreements contained in this Article IV shall survive
the Delivery Date and shall inure to the benefit of successors of the Company
and successors of the Underwriter, and shall be valid irrespective of any
investigation made by or on behalf of the Underwriter or the Company.
12
<PAGE>
V. Payment of Expenses
The Company shall, at its own expense and without expense to the
Underwriter, pay all costs and expenses incident to this Agreement,
including, but without limitation, all expenses in connection with the
preparation, printing and filing of the Registration Statement and the
Prospectus as well as all amendments to them together with all exhibits; pay
all filing fees and costs, original issue taxes, trustee's fees, charges, or
disbursements connected with the issue and delivery of the Notes; and pay all
reasonable expenses incurred in connection with the qualification of the
Notes under the securities or blue sky laws of the states previously referred
to.
VI. Public Offering
1. The Underwriter shall make a public offering on a best efforts
basis of the Notes covered hereby as soon after the effective date of the
Registration Statement as is advisable in accordance with and as set forth in
the Registration Statement. The public offering may be made either in the
open market or through securities dealers (acting as principals) selected by
the Underwriter, or partly in each manner, as determined by the Underwriter
in their sole discretion. The Underwriter may pay these dealers out of the
commissions received by the Underwriter for the Notes sold by the dealers
whatever compensation the Underwriter and such dealers may determine.
VII. Payments on Default
If any of the conditions, representations or warranties set forth in
Article VIII of this Agreement are not fulfilled in any material respect, or
if for any reason the Company fails to comply with the terms of this
Agreement in any material respect (other than in connection with a breach of
the Agreement by the Underwriter), and if the Underwriter elects to terminate
this Agreement pursuant to Article XI hereto, then, in addition to paying the
Company's own expenses as provided in Article V hereof, the Company shall
reimburse the Underwriter for its actual accountable out-of-pocket expenses.
VIII. Conditions Precedent to Underwriter's Obligations
The obligations hereunder of the Underwriter are conditioned upon:
1. The approval of counsel for the Underwriter of the form and content of
the Registration Statement and the Prospectus, of the organization and present
legal status of the Company or Transition Leasing, and of the legality and
validity of the Notes to be offered hereunder, which approval shall not be
unreasonably withheld.
13
<PAGE>
2. The Company's performance in all material respects of all the
obligations required by it to be performed hereunder and the truth,
completeness and accuracy of all statements and representations in all
material respects contained herein or of any financial statements furnished
hereunder.
3. From the date hereof until the Delivery Date, and during the term
hereof, no material adverse change occurring in the properties and assets of
the Company or Transition Leasing, other than changes occurring in the
ordinary course of business.
4. No claim being made or legal action being instituted against the
Company or Transition Leasing, which if adversely determined would have a
material adverse effect on the financial condition of Transition Leasing and
the Company, taken as a whole, and no reasonable basis for a claim or an
action of this nature being discovered.
5. The Registration Statement becoming effective no later than April
15, 1998, or whatever later date that may be agreed upon, and no amendment to
the Registration Statement being filed to which the Underwriter reasonably
have objected after having received reasonable notice; and no stop order
suspending the effectiveness of the Registration Statement being issued and
no proceedings for that purpose being threatened or instituted.
6. Prior to the Delivery Date, the Company not sustaining any loss on
account of fire, flood, accident, or calamity of a character that materially
adversely affects its business or property, regardless of whether the loss is
insured; no litigation being instituted or threatened against the Company or
Transition Leasing of a character required to be disclosed in the
Registration Statement that is not disclosed and that shall materially
adversely affect the Company, its business or its property; and no
substantial adverse change occurring in the operations or financial condition
or credit of the Company or Transition Leasing or in any conditions affecting
the prospects of the business of the Company.
7. The Company having furnished to the Underwriter on the Delivery
Date an opinion or opinions of Kuperman, Orr, Mouer & Albers, counsel to the
Company, dated the Delivery Date and stating in effect that:
(a) The Company and its parent, Transition Leasing, have been duly
incorporated and, on the Delivery Date, are validly existing
corporation in good standing under the laws of the State of Texas
with an authorized and issued capital stock as set forth in the
Registration Statement, and the shares of the Company shown in
the Registration Statement to be issued and outstanding have been
duly and validly issued and are outstanding;
14
<PAGE>
(b) The Company and Transition Leasing are duly registered and
qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration and
qualification, except where the failure so to register and
qualify does not have material adverse effect on the financial
condition of the Company.
(c) The Notes conform in all material respects to the description of
the Notes contained in the Registration Statement and the
Prospectus, subject to the qualifications set forth in those
documents, and the holders of the Notes shall be entitled to the
rights and preferences set forth in the certificates for the
Notes;
(d) The Company and Transition Leasing have the requisite corporate
power and authority to enter into and perform their respective
obligations under the Agreement. The Agreement has been duly
authorized, executed and delivered by the Company and Transition
Leasing and is a valid and binding agreement of the Company and
Transition Leasing and is enforceable against the Company and
Transition Leasing in accordance with its terms, subject to the
Underwriter obtaining the approval of the National Association of
Securities Dealers, Inc. to the compensation and other
arrangements set forth therein, except to the extent that the
rights to indemnification thereunder may be limited by federal or
state securities laws and policies embodied therein, or to the
extent that such obligations are subject to or affected or
limited by (i) applicable liquidation, conservatorship,
bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other laws affecting creditors' rights or in the
collection of debtors obligations generally from time to time in
effect or (ii) general principles of equity (whether
enforceability is considered in a proceeding in equity or at
law), including the qualification that the availability of the
remedy of specific performance or injunctive relief or other
equitable remedies is subject to the discretion of the court
before which any such preceding therefor may be brought and
including standards of good faith, fair dealing and
reasonableness that may be applied by a court to the exercise or
certain rights and remedies;
15
<PAGE>
(e) The Registration Statement and the Prospectus comply as to form
in all material respects with the requirements of the Act and the
rules and regulations of the Commission under the Act (except
that no opinion need be expressed as to financial statements and
financial data). In addition, the opinion shall state, or counsel
shall advise the Underwriter by separate letter, that, although
such counsel has not passed upon and does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the
Prospectus (except as expressly provided herein), from the facts
within its actual knowledge, nothing has come to such counsel's
attention that would cause counsel to believe that either the
Registration Statement or the Prospectus at the time such
Registration Statement becomes effective contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein in order to make the statements
stated therein not misleading; and that counsel is familiar with
all contracts referred to in the Registration Statement or the
Prospectus, such contracts that are required to be filed as
exhibits to the Registration Statement have been filed as
exhibits to the Registration Statement, the description of such
contracts is correct in all material respects, and counsel does
not know of any contracts required to be summarized or disclosed
or filed that have not been summarized or disclosed or filed; and
(f) That counsel has no knowledge or information concerning pending
or threatened litigation or any unasserted claims or assessments
by any third party, or parties, against the Company or Transition
Leasing that is not disclosed in the Registration Statement that
are required to be disclosed in the Registration Statement.
8. The Company having furnished to the Underwriter on the Delivery Date a
certificate or certificates verified by the President or a Vice President and by
the Treasurer of the Company, certifying that:
(a) The respective signers of the certificate or certificates have
examined the answers to each item of the Registration Statement
and the information contained in the Prospectus, and, to the best
of their knowledge, information and belief, those answers and
that information, as of the effective date of the Registration
Statement, were true and
16
<PAGE>
correct and did not omit to state any material fact required
to be stated or necessary in order to make the statements not
misleading; and since the effective date of the Registration
Statement no event has occurred that should have been set
forth in an amendment to the Registration Statement or in a
supplement or amendment to the Prospectus that has not been so
set forth in an amendment or supplement;
(b) The respective signers of the certificate or certificates do not
know of any litigation or proceeding instituted or threatened
against the Company of a character required to be disclosed in
the Registration Statement that is not disclosed in the
Registration Statement;
(c) The respective signers of the certificate or certificates do not
know of any contract or arrangement that is required to be
summarized or disclosed in the Registration Statement or filed as
an exhibit to the Registration Statement that has not been
summarized or disclosed or filed;
(d) To the best of their knowledge, information and belief, the
respective signers know of no substantial adverse change in the
general affairs of the Company, or in the financial position of
the Company during the period from the date of the latest
financial statements contained in the Registration Statement to
the Delivery Date, except for the changes disclosed or indicated
in the Registration Statement; and
(e) To the best of their knowledge, information and belief (i) the
representations and warranties contained in Article I of this
Agreement are true and correct at the Delivery Date; (ii) no stop
order suspending the effectiveness of the Registration Statement
has been issued prior to the Delivery Date and no proceedings for
that purpose, prior to that date, has been initiated or
threatened by the Commission; (iii) every reasonable request by
the Commission for additional information to be included in the
Registration Statement or the Prospectus or otherwise has or will
be complied with; (iv) prior to the Delivery Date, the Company
has not sustained a loss on account of fire, flood, accident, or
calamity of a character that materially adversely affects its
property or business.
17
<PAGE>
9. The Company having furnished to the Underwriter copies of the
Articles of Incorporation and of each amendment to the Articles of
Incorporation, if any, of the Company, which are officially certified by a
proper state official; one copy of the bylaws of the Company certified by the
Secretary or an Assistant Secretary of the Company as being currently in
effect; and a certificate of good standing issued by the proper state
official or officials of each state in which the Company transacts business.
10. The Underwriter, on the Delivery Date, having received a
certificate or letter from the Company's accountants addressed to the
Company, dated not more than three days prior to the Delivery Date,
confirming that the accountants are independent certified public accountants
within the meaning of the Act, and the rules and regulations of the
Commission, and certifying to the effect that the financial statements
audited by them and included in the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations of the Commission, and
that, in their opinion, on the basis of the representations from certain
officials of the Company who have responsibility for financial and accounting
matters, nothing has come to their attention that caused them to believe that
there was any substantial adverse changes in the capitalization of the
Company or the financial position or net worth of the Company, except as
disclosed or indicated in the Registration Statement, and decreases in the
capital stock and surplus accounts of the Company from that shown in the
Registration Statement or the Prospectus.
11. The Company having furnished to the Underwriter whatever
certificates, in addition to those specifically mentioned in this Agreement,
that the Underwriter may request as to the accuracy, on the Date of Delivery,
of the representations and warranties of the Company in this Agreement, as to
the performance by the Company of its obligations under this Agreement, and
as to the other concurrent or precedent conditions to the obligations of the
Underwriter under this Agreement.
All of the opinions, letters, evidence, and certificates mentioned above
or elsewhere in this Agreement shall be deemed to be in full compliance with
the provisions hereof only if they are in form satisfactory to counsel to the
Underwriter.
In the event of the failure of any of the above conditions in any
material respect, the Underwriter may be relieved of any and all obligations
hereunder or may waive this right and demand full performance hereunder.
IX. Delivery Date
The Delivery Date, as referred to in this Agreement, shall be a date
agreed upon by the Company and the Underwriter and failing
18
<PAGE>
agreement, then the Delivery Date shall be the Effective Date of the offering
of the Notes.
1. The representations and warranties in this Agreement shall survive
the Delivery Date and shall continue in full force and effect regardless of
any investigation made by the party relying upon any representation or
warranty.
2. This Agreement shall inure to the benefit of, and be binding upon,
the Company and the Underwriter (including specifically any dealer that the
Underwriter associates with pursuant hereto), and their successors. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person other than the persons mentioned in the preceding sentence
any legal or equitable right, remedy or claim under or with respect hereto,
or any provisions contained herein. This agreement and all of its conditions
and provisions are for the sole and exclusive benefit of the foregoing
persons and for the benefit of no other person, except that the warranties,
indemnities and agreements of the Company contained herein also shall be for
the benefit of any persons, if any, who control the Underwriter within the
meaning of Section 15 of the Act, and except that the indemnification by the
Underwriter shall be for the benefit of the directors of the Company and the
officers of the Company who have signed the Registration Statement.
3. This Agreement sets forth the entire agreement between the parties
hereto, and no representation, warranty, understanding, or agreement not
specifically set forth herein shall be implied from this Agreement.
4. The proceeds received by the Underwriter from the sale of the Notes
shall be remitted to the Trustee(s) not later than noon of the following
business day, less the selling commission payable by the Company to the
Underwriter.
5. The Underwriter shall comply with all of the rules and regulations
of the Commission and the state regulatory agencies where the Notes shall be
offered. If at any time during the term of this Agreement, the Underwriter
should, for any reason, be disqualified or precluded from offering to the
public these Notes, then the Company shall have the option to terminate this
Agreement upon three (3) days written notice to the Underwriter, in which
event this Agreement shall be void and of no further force and effect, except
that the Underwriter shall be entitled to the commissions earned and to their
accountable out-of-pocket expenses.
6. This Agreement, unless sooner terminated as herein provided, shall
continue until all Notes registered under the Registration Statement are
either sold or withdrawn by the Company from registration, whichever event
first occurs.
19
<PAGE>
X. Underwriter's Right to Terminate
Notwithstanding any of the terms and provisions hereof, this Agreement
may be terminated by the Underwriter based on a material breach of this
Agreement by the Company. Underwriter shall give fifteen (15) days prior
written notice to the Company of such breach, and the Company shall have the
opportunity to cure such breach. In the event of such termination, the
Underwriter shall be entitled to any commissions to which it was entitled as
of the date of termination as well as any and all accountable out-of-pocket
expenses. In the event that the Underwriter reasonably determines that the
Notes are not marketable, notwithstanding its best efforts to sell the Notes,
the Underwriter may terminate this Agreement with thirty (30) days prior
written notice.
XI. Post-Effective Amendments
1. The Company shall prepare and file under the Act any required
post-effective amendments to the Registration Statement and related
Prospectus or new Registration Statements and new related Prospectuses.
2. If any post-effective amendments or new Registration Statements
become effective, the Company shall furnish to the Underwriter opinions by
the same counsel and to the same effect as those required by Article VIII of
this Agreement, except that such opinions shall relate to the post-effective
amendments and new Prospectuses or to the new Registration Statements and new
Prospectuses and to the Notes that are being offered. The Company further
agrees with respect to these post-effective amendments and new Prospectuses
and with respect to these new Registration Statements and new Prospectuses to
observe all of the terms and conditions of this Agreement as set forth in
Article III, subdivisions 1, 2, 3, 4, 5, 6, and 7 and Article IV.
XII. Notice
Any notice required or permitted to be given under or pursuant to this
Agreement may be given in writing by depositing the notice in the United
States mail, postage prepaid, by hand-delivery or by courier, or by
facsimile, addressed as follows:
To the Underwriter:
Great Nation Investment Corporation
5408 Bell Street
Amarillo, Texas 79109
FAX - (806) 353-9631
To the Company:
Transition Auto Finance II, Inc.
20
<PAGE>
5422 Alpha Road, Suite 100
Dallas, TX 75240
FAX - (972) 404-9934
Attention: Ken Lowe, President
To Transition Leasing:
Transition Leasing Management, Inc.
5422 Alpha Road, Suite 100
Dallas, TX 75240
FAX - (972) 404-9934
Attention: Ken Lowe, President
Copy to:
Kuperman, Orr, Mouer & Albers
100 Congress Avenue
Suite 1400
Austin, Texas 78701
Attn: Vince Mouer
FAX - (512) 322-8143
Notice shall be deemed given to a party hereunder when actually received by
such party.
XIII. Miscellaneous
1. This Agreement may be modified only by writing signed by the parties
hereto.
2. This Agreement shall be governed and construed in accordance with the
laws of the state of Texas.
3. This Agreement may be signed in various counterparts, which together
shall constitute one and the same instrument.
4. For purposes of any lawsuit or other proceeding in respect to this
Agreement, the undersigned hereby submits and consents to the jurisdiction of
any court of competent jurisdiction sitting in the State of Texas, Dallas
County.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day, month and year first written above.
Transition Auto Finance II, Inc.
By:
-------------------------------------
Ken Lowe,
Its President
Great Nation Investment
21
<PAGE>
Corporation
By:
-------------------------------------
Byron Pat Treat,
Its President
Transition Leasing Management, Inc.
By:
-------------------------------------
Ken Lowe,
Its President
22
<PAGE>
TRANSITION AUTO FINANCE II, INC.
AND
TRUST MANAGEMENT, INC., AS TRUSTEE
11% REDEEMABLE SECURED NOTES
DUE JUNE 30, 2002
____________________
INDENTURE
____________________
DATED AS OF ____________________, ______
<PAGE>
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TRUST INDENTURE ACT
SECTION INDENTURE SECTION
______________________________________________________________________________
<S> <C>
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, 5.8, 11.2
(b) 5.9
(c) (1) 11.4
(c) (2) 11.4
(c) (3) N/A
(d) 5.12
(e) 11.4
(f) N/A
315 (a) 7.1(0)
(0) 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) (last sentence) 1.1 (Def. of
"Outstanding")
(b) 6.7
(c) N/A
317 (a) (1) 6.8
(a) (2) 6.9
(b) 5.2
318 (a) 11.1
</TABLE>
"N/A" = Not Applicable
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1--DEFINITIONS AND INCORPORATION BY REFERENCE. . . . . . . . . . . 2
Section 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2 Incorporation by Reference of Trust Indenture Act. . . 12
Section 1.3 Rules of Construction. . . . . . . . . . . . . . . . . 12
ARTICLE 2--THE SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.1 Forms Generally. . . . . . . . . . . . . . . . . . . . 13
Section 2.3 Denominations. . . . . . . . . . . . . . . . . . . . . 17
Section 2.4 Execution and Authentication . . . . . . . . . . . . . 17
Section 2.5 Registrar and Paying Agent . . . . . . . . . . . . . . 18
Section 2.6 Securityholder Lists . . . . . . . . . . . . . . . . . 18
Section 2.7 Transfer and Exchange. . . . . . . . . . . . . . . . . 18
Section 2.8 Replacement Securities . . . . . . . . . . . . . . . . 19
Section 2.9 Temporary Securities . . . . . . . . . . . . . . . . . 19
Section 2.10 Cancellation . . . . . . . . . . . . . . . . . . . . . 19
Section 2.11 Defaulted Interest . . . . . . . . . . . . . . . . . . 19
Section 2.12 Persons Deemed Owners. . . . . . . . . . . . . . . . . 20
ARTICLE 3--REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 3.1 Redemption after Release of Funds from Escrow. . . . . 20
Section 3.2 Securities Not Previously Delivered to Trustee . . . . 20
Section 3.3 Selection of Securities to Be Purchased or Redeemed. . 20
Section 3.4 Notice of Redemption . . . . . . . . . . . . . . . . . 21
Section 3.5 Effect of Notice of Redemption . . . . . . . . . . . . 21
Section 3.6 Deposit of Redemption Amount . . . . . . . . . . . . . 21
Section 3.7 Securities Redeemed in Part. . . . . . . . . . . . . . 22
ARTICLE 4--ACCOUNTS, DISBURSEMENTS AND RELEASES. . . . . . . . . . . . . . 22
Section 4.1 Collection of Moneys . . . . . . . . . . . . . . . . . 22
Section 4.2 Sinking Fund Account; Operating Account; Master
Collections Account. . . . . . . . . . . . . . . . . . 22
Section 4.3 Purchase of Leased Vehicles and Eligible Additional
Contracts. . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.4 Representations and Warranties as to the Contracts . . 26
Section 4.5 General Provisions regarding Sinking Fund Account. . . 28
Section 4.6 Releases . . . . . . . . . . . . . . . . . . . . . . . 29
Section 4.7 Reports by Trustee . . . . . . . . . . . . . . . . . . 30
Section 4.8 Trust Estate; Contract Documents . . . . . . . . . . . 30
ARTICLE 5--COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 5.1 Payment of Principal and Interest. . . . . . . . . . . 31
Section 5.2 Money for Security Payments to be Held in Trust. . . . 32
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Section 5.3 Payment of Taxes and Other Claims. . . . . . . . . . . 33
Section 5.4 Maintenance of Properties. . . . . . . . . . . . . . . 33
Section 5.5 Limitation on Investment Activities. . . . . . . . . . 33
Section 5.6 Compliance Certificates. . . . . . . . . . . . . . . . 33
Section 5.7 Reporting. . . . . . . . . . . . . . . . . . . . . . . 34
Section 5.8 Protection of Trust Estate . . . . . . . . . . . . . . 35
Section 5.9 Opinions as to Trust Estate. . . . . . . . . . . . . . 35
Section 5.10 Performance of Obligations; Servicing Agreement. . . . 36
Section 5.11 Negative Covenants . . . . . . . . . . . . . . . . . . 37
Section 5.12 Substitution or Release of Collateral or Withdrawal
of Cash in Trust Estate. . . . . . . . . . . . . . . . 38
ARTICLE 6--DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . 39
Section 6.1 Events of Default. . . . . . . . . . . . . . . . . . . 39
Section 6.2 Acceleration . . . . . . . . . . . . . . . . . . . . . 41
Section 6.3 Remedies . . . . . . . . . . . . . . . . . . . . . . . 41
Section 6.4 Waiver of Past Defaults. . . . . . . . . . . . . . . . 42
Section 6.5 Control by Majority. . . . . . . . . . . . . . . . . . 42
Section 6.6 Limitation on Suits. . . . . . . . . . . . . . . . . . 42
Section 6.7 Rights of Holders to Receive Payment . . . . . . . . . 42
Section 6.8 Collection Suit by Trustee . . . . . . . . . . . . . . 43
Section 6.9 Trustee may File Proofs of Claim . . . . . . . . . . . 43
Section 6.10 Priorities . . . . . . . . . . . . . . . . . . . . . . 43
Section 6.11 Undertaking for Costs. . . . . . . . . . . . . . . . . 43
Section 6.12 Stay, Extension or Usury Laws. . . . . . . . . . . . . 44
Section 6.13 Optional Preservation of Trust Estate. . . . . . . . . 44
Section 6.14 Sale of Trust Estate . . . . . . . . . . . . . . . . . 45
ARTICLE 7--TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 7.1 Duties of Trustee. . . . . . . . . . . . . . . . . . . 46
Section 7.2 Rights of Trustee. . . . . . . . . . . . . . . . . . . 47
Section 7.3 Individual Rights of Trustee . . . . . . . . . . . . . 47
Section 7.4 Trustee's Disclaimer . . . . . . . . . . . . . . . . . 47
Section 7.5 Notice of Defaults . . . . . . . . . . . . . . . . . . 47
Section 7.6 Reports by Trustee to Holders. . . . . . . . . . . . . 48
Section 7.7 Compensation and Indemnity . . . . . . . . . . . . . . 48
Section 7.8 Replacement of Trustee . . . . . . . . . . . . . . . . 49
Section 7.9 Successor Trustee by Merger, etc.. . . . . . . . . . . 49
Section 7.10 Eligibility; Disqualification. . . . . . . . . . . . . 50
Section 7.11 Preferential Collection of Claims Against Company. . . 50
Section 7.12 Withholding Taxes. . . . . . . . . . . . . . . . . . . 50
ARTICLE 8--DISCHARGE OF INDENTURE. . . . . . . . . . . . . . . . . . . . . 50
Section 8.1 Satisfaction and Discharge of Indenture. . . . . . . . 50
Section 8.2 Application of Trust Money . . . . . . . . . . . . . . 51
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Section 8.3 Repayment to Company . . . . . . . . . . . . . . . . . 51
ARTICLE 9--AMENDMENTS, SUPPLEMENTS AND WAIVERS . . . . . . . . . . . . . . 52
Section 9.1 Without Consent of Holders . . . . . . . . . . . . . . 52
Section 9.2 With Consent of Holders. . . . . . . . . . . . . . . . 52
Section 9.3 Compliance with Trust Indenture Act. . . . . . . . . . 53
Section 9.4 Revocation and Effect of Consents. . . . . . . . . . . 53
Section 9.5 Notation on or Exchange of Securities. . . . . . . . . 53
Section 9.6 Trustee to Sign Amendments, etc. . . . . . . . . . . . 53
ARTICLE 10--MEETINGS OF SECURITYHOLDERS. . . . . . . . . . . . . . . . . . 54
Section 10.1 Purposes for which Meetings may be Called. . . . . . . 54
Section 10.2 Manner of Calling Meetings . . . . . . . . . . . . . . 54
Section 10.3 Call of Meetings by Company or Securityholders . . . . 54
Section 10.4 Who May Attend and Vote at Meetings. . . . . . . . . . 55
Section 10.5 Regulations may be Made by Trustee; Conduct of the
Meeting; Voting Rights . . . . . . . . . . . . . . . . 55
Section 10.6 Exercise of Rights of Trustee or Securityholders may
not be Hindered or Delayed by Call of Meeting. . . . . 55
Section 10.7 Evidence of Actions by Securityholders . . . . . . . . 55
ARTICLE 11--MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 11.1 Trust Indenture Act Controls . . . . . . . . . . . . . 56
Section 11.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . 56
Section 11.3 Communication by Holders with Other Holders. . . . . . 57
Section 11.4 Certificate and Opinion as to Conditions Precedent . . 57
Section 11.5 Rules by Paying Agent and Registrar. . . . . . . . . . 57
Section 11.6 Legal Holidays . . . . . . . . . . . . . . . . . . . . 57
Section 11.7 Governing Law. . . . . . . . . . . . . . . . . . . . . 57
Section 11.8 No Adverse Interpretation of Other Agreements. . . . . 58
Section 11.9 No Recourse Against Others . . . . . . . . . . . . . . 58
Section 11.10 Successors . . . . . . . . . . . . . . . . . . . . . . 58
Section 11.11 Duplicate Originals. . . . . . . . . . . . . . . . . . 58
</TABLE>
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THIS INDENTURE, dated as of ______________, 1998, is between TRANSITION
AUTO FINANCE II, INC., a Texas corporation (the "Company"), having its
principal office at 5422 Alpha Road, Suite 100, Dallas, Texas 75240 and TRUST
MANAGEMENT, INC., a Texas Trust Company, 210 West Sixth Street, Suite 605,
Fort Worth, Texas 76102, as Trustee (the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture and the issuance of its 11% Redeemable Secured Notes Due June 30,
2002 in the maximum aggregate principal amount of $10,000,000 (the
"Securities").
All acts necessary to make the Securities, when executed by the Company
and 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 Securities by the Holders (as herein defined) thereof, it
is mutually covenanted and agreed, for the equal and proportionate benefit of
all Holders of the Securities, as follows:
GRANTING CLAUSES
The Company hereby Grants to the Trustee, for the exclusive benefit of
the Holders of the Securities, all of the Company's right, title and interest
in and to (a) all Contracts (as herein defined) hereafter acquired by the
Company, together with all related Contract Documents, and all payments or
instruments paid on account of such Contracts whenever received, and all
other proceeds (cash or non-cash) received in respect of such Contracts, (b)
the Servicing Agreement, (c) the Operating Account, (d) the Master Collections
Account, (e) the Sinking Fund Account, including all Eligible Investments
therein and all income from the investment of funds therein, (f) all Leased
Vehicles, together with any repossessed or returned Leased Vehicles
(including any Leased Vehicle returned upon termination of its Contract), and
(g) all proceeds of the conversion, voluntary or involuntary, of any of the
foregoing into cash or other liquid property, including, without limitation,
all Net Liquidation Proceeds and Insurance Proceeds (collectively, the "Trust
Estate").
The foregoing Grants are made, however, in trust, to secure the
Securities equally and ratably without prejudice, priority or distinction,
except as expressly provided in the Indenture, between any Security and any
other Securities by reason of difference in time of issuance or otherwise,
and to secure (i) the payment of all amounts due on the Securities in
accordance with their terms, (ii) the payment of all other sums payable under
this Indenture, and (iii) compliance with the provisions of this Indenture,
all as provided in this Indenture.
<PAGE>
The Trustee acknowledges the foregoing Grants, accepts the trusts hereunder
in accordance with the provisions hereof and agrees to perform the duties
herein required to the best of its ability.
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS.
"Accounts" means the Sinking Fund Account, the Master Collections Account
and the Operating Account established by the Company under the provisions of
Section 4.2.
"Affiliate" means, as to any Person, any other Person that 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 that owns directly or indirectly 20% or more of the
securities having ordinary voting power for the election of directors or
other governing body of a corporation or 20% 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 Trustee's name, any fees payable
for the transfer of the ownership 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), any bank
service charges and account fees relating to the Accounts, the Company's pro
rata share (based on the relative amounts of funds attributable to the
Contracts as compared to the lease Contracts of all other Persons serviced by
the Servicer) of the lockbox fees, account fees and bank service charges
relating to the Master Collections Account, any legal and accounting fees for
reports, certificates and opinions of attorneys and independent accountants
required under this Indenture, and any Liquidation Expenses.
"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 ownership interest in the
Leased Vehicle is governed such that the ownership interest and a first
priority security interest in the Leased Vehicle may be transferred to the
Company and a second priority security interest in the related Leased Vehicle
may be granted in favor of the Trustee to permit the assignee to exercise all
rights granted by the Obligor under such Contract and such
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<PAGE>
other documents and all rights available under applicable law to the obligee
under such Contract and that 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 that is not a Legal Holiday.
"Collection Period" means with respect to any Payment Date, the calendar
month immediately preceding the Payment Date.
"Common Stock" means the common stock issued or issuable by the Company.
"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, and by its Treasurer, Assistant Treasurer, Controller, Assistant
Controller, Secretary or an Assistant Secretary, and delivered to the Trustee.
"Contract" means each lease contract that has been executed by an
Obligor and pursuant to which such Obligor leased the Leased Vehicle
described therein, agreed to pay the lease payments as therein provided in
connection with such lease, and undertook to perform certain other
obligations as specified in such contract and that is Granted to the Trustee
pursuant to this Indenture as security for the Securities. The term
"outstanding Contracts" as of any date means all Contracts other than
Liquidated Contracts.
"Contract Documents" means with respect to each Contract, (i) the
original Contract; (ii) either the original Title Document for the related
Leased Vehicle showing the Company as the owner and first lienholder and the
Trustee as second lienholder or an official receipt from the responsible
state or local government authority showing that an application has been made
(and the required fees have been paid) for registration of the Title
Documents for such Leased Vehicle in the names of the Company as owner and
first lienholder and the Trustee as second lienholder (or such other evidence
of ownership of the Leased Vehicle by the Company and perfection of the
security interest in the related Leased Vehicle, as determined by the Trustee
to be permitted or required to transfer ownership of the Leased Vehicle to
the Company and to perfect such security interests under the laws of the
applicable jurisdiction, or a guarantee from the dealer conveying such Leased
Vehicle that the Title Document for such Leased Vehicle showing the Company
as owner and first lienholder and the Trustee as second lienholder has been
applied for); (iii) the related Assignment; and (iv) any agreement(s)
modifying the Contract (including, without limitation, any extension
agreement(s)).
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<PAGE>
"Contract Number" means with respect to any Contract included in the
Trust Estate, the number assigned to such Contract by the Servicer, which
number is set forth in the related Monthly Report.
"Contract Unavailability Notice" shall have the following meaning: in
the event that the Company determines, in its discretion, that it is unable,
for any reason outside its control, to purchase additional Leased Vehicles
and Contracts that conform with the purchasing criteria set forth in the
Servicing Agreement or in Exhibit B hereto, the Company may elect to provide
notice of such determination to the Trustee, such notice to be referred to
herein as a "Contract Unavailability Notice."
"Corporation" includes corporations, associations, companies and
business trusts.
"Default" means any event that is, or after notice or passage of time
would be, an Event of Default.
"Defaulted Contract" means with respect to any Collection Period, a
Contract (a) whose Obligor, at the end of such Collection Period is past due
with respect to at least one scheduled lease payment, or (b) with respect to
which the related Leased 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 Contracts, have not yet been collected as of the end of such
Collection Period.
"Disbursement Certificate" means an Officers' Certificate of the Company
setting forth the individual items of Allowed Expenses to be paid by the
Company from funds in the Operating Account, agreeing that such items will be
promptly paid with such funds and certifying that such withdrawal of funds
and the payment of such Allowed Expenses conforms to the requirements of this
Indenture.
"Due Date" means as to any lease payment by an Obligor on a Contract,
the date upon which such lease payment 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
$3,000,000, or (ii) an account or accounts the deposits in which are fully
insured by the Federal Deposit Insurance Corporation.
"Eligible Additional 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 4.4 of this Indenture.
"Eligible Investments" means any one or more of the following
obligations or securities:
(i) United States Obligations;
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<PAGE>
(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 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 $3,000,000;
(iii) repurchase obligations with respect to any security
described in clause (i) entered into with a depository institution or
trust company, acting as principal, whose obligations have 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 that at the time of such investment has
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 and held as part of the Trust
Estate to exceed 10% of the aggregate outstanding balances and amounts
of all Contracts and Eligible Investments held as part of the Trust
Estate;
(v) commercial paper given the highest rating by Standard &
Poor's at the time of such investment; and
(vi) any publicly traded money market mutual fund that is
invested in the above-mentioned Eligible Investments.
"Event of Default" shall have the meaning provided in Section 6.1.
"Full Prepayment" with respect to a Contract means either of the
following: (i) payment to the Servicer of 100% of the outstanding lease
payments of a Contract plus early termination fees and/or other charges
properly payable under the Contract (exclusive of any Contract referred to in
clause (ii) or (iii) of the definition of the term "Liquidated Contract"),
less any discount of such lease payments to which the Obligor shall be
entitled under the terms of such Contract and applicable law by virtue of
early payment of any lease payment, or (ii) payment by the Servicer into the
Master Collections Account of the purchase price of a Contract in connection
with the repurchase by Servicer of the Contract.
"Grant" means to mortgage, pledge, assign and grant a security interest
in. A Grant of a Contract and the related Contract Documents, the related
Leased Vehicle, an Eligible Investment, the Servicing Agreement or any other
instrument shall include all rights, powers and options (but none of the
obligations, except to the extent required by law) of the Granting party
thereunder, including without limitation, the immediate and continuing right
to claim, collect, receive and give receipt for payments in respect of the
Contract and principal and interest payments in respect of
5
<PAGE>
the Eligible Investment, Insurance Proceeds, Liquidation Proceeds, purchase
prices and all other moneys payable thereunder and all proceeds thereof, to
give and receive notices and other communications, to make waivers or other
agreements, to exercise all rights and options, to bring suit or other legal
proceedings in the name of the Granting party or otherwise, and generally to
do and receive anything that the Granting party is or may be entitled to do
or receive thereunder or with respect thereto.
"Holder," "Securityholder" or "Noteholder" means a Person in whose name
a Security 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, such a Person
who (i) is in fact independent, (ii) does not have any direct financial
interest or any material indirect financial interest in the 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
in the exercise of reasonable care and such opinion or certificate shall
state that the signer is Independent within the meaning hereof.
"Insurance Proceeds" means the proceeds paid pursuant to any Physical
Damage Insurance Policy and amounts paid by any insurer under any other
insurance policy for damage or repair of a Leased Vehicle.
"Investment Company Act" means the Investment Company Act of 1940 (15
U.S.C. 90a-1 et seq.), as amended.
"Leased Vehicle" means, as to any Contract, the automobile (which may be
a passenger car, minivan, sport/utility vehicle or light truck) that
constitutes the subject of such Contract.
"Legal Holiday" shall have the meaning provided in Section 11.6.
"Liquidated Contract" means a Contract that (i) has been the subject of
a Full Prepayment, (ii) was a Defaulted Contract and with respect to which
Liquidation Proceeds that, in the Servicer's judgment, constitute the final
amounts recoverable in respect of such Contract have been realized and
deposited in the Master 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 that is brought current
and is no longer in default during such attempted liquidation)
6
<PAGE>
and the sale of any property acquired in respect thereof, which expenses are
not recoverable under any insurance policy.
"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 property acquired
in respect thereof, whether through receipt of Insurance Proceeds,
repossession, sale or otherwise.
"Master Collections Account" means the lockbox account established and
maintained by the Servicer.
"Master Contract Acquisition Agreement" means the agreement between the
Company and Transition Leasing Management, Inc. pursuant to which Transition
Leasing (i) will acquire on behalf of the Company vehicles that are to become
Leased Vehicles and prepare and execute Contracts on the Company's behalf
with Obligors, and (ii) will prepare and execute on behalf of the Company the
necessary documents by which the Company may acquire existing Contracts from
Transition Auto Finance Inc.
"Maturity Date" means with respect to any Contract, the date on which
the last scheduled lease payment of such Contract shall be due and payable
(after giving effect to all prepayments received prior to the date of
determination).
"Monthly Report" means an Officer's Certificate of the Company relating
to interest payments on the Notes 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.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"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 Securities maintained by the
Registrar pursuant to Section 2.5.
"Obligor" means each Person who is indebted under a Contract or who has
acquired the Leased Vehicle subject to a Contract.
"Offering Amount" shall mean the $10,000,000 in aggregate principal
amount of 10% Redeemable Secured Notes Due June 30, 2002 that may be issued
under this Indenture.
7
<PAGE>
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary or the Controller of any Person.
"Officers' 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 4.2.
"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" means, with respect to the Securities, as of the date of
determination, all the Securities theretofore authenticated and delivered
under this Indenture except:
(i) the Securities theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation;
(ii) the Securities 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 Securities;
provided that, if such Securities 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) Securities in exchange for or in lieu of which other
Securities have been authenticated and delivered pursuant to this Indenture
unless proof satisfactory to the Trustee is presented that any such
Securities are held by a holder in due course;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request,
demand, authorization, direction, notice, consent or waiver hereunder,
Securities owned by the Company or any Affiliates of the Company shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request,
demand, authorization, direction, notice, consent or waiver, only Securities
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. Securities so owned that have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and
that the pledgee is not the Company or any other obligor upon the Securities
or any Affiliate of the Company or such other obligor.
8
<PAGE>
"Overdue Interest Rate" means the lesser of (i) an interest rate of 18%
per annum, or (ii) the highest lawful rate of interest.
"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 that may
become payable on any Securities on behalf of the Company.
"Payment Date" with respect to any Security, means the (i) fifteenth day
of each calendar month (unless such day is a Legal Holiday, in which event
the next succeeding Business Day) commencing with the second calendar month
following the month in which the Security is issued, and (ii) the Stated
Maturity.
"Payment Date Statement" shall have the meaning provided in Section 5.1.
"Person" means any individual, corporation, partnership, joint venture,
joint adventure, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Physical Damage Insurance Policy" means with respect to a Leased
Vehicle, any policy of physical damage, comprehensive or collision insurance
covering the Leased Vehicle pursuant to which the Servicer may obtain
recoveries for loss or damage to the Leased Vehicle.
"Purchase Date" means the date on which the Company remits funds from
the Operating Account to pay the purchase price for a Leased Vehicle or for
an Eligible Additional Contract.
"Purchased Contracts Certificate" means the Officer's Certificate of the
Company and the Servicer required to be delivered to the Trustee in
connection with the purchase of any Eligible Additional Contracts and
designated as such pursuant to Section 4.3.
"Record Date" for the interest payable on any Payment Date means the
first Business Day of the month in which such Payment Date occurs.
"Redemption Date" means any Payment Date which is subsequent to the
Sinking Fund Trigger Date and which is designated by the Company as the date
upon which the Company will redeem some or all of the Securities.
"Redemption Price" means with respect to any Security to be redeemed,
100% of the unpaid principal amount of such Security together with accrued
and unpaid interest on the unpaid principal amount thereof to the applicable
Redemption Date.
"Registrar" means the registrar for the Securities appointed by the
Company pursuant to Section 2.5 hereof, and any successor registrar appointed
by the Company hereunder.
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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 Leased Vehicle is registered.
"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 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 knowledge of and familiarity with
the particular subject.
"Sale" has the meaning set forth in Section 6.14.
"Schedule of Contracts" means the list of Contracts attached hereto as
Exhibit A, as such list may be supplemented from time to time hereafter
pursuant to Section 4.3, as being Granted to the Trustee as part of the Trust
Estate, which list or lists shall set forth, with respect to each Contract,
the Contract Number, the aggregate unpaid lease payments as of the date
acquired by the Company and as of the date of origination, the name of the
Obligor, the Maturity Date, the name of the originating person, and the
vehicle identification number for the Leased Vehicle, and the date on which
the Contract was originated.
"SEC" means the Securities and Exchange Commission, as from time to time
constituted, created under the Securities Exchange Act of 1934, or if at any
time after the execution of this Indenture such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act,
then the body performing such duties on such date.
"Securities" or "Notes" means the 10% Redeemable Secured Notes Due June
30, 2002, that are issued under this Indenture, as amended from time to time.
"Securities Act of 1933" means the Securities Act of 1933, as amended.
"Securities Exchange Act of 1934" means the Securities Exchange Act of
1934, as amended.
"Servicer" means Transition Leasing Management, Inc., as servicer under
the Servicing Agreement, and its permitted successors and assigns, including
any successor servicer appointed pursuant to Section 5.10.
"Servicer Report Date" means the l0th day (or the Business Day next
preceding such day if such day is not a Business Day) of each month during
the existence of this Indenture.
"Servicing Agreements" means the Acquisition Agreement and the Servicing
Agreement, each dated as of ______________, 1998, between the Company and the
Servicer, providing,
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among other things, for the purchasing of Leased Vehicles and Contracts and
the 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 servicing agreement entered into with a
successor servicer pursuant to Section 5.10 and any separate servicing
agreement for the servicing of Contracts.
"Servicing Fee" means the servicing, purchasing, and investor
administration 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.
"Sinking Fund Account" means the trust account established and
maintained by the Company and designated as such pursuant to Section 4.2.
"Sinking Fund Trigger Date" means the earlier to occur of 25 months from
the release of funds from escrow or the receipt by the Trustee of a Contract
Unavailability Notice.
"Special Record Date" means the date determined pursuant to Section 2.11.
"Stated Maturity" means June 30, 2002.
"Subsidiary" means, with respect to the Company, any corporation,
partnership, joint venture or joint adventure whether now existing or
hereafter organized or acquired: (i) in the case of a corporation, of which a
majority of the securities having ordinary voting power for the election of
directors or other governing body of such corporation (other than securities
having such power only by reason of the happening of a contingency) are at
the time owned by the Company or one of more other Subsidiaries of the
Company, or (ii) in the case of a partnership, joint venture or joint
adventure, in which the Company is a general partner or joint venturer or
joint adventurer.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code 77aaa-77bbbb),
as amended from time to time.
"Title Document" means, with respect to any Leased Vehicle, the
certificate of title for, or other evidence of ownership of, such Leased
Vehicle issued by the Registrar of Titles in the jurisdiction in which such
Leased Vehicle is registered.
"Trust Estate" shall have the meaning provided in the Granting Clauses
of this Indenture.
"Trustee" means the party named as such in this Indenture until a
successor replaces it, and thereafter means the successor.
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"Trust Officer" means any Responsible Officer assigned by the Trustee to
administer its corporate trust matters.
"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 United 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 Securities.
"indenture securityholder" means a Securityholder.
"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 Securities).
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 so 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 principles as of the
date of this Indenture;
(3) "or" is not exclusive; and
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(4) words in the singular include the plural, and in the plural
include the singular.
ARTICLE 2
THE SECURITIES
SECTION 2.1 FORMS GENERALLY.
The Securities and the Trustee's certificate of authentication shall be
in substantially the forms set forth in this 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
Securities may be listed, or as may consistently herewith be determined by
the officers executing such Securities, as evidenced by their execution
thereof. Any portion of the text of any Security 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 Securities shall be inserted on the face
of the Securities, immediately prior to the paragraph stating that the
certificate of authentication on the Security must be executed by manual
signature of the Trustee as a condition to the validity of such Security:
"Reference is hereby made to the further provisions of this Security
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 Securities shall be printed, lithographed or engraved or
produced by any commercially reasonable manner, all as determined by the
officers executing such Securities, as evidenced by their execution thereof.
SECTION 2.2 FORMS OF SECURITY.
(a) The form of Security is as follows:
TRANSITION AUTO FINANCE II, INC.
11% REDEEMABLE SECURED NOTES DUE JUNE 30, 2002
No. _________ CUSIP NO. _______ $__________
Transition Auto 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 on June 30, 2002 (the "Stated Maturity"
of such principal), 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
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the date of issue, until the principal amount of this Note is paid in full at
the rate of 11% per annum, which interest shall be due and payable on the
fifteenth day of each calendar month (for such interest accruing during the
preceding month or months) commencing with the second calendar month after
the issuance hereof and upon the Stated Maturity (each a "Payment Date").
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. Any installment of interest that is not paid when and as due shall
bear interest at the Overdue Interest Rate from the date due to the date of
payment thereof, but only to the extent payment of such interest shall be
lawful and enforceable. 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 11% Redeemable Secured Notes Due June 30, 2002 (herein
called the "Notes"), all issued and to be issued under the Indenture dated as
of _______________, 1998 (herein called the "Indenture"), between the Company
and Trust Management, Inc. (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 terms used in this Note that are
capitalized, if not defined herein, are defined in the Indenture and 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 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 business 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.
The payment of principal and accrued interest on the Notes, when due, is
secured by the Trust Estate, which consists of, among other things, a first
priority security interest in specific motor vehicle lease Contracts, the
Leased Vehicles described therein and the funds in the Sinking Fund Account.
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 Company and each surety, endorser, guarantor, and other party, if
any, now or hereafter liable for payment of any sums of money payable on this
Note, jointly and severally, waive presentment and demand for payment, notice
of intent to accelerate and notice of acceleration, protest and notice of
protest and nonpayment, and diligence in collecting or bringing suit against
any party liable hereon, and agree that their liability on this Note shall
not be affected by any renewal or extension in time of payment hereof, by any
indulgence, or by any release, modification, or substitution of any security
for the payment of this Note, and hereby consent to any and all extensions,
renewals, replacements, waivers, releases, or exchanges affecting this Note
and the taking, release, modification, or substitution of any security, with
or without notice and before or after maturity.
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The Notes are redeemable at the option of the Company on any Payment
Date following the Sinking Fund Trigger Date, in whole or in part, at 100% of
the unpaid principal amount thereof, together with accrued and unpaid
interest thereon to the Redemption Date; 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 10 but not more than 60 days
prior to the Redemption Date, the Company is required to mail a notice of
redemption by first class mall 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 his 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.
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 is 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 Holders of Notes representing
more than 50% of the principal amount of all Notes at the time outstanding.
The Indenture also contains provisions permitting the Holders of Notes
representing specified percentages of the principal amount of the Notes at
the time outstanding, 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 term "Company" as used in this Note includes any successor to the
Company under the Indenture.
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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.
This Note and the Indenture shall be construed in accordance with, and
governed by, the laws of the State of 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, and if from any such
circumstances the registered owner of this Note shall ever receive interest
or anything that might be deemed interest under applicable law that should
exceed the highest lawful rate, such amount that 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 registered owner of this
Note for the use, forbearance or detention of the indebtedness of the Company
to the registered owner 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.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall impair or affect the right of the registered owner of
this Note to receive payment of principal and interest on this Note, on or
after the respective due dates, or to being suit for the enforcement of any
such payment on or after such respective dates, without the consent of the
registered owner.
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, Transition Auto Finance II, Inc. has caused this
instrument to be duly executed under its corporate seal.
Dated: ___________________________
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TRANSITION AUTO FINANCE II, INC.
By:
-------------------------------------
(Authorized Officer)
[SEAL]
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 within-mentioned Indenture.
-----------------------------------------
-----------------------------------------
as Trustee, Paying Agent and Registrar
By:
-------------------------------------
Authorized Signatory
SECTION 2.3 DENOMINATIONS.
The Securities shall be issuable only as registered Securities in
authorized denominations with a minimum denomination of $1,000 and larger
denominations of integral multiples of $1,000 (in each case expressed in
terms of the principal amount thereof on the date of issuance).
SECTION 2.4 EXECUTION AND AUTHENTICATION.
(a) The Securities 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 Securities. The signature of any such Persons on the Securities
may be manual or facsimile.
(b) Securities bearing the manual or facsimile signatures of
individuals who were at any time the Officers of the Company 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 Securities.
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(c) A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security on
behalf of the Trustee. The signature shall be conclusive evidence that the
Security has been authenticated under this Indenture.
(d) The Trustee shall authenticate Securities from time to time for
original issue in the aggregate Offering Amount upon a Company Order;
provided, however, the Trustee shall not be required to so authenticate more
often than once a week. The aggregate principal amount of Securities
outstanding at any time may not exceed that amount except as provided in
Section 2.8.
(e) Notwithstanding anything contained herein to the contrary, each of
the Notes issued hereunder, with the consent of the Company and Trustee,
may be issued in book entry from as an uncertificated security in accordance
with the provisions of Article 8 of the Uniform Commercial Code as adopted
in the state of organization of the Company.
SECTION 2.5 REGISTRAR AND PAYING AGENT.
(a) The Company shall appoint a registrar for the Securities (the
"Registrar") who shall maintain or cause to be maintained an office or agency
where Securities may be presented for registration or transfer or for
exchange. The Registrar shall keep a register of the Securities 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 (the "Paying Agents") who shall maintain or cause
to be maintained an office within the United States of America, at which the
Securities may be presented or surrendered for payment or at which the Paying
Agent may make payments of accrued interest on the Securities 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 as
Paying Agent.
SECTION 2.6 SECURITYHOLDER LISTS.
The Trustee shall preserve a list of the names and addresses of
Securityholders 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 five Business Days before each Payment Date 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 Securityholders.
SECTION 2.7 TRANSFER AND EXCHANGE.
Where a Security is presented to the Company or the Registrar with a
request to register a transfer of Securities, 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 Securities are presented to the Company or the
Registrar with a request to exchange them for an equal principal amount of
Securities of other denominations, the 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 Securities upon
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Company Request or upon request of the Registrar. The Company may charge a
reasonable fee to the Holder for any transfer or exchange other than an
exchange pursuant to Section 2.9, 3.7 or 9.5.
SECTION 2.8 REPLACEMENT SECURITIES.
If the Holder of a Security claims that the Security has been lost,
destroyed or wrongfully taken, the Company shall issue and the Trustee shall
authenticate a replacement Security if the requirements for the issuance of
replacements 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 that any of them may suffer
if a Security is replaced. The Company may charge for its expenses in
replacing a Security.
SECTION 2.9 TEMPORARY SECURITIES.
Until definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but
may have variations that the Company considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall prepare and the
Trustee shall authenticate definitive Securities in exchange for temporary
Securities.
SECTION 2.10 CANCELLATION.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar, the Paying Agent and the Company shall forward
to the Trustee any Securities surrendered to them for transfer, exchange,
payment or cancellation and shall dispose of cancelled Securities as the
Company directs in accordance with applicable law. The Company may not issue
new Securities to replace Securities 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 Securities, it
shall pay the defaulted interest and, to the extent permitted by law,
interest on defaulted interest at the Overdue Interest Rate to the persons
who are Securityholders 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 subsequent Special Record Date, the Trustee shall mail to each
Securityholder a notice that states the subsequent Special Record Date, the
payment date for the defaulted interest, and the amount of defaulted interest
(plus any permitted interest thereon) to be paid.
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SECTION 2.12 PERSONS DEEMED OWNERS.
Prior to the due presentment for registration of transfer of any
Security, the Company, the Trustee, the Paying Agent, the Registrar and any
agent of the Company or of the Trustee may treat the Person whose name and
Security is registered on the Note Register as the owner of such Security for
the purpose of receiving payments of the principal of and interest on such
Security and for all other purposes whatsoever, whether or not such Security
be overdue, and neither the Company, the Trustee, nor any agent of the
Company shall be affected by notice to the contrary.
ARTICLE 3
REDEMPTION
SECTION 3.1 REDEMPTION AFTER RELEASE OF FUNDS FROM ESCROW.
At any time on any Payment Date on or after the Sinking fund Trigger
Date, the Securities may be redeemed, in whole or in part, at the option of
the Company at the Redemption Price for such Securities. If the Company
elects to redeem the Securities, it shall, not later than 45 days prior to
the Payment Date selected for redemption, deliver notice of such election to
the Trustee, together with a Company Order directing the Trustee to effect
such redemption.
SECTION 3.2 SECURITIES NOT PREVIOUSLY DELIVERED TO TRUSTEE.
If the Company wishes to credit Securities it has not previously
delivered to the Trustee for cancellation against the principal amount of
Securities to be redeemed, it shall so notify the Trustee and it shall
deliver the Securities duly endorsed with the notice.
SECTION 3.3 SELECTION OF SECURITIES TO BE PURCHASED OR REDEEMED.
If less than all of the Securities are to be called for redemption, the
particular Securities to be redeemed shall be selected by the Trustee by lot
or by such other method as the Trustee deems appropriate.
The Trustee shall promptly notify the Company in writing of the
Securities selected for redemption and, in the case of any Security selected
for partial redemption, the principal amount thereof to be redeemed.
Securities and portions of Securities selected shall be in amounts of $1,000
or whole multiples of $1,000; except that if all of the Securities of a
Holder are to be redeemed, the entire outstanding amount of Securities held
by such Holder, even if not a multiple of $1,000, shall be purchased or
redeemed. Except as provided in the preceding sentence, provisions of this
Indenture that apply to Securities called for redemption also apply to
portions of Securities called for redemption.
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SECTION 3.4 NOTICE OF REDEMPTION.
(a) At least 10 days but not more than 60 days before the Redemption
Date, the Company shall mall a notice of redemption by first-class mall to
each Holder of Securities, with a copy thereof to Trustee.
(b) The notice shall identify the Securities to be redeemed by CUSIP
No. and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the
redemption date upon surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion shall be
issued upon cancellation of the original Security;
(iv) the name and address of the Paying Agent;
(v) that the Securities must be delivered to Paying Agent at the
address stated in the notice for the Holder to receive the Redemption
Price; and
(vi) that interest on the Securities ceases to accrue on and after
the Redemption Date.
(c) At the Company's request, the Trustee shall give 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 of any
Security shall not impair or affect the validity of the redemption of any
Security.
SECTION 3.5 EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption under Section 3.4 has been given, the
Securities called for redemption must be redeemed on the designated
Redemption Date. Upon surrender to the Paying Agent, such Securities shall be
paid at the Redemption Price.
A notice of redemption under Section 3.4 may not be conditional. Unless
the Company shall default in the payment of the Redemption Price, no interest
shall accrue on the Securities for any period after the Redemption Date.
SECTION 3.6 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 Securities on that
date. Such moneys shall be segregated
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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
Securities shall be limited to the Redemption Price therefore, without any
premium or penalty, and no interest shall accrue on such Redemption Price for
any period after the Redemption Date. If any Security called for redemption
shall not be so paid upon surrender for redemption because of the failure of
the Company to comply with the provisions of this Section 3.6, interest shall
be paid on the unpaid principal from the Redemption Date until such principal
is paid, and, to the extent lawful, on any interest not paid on such unpaid
principal, in each case at the rate provided in the Securities.
SECTION 3.7 SECURITIES REDEEMED IN PART.
Upon surrender of a Security that is redeemed in part, the Company shall
issue and, upon the Company's written request, the Trustee shall authenticate
for the Holder at the expense of the Company a new Security equal in
principal amount to the unredeemed portion of the Security surrendered.
ARTICLE 4
ACCOUNTS, DISBURSEMENTS AND RELEASES
SECTION 4.1 COLLECTION OF MONEYS.
Except as otherwise expressly provided herein, the Trustee may demand
payment or delivery of, and may receive and collect, directly and without
intervention or assistance of any fiscal agent or other intermediary, all
money and other property payable to or receivable by the Trustee pursuant to
this Indenture. The Trustee shall hold all such money and property received
by it as part of the Trust Estate, and shall apply it as provided in this
Indenture. Except as otherwise expressly provided in this Indenture, if any
default occurs in the making of any payment or performance under the
Servicing Agreement, the Trustee may, and upon the request of the Holders of
Securities representing more than 50% of the principal amount of the
Outstanding Securities shall, take such action as may be appropriate to
enforce such payment or performance including the institution and prosecution
of appropriate judicial proceedings. Any such action shall be without
prejudice to any right to claim a Default or Event of Default under this
Indenture and to proceed thereafter as provided in Article 7.
SECTION 4.2 SINKING FUND ACCOUNT; OPERATING ACCOUNT; MASTER COLLECTIONS
ACCOUNT.
(a) Prior to the initial authentication and delivery of any Securities,
the Company shall open, at one or more depository institutions (which may be
the Trustee) (the "Custodians"), a trust account denominated "Sinking Fund
Account--Trust Management, Inc., as trustee in respect of the 11% Redeemable
Secured Notes Due June 30, 2002," (the "Sinking Fund Account"). The Sinking
Fund Account shall be an Eligible Account. Deposits to and withdrawals from
the Sinking Fund Account shall be made solely in accordance herewith, and the
funds in the Sinking Fund Account shall not be commingled with any other
moneys, except as expressly provided for herein. The Company shall also open
a commercial bank account in its own name for use in holding the Company's
funds and in
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paying the Company's expenditures (the "Operating Account"). The Sinking
Fund Account, the Master Collections 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 any 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 Master
Collections Account maintained by the Servicer. The Company agrees to provide
or cause to be provided payment books or will mail or cause to be mailed
monthly statements to all Obligors with remittance instructions directing all
payments to be remitted directly to the Master Collections Account. The
Company agrees that all cash, money orders, checks, notes, drafts and other
items that it otherwise receives and that are attributable to the Contracts
shall be promptly deposited into the Master Collections Account. The Company
shall likewise deposit or cause to be deposited in the Master Collections
Account within two Business Days of receipt all Net Liquidation Proceeds and
Insurance Proceeds (net of any portion thereof applied to the repair of any
Leased Vehicle, released to an Obligor in accordance with the normal
servicing procedures of the Servicer). The Company shall cause the Servicer
to transfer to the Operating Account, at least weekly and more frequently if
deemed reasonable by the Company under the circumstances, all funds (except
any minimum sum necessary to avoid bank service charges) in the Master
Collections Account that are attributable to the Contracts.
(c) The Company shall cause the Servicer to maintain detailed
accounting books and records adequate to determine the respective share of
the funds (including all income earned thereon as determined by any
allocation method deemed reasonable by the Servicer) deposited or contained
in the Master Collections Account attributable to each motor vehicle lease
contract, including the Contracts, owned by the Company or serviced by the
Servicer.
(d) The Company agrees that it shall not withdraw any funds in the
Operating Account except for an investment, transfer or payment of such funds
in accordance with the provisions of this Section 4.2 and Section 4.3.
(e) The Company may invest the funds in the Operating Account but only
in Eligible Investments that mature on or prior to the Business Day next
preceding the next Payment Date following the making of such investment.
(f) So long as the Securities have not been declared due and payable
pursuant to Section 6.2 and subject to the receipt by the Trustee of any
required certificates, 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 Sinking Fund Account of the amount that,
together with any amounts held in the Sinking Fund Account, is
sufficient for the payment, PRO RATA, of all interest due on the
Outstanding Securities on each Payment Date;
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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 other 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, after the Sinking Fund Trigger Date or during the continuance
of an Event of Default, to the transfer to the Sinking Fund Account
for the PRO RATA payment of amounts owing on the Notes when due; and
FIFTH except during the continuance of an Event of Default, until the
Sinking Fund Trigger Date, to the purchase of Eligible Additional
Contracts in accordance with Section 4.3.
All of the foregoing applications of 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 Sinking Fund Trigger Date, the Company shall cause to
be transferred from the Operating Account to the Sinking Fund Account an
amount that, together with any funds then held in the Sinking Fund Account,
is sufficient to pay the accrued interest due on the Outstanding Notes on
such Payment Date. After the Sinking Fund Trigger Date, upon the written
request of a Trust Officer from time to time or as otherwise determined by
the Company 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 Sinking Fund Account the funds in the Operating
Account (except any minimum balance necessary to avoid bank service charges),
less any Allowed Expenses for which funds have not been previously withdrawn
from the Operating Account.
(h) 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 Sinking Fund
Account all of the funds in the Operating Account, less any amounts due the
Trustee under Section 7.7.
(i) If the funds in the Operating Account exceed $250,000 for a period
of 60 consecutive days or longer, the Company shall promptly transfer from
the Operating Account to the Sinking Fund Account that portion of such funds
exceeding $250,000 at the end of such 60 day period. This provision shall not
apply to any proceeds from the sale of the Notes by the Company if the
Company elects to deposit such proceeds in the Operating Account, and for
this purpose, any proceeds from the sale of Notes shall be deemed to be the
first funds used by the Company for the purchase of Eligible Additional
Contracts.
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(j) Upon the Sinking Fund Trigger Date, the Company shall deposit in
the Sinking Fund Account any remaining net proceeds from the sale of the
Securities that have not been used for the purchase of Contracts.
(k) All payments of principal or accrued interest with respect to the
Securities shall be made from amounts held in the Sinking Fund Account. All
payments to be made from time to time to the holders of Securities out of
funds in the Sinking Fund Account pursuant to this Indenture shall be made by
the Trustee as the Paying Agent appointed by the Company, subject to Section
5.2. All moneys deposited from time to time in the Sinking Fund Account, and
all investments made with such moneys, shall be held by the Trustee as part
of the Trust Estate as herein provided. No amounts contained in the Sinking
Fund Account shall be paid over to or at the direction of the Company, except
as provided in a Payment Date Statement delivered by the Company, that is in
compliance with provisions of Section 5.1 or 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 Sinking Fund 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 Sinking Fund 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 the
consent of the Trustee or any Noteholder, withdraw from the Operating Account
the funds necessary to pay the offering expenses incurred in connection with
the sale of the Notes, but not to exceed the limits set forth in the
Company's final prospectus filed with the SEC pursuant to which the
Securities are offered and sold on behalf of the Company.
SECTION 4.3 PURCHASE OF LEASED VEHICLES AND ELIGIBLE ADDITIONAL CONTRACTS.
(a) Leased Vehicles and Eligible Additional Contracts shall be
originated by the Servicer (or its contractors) for purchase by the Company
pursuant to the terms of the Servicing Agreements and this Indenture. In
carrying out its purchase obligations, the Servicer shall use its customary
and usual procedures in evaluating the purchase of motor vehicles and motor
vehicle lease Contracts and, to the extent more exacting, the procedures used
by the Servicer in respect to such motor vehicles and Contracts purchased by
it for its own account. The Company and the Servicer shall agree from time to
time as to which Leased Vehicles and Eligible Additional Contracts are to be
purchased by the Company through Servicer. The purchase prices for any such
purchases shall be payable from the funds in the Operating Account,
notwithstanding the provisions of Section 5.12. On or prior to each Servicer
Report Date, the Company shall deliver to the Trustee (or any duly appointed
custodian for the Contract Documents) the Contract Documents relating to such
Contracts, with the Contracts containing the notice required by Section
4.3(e).
(b) Servicer agrees that any motor vehicle lease Contracts originated
by it that satisfy the criteria established in Section 4.4 of this Indenture
will be offered for sale to the Company, to the extent that the Company has
sufficient funds to purchase such Contracts.
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(c) The purchase price payable by the Company for each Leased Vehicle
originated by the Servicer on the Company's behalf shall equal the original
purchase price of the Leased Vehicle, plus a fee to the Servicer equal to
$150 of per purchased Contract, plus 57.5% of the Obligor's down payment to
the Company. The purchase price payable by the Company for each Eligible
Additional Contract acquired from Transition Auto Finance Inc. ("TAFI"), an
affiliate of the Company, shall be an amount equal to the sum of (i) the
value of the Leased Vehicle on a "clean wholesale retail" basis, as
determined by reference to the Automobile Wholesale Buyer's Guide in effect
as of the date of the Company's purchase plus (ii) 57.5% of the down payment
originally received by TAFI with respect to such Leased Vehicle plus (iii)
$150.
(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 Holders of 50% of the aggregate
principal amount of the Outstanding Securities must be obtained.
(e) Each Eligible Additional Contract purchased by the Company pursuant
to this Section 4.3 shall be marked on its face with the following notice:
"NOTICE: THIS MOTOR VEHICLE LEASE CONTRACT HAS BEEN SOLD TO TRANSITION AUTO
FINANCE II, INC., AND IS SUBJECT TO A PERFECTED SECURITY INTEREST OF TRUST
MANAGEMENT, INC., AS TRUSTEE, UNDER AN INDENTURE DATED AS OF ______________,
1998 BETWEEN TRANSITION AUTO FINANCE II, INC. AND SAID TRUSTEE." A UCC-l
financing statement properly describing each Eligible Additional Contract and
naming the Trustee as secured party shall be duly filed in the appropriate
filing office to perfect the Trustee's security interest in such Contract.
(f) 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 (i) following the Sinking
Fund Trigger Date, or (ii) during the continuance of an Event of Default.
SECTION 4.4 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS.
With respect to each Contract, the Company covenants and agrees that,
effective as of the Purchase Date for such Contract, the following
representations and warranties shall be true and shall be reaffirmed by
delivery of the Purchased Contracts Certificate signed by the Servicer:
(a) Each Contract conforms with all applicable Federal, state and local
laws, regulations and official rulings.
(b) Each Contract (i) shall have been originated in the United States
of America and covers a Leased Vehicle purchased from a dealer in the retail
sale of the Leased Vehicle in the ordinary course of such dealer's business,
shall have been fully and properly executed by the parties thereto and the
full and complete title to such Leased Vehicle shall have been validly
assigned by such dealer to the Company in accordance with its terms, (ii)
shall have created or shall create ownership of the Leased Vehicle in the
name of the Company and a valid, subsisting
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and enforceable first priority security interest in favor of the Company and
a valid, subsisting and enforceable second priority security interest in
favor of the Trustee in the Leased 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 Leased Vehicle, (iv) shall provide for, in the event that
such Contract is prepaid, a prepayment that fully satisfies all required
payments pursuant to the Contract, (v) meets in all material respects all
purchasing criteria set forth on Exhibit A attached hereto, and (vi) shall
not be a Defaulted Contract.
(c) (i) The Title Document for the related Leased Vehicle shows (or if
a new or replacement Title Document is applied for with respect to such
Leased 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 owner of the Leased Vehicle and the Trustee as the holder of a first
priority security interest in such Leased Vehicle, (ii) within 30 days after
the Purchase Date for the Contract relating to the Leased Vehicle, the Title
Document for such Leased Vehicle will show the Company as owner of the Leased
Vehicle and the Trustee as the holder of a first priority security interest
in such Leased Vehicle, and (iii) the Company, upon delivery of the
Assignment, will have a valid and enforceable ownership interest in the
Leased Vehicle and the Trustee will have a first priority security interest
in the Leased Vehicle.
(d) Each Contract and the lease of the Leased Vehicle shall have
complied at the time it was originated or made 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, M 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.
(e) 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 effects of bankruptcy,
insolvency, reorganization or other similar laws affecting the enforceability
of creditors' rights generally.
(f) No provision of a Contract shall have been waived, amended or
modified, except as disclosed in writing by Servicer.
(g) No right of rescission, setoff, counterclaims or defense shall have
been asserted or threatened with respect to any Contract.
(h) The Assignment constitutes an enforceable sale and transfer of the
Leased Vehicle and the Contract from the Person from whom they are purchased
to the Company and it is the intention of the Servicer that the beneficial
interest in and title to the Leased Vehicles and the
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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.
(i) Immediately prior to the Assignment herein contemplated, the Person
from whom such Leased Vehicle or Contract is purchased by the Company had
good and marketable title to each Leased Vehicle or 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 Leased Vehicle and Contract,
free and clear of all liens, encumbrances, security interests and rights of
others.
(j) 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 4.5 GENERAL PROVISIONS REGARDING SINKING FUND ACCOUNT.
(a) The Company shall not direct the Trustee to make any investment of
any funds in the Sinking Fund Account or to sell any investment held in the
Sinking Fund 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 such issuer of such investment, such pledge may be so
registered), (B)any instrument evidencing such investment shall be delivered
directly to the Trustee or its agent; and (ii) the proceeds of each such sale
of an investment shall be remitted by the purchaser thereof directly to the
Trustee for deposit into the Sinking Fund Account.
(b) If any amounts are needed for disbursement from the Sinking Fund
Account and sufficient uninvested funds are not available to make such
disbursement, in the absence of a Company Order for the liquidation of the
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 Sinking Fund Account.
(c) The Trustee shall not in any way be held liable by reason of any
insufficiency in the Sinking Fund Account resulting from any loss on any
Eligible Investment included therein except that the Trustee shall remain
liable on Eligible Investments that are obligations of the Trustee in its
commercial capacity.
(d) All investments of funds in the Sinking Fund Account and all sales
of Eligible Investments held in the Sinking Fund 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 not be invested, in which
case such funds shall remain deposited in the Sinking Fund Account) or may be
a general, standing order authorizing the Trustee to act on written
instructions of specified personnel or agents of the Company. In order to
insure that the Trustee can invest funds in the Sinking Fund
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Account or sell any investment in the Sinking Fund 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:
(i) 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 Sinking Funds Account,
(ii) a Default or Event of Default shall have occurred and be
continuing but the Securities shall not have been declared due and payable
pursuant to Section 6.2, or if the Securities shall have been declared due
and payable following an Event of Default, amounts collected or receivable
from the related Trust Estate are being applied in accordance with Section
6.13, or
(iii) an Event of Default shall have occurred and be continuing, the
Securities shall have been declared due and payable pursuant to Section
6.2, and amounts collected or receivable from the related Trust Estate are
being applied in accordance with Section 6.10,
the Trustee shall invest and reinvest the funds then in the Sinking Fund Account
to the fullest extent practicable in the _______________________________________
__________________. All investments made pursuant to clause (i) above shall
mature on the next Business Day following the date of such investment, all
such investments made pursuant to clause (ii) above shall mature no later
than the next Payment Date, and all investments made pursuant to clause (iii)
above shall mature no later than the first date following the date of such
investment on which the Trustee proposes to make a distribution to
Noteholders pursuant to Section 6.10.
SECTION 4.6 RELEASES.
(a) The lien of this Indenture shall be released from a Liquidated
Contract (including any related Contract Documents and Leased Vehicle),
notwithstanding the provisions of Section 5.12, if:
(i) in the event that such Liquidated Contract has been paid in
full, the Trustee receives the certificate of a Servicing Officer
identifying such Contract and certifying that such Contract has been fully
paid and all proceeds received in respect of such Contract have been
deposited in the Master Collections Account;
(ii) in the event that such Liquidated Contract is required to be
purchased by the Servicer pursuant to the Servicing Agreement, the Trustee
receives a certificate of a Servicing Officer (A) identifying the Contract
to be released, (B) requesting the release thereof, and (C) certifying that
the correct repurchase price therefor has been deposited in the Master
Collections Account; and
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(iii) in the event that such Liquidated Contract is a "Liquidated
Contract" by virtue of clause (ii) of the definition thereof, the Trustee
receives the certificate of a Servicing Officer to the effect that such
Contract is a Defaulted Contract that became a Liquidated Contract during
the related Collection Period, and there has been deposited in the Master
Collections Account any related Net Liquidation Proceeds that, in the
Servicer's judgment, constitute the final amounts recoverable in respect of
such Contract.
(b) Each certificate of a Servicing Officer required by subsection (a)
above, shall contain a statement to the effect that the release of the
Liquidated Contract from the lien for this Indenture will not impair the
security under this Indenture in contravention of its provisions, after
taking into account the amounts deposited in the Master Collections Account
on the account of such Liquidated Contract.
SECTION 4.7 REPORTS BY TRUSTEE.
The Trustee shall report and account to the Company in writing (using
such form as the Trustee shall choose in its sole discretion) with respect to
the Sinking Fund 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 accounting of deposits into and
payments from the Sinking Fund Account.
SECTION 4.8 TRUST ESTATE; CONTRACT DOCUMENTS.
(a) Subject to the payment of its fees and expenses the Trustee may,
and when required by the provisions of this Indenture shall, execute
instruments to release property from the lien of this Indenture, or convey
the Trustee's interest in the same, in a manner and under circumstances that
are not inconsistent with the provisions of this Indenture. No party relying
upon an instrument executed by the Trustee as provided in this Article 4
shall be bound to ascertain the Trustee's authority, inquire into the
satisfaction of any conditions precedent or see to the application of any
moneys.
(b) In order to facilitate the servicing of the Contracts by the
Servicer, the Trustee hereby acknowledges that the Servicer is authorized in
the name and on behalf of the Company, to execute instruments of satisfaction
or cancellation, or of partial or full release or discharge, and other
comparable instruments with respect to the Contracts and with respect to the
Leased Vehicles.
(c) Upon Company Order, the Trustee shall, at such time as there are no
Securities Outstanding, release and transfer, without recourse, all of the
Trust Estate that secured the Securities (other than any cash held for the
payment of the Securities pursuant to Sections 4.2(b) or 8.2).
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ARTICLE 5
COVENANTS
SECTION 5.1 PAYMENT OF PRINCIPAL AND INTEREST.
(a) Interest payable on any Security shall be paid to the Person in
whose name such Security (or one or more predecessor Securities) is
registered at the close of business on the Record Date for such 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 a Security,
which shall be payable only upon presentation and surrender as provided in
subsection (b) of this Section 5.1.
Checks for interest shall be mailed without requiring that such Security
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 Securities and of any Securities
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 Securities is payable as
specified in the form of Security set forth in Section 2.2. Any installment
of interest that is not paid when and as due shall bear interest at the
Overdue Interest Rate from the date due to the date of payment thereof, but
only to the extent payment of such interest shall be lawful and enforceable.
The principal of each Security shall be payable at the Stated Maturity
thereof unless such Security becomes due and payable at an earlier date by
declaration of acceleration, call for redemption or otherwise. The final
payment of principal of each Security (or the Redemption Price thereof of the
Securities called for redemption) shall be payable upon presentation and
surrender thereof on or after its Stated Maturity to the Paying Agent. The
Trustee upon Company Order shall notify the Person in whose name a Security
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 Security will be paid. Such notice shall be mailed no
earlier than the sixtieth (60th) day, and no later than the twentieth (20th)
day, prior to such Payment Date and shall specify that such final payment
will be payable only upon presentation and surrender of such Securities and
shall specify the name and address of the Paying Agent where such Securities
may be presented and surrendered for payment of such installment. Notices in
connection with redemptions of Securities shall be mailed to Securityholders
as provided in Section 3.2.
(c) All computations of interest due with respect to any Securities
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 Securities from time to time.
(d) On each Servicer Report Date, the Company shall transmit to the
Trustee the Monthly Report (a "Payment Date Statement"), which shall set
forth, with respect to the next succeeding Payment Date, the amount of
interest payable on such Payment Date on each
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Outstanding Security. On the last Servicer Report Date prior to the Stated
Maturity, the Company shall transmit to the Trustee a final Payment Date
Statement setting forth, with respect to the Stated Maturity, the amount of
accrued interest and principal payable on the Stated Maturity on each
Outstanding Security. Each Payment Date Statement 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 Securities.
(e) The Company at any time may terminate its obligation to pay an
installment of interest if it deposits with the Trustee, or the Trustee holds
in the Sinking Fund Account as of the related Payment Date, money sufficient
to pay the installment when due. The Company shall designate the installment.
(f) Subject to the foregoing provisions of this Section 5.1, each
Security delivered under this Indenture upon registration of transfer of or
in exchange for or in lieu of any other Security shall carry the rights to
unpaid principal and interest, if any, that were carried by such other
Security.
SECTION 5.2 MONEY FOR SECURITY 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 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 Securities 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 Securities) in the making of any payment required to
be made with respect to the Securities; 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.
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(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 or the Leased
Vehicles, and (2) all lawful claims for labor, materials and supplies that,
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's Board of Directors 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's Board of Directors, 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 that shall cause it to become, or to be deemed to be, an "investment
Company" as defined under the provisions of the Investment Company Act.
SECTION 5.6 COMPLIANCE CERTIFICATES.
(a) Commencing with the fiscal year ending December 31, 1998, the
Company shall deliver to the Trustee within 120 days after the end of each
fiscal year of the Company a certificate of a firm of independent accountants
with respect to the compliance by the Company
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and the Servicer, in all material respects, with their respective obligations
arising under this Indenture. If such accountant knows of such a default, the
certificate shall describe the default.
(b) Commencing with the fiscal quarter ending December 31, 1998, on or
before 45 days after the end of each fiscal quarter of the Company, the
Company shall deliver an Officers' Certificate to the Trustee to the effect
that a review of the activities of the Company during the Company's preceding
fiscal quarter has been made under the supervision of the officers executing
such Officers' Certificate with a view to determining whether during such
period the Company and the Servicer have performed and observed all of their
obligations under this Indenture, and either (A) stating that to the best of
their knowledge no Default by the Company or the Servicer under this
Indenture has occurred and is continuing, or (B) if such a Default has
occurred and is continuing, specifying such Default and the nature and status
thereof.
(c) The Company will deliver to the Trustee an Officers' 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, and assurances as may reasonably
be requested by the Trustee. The certificates required under this Section 5.6
need not comply with Section 11.4.
(d) The Company will deliver to the Trustee within 15 days after the
occurrence thereof written notice of any Default.
SECTION 5.7 REPORTING.
(a) Commencing with the 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) that the
Company may be required to file with the SEC pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, within 15 days after it files them
with the SEC. The Company also shall comply with the other provisions of TIA
Section 314(a).
(b) Until the Company has a class of equity securities registered under
the Securities Exchange Act of 1934, the Company will prepare, for the first
three quarters of each fiscal year, commencing with the fiscal quarter ending
December 31, 1998, summary reports containing unaudited cash basis financial
statements of the Company. In addition, the Company will prepare, for each
fiscal year, an annual report containing complete audited financial
statements of the Company including, but not limited to, a balance sheet, a
statement of income and shareholders' equity, a statement of changes in
financial position and all appropriate notes. The annual financial statements
will be prepared in accordance with generally accepted accounting principles
consistently applied, except for changes with which the Company's independent
public accountants concur. Quarterly statements may be subject to year-end
adjustments. The Company will cause a copy of the respective quarterly or
annual report to be mailed to the Trustee and to each of the
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Holders of the Securities within 45 days alter the close of each of the first
three quarters of each fiscal year and within 120 days after the close of
each fiscal year, at such Holder's address appearing on the Note Register.
SECTION 5.8 PROTECTION OF TRUST ESTATE.
The Company will from time to time execute and deliver all such
supplements and amendments hereto and all such financing statements,
continuation statements, instruments of further assurance, and other
instruments, and will take such other action as is necessary or advisable to:
(i) grant more effectively all or any portion of the Trust Estate,
(ii) maintain or preserve the lien of this Indenture or carry out
more effectively the purposes hereof,
(iii) perfect, publish notice of, or protect the validity of, any
Grant made or to be made by this Indenture,
(iv) enforce any of the Contract Documents, or
(v) preserve and defend title to the Trust Estate and the rights
of the Trustee and the Securityholders in such Trust Estate against the
claims of all persons and parties.
SECTION 5.9 OPINIONS AS TO TRUST ESTATE.
(a) Upon the initial Company Order to the Trustee for the
authentication of Notes under this Indenture, the Company shall deliver to
the Trustee an Opinion of Counsel (i) that this Indenture, together with the
filing referred to in the next sentence, creates as security for the Notes a
security interest in the Contracts, and identifiable cash proceeds thereof in
the Operating Account and the Sinking Fund Account; (ii) that a financing
statement with respect to the Contracts has been filed with the Texas
Secretary of State pursuant to the Texas Uniform Commercial Code, as amended;
(iii) that the security interest in the Trust Estate has been perfected and
is a valid second priority security interest; and (iv) that no other filings
in any jurisdiction or any other actions are necessary to perfect the
security interest of the Trustee in the Trust Estate, as constituted as of
the date of such opinion, as against any third parties.
(b) On or before December 15, in each calendar year commencing with
1998, the Company shall furnish to the Trustee an Opinion of Counsel either
stating that, in the opinion of such counsel, such action has been taken with
respect to the recording, filing, re-recording and re-filing of this
Indenture, any indentures supplemental hereto and any other requisite
documents and with respect to the execution and filing of any financing
statements and continuation statements as is necessary to maintain the lien
and security interest created by this Indenture and reciting the details of
such action or stating that in the opinion of such counsel no such action is
necessary to maintain such lien and security interest. Such Opinion of
Counsel shall also describe
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the recording, filing, re-recording and re-filing of this Indenture, any
indentures supplemental hereto and any other requisite documents and the
execution and filing of any financing statements and continuation statements
that will, in the opinion of such counsel, be required to maintain the lien
and security interest of this Indenture until December 15 in the following
calendar year. In rendering such opinion, such counsel may rely upon an
Officers' Certificate of the Servicer as to the filing of any financing
statements and to the effect that no further assignment of the related
Contract or satisfaction and discharge thereof has been recorded and that the
original financing statements so filed have not been discharged.
SECTION 5.10 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 that would release any Person from any of such Person's
covenants or obligations under any of the Contract Documents or under any
instrument included in the Trust Estate, or that 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 Documents 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, 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 with respect to
the Contracts, the Company may remedy such failure. So long as any such
default under the Servicing Agreement shall be continuing, the Trustee may,
and upon the direction of the Holders of Securities representing more than 25
% of the aggregate principal amount of the Outstanding Securities the Trustee
shall, direct the Company to, and the Company shall, terminate all of the
rights and powers of the Servicer under the Servicing Agreement. Unless
directed or permitted by the Trustee or the Holders of Securities
representing not less than 50% of the aggregate principal amount of the
Outstanding Securities, the Company may not waive any such default under the
Servicing Agreement or terminate the rights and powers of the Servicer under
the Servicing Agreement.
(d) Upon any termination of the Servicer's rights and powers, all
rights, powers, duties, obligations and responsibilities of the Servicer with
respect to the related Contracts (except for any obligations of the Servicer
to indemnify the Company) shall vest in and be assumed by the Company, or any
servicing agent that the Company may designate, and the Company or its
servicing agent shall be the successor in all respects to the Servicer in its
capacity as servicer with respect to such Contracts under the Servicing
Agreement (except for any obligations of the Servicer to indemnify the
Company). The Company may resign as the Servicer by giving written notice of
such resignation to the Trustee and in such event will be released from such
duties and obligations, such release not to be effective until the date a new
servicer enters into a servicing
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agreement with the Company as provided below and has been approved in writing
by the Trustee. Any successor servicer shall enter into a servicing agreement
with the Company substantially similar to the Servicing Agreement. The
Company may make such arrangements for the compensation of such successor
servicer as it and such successor servicer shall agree, provided that such
compensation of the successor servicer shall not be in excess of that payable
to the Servicer under the Servicing Agreement, unless the Servicer or the
Company agrees to pay such additional compensation.
SECTION 5.11 NEGATIVE COVENANTS.
The Company will not:
(i) sell, transfer, exchange or otherwise dispose of any of the
Trust Estate except as expressly permitted by this Indenture;
(ii) obtain or carry insurance relating to the Contracts separate
from that required by the Servicing Agreement, unless the Trustee shall be
named therein as a loss payee;
(iii) claim any credit on, or take any deduction from, the principal
of or interest payable in respect to the Securities by reason of the
payment of any taxes levied or assessed upon any part of the Trust Estate;
(iv) engage in any business or activity other than in connection
with the purchase, collection and servicing of lease Contracts or consumer
obligations secured by motor vehicles, the repossession and resale of motor
vehicles and the raising of capital, both debt and equity, and any other
incidental businesses or activities, without the consent of the Holders of
a majority of the aggregate principal amount of the Securities then
outstanding;
(v) without the consent of the Holders of a majority of the
aggregate principal amount of the Securities then outstanding, create,
incur, assume or in any manner become liable in respect of any indebtedness
other than the Securities, any indebtedness incurred for the purpose of the
purchase of lease Contracts or consumer obligations relating to or secured
by motor vehicles (including any related borrowing and transactional
costs), any Allowed Expenses and any other amounts incurred in the ordinary
course of the Company's business;
(vi) dissolve or liquidate in whole or in part;
(vii) merge or 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; any such merger or
consolidation with another Subsidiary of the Servicer shall be subject to
the following conditions:
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(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 (iv)
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 or Default shall exist with respect to
the Securities;
(viii) (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;
(ix) (1) permit the validity or effectiveness of this Indenture to
be impaired, or permit the lien of this Indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit any Person
to be released from any covenants or obligations under this Indenture,
except as may be expressly permitted hereby, (2) permit any lien, charge,
security interest, mortgage or other encumbrance (other than the lien of
this Indenture) to be created on or extend to or otherwise arise upon or
burden the Trust Estate or any part thereof or any interest therein or the
proceeds thereof, or (3) permit the lien of this Indenture not to
constitute a valid first priority security interest in the Trust Estate; or
(x) originate or acquire any Contract with 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
the Indenture and the Servicing Agreement with respect to such Contract,
(3) necessary to maintain the enforce ability of such Contract and the
security interest in the related Leased 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.
(xi) enter into any transaction with the Servicer, or any
Affiliate of the Servicer on terms less favorable to the Company than
could be obtained from an independent third party in an arms-length
transaction.
SECTION 5.12 SUBSTITUTION OR RELEASE OF COLLATERAL OR WITHDRAWAL OF CASH IN
TRUST ESTATE.
(a) The Company shall furnish to the Trustee an Officer's Certificate
stating the fair value of any property or securities the deposit of which
with the Trustee is to be the basis for the withdrawal or release of any
cash, property or securities constituting a part of the Trust Estate.
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If the fair value to the Company of any such securities and all other such
securities made the basis for the withdrawal or release of any cash, property
or securities constituting part of the Trust Estate since the commencement of
the then current calendar year, as set forth in the Officer's Certificates
with respect thereto, is 10% or more of the aggregate principal amount of the
Notes at that time Outstanding, and if the fair value of such securities so
delivered is at least $25,000 and one percent of the aggregate principal
amount of the Notes at that time outstanding, the Company shall furnish a
certificate of an Independent appraiser or financial expert as to the fair
value of the securities so delivered. If the property so delivered has been
used or operated by a Person other than the Company, within six months prior
to the date of acquisition by the Company, in a business similar to that in
which it has been or is to be used or operated by the Company, and if the
fair value to the Company of such property is not less than $25,000 and not
less than one percent of the aggregate principal amount of the Notes at that
time Outstanding, the Company shall furnish an opinion of an Independent
engineer, appraiser or other expert covering the fair value to the Company of
the property so subjected to the lien of the Indenture.
(b) The Company shall furnish to the Trustee an Officer's Certificate
as to the fair value of any property or securities to be released from the
lien of this Indenture and stating that in the opinion of the signer the
proposed release will not impair the security under this Indenture in
contravention of its provisions. If the fair value of such property or
securities and of all other property or securities released since the
commencement of the then current calendar year, as set forth in such
Officer's Certificates required by the preceding sentence, is 10% or more of
the aggregate principal amount of the Notes at the time Outstanding and if
the fair value of the property or securities proposed to be released is at
least $25,000 and one percent of the aggregate principal amount of the Notes
at the time Outstanding, the Company shall furnish an opinion of an
Independent engineer, appraiser or other expert with respect to the same
subject matter required to be set forth in such Officer's Certificate.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.1 EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest on any Security
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
Security when the same becomes due and payable at the Stated Maturity, upon
redemption or otherwise;
(3) the Company falls to comply with any of its other agreements in
the Securities 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
alter 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
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is a "Notice of Default" hereunder or after receipt by the Company and the
Trustee of such notice from the Holders of not less than 25% in aggregate
principal amount of the Securities then Outstanding;
(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 m any material
respect as of the time when the same shall have been made 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 Securities
representing at least 25 % of the aggregate principal amount of the
Outstanding Securities, the circumstance or condition in respect of which
such representation or warranty was incorrect shall not have been
eliminated or otherwise cured;
(5) if (i) the validity or effectiveness of this Indenture or any
Grant under 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, (ii) any lien, charge, security
interest, mortgage or other encumbrance (exclusive of any mechanic's lien
on any Leased Vehicle) shall be created on or extend to or otherwise arise
upon or burden the Trust Estate or any part thereof or any interest therein
or the proceeds thereof, or (iii) this Indenture shall not constitute a
valid first priority security interest in the Trust Estate, and if any of
the foregoing Defaults shall continue for a period of 30 days after receipt
by the Company of written notice 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 Securities representing at least 25 % of
the aggregate principal amount of the Outstanding Securities; or
(6) the Company, pursuant to or within the meaning of any 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:
(A) for relief in an involuntary case;
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(B) appointing a receiver, trustee, assignee, liquidator or
similar official for all or substantially all of its property; or
(C) ordering its liquidation.
The term "Bankruptcy Law" means title 11, U.S. Code, or any similar Federal or
State law for the relief of debtors.
SECTION 6.2 ACCELERATION.
If an Event of Default occurs and is continuing, the Trustee may, or at
the direction of the Holders of at least 25 % in principal amount of the
Securities shall, by notice to the Company, declare the principal amount of
all the Securities together with accrued interest thereon to be due and
payable immediately, and upon any such declaration such principal and accrued
and unpaid interest shall become immediately due and payable, notwithstanding
anything contained in this Indenture or the Securities to the contrary. The
Holders of a majority in principal amount of the Outstanding Securities may,
by written notice to the Trustee, rescind an acceleration and its
consequences if all existing Events of Default have been cured or waived, all
expenses relating to the Default have been paid and if the rescission would
not conflict with any judgment or decree.
SECTION 6.3 REMEDIES.
(a) If an Event of Default shall have occurred and be continuing, the
Trustee may, subject to Section 6.2, do one or more of the following:
(i) make demand and institute judicial proceedings in equity or
law for the collection of all amounts then payable on the Securities, or
under this Indenture, whether by declaration or otherwise, enforce all
judgments obtained, and collect from the Company the Trust Estate securing
the Securities and moneys adjudged due;
(ii) subject to Section 6.14, sell the Trust Estate securing the
Securities or any portion thereof or rights or interest therein, at one or
more public or private Sales called and conducted in any manner permitted
by law;
(iii) institute judicial proceedings in equity or at law from time
to time for the complete or partial foreclosure of this Indenture with
respect to the Trust Estate; and
(iv) exercise any remedies of a secured party under the UCC and
take any other appropriate action to protect and enforce the rights and
remedies of the Trustee or the Holders of the Securities hereunder.
(b) The Trustee may maintain a proceeding even if it does not possess
any of the Securities or does not produce any of them in the proceedings. A
delay or omission by the Trustee or any Securityholder 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.
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SECTION 6.4 WAIVER OF PAST DEFAULTS.
Subject to Section 9.2, the Holders of a majority in principal amount of
the Outstanding Securities may, by written notice to the Trustee, waive an
existing Default and its consequences. When a Default is waived in accordance
herewith, it is cured and shall stop continuing.
SECTION 6.5 CONTROL BY MAJORITY.
The Holders of a majority in aggregate principal amount of the
Outstanding Securities 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 Securityholders not joining in such direction,
or that would involve the Trustee in personal liability.
SECTION 6.6 LIMITATION ON SUITS.
(a) A Securityholder may not pursue any remedy with respect to this
Indenture or the Securities unless:
(i) the Holder gives to the Trustee written notice of a continuing
Event of Default;
(ii) the Holders of at least 25 % in aggregate principal amount of
the Outstanding Securities make 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 expense;
(iv) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity and the Event of
Default has not been waived; and
(v) the Trustee has received no contrary direction from the
Holders of a majority in principal amount of the Outstanding Securities
during such 60-day period.
(b) A Securityholder may not use this Indenture to prejudice the rights
of another Securityholder or to obtain a preference or priority over another
Securityholder.
SECTION 6.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Security to receive payment of principal and interest on the
Security, 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.
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SECTION 6.8 COLLECTION SUIT BY TRUSTEE.
If an Event of Default in payment of interest or principal 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 Securityholders 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
Securities 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 Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities 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.
The Trustee shall fix a Special Record Date and payment date pursuant to
Section 2.11 hereof for any payment to Securityholders under this Section
6.10.
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
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or defenses made by the party litigant. This Section does not apply to a suit
by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by
Holders of more than 10% in principal amount of the Outstanding Securities.
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 Securities 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.
SECTION 6.13 OPTIONAL PRESERVATION OF TRUST ESTATE.
(a) If the Securities have been declared due and payable following an
Event of Default and such declaration and its consequences have not been
rescinded and annulled, the Trustee may, in its sole discretion, refrain from
selling the Trust Estate and may apply all amounts received with respect to
such Trust Estate to the payment of the principal of and interest on the
Securities as and when such principal and interest would have become due
pursuant to the terms hereof and of the Securities if there had not been a
declaration of acceleration of the maturity of the Securities, provided that:
(i) the Trustee shall have determined that the amounts receivable
with respect to such Trust Estate are sufficient to provide the funds
required to pay the principal of and interest on the Securities as and when
such principal and interest would have become due pursuant to the terms
hereof and of the Securities if there had not been a declaration of
acceleration of the maturity of the Securities; and
(ii) the Securityholders shall not have directed the Trustee in
accordance with Section 6.5 (subject, however, to Section 6.14(b)) to sell
the Trust Estate securing the Securities.
(b) The Trustee may, but need not, obtain and rely upon an opinion of
an independent investment banking firm as to the feasibility of any action
proposed to be taken in accordance with Section 6.13(a) and as to the
sufficiency of the amounts receivable with respect to the Trust Estate to
make the required payments of principal of and interest on the Securities,
which opinion shall be conclusive evidence as to such feasibility or
sufficiency.
(c) If the conditions of Section 6.13(a) are not satisfied after the
Securities have been declared due and payable following an Event of Default
or the Trustee does not determine to take
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the action specified in Section 6.13(a), then all amounts collected by the
Trustee with respect to the Securities pursuant to this Article 6 or
otherwise shall be applied in accordance with Section 6.10.
(d) Notwithstanding anything in this Indenture to the contrary, if the
Securities have been declared due and payable, then Trustee may, in its sole
discretion, retain the Trust Estate without compliance with this Section 6.13
and apply all amounts received with respect to the Trust Estate to the payment
of principal and interest on the Securities as and when such principal and
interest would have become due pursuant to the terms hereof and of the
Securities if there had not been a declaration of acceleration of the maturity
of the Securities.
SECTION 6.14 SALE OF TRUST ESTATE.
(a) The power to effect any sale (a "Sale") of any portion of the Trust
Estate pursuant to Section 6.3 shall not be exhausted by any one or more
Sales as to any portion of such Trust Estate remaining unsold, but shall
continue unimpaired until the entire such Trust Estate shall have been sold
or all amounts payable on the Securities secured thereby and under this
Indenture with respect thereto shall have been paid. The Trustee may from
time to time postpone any Sale by public announcement made at the time and
place of such Sale. The Trustee hereby expressly waives its rights to any
amount fixed by law as compensation for any Sale.
(b) (i) Without the consent or direction to the contrary by the Holders
of a majority in principal amount of the Securities then Outstanding, the
Trustee shall not sell or otherwise dispose of the Trust Estate following an
Event of Default for an amount less than the sum of (x) the amount of fees
and expenses of such sale that are reimbursable to the Trustee and (y) the
entire amount that would be distributable to the Holders of the Securities,
in full payment thereof in accordance with Section 6.10, and (ii) without the
consent of or direction to the contrary by the Holders of a majority in
principal amount of the Securities then Outstanding, at any public Sale at
which no other Person bids an amount equal to or greater than the amount
described in clause (y) above, the Trustee shall bid an amount at least equal
to $1.00 more than the highest other bid.
(c) The Trustee may bid for and acquire any portion of the Trust Estate
in connection with a public Sale thereof. The Securities need not be produced
in order to complete any such sale. The Trustee may, subject to this
Indenture, hold, lease, operate, manage or otherwise deal with any property
so acquired in any manner permitted by law.
(d) The Trustee shall execute and deliver an appropriate instrument of
conveyance transferring its interest in any portion of the Trust Estate in
connection with a Sale thereof. In addition, the Trustee is hereby
irrevocably appointed the agent and attorney-in-fact of the Company to
transfer and convey its interest in any portion of the Trust Estate in
connection with a Sale thereof (including changing the designation of the
secured party on any certificate of title or financing statements), and to
take all action necessary to effect such Sale. No purchaser or transferee at
such a Sale shall be bound to ascertain the Trustee's authority, inquire into
the satisfaction of any conditions precedent or see to the application of any
moneys.
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(e) Notwithstanding anything in this Indenture to the contrary, if an
Event of Default specified in Section 6.1(1) or (2) is the Event of Default,
or one of the Events of Default, on the basis of which the Securities have
been declared due and payable, then the Trustee may, in its sole discretion,
sell the Trust Estate without compliance with this Section 6.14.
ARTICLE 7
TRUSTEE
SECTION 7.1 DUTIES OF TRUSTEE.
(a) For so long as any Notes remain outstanding, the Trustee shall:
(i) maintain the custodianship of the documentation delivered to
it evidencing title or perfected security interest in the Company's
assets;
(ii) verify all funds deposited in the trust account for the
benefit of the Securityholders and use its best efforts to verify all
payments called for under the terms of this Indenture;
(iii) verify the delivery of all reports and other instruments
required pursuant to the terms of this Indenture and the Securities
Exchange Act of 1934;
(iv) examine all reports or other instruments furnished to the
Trustee pursuant to the terms of this Indenture and determine, based on
the information provided, whether there is a violation of any of the
terms and conditions set forth in this Indenture;
(b) 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 their exercise as a prudent man
would exercise or use under the circumstances in the conduct of his own
affairs.
(c) Except during the continuance of an Event of Default:
(i) The Trustee need perform only those duties that are
specifically set forth in this Indenture and no others.
(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.
(d) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, breach of this Indenture
or its own willful misconduct, except that:
(i) This paragraph does not limit the effect of paragraph (c) 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 in accordance with a direction
received by it from the Holders of not less than a majority in principal
amount of the Notes at the time Outstanding.
(e) The Trustee shall not be liable for any action or omission taken or
not taken by the Servicer of any kind or nature.
(f) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives written indemnity and security satisfactory to it
against any loss, liability or expense and no provision of this Indenture or
any other document shall require the Trustee to expend or risk its own funds
or otherwise incur 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 to believe that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured
to it; provided, however, that in the event that the Trustee determines that
there has been an Event of Default, the Trustee shall not be entitled to such
indemnification and security other than that provided in this Indenture as a
condition to providing notice of such default to the Securityholders in
accordance with the terms of this Indenture and to taking appropriate remedial
action.
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(g) 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.
(h) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraph (b), (c), (d) and (e) of this Section.
SECTION 7.2 RIGHTS OF TRUSTEE.
(a) The Trustee may rely on any document 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. 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 or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records, and premises of the
Company, personally or by agent or attorney, to the extent reasonably
required by such inquiry or investigation.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall
not be liable for any action it takes or omits to take in good faith in
reliance on such Certificate or Opinion.
(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 not be liable for any action it takes or omits to
take in good faith that it believes to be authorized or within its rights or
powers.
(e) The Trustee may consult with counsel of its selection and the
advice of such counsel or any opinion of counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(f) The Trustee shall not be deemed to have notice of any Default or
Event of Default unless a Trust Officer of the Trustee has actual knowledge
thereof or unless written notice of any event which is in fact such a default
is received by the Trustee at the principal corporate trust office of the
Trustee, and such notice references the Securities and this Indenture.
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the owner
or pledgee of Securities and may otherwise deal with the Company or its
Affiliate with the same rights it would have if it were not the 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.
SECTION 7.4 TRUSTEE'S DISCLAIMER.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities. It shall not be accountable for the
Company's use of the proceeds from the Securities and shall not be
responsible for any statement in the Securities, other than its certificate of
authentication, or in any prospectus used in the sale of the Securities,
other than statements provided in writing by the Trustee for use in such
prospectus.
SECTION 7.5 NOTICE OF DEFAULTS.
If a Default occurs and is continuing and if it is known to the Trustee,
the Trustee shall mail to each Securityholder notice of the Default within 90
days after it obtains actual knowledge of the Default. Except in the case of
a Default in payment on any Security, 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
Securityholders.
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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 Securityholder a brief report dated as of such September 30 that
complies with TIA Section 313(a). The Trustee also shall also, to the extent
required by TIA Section 313(b), comply with TIA Section 313(b)(l) 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 Securityholders shall be filed
with the SEC and each national securities exchange on which the Securities
are listed. The Company shall notify the Trustee if and when the Securities
are listed on any national securities exchange (as defined in the Securities
Exchange Act of 1934) or quoted on NASDAQ.
(c) Within 60 days after each December 31 beginning with December 31,
1998, the Trustee shall mail to each Securityholder a brief report which
indicates whether the Trustee has fulfilled its obligations under this
Indenture and whether there have been any known uncured defaults under this
Indenture.
SECTION 7.7 COMPENSATION AND INDEMNITY.
(a) 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. Such expenses may include the reasonable compensation and expenses of
the Trustee's agents and counsel. The Company 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, expenses and disbursements of any kind or nature whatsoever
(including, reasonable attorneys' fees) that may be imposed on, incurred by
or asserted against Trustee or its successors, or their respective officers,
directors, employees, agents and attorneys, in connection with the
performance of its duties hereunder. The Trustee shall notify the Company
promptly of any claim for which it may seek indemnity. The Company shall
defend the claim and the Trustee shall cooperate in the defense. The Trustee
may have separate counsel and the Company shall pay the reasonable fees and
expenses of such counsel. The Company need not pay for any settlement made
without its consent. The Company need not reimburse any expense or indemnify
against any loss or liability incurred by the Trustee through the Trustee's
negligence or bad faith, other than to the extent that such negligence or bad
faith is excused pursuant to Sections 7.1 and 7.2.
(b) To secure the Company's payment of these obligations, the Trustee
shall have a lien prior to the Securities on all money or property held or
collected by the Trustee, except that held in trust to pay principal and
interest on the Securities. Such obligations shall survive the satisfaction
and discharge of this Indenture.
(c) When the Trustee incurs expenses or renders services after an Event
of Default specified in Section 6.1(7) or (8), the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
(d) The provisions of this Section 7.7 shall survive the satisfaction
and discharge or other termination of this Indenture.
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SECTION 7.8 REPLACEMENT OF TRUSTEE.
(a) The Trustee may resign at any time upon 30 days prior written
notice to the Company. The Holders of a majority in principal amount of the
Outstanding Securities 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 falls 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 Securityholder.
(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 Holders of a majority in principal amount of the Securities 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
Securityholder 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 or
if the Trustee consolidates with, merges or converts into, or transfers a
substantial portion of its corporate trust assets to a Person that is
wholly-owned by the Trustee or by the Trustee's parent (of which the Trustee
is a wholly-owned subsidiary), the resulting, surviving or transferee Person
without any further act shall be the successor Trustee.
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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 $1,000,000 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.
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 Securities, 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
Securities of any withholding taxes imposed thereon and with respect to any
reporting requirements in connection therewith.
ARTICLE 8
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 Securities 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 Securities theretofore authenticated and delivered
(other than Securities that have been destroyed, lost or stolen and that
have been replaced or paid as provided in Section 2.8) have been delivered
to the Trustee for cancellation; or
(B) all such Securities 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
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(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 Securities not theretofore delivered to the Trustee for
cancellation, the principal at Stated Maturity of such Securities, 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 Officers'
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.
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
Securities 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, or the Securities 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 Securities in full. The Trustee and
the Paying Agent shall pay to the Company upon request 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, Securityholders
entitled to such funds must look to the Company for the payment of such
unclaimed principal or interest.
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ARTICLE 9
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 Securities without notice to or consent of any Securityholder:
(i) to cure any ambiguity, defect or inconsistency in this
Indenture or the Securities;
(ii) to effect a merger or consolidation in conformance with
Section 5.11(vii);
(iii) to provide for uncertificated Securities in addition to or in
place of certificated Securities;
(iv) to make any change that does not materially adversely affect
the rights of any Securityholder; 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 provision of
this Indenture or the Securities without notice to or consent of any
Securityholder if the waiver does not adversely affect the rights of any
Securityholder, provided that the Indenture or the Securities reflect the terms
of such waiver.
SECTION 9.2 WITH CONSENT OF HOLDERS.
(a) The Company and the Trustee may amend or supplement this Indenture
or the Securities without notice to any Securityholder but with the written
consent of the Holders of at least a majority in principal amount of the
Securities. The Holders of a majority in principal amount of the Securities
may waive compliance by the Company with any provision of this Indenture or
the Securities without notice to any Securityholder. However, without the
consent of each Securityholder affected, an amendment, supplement or waiver,
including a waiver pursuant to Section 6.4, may not:
(i) reduce the amount of Securities 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 Security;
(iii) reduce the principal of or extend the Stated Maturity of any
Security;
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(iv) permit the creation of any lien ranking prior to or on a
parity with the lien of this Indenture with respect to any part of a Trust
Estate or terminate the lien of this Indenture on any property at any time
subject hereto or deprive the Holder of any Note of the security afforded
by the lien of this Indenture; or
(v) make any Security payable in money other than that stated in
the Security.
(b) After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing the amendment.
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment to or supplement of this Indenture or the Securities
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 of a
Security shall bind the holder and every subsequent Holder of a Security or
portion of a Security that evidences the same debt as the consenting Holder's
Security, even if notation of the consent is not made on any Security.
However, any such Holder or subsequent Holder may revoke the consent as to
his Security or portion of a Security. 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 Securityholder 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 of a Security or portion of a
Security that evidences the same debt as the consenting Holder's Security.
SECTION 9.5 NOTATION ON OR EXCHANGE OF SECURITIES.
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the
Trustee. The Trustee may place an appropriate notation on the Security
concerning the change terms and return it to the Holder. Alternatively, if
the Company or the Trustee so determines, the Company in exchange for the
Security shall issue, and the Trustee shall authenticate, a new Security 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 or Securityholders. 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
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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 does not adversely
affect the rights of the Securityholders.
ARTICLE 10
MEETINGS OF SECURITYHOLDERS
SECTION 10.1 PURPOSES FOR WHICH MEETINGS MAY BE CALLED.
A meeting of Securityholders may be called for the following purposes:
(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 default hereunder and its consequences;
(b) to remove the Trustee, or 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
Securities 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 Securityholders 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 of the Securities 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
Securities are present in person or by proxy, or if notice is waived before
or alter the meeting by the Holders of all Securities outstanding, and if the
Company and the Trustee are either present or have, before or after the
meeting, waived notice.
SECTION 10.3 CALL OF MEETINGS BY COMPANY OR SECURITYHOLDERS.
In case at any time the Company or the Holders of not less than 50% in
aggregate principal amount of the Securities then outstanding shall have
requested in writing that the Trustee call a meeting of Securityholders to
take any action specified in Section 10.1, and the Trustee shall not
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have mailed the notice of such meeting within 20 days after receipt of such
request, then the Company or the Holders of Securities 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 Securityholders, a person
shall (a) be a Holder of one or more Securities, or (b) be a person appointed
by an instrument in writing as proxy for the Holder of Securities. The only
persons who shall be entitled to be present or to speak at any meeting of
Securityholders 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 Securityholders, to prove the holding of
Securities, 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 Securityholder or proxy shall be entitled to
one vote for each $1,000 principal amount of Securities held by him;
provided, however, that the Company shall not be entitled to vote any
Securities held of record by it. At any meeting of Securityholders, the
presence of persons holding or representing any number of Securities shall be
sufficient for a quorum.
SECTION 10.6 EXERCISE OF RIGHTS OF TRUSTEE OR SECURITYHOLDERS 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 Securityholders or any rights
expressly or impliedly conferred hereunder to make such call, any hindrance
or delay in the exercise of any rights conferred upon or reserved to the
Trustee or to the Securityholders or by the Securities.
SECTION 10.7 EVIDENCE OF ACTIONS BY SECURITYHOLDERS.
Whenever the Holders of a specified percentage in aggregate principal
amount of the Securities 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 securityholders in person or by attorney or written proxy,
or (b) the Holders of Securities voting in favor thereof at any meeting of
Securityholders called and held in accordance with the provisions of this
Article 10, or (c) by a combination thereof. The Trustee may require proof of
any matter concerning the execution of any instrument by a Securityholder or
his attorney or proxy as it shall deem necessary.
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ARTICLE 11
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 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: Transition Auto Finance Inc.
5422 Alpha Road
Suite 100
Dallas, Texas 75240
Attn: Ken Lowe, President
if to the Trustee: Trust Management, Inc.
210 West Sixth Street, Suite 605
Fort Worth, Texas 76102
Attn: Robert C. Finley, President
if to the Servicer: Transition Leasing Management, Inc.
5422 Alpha Road
Suite 100
Dallas, Texas 75240
Attn: Ken Lowe, 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 Securityholder shall be
mailed first class, postage prepaid to him at his address as it appears on
the Note Register of the Registrar and shall be sufficiently given to him if
so mailed within the time prescribed. If the Company mails a notice or
communication to Securityholders, it shall mail a copy to the Trustee at the
same time.
(d) Failure to mail a notice or communication to a Securityholder or
any defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner
provided above, it is duly given, whether or not the addressee receives it.
56
<PAGE>
SECTION 11.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Securityholders may communicate pursuant to TIA Section 312(b) with
other Securityholders with respect to their rights under this Indenture or
the Securities. 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 Officers' 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
Securities.
57
<PAGE>
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.
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 Securities 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 Securityholders.
SECTION 11.10 SUCCESSORS.
All agreements of the Company and the Servicer in this Indenture and the
Securities 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.
<PAGE>
ARTICLE TWELVE
AGREEMENTS OF SERVICER
SECTION 12.1 GENERAL.
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.
SECTION 12.2 SERVICER ACTING AS CUSTODIAN.
The Servicer acknowledges that any collections or proceeds from the
Contracts in the Master 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 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.
<PAGE>
(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 12.5 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 12.6 PERFORMANCE OF OBLIGATIONS.
(a) The Servicer shall punctually perform and observe all of its
obligations and agreements contained in 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 12.7 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
<PAGE>
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 12.9 .
(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 12.5 (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.
(c) For a period of 90 days after the occurrence of any Subsidiary
Payment Default (as hereinafter defined), the Trustee shall have the right to
remove the Servicer and terminate the Servicing Agreement upon delivery of
written notice of removal and termination to the Servicer. As used in this
Section 12.7(c), the term "Subsidiary Payment Default" shall mean any
default in the payment of principal and interest on any other Asset-backed
Securities (as hereinafter defined) issued (i) by an entity owned or
controlled by Transition Leasing or any affiliate of Transition Leasing and
formed for the purpose of issuing Asset-Backed Securities, (ii) in connection
with the same business plan as that of the Company and (iii) in connection
with a business plan utilizing Transition Leasing as servicer. As used in
this Section 12.7(c), the term "Asset-Backed Securities" means securities
that provide a stated rate of return to holders of such securities and that
are primarily paid, as to both return of investment and return on investment,
by the cash flow from the collateral securing such payment obligations.
SECTION 12.8 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS.
With respect to each Contract, the Servicer represents and warrants to the
Company, effective as of the date each such Contract is executed by the Company,
as follows:
(a) All of the representations and warranties with respect to the Servicer
set forth in Section 12.4 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 the Servicer in the ordinary course of an automobile dealer's
business, shall have been fully and properly executed by the parties thereto,
(ii) shall contain customary and enforceable provisions such that the rights and
remedies of the holder thereof shall be adequate for realization against the
Contract lessee for the benefits of the Contract, (iii) shall have met, at the
time of its execution, in all material respects all purchasing criteria set
forth on EXHIBIT A attached hereto and in the Servicing Agreement, and (iv)
shall not be a Defaulted Contract.
(d) (i) The Title Document for the related Leased Vehicle shows (or if a
new or replacement Title Document is applied for with respect to such Leased
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 Company as the owner of the Leased Vehicle
and the Trustee, on behalf of the Trust, as the holder of a first priority
security interest in such Leased Vehicle, (ii) within 120 days after the
Purchase Date for the Contract relating to the Leased Vehicle, the Title
Document for such Leased Vehicle will show the Company as the owner of the
Leased Vehicle and the Trustee, on behalf of the
<PAGE>
Trust, as the holder of a first priority security interest in such leased
Vehicle, and (iii) the Company, upon execution of the Contract, will own the
Leased Vehicle and the Trustee, on behalf of the Trust, delivery of the
Assignment, will have a valid and enforceable security interest in the Leased
Vehicle.
(e) Each Contract and the sale or lease of each Leased 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) 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) No Contract shall have been originated in, or shall be subject to the
laws of, any jurisdiction under which the execution of such Contract would be
unlawful, void, or voidable.
SECTION 12.9 PURCHASE OF CERTAIN CONTRACTS.
(a) The representations and warranties of the Servicer set forth in
Section 12.8 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
<PAGE>
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 Master Collections Account
no later than the end of the calendar month after which such 90-day 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.
(c) At the time of any purchase by the Servicer of any Contract,
pursuant to the provisions of subparagraph (a) above or otherwise, the
Servicer shall certify to the Trustee in writing that (i) such purchase is
not for the purpose of recognizing gains or decreasing losses resulting from
market value changes in the Company's portfolio of Contracts and Leased
Vehicles and (ii) such purchase is at the price determined by the following
formula: the purchase price paid by the Company for the Contract (and the
Leased Vehicle related thereto), less the amount of any lease payments
received by the Company after the acquisition of the Contract.
SECTION 12.10 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 12.11 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 Leased Vehicle securing a Contract.
<PAGE>
SECTION 12.112 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
12.12(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 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.
SECTION 12.13 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, as of the date and year first above written.
TRUST MANAGEMENT, INC.,
Attest: AS TRUSTEE
By:
- ------------------------------------ -------------------------------------
Title Title:
----------------------------------
Attest: TRANSITION AUTO FINANCE II, INC.
By:
- ------------------------------------ -------------------------------------
Secretary Ken Lowe, President
The undersigned Transition Leasing Management, 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 perform any of the Company's obligations
hereunder.
Attest: Transition Leasing Management, Inc.
By:
- ------------------------------------ -------------------------------------
Secretary Ken Lowe, President
58
<PAGE>
STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
BEFORE ME, the undersigned authority, on this day personally appeared
Ken Lowe, President of Transition Auto 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 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 __________,
1998.
[SEAL] --------------------------------------------
Notary Public in and for the State of Texas
--------------------------------------------
Notary Public Printed or Typed Name
My Commission Expires:
----------------------
STATE OF TEXAS Section
Section
COUNTY OF TARRANT Section
BEFORE ME, the undersigned authority, on this day personally appeared
____________ _____________________, ____________________ of Trust Management,
Inc., 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 trust company.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of ___________,
1998.
[SEAL] --------------------------------------------
Notary Public in and for the State of Texas
--------------------------------------------
Notary Public Printed or Typed Name
My Commission Expires:
----------------------
59
<PAGE>
EXHIBIT A
LEASED VEHICLE AND CONTRACT PURCHASE CRITERIA
TRANSITION AUTO FINANCE II, INC.
The following purchasing criteria shall govern all purchases of Leased
Vehicles and Eligible Additional Contracts by the Company and no Leased
Vehicle or Contract shall be purchased that does not materially meet such
criteria.
I. VEHICLE CRITERIA
a. No vehicle that is to become a Leased Vehicle may be purchased by the
Buyer if the vehicle is more than four model years old. No Contract
may be acquired by the Buyer if the Contract is secured by a Leased
Vehicle that, at the time of lease, was more than four model years
old.
b. The purchase price payable by the Buyer for each vehicle that is to
become a Leased Vehicle (and thus to become subject to a Contract)
shall never exceed that amount that a Dealer shall receive from bank
draft upon the delivery of the Leased Vehicle. With respect to any
Leased Vehicle (and the Contract related thereto) the Buyer may
acquire from TAF-I, the Purchase Price for such Leased Vehicle payable
by Buyer shall be an amount equal to the sum of (i) the value of
Leased Vehicle on a "average wholesale" basis, as determined by
reference to the "Texas Edition" of the "Official Used Car Market
Guide" in effect as of the date of the Buyer's purchase plus (ii)
57.5% of the down payment received by TAF-I with respect to the
Contract related to such Leased Vehicle.
c. In addition, with respect to any Leased Vehicle (the "Subject
Vehicle") and the Contract related thereto (the "Subject Contract")
the Buyer may acquire from TAF-I, the Subject Contract may not be in
default at the time of purchase by Buyer and may not be purchased if
another Leased Vehicle and Contract within TAF-I's portfolio both
satisfies the criteria specified within this Exhibit A and was entered
into as of a date prior to the date of such Subject Contract.
II. DOWN PAYMENT RATIO
Obligors on all Contracts must have made a down payment in cash and/or net
trade-in allowance of not less than 15% of the actual price paid by draft
to the selling automobile Dealer for the related Leased Vehicle;
provided, however, that the down payment for any Leased Vehicle which is
more than three model years old shall equal at least 20% of the actual
purchase price.
III. CONTRACT TERMS
A. Each Contract must have an original term of 42 months or less.
B. Each Contract shall be in the form of industry-standard consumer
automobile lease Contracts.
IV. CREDIT CRITERIA
A. With respect to each Obligor on each Contract, the Servicer shall
perform all credit checks and reviews that are standard for the motor
vehicle lease industry and shall supply the verification information
to the Company at the time of acquisition of each Contract.
A-1
<PAGE>
B. In addition to the credit checks and reviews set forth in paragraph
IV.A. above, each Obligor must satisfy the following criteria:
1. Verifiable home telephone number in Obligor's residence;
2. Residence:
(a) Evidence of purchase, lease or rental agreement in Obligor's
name;
(b) Stability - Review length of time at last two addresses, as
well as time in area;
3. Employment: At least one year with last two employers;
4. Obligor has verifiable income (check stub, W-2, 1099, tax return,
or bank statements);
5. Ratio of Obligor's net disposable income to gross generally
should exceed 60%;
6. References: (a) Five relatives;
(b) Five personal.
7. Valid Texas driver's license;
8. If a previous bankruptcy, must have been discharged, or if open,
need letter of permission from bankruptcy trustee.
9. Certain exceptions for first-time buyers permitted.
A-2
<PAGE>
EXHIBIT B
MONTHLY REPORT CERTIFICATE
For Month: _______________, ________ (the "Collection Period")
(year)
Company: Transition Auto Finance II, Inc.
Servicer: Transition Leasing Management, Inc.
Indenture: Dated as of __________________, 1998
Trustee: Trust Management, Inc.
I. INTEREST PAYMENTS ON NOTES (INDENTURE SECTION 5.1)
A. EXHIBIT I hereto sets forth a listing of the interest and any principal
payable to each Noteholder 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: ____________________, ________
TRANSITION LEASING MANAGEMENT, INC.
By:
-------------------------------------
Printed Name:
--------------------------
Title:
---------------------------------
TRANSITION AUTO FINANCE II, INC.
By:
-------------------------------------
Printed Name:
--------------------------
Title:
---------------------------------
B-1
<PAGE>
EXHIBITS DESCRIPTION
- -------- -----------
I Noteholder Interest Report
B-2
<PAGE>
EXHIBIT C
TRUSTEE'S FEE
TRANSITION AUTO FINANCE II, INC.
11% REDEEMABLE ASSET-BACKED NOTES
DUE JUNE 30, 2002
<TABLE>
<CAPTION>
<S> <C>
Acceptance Fee $_______________
Annual Administration Fee $_______________
(annually per
Paying Agent/Registrar Services $_______________ account maintained)
Interest Checks $_______________ each
Corrections to Schedule A $_______________ each
(certificate registration request)
</TABLE>
All out-of-pocket expenses such as long distance telephone, stationery,
insurance, courier, attorney or accountant expense, etc., will be billed at
cost to the Company. The Trustee understands that the closing of the Note
issuance will be completed in Fort Worth and there will not be any travel
expenses charged to the Company. These fees do not include servicing
responsibilities should the Trustee be involved due to a removal of the
Servicer. The Trustee would present servicing fees at that time. These fees
do not include arbitrage accounting or excess yield calculations, if
required. If the common trust funds of Trustee are utilized, there will be
0.5% annual fee deducted from the account. If Trustee's duties are modified
to any great extent, Trustee reserves the right to re-evaluate its fees.
Extraordinary services will be charged according to time and scope of
services.
C-1
<PAGE>
CONSENT OF COUNSEL
Drenner & Stuart, L.L.P., a limited liability partnership, hereby
consents to the use of its name under the heading "Legal Matters" in the
Prospectus constituting a part of the Form SB-2 Registration Statement filed
by Transition Auto Finance II, Inc. ("TAFI-II") for the registration of
$10,000,000 in aggregate principal amount of 11% Redeemable Secured
Promissory Notes to be issued by TAFI-II.
/s/ Drenner & Stuart, L.L.P.
Austin, Texas
July 9, 1998
<PAGE>
CONSENT OF COUNSEL
Kuperman, Orr, Mouer & Albers, a professional corporation, hereby
consents to the use of its name under the heading "Legal Matters" in the
Prospectus constituting a part of Form SB-2 Registration Statement of
Transition Auto Finance II, Inc. ("TAFI-II") for the registration of
$10,000,000 in aggregate principal amount of 11% Secured Promissory Notes to
be issued by TAFI-II.
Kuperman, Orr, Mouer & Albers, P.C.
Austin, Texas
July 9, 1998
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 of our
report included herein dated March 31, 1998, relating to the financial
statements of Transition Auto Finance II, Inc., and to our firm being named
under the caption "Experts" in the Prospectus.
/s/ Sprouse & Winn, L.L.P.
Austin, Texas 78701
July 9, 1998
<PAGE>
Securities Act of 1933 File No. 333-
---------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(b)(2) [X]
TRUST MANAGEMENT, INC.
(Exact name of trustee as specified in its charter)
TEXAS
(Jurisdiction of incorporation or organization if not a U.S. national bank)
75-1333672
(I.R.S. Employer Identification Number)
210 W. 6TH STREET, SUITE 605, FT. WORTH, TEXAS
(Address of principal executive offices)
76102
(Zip code)
ROBERT C. FINLEY, PRESIDENT
210 W 6TH STREET, SUITE 605
FT. WORTH, TEXAS 76102
(817) 335-2933
(Name, address and telephone number of agent for service)
TRANSITION AUTO FINANCE INC.
(Exact name of obligor as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation or organization)
75-2753067
(I.R.S. Employer Identification Number)
5422 ALPHA ROAD, SUITE 100, DALLAS, TEXAS
(Address of principal executive offices)
75240
(Zip code)
% REDEEMABLE ASSET-BACKED NOTES DUE , 2002
-- ----
(Title of indenture securities)
<PAGE>
The application relates to all of the securities registered pursuant to the
delayed offering registration statement.
<PAGE>
ITEM 1. GENERAL INFORMATION
(a) Trust Management, Inc.(the Trustee ) is subject to the examining
or supervisory authority of the following authorities:
Texas Department of Banking
(b) The Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
Transition Auto Finance Inc. (the "Obligor"), is not affiliated with the
Trustee.
ITEM 3. VOTING SECURITIES OF THE TRUSTEE.
As of March 30, 1998, the Trustee has no outstanding voting securities.
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES.
The Trustee is not a trustee under any other indenture under which any other
securities, or certificates of interest or participation in any other
securities, of the Obligor are outstanding.
ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR
OR UNDERWRITERS.
Neither the Trustee, nor any of the directors or executive officers of the
Trustee is a director, officer, partner, employee, appointee, or
representative of the Obligor or of any underwriter for the Obligor.
ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS
OFFICIALS.
As of March 30, 1998, neither the Obligor, nor any of its directors,
partners or executive officers beneficially owned any voting securities of
the Trustee.
ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE UNDERWRITERS OR THEIR
OFFICIALS.
As of March 30, 1998, no underwriter for the Obligor, nor any director,
partner or executive officer of any such underwriter, beneficially owned any
voting securities of the Trustee.
ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
As of March 30, 1998, the Trustee did not beneficially own any securities
of the Obligor, nor did the Trustee hold any such securities as collateral
security for obligations in default.
ITEM 9. SECURITIES OF THE UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
As of March 30, 1998, the Trustee did not beneficially own any securities
of any underwriter for the Obligor, nor did the Trustee hold any such
securities as collateral security for obligations in default.
<PAGE>
ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF
CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
As of March 30, 1998, the Trustee did not beneficially own or hold as
collateral security for any obligations in default any voting securities of
any person who, to the Trustee's knowledge, (l) owned 10% or more of the
voting securities of the Obligor, or (2) is an affiliate, other than a
subsidiary, of the Obligor.
2
<PAGE>
ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
As of March 30, 1998, the Trustee did not beneficially own or hold as
collateral security for any obligations in default any securities of any
person, who to the trustee's knowledge, owned 50% or more of the voting
securities of the Obligor.
ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
As of March 30, 1998, the Obligor was not indebted to the Trustee.
ITEM 13. DEFAULTS BY THE OBLIGOR.
(a) There has been no default with respect to the securities under this
indenture.
(b) The Trustee is not a trustee under another indenture under which any
other securities, or certificates of interest or participation in any
other securities, of the Obligor are outstanding, nor a trustee for
more than one outstanding series of securities under the indenture.
ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS.
No underwriter of the Obligor is an affiliate of the Trustee.
ITEM 15. FOREIGN TRUSTEE.
This item is not applicable.
ITEM 16. LIST OF EXHIBITS.
16.1 Certificate of Amendment to the Charter of Trust Management, Inc.
16.2 Certificate of Authority of Trust Management, Inc.to commence
business.
16.3 Authorization of Trust Management, Inc.to exercise corporate trust
powers.
16.4 By-Laws of Trust Management, Inc.
16.5 Not applicable.
16.6 Consent of Trustee.
16.7 Latest Report of Condition of Trust Management, Inc.
16.8 Not applicable.
16.9 Not applicable.
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Trust Management, Inc., a corporation organized and existing under the laws
of the State of Texas, has duly caused this statement of eligibility to be
signed on its behalf by the undersigned, thereunto duly authorized, all in
the city of Fort Worth, and State of Texas, on the 30th day of March, 1998.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert C. Finley
------------------------------------
Robert C. Finley, President
4
<PAGE>
NOTE
The answers to this statement insofar as such answers relate to what persons
have been underwriters for any securities of the obligor within three years
prior to the date of filing this statement, or what persons are owners of 10% or
more of the voting securities of the obligor, or affiliates, are based upon
information furnished to the Trustee by the obligor. While the Trustee has no
reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Trust Management, Inc., a corporation organized and existing under the laws of
the State of Texas, has duly caused this statement of eligibility to be signed
on its behalf by the undersigned, thereunto duly authorized, all in the City of
Ft. Worth, and State of Texas, on the 30th day of March, 1998.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert c. Finley
-------------------------------------
Robert C. Finley, President
5
<PAGE>
EXHIBIT 16.1
Certificate of Amendment of Trust Management, Inc.
<PAGE>
RESTATED ARTICLES OF INCORPORATION (WITH AMENDMENT)
OF A. B. CULBERTSON TRUST COMPANY
1. A. B. Culbertson Trust Company, pursuant to the provisions of Article
4.07 of the Texas Business Corporation Act, hereby adopts Restated Articles of
Incorporation which accurately copy the Articles of Incorporation and all
amendments thereto that are in effect to date and as further amended by such
Restated Articles of Incorporation as hereinafter set forth and which contain no
other change in any provision thereof.
2. The Articles of Incorporation of the Corporation are amended by the
Restated Articles of Incorporation as follows:
a. The third article of the amendment dated the 11th day of April,
1961, and filed by the Secretary of State on April 20, 1961,
which provides for a stated capital as follows:
"The aggregate number of shares which the corporation shall
have authority to issue in One Hundred Thousand (100,000)
shares of the par value of Ten Dollars ($10.00) each. One-
half of such capital has been fully paid to the corporation
in cash and in property now owned and held by the
corporation in its capital and surplus account, all as fully
determined and approved by the Board of Directors and all of
the stockholders, and as it appears in the capital account
on the books of the corporation. The present stockholders
of the corporation shall be issued 50,000 shares of such
stock in exchange for the stock previously issued in
proportion to their ownership of the common stock now held
by them, so that he corporation will have current capital
stock paid in of $500,000.00. No stockholder shall have any
cumulative voting rights."
is deleted and in lieu thereof, the following article adopted as
Article Six of the Restated Articles as amended:
"The stated capital stock of the corporation is Two Hundred
Thousand ($200,000.00) Dollars and the aggregate number of
<PAGE>
shares which the corporation shall have authority to issue
is Fifty Thousand (50,000) Shares of common stock without
cumulative voting privileges and all of one class, of the
par value of Four ($4.00) Dollars each. All of said stock
is fully paid and said capital is represented by capital
assets on the books of the corporation determined and
approved by the Board of Directors and all of the
stockholders."
b. This change of stated capital shall be effected by changing the
stated capital from One Million ($1,000,000.00) Dollars
represented by One Hundred Thousand (100,000) Shares of common
stock of a par value of Ten ($10.00) Dollars, Fifty Thousand
(50,000) Shares of which were fully paid, and the cancellation of
all of the Fifty Thousand (50,000) outstanding shares. The new
shares of a par value of Four ($4.00) Dollars shall be issued to
the present shareholders in the exact proportion of their
ownership of their present paid in shares so that each will have
the same number of shares but of a par value of Four ($4.00)
Dollars instead of Ten ($10.00) Dollars.
c. The restated articles bear the same numbers except for an
additional Article Number VII, which reads as follows:
"The post office address of its initial registered office is
Post Office Box 167, 4235 East Lancaster, Fort Worth, Texas,
and the name of its initial registered agent at such address
is Dee S. Finley."
3. The amendment to the Articles of Incorporation for the purpose of
filing Restated Articles of Incorporation was adopted at a joint meeting of the
stockholders and directors which was called and held for that purpose on the
29th day of June, 1962.
4. The number of shares of the corporation outstanding at the time of the
adoption was 50,000 with 50,000 shares not issued.
<PAGE>
The number of shares entitled to vote thereon was 50,000. There was
only one class, namely, common shares of 50,000 entitled to vote. All 50,000
shares voted for the amendment.
Dated the 4th day of November, 1965.
A. B. CULBERTSON TRUST COMPANY
By: /s/ William R. Sarogard
-----------------------------------
Its President
And: /s/ Blanche Austin
----------------------------------
Its Assistant Secretary
<PAGE>
THE STATE OF TEXAS )
) SS.
COUNTY OF TARRANT )
I, Dorothy Hoover, a Notary Public, do hereby certify that on this the 4th
day of November, 1965, personally appeared before me WILLIAM R. SARSGARD, who
declared he is President of the corporation executing the foregoing document,
and being first duly sworn, acknowledged that he signed the foregoing document
in the capacity therein set forth and declared that the statements therein
contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year
before written.
/s/ Dorothy Hoover
--------------------------------------
Notary Public in and for
Tarrant County, Texas
My Commission Expires: June 1, 1967
ARTICLES OF INCORPORATION
OF A. B. CULBERTSON TRUST COMPANY
ARTICLE ONE
The name of he corporation is A. B. CULBERTSON TRUST COMPANY.
ARTICLE TWO
The purpose for which the corporation is organized is:
To accumulate and lend money, to sell and deal in notes, bonds,
and securities; to act as trustee under any lawful express trust
committed to it by contract o will, or under appointment of any
court, having jurisdiction of the subject matter, and as agent
for the performance of any lawful act; to subscribe for,
purchase, invest in, hold, own, assign, pledge, and otherwise
deal in and dispose of shares of stocks, bonds, mortgages,
debentures, notes, and other securities or obligations,
contracts, and evidences of indebtedness of foreign or domestic
corporations not
<PAGE>
competing with each other in the same line of business; to
borrow money, or issue debentures for carrying out any or all
purposes above enumerated, all as authorized by Article 1303(b)
Revised Civil Statutes of the State of Texas, and to exercise
all of the powers conferred by Article 1524(a)-1, Revised Civil
Statutes of the State of Texas.
ARTICLE THREE
The place where the business of the corporation is to be transacted is at
Fort Worth, Tarrant County, Texas.
ARTICLE FOUR
The period of its duration is perpetual.
ARTICLE FIVE
The number of directors now constituting the board of directors is FIVE
(5), and the names and addresses of he persons now serving as directors are as
follows:
Dee S. Finley 2420 Medford Court East
Fort Worth, Texas
William R. Sarsgard 4220 Shannon Drive
Fort Worth, Texas
Marjorie Finley 2420 Medford Court East
Fort Worth, Texas
Helen Sarsgard 4220 Shannon Drive
Fort Worth, Texas
A. B. Culbertson 4217 East Lancaster
Fort Worth, Texas
ARTICLE SIX
The stated capital stock of he corporation is TWO HUNDRED THOUSAND
($200,000.00) DOLLARS and the aggregate number of shares which the corporation
shall have authority to issue is FIFTY THOUSAND (50,000) SHARES of common stock
without
<PAGE>
cumulative voting privileges and all of one class, of the par value of FOUR
($4.00) DOLLARS each. All of said stock is fully paid and said capital is
represented by capital assets on the books of the corporation determined and
approved by the Board of Directors and all of the stockholders.
ARTICLE SEVEN
The post office address of its initial registered office is Post Office Box
167, 4235 East Lancaster, Fort Worth, Texas, and the name of its initial
registered agent at such address is Dee S. Finley.
Dated the 28th day of August, 1962.
A. B. CULBERTSON TRUST COMPANY
/s/ A. B. Culbertson
---------------------------------------
President
/s/ William R. Sarsgard
----------------------------------------
Secretary
STATE OF TEXAS )
)
COUNTY OF TARRANT )
I, Blanche A. Austin, a Notary Public, do hereby certify that on this 13th
day of September, 1962, personally appeared before me A. B. Culbertson, who
declared he is President of the corporation executing the foregoing document,
and being first dully sworn, acknowledged that he signed the foregoing document
in the capacity therein set forth and declared that the statements therein
contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year
before written.
/s/ Blanche A. Austin
-----------------------------------------------
My commission expires: Notary Public for Tarrant County, Texas
6-1-63
<PAGE>
A JOINT MEETING OF THE STOCKHOLDERS AND DIRECTORS
OF THE A. B. CULBERTSON TRUST COMPANY
HELD JUNE 29, 1962
A joint meeting of all of the Stockholders and Directors of the A. B.
Culbertson Trust Company was held in the office in Fort Worth, Texas, on the
29th day of June, 1962, at which all of the Stockholders and Directors were
present, and the following resolution was adopted:
Be it resolved that the Charter of A. B. Culbertson Trust Company
was amended to change the stated capital stock from 100,000 shares
of common stock of a par value of $10.00, with one-half paid in and
the balance remaining in the treasury, to 50,000 shares of common
stock of a par value of $4.00 per share, all fully paid and of one
class; and that said stock be issued to the present Shareholders in
the proportion of their present paid in shares; and that restated
Articles of Incorporation with such amendment be filed with the
Secretary of State.
STATE OF TEXAS )
)
COUNTY OF TARRANT )
I, Marjorie Finley, Assistant Secretary of A. B. Culbertson Trust Company,
certify that he above and foregoing is a true and correct copy of a resolution
contained in the minutes of a meeting of the Stockholders and Directors of A. B.
Culbertson Trust Company, held on the 29th day of June, 1962.
/s/ Marjorie Finley
--------------------------------------
Assistant Secretary
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
A. B. CULBERTSON TRUST COMPANY
* * * * * * * * *
Pursuant to the provisions of Art. 4.04 of the Texas Business Corporation
Act, the undersigned corporation adopts the following Articles of Amendment to
its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is A. B. CULBERTSON TRUST COMPANY.
ARTICLE TWO
The following amendment to the Articles of Incorporation was adopted by the
shareholders of the corporation on November 1, 1965:
Article First of the Articles of Incorporation is hereby amended so as
to read as follows:
The name of the corporation is A. B. CULBERTSON AND COMPANY.
ARTICLE THREE
The number of shares of the corporation outstanding at the time of such
adoption was fifty thousand (50,000); and the number of shares entitled to vote
thereon was fifty thousand (50,000).
<PAGE>
ARTICLE FOUR
The holders of all the shares outstanding and entitled to vote on said
amendment have signed a consent in writing adopting said amendment.
Dated the 4th day of November, 1965.
A. B. CULBERTSON TRUST COMPANY
By: /s/ William R. Sarsgard
-----------------------------------
Its President
And: /s/ Blanche A. Austin
----------------------------------
Its Assistant Secretary
THE STATE OF TEXAS )
)
COUNTY OF TARRANT )
I, Dorothy Hoover, a Notary Public, do hereby certify that on this the 4th
day of November, 1965, personally appeared before me WILLIAM R. SARSGARD, who
declared he is President of the corporation executing the foregoing document,
and being first duly sworn, acknowledged that he signed the foregoing document
in the capacity therein set forth and declared that he statements therein
contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year
before written.
/s/ Dorothy Hoover
--------------------------------------
Notary Public in and for
Tarrant County, Texas
My Commission Expires: June 1, 1967
<PAGE>
STATE OF TEXAS
COUNTY OF TARRANT
I, Dorothy Hoover, a Notary Public, do hereby certify that on this the
6th day of August 1970, personally appeared before me Charles E. Martin who
declared he is Vice President of the corporation executing the foregoing
document, and being first duly sworn, acknowledged that he signed the foregoing
document in the capacity therein set forth and declared that the statements
therein contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year
before written.
[SEAL] /s/ Dorothy Hoover
---------------------------
Notary Public in and for
Tarrant County
My Commission Expires: June 1, 1971
<PAGE>
[LETTERHEAD]
OFFICE OF THE SECRETARY OF STATE
CERTIFICATE OF AMENDMENT
OF
TRUST MANAGEMENT, INC.
- --------------------------------------------------------------------------------
FORMERLY: A.B. CULBERTSON AND COMPANY
CHARTER NO. 120580
The undersigned, as Secretary of State of the State of Texas, hereby
certifies that duplicate originals of Articles of Amendment to the Articles of
Incorporation of the above corporation duly signed and verified pursuant to the
provisions of the Texas Business Corporation Act, have been received in this
office and are found to conform to law.
ACCORDINGLY the undersigned, as such Secretary of State, and by virtue of
the authority vested in him by law, hereby issues this Certificate of Amendment
to the Articles of Incorporation and attaches hereto a duplicate original of the
Articles of Amendment.
Dated August 10, 1970.
/s/ Martin Dies Jr.
--------------------------------
Secretary of State
[SEAL]
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
A. B. CULBERTSON AND COMPANY
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is A. B. CULBERTSON AND COMPANY.
ARTICLE TWO
The following amendment to the Articles of Incorporation changing the name
of the corporation was adopted by the shareholders of the corporation on August
5, 1970.
Article One of the Articles of Incorporation, as heretofore amended, is
hereby amended so as to read and provide as follows:
The name of the corporation is TRUST MANAGEMENT, INC.
ARTICLE THREE
The number of shares of the corporation outstanding at the time of such
adoption was 32,500; and the number of shares entitled to vote thereon was
32,500.
ARTICLE FOUR
The holders of all of the shares outstanding and entitled to vote on said
amendment have signed a consent in writing adopting said amendment.
DATED the 6th day of August, 1970.
A. B. CULBERTSON AND COMPANY
By /s/ Charles E. Martin
----------------------------
Its Vice President
And /s/ Blanche A. Austin
---------------------------
Its Secretary
<PAGE>
EXHIBIT 16.2
Certificate of Authority of Trust Management, Inc.
to commence business.
<PAGE>
[SEAL]
THE STATE OF TEXAS
SECRETARY OF STATE
IT IS HEREBY CERTIFIED, that
Articles of Incorporation
of
TRUST MANAGEMENT, INC.
were filed in this office and a certificate of
incorporation was issued on
June 30, 1954;
IT IS FURTHER CERTIFIED, that no certificate
of dissolution has been issued, and the corporation
is still in existence.
[SEAL] IN TESTIMONY WHEREOF, I have hereunto
signed my name officially and caused to
be impressed hereon the Seal of State at
my office in the City of Austin, this
6th day of April, A.D. 1988
[ILLEGIBLE]
-------------------------------------
Secretary of State
<PAGE>
EXHIBIT 16.3
Authorization of Trust Management, Inc.
to exercise corporate trust powers.
<PAGE>
STATE OF TEXAS
DEPARTMENT OF BANKING
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CERTIFICATE OF AUTHORITY
95-37
-----------------
charter number
This is to certify that
TRUST MANAGEMENT. INC.
---------------------------------
corporate name
[SEAL]
is duly authorized under the laws of the State of Texas to
conduct business as Trust Company
210 W. 6th St., Suite 605
---------------------------------
Fort Worth, Tarrant County
---------------------------------
Texas
In witness whereof, I have hereunto set my
hand at the City of Austin, Travis County,
in the State of Texas, on this the 15th day
of June, 1992.
/s/ Randall S. James
------------------------------------------------------
Randall S. James, Banking Commissioner of Texas
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 16.4
Bylaws of Trust Management, Inc.
<PAGE>
REVISED BYLAWS OF
TRUST MANAGEMENT, INC.
Contents
Article 1: Offices
1.01 Registered Office and Agent
1.02 Other Offices
Article 2: Shareholders
2.01 Place of Meetings
2.02 Annual Meeting
2.03 Special Meetings
2.04 Notice
2.05 Order of Business at Meetings
2.06 Quorum
2.07 Majority Vote; Withdrawal of Quorum
2.08 Method of Voting
2.09 Election of Directors; Non-cumulative Voting
2.10 Voting List
2.11 Record Date; Closing Transfer Books
2.12 Action Without Meeting
2.13 Telephone Meetings
Article 3: Directors
3.01 Management
3.02 Place of Meetings
3.03 Regular Meetings; Notice
3.04 Special Meetings; Notice
3.05 Quorum; Majority Vote
3.06 Number; Qualification; Election; Term
3.07 Change in Number
3.08 Removal
3.09 Vacancies
3.10 Procedure
3.11 Compensation
3.12 Interested Directors, Officers, and shareholders
3.13 Action Without Meeting
3.14 Telephone Meetings
3.15 Deadlock
CONTENTS - 1
<PAGE>
Article 4: Notice
4.01 Method
4.02 Waiver
Article 5: Officers and Agents
5.01 Number; Qualification; Election
5.02 Term and Compensation
5.03 Removal
5.04 Vacancies
5.05 Authority
5.06 President
5.07 Vice President
5.08 Secretary
5.09 Treasurer
5.10 Excess Compensation
Article 6: Certificates and Shareholders
6.01 Certificates
6.02 Issuance
6.03 Payment for Shares
6.04 No Pre-Emptive Rights
6.05 Lien
6.06 Replacement of Lost, Stolen, or Destroyed Certificates
6.07 Transfer of Shares
6.08 Registered Shareholders
Article 7: Indemnification
7.01 Indemnification of Directors, Officers, Employees, etc.
7.02 Limitations on Indemnification
7.03 Indemnity for successful Defense
7.04 Advancement of Expenses
7.05 indemnification Not Exclusive
7.06 Liability Insurance
7.07 Notification of shareholders
Article 8: General Provisions
8.01 Dividends and Reserves
8.02 Books and Records
8.03 Annual Statement
8.04 Checks and Notes
8.05 Fiscal Year
8.06 Seal
8.07 Resignation
8.08 Interested Directors, Officers, and Shareholders
CONTENTS - 2
<PAGE>
8.09 Purchase Own Shares
8.10 Construction
8.11 Amendment of Bylaws
8.12 Table of Contents; Headings
CONTENTS - 3
<PAGE>
Article 1: Offices
1.01 REGISTERED OFFICE AND AGENT. The registered office of the
corporation shall be located in Fort Worth, Tarrant County, Texas.
1.02 OTHER OFFICES. The corporation may also have offices at such other
places both within and without the State of Texas as the board of directors may
from time to time determine or the business of the corporation may require.
Article 2: Shareholders
2.01 PLACE OF MEETINGS. All meetings of the shareholders for the
election of directors shall be held at such time and place, within or without
the state of Texas, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
2.02 ANNUAL MEETING. An annual meeting of the shareholders shall be
held each year on the second Tuesday in September. If such day is a legal
holiday, then the meeting shall be on the next secular day following. At the
meeting, the shareholders shall elect directors and transact such other business
as may properly be brought before the meeting.
2.03 SPECIAL MEETINGS. Unless otherwise prescribed by statute or by the
articles of incorporation, or by these bylaws, special meetings of the
shareholders, for any purpose or purposes, may be called by the president, the
board off directors, or the holders of not less than one-tenth of all the shares
entitled to vote at the meetings. Business transacted at a special meeting
shall be confined to the objects stated in the notice of the meeting.
2.04 NOTICE. Written or printed notice stating the place, day and hour
of the meeting, and, in case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than ten nor more than
fifty days before the date of the meeting, either personally or by mail, by or
at the direction of the president, the secretary, or the officer or person
calling the meeting, to each shareholder of record entitled to vote at the
meeting. If mailed, the notice shall be deemed to be delivered when deposited in
the United States mail addressed to the shareholder at his address as it appears
on the stock transfer books of the corporation, with postage thereon prepaid.
<PAGE>
2.05 ORDER OF BUSINESS AT MEETINGS. The order of business at annual
meetings and so far as practicable at other meetings of shareholders shall be as
follows unless changed by the board of directors:
(a) Call to order
(b) Proof of due notice of meeting
(c) Determination of quorum and examination of proxies
(d) Announcement of availability of voting list
(e) Announcement of distribution of annual statement
(f) Reading and disposing of minutes of last meeting of
shareholders
(g) Reports of officers and committees
(h) Appointment of voting inspectors
(i) Unfinished business
(j) New business
(k) Nomination of directors
(l) Opening of polls for voting
(m) Recess
(n) Reconvening; closing of polls
(o) Report of voting inspectors
(p) Other business
(q) Adjournment
2.06 QUORUM. The holders of a majority of the shares issued and
outstanding and entitled to vote, present in person or represented by proxy,
shall be requisite and shall constitute a quorum at all meetings of the
shareholders for the transaction of business except as otherwise provided by
statute, by the articles of incorporation or by these bylaws. If a quorum is not
present or represented at a meeting of the shareholders, the shareholders
entitled to vote, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented. At the adjourned meeting
at which a quorum is present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
2.07 MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at
any meeting, the vote of the holders of a majority of the shares having voting
power, present in person or represented by proxy, shall decide any question
brought before the meeting, unless the question is one upon which, by express
provision of the statutes or of the articles of incorporation or of these
bylaws, a different vote is required in which case the express provision shall
govern and control the decision of the question. The shareholders present at a
duly organized meeting may continue to transact
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business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
2.08 METHOD OF VOTING. Each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Articles of Incorporation and
except as otherwise provided by Article 5.13 of the Texas Business Corporation
Act. At any meeting of the shareholders, every shareholder having the right to
vote may vote either in person, or by proxy executed in writing by the
shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid
after eleven months from the date of its execution, unless otherwise provided in
the proxy. Each proxy shall be revocable unless expressly provided therein to
be irrevocable and unless otherwise made irrevocable by law. Each proxy shall
be filed with the secretary of the corporation prior to or at the time of the
meeting. Voting for directors shall be in accordance with Section 2.09 of these
bylaws. Any vote may be taken by voice or by show of hands unless someone
entitled to vote objects, in which case, written ballots shall be used.
2.09 ELECTION OF DIRECTORS; NON-CUMULATIVE VOTING. Directors shall be
elected by plurality vote. Cumulative voting shall not be permitted.
2.10 VOTING LIST. At least ten days before each meeting of shareholders,
a complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, with the address of each and the number of voting shares
held by each, shall be prepared by the officer or agent having charge of the
stock transfer books. For a period of ten days prior to the meeting, the list
shall be kept on file at the registered office of the corporation and shall be
subject to inspection by any shareholder at any time during usual business
hours. The list shall also be produced and kept open at the time and place of
the meeting during the whole time thereof, and shall be subject to the
inspection of any shareholder during the whole time of the meeting.
2.11 RECORD DATE; CLOSING TRANSFER BOOKS. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholderS or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other proper purpose, the
board of directors of the corporation may provide that the stock transfer books
shall be closed for a stated period but not to exceed, in any case, fifty days.
If the stock transfer books are closed for the
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purpose of determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least ten days
immediately preceding such meeting. In lieu of closing the stock transfer
books, the board of directors may fix in advance a date as the record date for
any such determination of shareholders, such date in any case to be not more
than fifty days and, in case of a meeting of shareholders, not less than ten
days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date of which notice of the
meeting is mailed or the date on which the resolution of the board of directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided
herein, such determination shall apply to any adjournment thereof except when
the determination has been made through the closing of stock transfer books, and
the stated period of closing has expired.
2.12 ACTION WITHOUT MEETING. Any action required by statute to be taken
at a meeting of the shareholders, or any action which may be taken at a meeting
of the shareholders, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the shareholders
entitled to vote with respect to the subject matter thereof, and the consent
shall have the same force and effect as a unanimous vote of the shareholders.
Any signed consent, or a signed copy thereof, shall be placed in the minute book
of the corporation.
2.13 TELEPHONE MEETINGS. subject to the provisions of these bylaws, for
notice of meetings, shareholders may participate in and hold a meeting of the
shareholders by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this section shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Article 3: Directors
3.01 MANAGEMENT. The business and affairs of the corporation shall be
managed by the board of directors who
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may exercise all powers of the corporation and do all lawful acts and things as
are not (by statute or by the articles of incorporation or by these bylaws)
directed or required to be exercised or done by the shareholders.
3.02 PLACE OF MEETINGS. Meetings of the board of directors, regular or
special, may be held either within or without the State of Texas.
3.03 REGULAR MEETINGS; NOTICE. Regular meetings of the board of
directors may be held without notice at such time and place as shall from time
to time be determined by the board.
3.04 SPECIAL MEETINGS; NOTICE. Special meetings of the board of
directors may be called by the president on three days' notice to each director,
either personally or by mail or by telegram. Special meetings shall be called
by the secretary or by two directors in like manner and on like notice. Except
as otherwise expressly provided by statute, or by the articles of incorporation,
or by these bylaws, neither the business to be transacted at, nor the purpose
of, any special meeting need be specified in a notice or waiver of notice.
3.05 QUORUM; MAJORITY VOTE. At all meetings of the board of directors a
majority of the number of directors fixed by these bylaws then holding office
shall constitute a quorum for the transaction of business. The act of a
majority of the directors present at any meeting at which a quorum is present
shall be the act of the board of directors, except as otherwise specifically
provided by statute or by the articles of incorporation or by these bylaws. If
a quorum is not present at a meeting of the board of directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum is present.
3.06 NUMBER; QUALIFICATION; ELECTION; TERM. The board of directors shall
consist of at least three. Directors need not be shareholders or residents of
the State of Texas. The directors shall be elected at the annual meeting of the
shareholders, except as hereafter provided. Each director elected shall hold
office until his successor shall be elected and shall qualify.
3.07 CHANGE IN NUMBER. The number of directors may be increased or
decreased from time to time by amendment to these bylaws but no decrease shall
have the effect of shortening the term of any incumbent director. Any
directorship to be filled by reason of an increase in the number of
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directors shall be filled by election at an annual meeting or at a special
meeting of shareholders called for that purpose.
3.08 REMOVAL. Any or all director(s) may be removed either with or
without cause at any special or annual meeting of shareholders, by the
affirmative vote of a majority of shares of the shareholders present in person
or by proxy at the meeting and entitled to vote for the election of such
director if notice of intention to act upon the matter shall have been given in
the notice calling such meeting.
3.09 VACANCIES. Any vacancy occurring in the board of directors (by
death, resignation, removal, or otherwise) may be filled by an affirmative vote
of a majority of the remaining directors though less than a quorum of the board
of directors. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. Any vacancy created by an increase
in the number of directors shall be filled by election at an annual meeting or a
special meeting of the shareholders called for that purpose.
3.10 PROCEDURE. The board of directors shall keep regular minutes of its
proceedings. The minutes shall be placed in the minute book of the corporation.
3.11 COMPENSATION. By resolution of the board of directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors. No such payment shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 INTERESTED DIRECTORS, OFFICERS, AND SHAREHOLDERS.
(a) VALIDITY. Any contract or other transaction between the
corporation and any of its directors, officers, or shareholders (or any
corporation or firm which any of them are directly or indirectly interested)
shall be valid for all purposes notwithstanding the presence of the director,
officer, or shareholder at the meeting authorizing the contract or transaction,
or his participation in the meeting or authorization.
(b) DISCLOSURE, APPROVAL. The foregoing shall, however, apply
only if the interest of each interested director, officer, or shareholder is
known or disclosed:
(1) To the board of directors and it nevertheless
authorizes or ratifies the contract or transaction by a majority of the
directors present, each interested director
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to be counted in determining whether a quorum is present but not in calculating
the majority necessary to carry the vote; or
(2) To the shareholders and they nevertheless authorize or
ratify the contract or transaction by a majority of the shares present, each
interested person to be counted for quorum and voting purposes.
(c) NON-EXCLUSIVE. This provision shall not be construed to
invalidate any contract or transaction which would be valid in the absence of
this provision.
3.13 ACTION WITHOUT MEETING. Any action required by statute to be taken
at a meeting of the directors, or any action which may be taken at a meeting of
the directors, may be taken without a meeting if a consent in writing, setting
forth the action so taken shall be signed by all of the directors entitled to
vote with respect to the subject matter thereof, and the consent shall have the
same force and effect as a unanimous vote of the directors. Any signed consent,
or a signed copy thereof, shall be placed in the minute book of the corporation.
3.14 TELEPHONE MEETINGS. subject to the provisions of these bylaws, for
notice of meetings, members of the board of directors or members of any
committee designated by such board, may participate in and hold a meeting of the
board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this section shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
3.15 DEADLOCK. If the directors are deadlocked on an issue, the
shareholders shall intervene and their vote shall control as to the disputed
issue.
Article 4: Notice
4.01 METHOD. Whenever by statute or the articles of incorporation, or
these bylaws, notice is required to be given to a director or shareholder, and
no provision is made as to how the notice shall be given, it shall not be
construed to mean personal notice, but the notice may be given (a) in writing,
by mail, postage prepaid, addressed to the director or shareholder at the
address appearing on the books of the corporation, or (b) in any other method
permitted by
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law. Any notice required or permitted to be given by mail shall be deemed given
at the time when the same is thus deposited in the United States mails.
4.02 WAIVER. Whenever by statute or the articles of incorporation or
these bylaws, notice is required to be given to a shareholder or director, a
waiver thereof in writing signed by the person or persons entitled to the
notice, whether before or after the time stated in the notice, shall be
equivalent to the giving of the notice. Attendance of a director at a meeting
shall constitute a waiver of notice of the meeting, except where a director
attends for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
Article 5: Officers and Agents
5.01 NUMBER; QUALIFICATION; ELECTION.
(a) The corporation shall have:
(1) a president, a vice president, a secretary, and a
treasurer; and
(2) such other officers and assistant officers and agents
as the board of directors may think necessary.
(b) No officer or agent need be a shareholder, a director, or a
resident of Texas.
(c) Officers named in Section 5.01(a)(1) shall be elected by the
board of directors on the expiration of an officer's term or whenever a vacancy
exists. Officers and agents named in Section 5.01(a) (2)may be elected by the
board at any meeting.
5.02 TERM AND COMPENSATION. Unless otherwise specified by the board at
the time of election or appointment, or in an employment contract approved by
the board, each officer's and agent's term shall end at the first meeting of
directors after the next annual meeting of shareholders. He shall serve until
the end of his term or, if earlier, his death, resignation, or removal. The
compensation of officers and agents shall be fixed from time to time by the
board of directors.
5.03 REMOVAL. Any officer or agent elected or appointed by the board of
directors may be removed by the board of directors whenever in its judgment the
best interests of the
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corporation will be served thereby. The removal shall be without prejudice to
the contract rights, if any, of the person so removed. Election or appointment
of an officer or agent shall not of itself create contract rights.
5.04 VACANCIES. Any vacancy occurring in any office of the corporation
(by death, resignation, removal or otherwise) may be filled by the board of
directors.
5.05 AUTHORITY. Officers and agents shall have such authority and
perform such duties in the management of the corporation as are provided in
these bylaws or as may be determined by resolution of the board of directors not
inconsistent with these bylaws.
5.06 PRESIDENT. The president shall be the chief executive officer of
the corporation. He shall preside at all meetings of the shareholders and the
board of directors, shall have general and active management of the business and
affairs of the corporation, and shall see that all orders and resolutions of the
board are carried into effect. He shall perform such other duties and have such
other authority and powers as the board of directors may from time to time
prescribe.
5.07 VICE PRESIDENT. The vice president shall, in the absence or
disability of the president, perform the duties and have the authority and
exercise the powers of the president. He shall perform such other duties and
have such other authority and powers as the board of directors may from time to
time prescribe or as the president may from time to time delegate.
5.08 SECRETARY.
(a) The secretary shall attend all meetings of the board of
directors and all meetings of the shareholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for the executive committee when required.
(b) He shall give, or cause to be given, notice of all meetings of
the shareholders and special meetings of the board of directors.
(c) He shall keep the seal of the corporation and, when authorized
by the board of directors or the executive committee, may affix the same to any
instrument, and may attest the signature of any officer to any instrument, but
neither the presence of the seal nor the attestation by the
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secretary shall be necessary to the validity of any instrument otherwise valid.
(d) He shall be under the supervision of the president. He shall
perform the duties of treasurer if no treasurer is elected. He shall perform
such other duties and have such other authority and powers as the board of
directors may from time to time prescribe or as the president may from time to
time delegate.
5.09 TREASURER.
(a) The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements of the corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated by the board of directors.
(b) He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for disbursements, and
shall render to the president and directors, at the regular meetings of the
board, or whenever they may require it, an account of all of his transactions as
treasurer and of the financial condition of the corporation.
(c) If required by the board of directors, he shall give the
corporation a bond in such form, in such sum, and with such surety or sureties
as shall be satisfactory to the board for the faithful performance of the duties
of his office and for the restoration to the corporation, in case of his death,
resignation, retirement, or removal from office, of all books, papers, vouchers,
money, and other property of whatever kind in his possession or under his
control belonging to the corporation.
(d) He shall perform such other duties and have such other
authority and powers as the board of directors may from time to time prescribe
or as the president may from time to time delegate.
5.10 EXCESS COMPENSATION. Any payments made to an officer of the
corporation such as a salary, commission, bonus, interest, or rent, or
entertainment expense incurred by him, which is disallowed in whole or in part
as a deductible expense by the Internal Revenue service, will be reimbursed by
such officer to this corporation to the full extent of such disallowance. It
will be the duty of the Board of Directors to enforce payment of each such
amount
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disallowed. In lieu of payment by the officer, subject to the determination of
the directors, proportionate amounts may be withheld from his future
compensation payments until the amount owed to the corporation has been
recovered.
Article 6: Certificates and Shareholders
6.01 CERTIFICATES. Certificates in the form determined by the board of
directors shall be delivered representing all shares to which shareholders are
entitled. Certificates shall be consecutively numbered and shall be entered in
the books of the corporation as they are issued. Each certificate shall state
on the face thereof the holder's name, the number and class of shares, the par
value of shares, or a statement that the shares are without par value, and such
other matters as may be required by law. They shall be signed by the president
or vice president and such other officer or officers as the board of directors
shall designate, and may be sealed with the seal of the corporation or a
facsimile thereof. If any certificate is countersigned by a transfer agent, or
an assistant transfer agent, or registered by a registrar (either of which is
other than the corporation or an employee of the corporation), the signature of
the officer may be facsimile. Each certificate representing shares shall state
upon the face thereof: (A) that the corporation is organized under the laws of
the state of Texas; (B) the name of the person to whom issued; (C) the number
and class of shares and the designation of the series, if any, which such
certificate represents; and (D) the par value of each share represented by such
certificate, or a statement that the shares are without par value.
6.02 ISSUANCE. Shares (both treasury and authorized but unissued) may be
issued for such consideration (not less than par value) and to such persons as
the Board of Directors may determine from time to time. Shares may not be
issued until the full amount of the consideration, fixed as provided by law, has
been paid.
6.03 PAYMENT FOR SHARES. The consideration paid for the issuance of
shares shall consist of money paid, labor done (including services actually
performed for the corporation), or property (tangible or intangible) actually
received. Neither promissory notes nor the promise of future services shall
constitute payment or part payment for shares off the corporation. In the
absence of fraud in the transaction, the judgment of the Board of Directors as
to the value of the consideration received for shares shall be conclusive. When
such consideration has been paid to the corporation, the shares shall be deemed
to have been issued, the shareholder entitled to receive such issue shall be a
shareholder with
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respect to such shares, and the shares shall be considered fully paid and
nonassessable. The consideration received for shares shall be allocated by the
board of directors in accordance with law between stated capital and capital
surplus accounts.
6.04 NO PRE-EMPTIVE RIGHTS. No shareholder or other person shall have
any pre-emptive right whatsoever.
6.05 LIEN. For any indebtedness of a shareholder to the corporation, the
corporation shall have a first and prior lien on all shares of its stock owned
by such shareholder and on all dividends or other distributions declared
thereon.
6.06 REPLACEMENT OF LOST, STOLEN, OR DESTROYED CERTIFICATES.
The board of directors may direct a new certificate or certificates to be
issued in place of any certificate previously issued by the corporation alleged
to have been lost or destroyed, upon the making of an affidavit of that fact by
the person claiming the loss or destruction. In so doing the board of directors
may, in its discretion and as a condition precedent to the issuance require a
bond (with a surety or sureties satisfactory to the corporation) in such sum as
it may direct, as indemnity against any claim, or expense resulting from any
claim, that may be made against the corporation with respect to the certificate
alleged to have been lost or destroyed. When a certificate has been lost,
apparently destroyed, or wrongfully taken, and the holder of record fails to
notify the corporation within a reasonable time after such holder has notice of
it, and the corporation registers a transfer of the shares represented by the
certificate before receiving such notification, the holder of record is
precluded from making any claim against the corporation for the transfer or for
a new certificate.
6.07 TRANSFER OF SHARES. Shares of stock shall be transferable only on
the books of the corporation by the holder thereof in person or by his duly
authorized attorney. Upon surrender, to the corporation or its transfer agent,
of a certificate representing shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, the corporation or
its transfer agent shall issue a new certificate to the person: entitled
thereto, cancel the old certificate, and record the transaction upon its books.
6.08 REGISTERED SHAREHOLDERS. The corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly,
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shall not be bound to recognize any equitable or other claim to or interest in
any share or shares on the part of any other person, whether or not it has
express or other notice thereof, except as otherwise provided by law.
Article 7: Indemnification
7.01 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, ETC.
Subject to the limitations set forth in section 7.02, the corporation shall
indemnify any person who was, is, or is threatened to be made a named defendant
or respondent in a proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, including any appeal in such proceeding and any
inquiry or investigation that could lead to such proceeding, by reason of the
fact that that person is or was a director, officer, employee, or agent of the
corporation, or, while occupying such position with the corporation, is or was
serving at the request of the corporation in a similar functionary position of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise. Indemnification shall be against all expenses, including,
without limitation, attorneys' fees, court costs, expert witness fees,
judgments, decrees, fines, penalties, settlements, and reasonable expenses
actually incurred by the person in connection with the proceeding, except that
in any action brought by or on behalf of the corporation, indemnification shall
be limited to reasonable expenses actually incurred by the person in connection
with the proceeding.
7.02 LIMITATIONS ON INDEMNIFICATION
(a) If a person is found liable to the corporation or is
found liable on the basis that personal benefit was improperly received by such
person, whether or not the benefit resulted from an action taken in the
person's official capacity, the indemnification (1) is limited; to) reasonable
expenses actually incurred by the person in connection with the proceeding; and
(2) shall not be made in respect of any proceeding in which the person shall
have been found liable for willful or intentional misconduct in the performance
of his duty to the corporation.
(b) Indemnification under section 7.61 of these Bylaws
shall be available only after a determination has been made that the person:
(1) acted in good faith;
(2) reasonably believed:
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(i) In the case of conduct in an official
capacity, his conduct was in the best interests of the corporation; and
(ii) In all other cases, that his conduct was at
least not opposed to the best interests of the corporation; and
(3) In the case of any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful.
The termination of any action, suit, or proceeding by judgment, order,
settlement, conviction, or on a plea of nolo contendere or its equivalent, shall
not of itself be determinative that the person failed to act in accordance with
these requirements. A person shall be deemed to have been found liable in
respect of any claim, issue or matter only after the person shall have been so
adjudged by a court of competent jurisdiction after exhaustion of all appeals
therefrom.
(c) The determination of indemnification required by
Subsection (b) must be made:
(1) By majority vote of a quorum of directors who at
the time of the vote are not named as defendants or respondents in the
proceeding;
(2) If such a quorum cannot be obtained, by a majority
vote of a committee of the board off directors, designated to act in the matter
by majority vote of all directors, consisting solely of two or more directors
who at the time of the vote are not named defendants or respondents in the
proceeding;
(3) By special legal counsel selected by the board of
directors or by a committee of the boards by vote as set forth in Paragraphs (1)
or (2) of this, Subsection, (c), or, if such a quorum cannot be obtained and
such a committee cannot be established, by a majority vote of all directors; or
(4) By the shareholders in a vote that exclude& the
shares held by those directors who are named defendants or respondents in the
proceeding.
(d) The determination as to reasonableness of expenses
shall be made in the same manner as the determination that indemnification is
permissible, except that if the determination that indemnification is
permissible is made by special legal counsel, determination as to reasonableness
of
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expenses shall be made in the manner specified in Paragraph (3) of Subsection
(c), for the selection of special legal counsel.
(e) The provision for mandatory indemnification set forth
in Section 7.01, subject to the limitations set forth in this Section 7.02,
shall be deemed to constitute authorization of indemnification in the manner
required by law.
7.03 INDEMNITY FOR SUCCESSFUL DEFENSE
Notwithstanding any limitation set forth in Sections 7.01 and 7.02
above, the corporation shall indemnify any person to which Section 7.01 applies
against reasonable expenses, including, without limitation, attorney's fees,
court costs and expert witness fees, incurred by such person in connection with
any proceeding, described in Section 7.01, in which such person is or was a
named defendant or respondent if such person has been wholly successful, on the
merits or otherwise, in the defense of the proceeding.
7.04 ADVANCEMENT OF EXPENSES
Reasonable expenses incurred by a director, officer, employee, or
agent of the corporation who was, is, or is threatened to be made a named
defendant or respondent in a proceeding, described in section 7.01, may be paid
or reimbursed by the corporation in advance of the final disposition as
authorized by the board of directors. Before authorizing the advance, the board
of directors must determine that the facts then known to the board of directors
would not preclude indemnification under these bylaws.
In addition, the board must receive:
(1) A written affirmation by the director, officers employee, or agent
of that person's good faith belief that he meets the standard of conduct,
defined in section 7.02 herein, which is necessary under these bylaws for
indemnification; and
(2) A written undertaking by or on behalf of the director, officer,
employee, or agent to repay the expenses if it is ultimately determined that he
has not met the standard of conduct, defined in section 7.02 herein, which is
necessary under these bylaws for indemnification.
7.05 INDEMNIFICATION NOT EXCLUSIVE
The indemnification provided by this Article shall not be deemed exclusive
of any other power to indemnify or right
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to indemnification that the corporation or any person referred to in this
Article may have or acquire under the laws of the State of Texas.
7.06 LIABILITY INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
described in Section 7.01 against any liability asserted against and incurred by
that person whether or not the corporation would have the power to indemnify him
against that liability under the provisions of this Article.
7.07 NOTIFICATION OF SHAREHOLDERS
Any indemnification or advance of expenses in accordance with this Article
7 shall be reported in writing to the shareholders with or before the notice or
waiver of notice of the next shareholder's meeting or with or before the next
submission to shareholders of a consent to action without a meeting.
Article 8: General Provisions
8.01 DIVIDENDS AND RESERVES.
(a) DECLARATION AND PAYMENT. Subject to statute and the articles
of incorporation, dividends may be declared by the board of directors at any
regular or special meeting and may be paid in cash, in property, or in, shares
of the corporation. The declaration and payment shall be at the discretion of
the board of directors.
(b) RECORD DATE. The board of directors may fix in advance a
record date for the purpose of determining shareholders entitled to receive
payment of any dividend, the record date to be not more than fifty days prior to
the payment date of the dividend, or the board of directors may close the stock
transfer books for that purpose for a period of not more than fifty days prior
to the payment date of the dividend. In the absence of any action by the board
of directors, the date upon which the board off directors adopts the resolution
declaring the dividend shall be the record date.
(c) RESERVES. By resolution the board of directors may create
such reserve or reserves out off the earned surplus of the corporation as the
directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends, or to repair or maintain any property
of the corporation, or for any other
-16-
<PAGE>
purpose they think beneficial to the corporation. The directors may modify or
abolish any such reserve in the manner in which it was created.
8.02 BOOKS AND RECORDS. The corporation shall keep correct and complete
books and records of account and shall keep minutes of the proceedings of its
shareholders and board of directors, and shall keep at its registered office or
principal place of business, or at the office of its transfer agent or
registrar, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of the shares held by each.
8.03 ANNUAL STATEMENT. The board of directors shall present at each
annual meeting of shareholders a full and clear statement of the business and
condition of the corporation ration, including a reasonably detailed balance
sheet, income statement, and surplus statement.
8.04 CHECKS AND NOTES. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
8.05 FISCAL YEAR. The fiscal year of the corporation shall be selected
by resolution of the board of directors.
8.06 SEAL. The corporation seal (of which there may be one or more
exemplars) shall contain the name of the corporation and the name of the state
of incorporation. The seal may be used by impressing it or reproducing a
facsimile of it, or otherwise.
8.07 RESIGNATION. Any director, officer, or agent may resign by giving
written notice to the president or the secretary. The resignation shall take
effect at the time specified therein. Unless otherwise specified therein, the
acceptance of a resignation shall not be necessary to make it effective.
8.08 INTERESTED DIRECTORS, OFFICERS, AND SHAREHOLDERS.
(A) If paragraph (B) below is satisfied, no contract or other
transaction between the corporation and any off its directors, officers, or
shareholders (or any corporation or firm in which any of them is directly or
indirectly interested) shall be invalid solely because of this relationship or
because of the presence of such director, officer, or shareholder at the
meeting authorizing such contract or transaction, or such person's participation
in such meeting or authorization.
-17-
<PAGE>
(B) Paragraph (A) above shall apply only if:
(1) The contract or transaction is fair to the corporation
as of the time it is authorized or ratified by the board of directors, a
committee of the board, or the shareholders; or
(2) The material facts of the relationship or interest of
each such director, officer, or shareholder are known or disclosed; (a) to the
shareholders and they nevertheless authorize or ratify the contract or
transaction by a majority of the shares present, each such interested person to
be counted for quorum and voting purposes; or (b) to the board of directors and
it nevertheless authorizes or ratifies the contract or transaction by a majority
of the directors present, each such interested director to be counted in
determining whether a quorum is present but not in calculating the majority
necessary to carry the vote.
(C) The provisions contained in paragraph (A) and (B) above shall
not be construed to invalidate a contract or transaction which would be valid in
the absence of such provisions.
8.09 PURCHASE OWN SHARES. The corporation may, directly or indirectly,
purchase its own shares to the extent of the aggregate of unrestricted capital
surplus available therefor and unrestricted reduction surplus available there
for.
8.10 CONSTRUCTION. Whenever the context so requires, the masculine shall
include the feminine and neuter, and the singular shall include the plural, and
conversely. If any portion of these bylaws shall be invalid or inoperative,
then, so far as is reasonable and possible:
(a) The remainder of these bylaws shall be considered valid and
operative, and
(b) Effect shall be given to the intent manifested by the portion
held invalid or inoperative.
8.11 AMENDMENT OF BYLAWS. These bylaws may be altered amended, or
repealed at any meeting of the board of directors at which a quorum is present,
by the affirmative vote of a majority of the directors present at the meeting,
provided notice of the proposed alteration, amendment, or repeal is contained in
the notice of the meeting.
-18-
<PAGE>
8.12 TABLE OF CONTENTS; HEADINGS. The table of contents and headings
used in these bylaws have been inserted for convenience only and do not
constitute matter to be construed, in interpretation.
- End of Bylaws -
-19-
<PAGE>
EXHIBIT 16.6
Consent of Trustee.
<PAGE>
CONSENT OF TRUSTEE
We hereby consent that reports of examinations by Federal, State,
Territorial, or District authorities may be furnished by such authorities to
the Commission upon request therefor.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert C. Finley
-----------------------------------
Robert C. Finley
President
<PAGE>
EXHIBIT 16.7
Latest Report of Condition of Trust Management, Inc.
<PAGE>
[State Seal of Texas]
Department of Banking
Trust Company
Quarterly Report of Condition and Income
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Name and Address:
Trust Management, Inc.
210 West Sixth Street, Suite 605
Fort Worth, Texas 76102
- --------------------------------------------------------------------------------
Charter Number: Reporting Period: January 1 through
95-37 12/31/97
(Month, Day, Year)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Report of Condition and Income must be signed by an
authorized officer(s) and attested by not less than three
directors other than the officer(s) signing the report.
I, THE UNDERSIGNED OFFICER, DO HEREBY DECLARE THAT THIS REPORT OF CONDITION AND
INCOME HAS BEEN PREPARED IN CONFORMANCE WITH OFFICIAL INSTRUCTIONS AND IS TRUE
AND CORRECT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ LeAnna P. Sharp 2/12/98
Signature of Officer Authorized to Sign Report Date Signed
- --------------------------------------------------------------------------------
LeAnna P. Sharp, Vice President (817) 335-2933
Name and Title of Officer Authorized to Sign Report Area Code/Phone Number
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE, THE UNDERSIGNED DIRECTORS, ATTEST THE CORRECTNESS OF THIS REPORT OF
CONDITION AND INCOME AND DECLARE THAT IT HAS BEEN EXAMINED BY US AND TO THE BEST
OF OUR KNOWLEDGE AND BELIEF HAS BEEN PREPARED IN CONFORMANCE WITH OFFICIAL
INSTRUCTIONS AND IS TRUE AND CORRECT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/s/ William R. Sarsgard /s/ Robert C. Finley /s/ James M. Whitton
Signature of Director Signature of Director Signature of Director
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 1 of
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ----------------------------------------------------------
SECTION A NAME AND ADDRESS
BALANCE SHEET
as of Trust Management, Inc.
12/31/97 210 West Sixth Street, Suite 605
(Month, Day, Year) Fort Worth, Texas 76102
- ---------------------------------------------------------- ----------------------------------------------------------
ASSETS Mil Thou Hun
- ---------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1. Cash 102 772 1
1.a Mutual Funds 1.a
1.b Money Market Mutual Funds 561 752 1.b
2. Investment Securities (Schedule A1, Column B, Line 5) 204 735 2.
3. Corporate Stock 214 003 3.
4. Trading Account Securities 4.
5. Loans (Net) 5.
6. Premises, furniture & fixtures, & other assets representing premises 36 457 6.
7. Real Estate Owned other than premises 7.
8. Other Assets (Schedule A2, Line 16) 256 110 8.
9. TOTAL ASSETS (sum of 1 through 8) 1 375 829 9.
LIABILITIES AND EQUITY CAPITAL
10. Accounts Payable 21 685 10.
11. Accrued Taxes 22 363 11.
12. Accrued Interest 66 430 12.
13. Mortgage indebtedness 13.
14. Other liabilities for borrowed money 14.
15. Subordinated notes and debentures 15.
16. Other liabilities (Schedule A3, Line 7) 15 307 16.
17. TOTAL LIABILITIES (sum of 10 through 16) 125 785 17.
18. EQUITY CAPITAL & RESERVES (Schedule A4, Column E, Line 11) 1 250 044 18.
19. TOTAL LIABILITIES AND EQUITY CAPITAL (sum of 17 and 18) 1 375 829 19.
- ---------------------------------------------------------- ----------------------------------------------------------
</TABLE>
Page 2 of
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------- --------------------------- ------------------------------- -------
SCHEDULE A1 - INVESTMENT SECURITIES A. B.
Market Value Book Value
- ------------------------------------------------------- --------------------------- ------------------------------- -------
Type of Investments Mil Thou Hun Mil Thou Hun
- ------------------------------------------------------- --------------------------- ------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. U.S. Government obligations 100 000 100 000 1
2. U.S. Government agencies obligations 100 000 100 000 2
3. State, county & municipal obligations 4 735 4 735 3
4. Other bonds, notes and debentures 4
5. TOTAL INVESTMENT SECURITIES (sum of 1 through 4) 204 735 204 735 5
- ------------------------------------------------------- --------- ---------- --------- -------- --------- -------- -------
<CAPTION>
- ----------------------------------------------------------------------------------- ------------------------------------
SCHEDULE A2 - OTHER ASSETS Mil Thou Hun
- ----------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
1. Accounts receivable 134 511 1
2. Due from affiliates or subsidiaries (Net) 2
3. Interest earned or accrued but not collected 68 770 3
4. Prepaid expenses 7 056 4
5. Cash items not in the process of collection 5
6. Deferred tax assets (Net) 6
7. Accrued interest purchased on securities 7
8. Margin accounts 8
9. Purchased computer software 6 302 9
10. Direct lease financing 10
11. Investment in unconsolidated subsidiaries & associated companies 11
12. Cash surrender value of life insurance policies 12
13. Furniture and equipment rented to others 13
14. Goodwill 38 471 14
15. All other (itemize amounts over 25% of line 16) 15
16. TOTAL OTHER ASSETS (sum of 1 through 15) 256 110 16
- ----------------------------------------------------------------------------------- --------- -------- ------- ------
<CAPTION>
- ----------------------------------------------------------------------------------- ------------------------------------
SCHEDULE A3 - OTHER LIABILITIES Mil Thou Hun
- ----------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
1. Due to affiliates or subsidiaries (Net) 1
2. Dividends declared by not yet paid. 2
3. Expenses accrued and unpaid. 6 854 3
4. Minority interest in consolidated subsidiaries 4
5. Deferred income taxes 8 453 5
6. All other (itemize amounts over 25% of line 7) 6
- ----------------------------------------------------------------------------------- ------------------------------------
</TABLE>
Page 3 of
<PAGE>
<TABLE>
<CAPTION>
<S><C>
7. TOTAL OTHER LIABILITIES (sum of 1 through 6) 15 307 7
- ---------------------------------------------------------------------------------- --------- -------- ------- ------
<CAPTION>
SCHEDULE A-4 A. B.
CHANGES IN EQUITY CAPITAL Preferred Stock Common Stock
(Year-to-Date) (Par Value) (Par Value)
- -------------------------------------------------- ------------------------ -----------------------
(Indicate decreases and losses in parentheses) Mil Thou Hun Mil Thou Hun
<S> <C> <C> <C> <C> <C> <C> <C>
1. Balance end of previous year 113 619
2. Adjustments (itemize below) (73 547)
3. Adjusted balance end of previous year
4. Net Income (loss)
5. Sale, conversion, acquisition,
or retirement of Capital net:
5a. Transactions with
own holding company or affiliates
5b. Other
6. Charges incident to mergers
absorption (net)
7. LESS: Cash dividends declared
on Common Stock
8. LESS: Cash dividends declared
on Preferred Stock
9. Stock dividends issued
10. Other: increases (decreases)
(itemize below)
11. Balance end of Current Period 39 972
- -------------------------------------------------- -------- ------- ------- ------- ------- -------
<CAPTION>
- -------------------------------------------------- ------------------------ ------------------------ -----------------------------
SCHEDULE A-4 C. D. E.
CHANGES IN EQUITY CAPITAL Surplus Undivided Profits Total
(Year-to-Date) and Capital Equity Capital
Reserves
- -------------------------------------------------- ------------------------ ------------------------ -----------------------------
(Indicate decreases and losses in parentheses) Mil Thou Hun Mil Thou Hun Mil Thou Hun
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Balance end of previous year 486 381 538 375 1 138 375 1
2. Adjustments (itemize below) 73 647 2
3. Adjusted balance end of previous year 3
4. Net Income (loss) 111 669 111 669 4
5. Sale, conversion, acquisition,
or retirement of Capital net:
5a. Transactions with 5a
own holding company or affiliates
5b. Other 5b
6. Charges incident to mergers 6
absorption (net)
7. LESS: Cash dividends declared 7
on Common Stock
8. LESS: Cash dividends declared 8
on Preferred Stock
9. Stock dividends issued 9
10. Other: increases (decreases)
(itemize below) 100 000 (100 000 10
)
11. Balance end of Current Period 660 028 550 044 1 250 044 11
- -------------------------------------------------- ------- -------- ------- ------- -------- ------- ------- -------- ------- ----
</TABLE>
Memoranda
1. Itemize adjustments shown on item 2:
Reclassification of additional paid in capital as requested by Banking
Department Examiner.
- --------------------------------------------------------------------------------
2. Itemize other increases or decreases shown in item 10.
Page 4 of
<PAGE>
To reclassify funds from Undivided Profits and Capital Reserves to Surplus in
order that Restricted Capital be no less than $700,000.00 at September 30, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
SECTION B - INCOME AND EXPENSES Mil Thou Hun
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
1. Operating Income:
1a. Interest and fees on loans 1a
1b. Interest on balances with depositor institutions 259 576 1b
1c. Interest on U.S. Treasury securities 31 226 1c
1d Interest on obligations of other U.S. Government agencies and 80 463 1d
corporations
1e Interest on obligations of States and political subdivisions of the 6 295 1e
United States
1f Interest on other bonds, notes and debentures 1f
1g Dividends on corporate stock 19 378 1g
1h Income from lease financing 1h
1i Income from fiduciary activities (Section D, line 5) 296 087 1i
1j Other service charges, commissions and fees 7 618 1j
1k Other income (Schedule B1, Line 8) 1k
1l TOTAL OPERATING INCOME (sum of 1a through 1k) 700 644 1l
2. Operating Expenses
2a Salaries and wages 307 197 2a
2b Employee benefits 34 600 2b
2c Audits and examinations 12 000 2c
2d Marketing 75 2d
2e Interest on borrowed money 2e
2f Interest on subordinated notes and debentures 2f
2g Occupancy expense (Net of Rental Income) 31 086 2g
2h Furniture and equipment expense 21 955 2h
2i Provision for possible loan losses 2i
2j Other operating expenses (Schedule B2, Line 14) 158 882 2j
2k TOTAL OPERATING EXPENSES (sum of 2a through 2j) 565 795 2k
3. Income before income taxes and securities gains (1l minus 2k) 134 849 3
4. Securities gains (losses 11 542 4
5. Applicable income taxes (34 722) 5
6. Net income (3 plus or minus 4 and 5) 111 669 6
7. Extraordinary items (net of tax effect) 7
8. NET OPERATING INCOME (6 plus or minus 7) 111 669 8
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
</TABLE>
Page 5 of
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
SECTION B - INCOME AND EXPENSES Mil Thou Hun
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
1. Investment advisory services (trust accounts) 1
2. Investment advisory services (non-trust accounts) 2
3. Income from affiliates (Schedule D1, Line 6) 3
4. Trading account (Net) 4
5. Equity in net income of unconsolidated subsidiaries 5
6. Data processing (non-affiliate) 6
7. All other (non-affiliate) 7
8. TOTAL OTHER OPERATING INCOME (sum of 1 through 7) 8
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
<CAPTION>
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
SECTION B - INCOME AND EXPENSES Mil Thou Hun
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
1. Directors and committee fees 3 767 1
2. Insurance 8 344 2
3. Legal fees 16 264 3
4. Losses on the sale of assets (excluding securities) 4
5. Amortization of intangible assets 5
6. Franchise taxes 5 152 6
7. Travel & entertainment 7 039 7
8. Broker/Dealer (non-affiliate) 8
9. Investment advisory services (non-affiliate) 9
10. Referral fees (non-affiliate) 10
11. Data processing (non-affiliate) 14 040 11
12. Affiliate service(s) (Schedule D2, Line 7) 12
13. All other (non-affiliate) 104 276 13
14. TOTAL OTHER OPERATING EXPENSES (sum of 1 through 13) 158 882 14
- ------------------------------------------------------------------------------------ ------- -------- ------- -------
</TABLE>
Page 6 of
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------ ------------------------ ------------------------
SECTION C A. B. C.
REPORT OF TRUST Employee Benefit Personal Estates
ASSETS Trusts Trusts
- ---------------------------------------- ------------------------ ------------------------ ------------------------
Bil Mil Thou Bil Mil Thou Bil Mil Thou
- ---------------------------------------- ------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Noninterest Bearing Deposits
2. Interest Bearing Deposits 12 630 73 647
3. U.S.G.'s & Agency Obligations 7
4. State, Co. & Muni Obligations
5. Money Market Mutual Funds 118
6. Other Short Term Obligations 13 339
7. Other Notes and Bonds 54 349
8. Common & Preferred Stocks
9. Real Estate Mortgages
10. Real Estate
11. Miscellaneous Assets 4 246
12. Total Discretionary Assets
(sum of 1 through 10) 86 075
13. Total # of Discretionary
Accounts 3896
14. Total Non-Discretionary Assets
15. Total # of Non-Discretionary
Accounts
16. TOTAL ASSETS
(sum of 12 and 14)
17. TOTAL # OF ACCOUNTS 17
(sum of 13 and 15)
18. MEMORANDA
TOTAL LIABILITIES
- ---------------------------------------- ------- -------- ------- ------- -------- ------- ------- -------- -------
<CAPTION>
- ---------------------------------------- ------------------------ ------------------------ ------------------------
SECTION C D. E. F
REPORT OF TRUST Employee All Other Totals
ASSETS Benefit Agencies
Agencies
- ---------------------------------------- ------------------------ ------------------------ -------------------------------
Bil Mil Thou Bil Mil Thou Bil Mil Thou
- ---------------------------------------- ------- -------- ------- ------- -------- ------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Noninterest Bearing Deposits 1
2. Interest Bearing Deposits 1 820 14 450 2
3. U.S.G.'s & Agency Obligations 304 311 3
4. State, Co. & Muni Obligations 4
5. Money Market Mutual Funds 7 479 7 597 5
6. Other Short Term Obligations 1 575 14 914 6
7. Other Notes and Bonds 54 349 7
8. Common & Preferred Stocks 8
9. Real Estate Mortgages 9
10. Real Estate 10
11. Miscellaneous Assets 9 4 255 11
12. Total Discretionary Assets 12
(sum of 1 through 10) 11 187 97 262
13. Total # of Discretionary 13
Accounts 40 3936
14. Total Non-Discretionary Assets 14
15. Total # of Non-Discretionary 15
Accounts
16. TOTAL ASSETS 16
(sum of 12 and 14)
17. TOTAL # OF ACCOUNTS 17
(sum of 13 and 15)
18. MEMORANDA 18
TOTAL LIABILITIES
- ---------------------------------------- ------- -------- ------- ------- -------- ------- ------- -------- ------- ------
</TABLE>
Page 7 of
<PAGE>
DO NOT USE MORE THAN ONE LINE PER FUND OR REPEAT THE INSTITUTION NAME IF IT IS
INCLUDED IN THE NAME OF THE FUND. IF MORE THAN 10 FUNDS ARE BEING REPORTED,
PLEASE REPRODUCE ADDITIONAL COPIES OF THIS SCHEDULE AND NUMBER PAGES
ACCORDINGLY.
<TABLE>
<CAPTION>
- -------------------------------- --------------------- ------------------- ----------------------- ---------------------
SCHEDULE C1 A. B. C. D.
COLLECTIVE INVESTMENT Classification Type of Total Number of
FUND Code Fund Code Fund Assets Participating
Accounts
In Fund
- -------------------------------- --------------------- ------------------- ----------------------- ---------------------
Name of Fund Bil Mil Thou
- -------------------------------- --------------------- ------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. 1
2. 2
3. 3
4. 4
5. 5
6. 6
7. 7
8. 8
9. 9
10. 10
- -------------------------------- ---------------------------------------------------------------------------------------
Classification Codes (Enter Type of Fund
only one code in Column A (Enter only one code in Column B for each fund)
for each fund)
- -------------------------------- ---------------------------------------------------------------------------------------
<CAPTION>
- ------ -------------------------------- ----- ----------------------------- ----- -------------------------------------
<S> <C> <C> <C> <C> <C>
01 Personal Trust 01 Equity 07 Mortgage
02 Employee Benefit 02 Diversified or Balanced 08 Foreign Equity
03 Keogh (HR 10) 03 Fixed Income 09 Foreign Fixed Income
04 Charitable Trust 04 Municipal Bond 10 Index Equity
05 Other 05 Real Estate Equity 11 Index Fixed Income
06 Short Term Investment 12 Other
- ------ -------------------------------- ----- ----------------------------- ----- -------------------------------------
<CAPTION>
- ----------------------------------------------------------- ------------------------------ ---------------------------
SCHEDULE C2 A. B.
CORPORATE TRUSTS Number of Principal Amount of
Accounts Outstanding Securities
- ----------------------------------------------------------- ------------------------------ ---------------------------
Type of Account Bil Mil Thou
- ----------------------------------------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
1. Corporate Securities Trusteeships 40 87 006
2. Tax Exempt & Other Municipal Securities Trusteeships
3. Stock or Bond Transfer Agent or Registrar
4. Mutual Fund Transfer Agent
5. Separate Dividend & Interest/Coupon Paying Agent
6. All Other Corporate Agencies
7. TOTALS 40 87 006
- ----------------------------------------------------------- ------------------------------ --------- --------- --------
</TABLE>
Page 8 of
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ----------------------------------------------------------
SECTION D (CONFIDENTIAL
FIDUCIARY INCOME INFORMATION)
- ---------------------------------------------------------- ----------------------------------------------------------
INCOME FROM FIDUCIARY ACTIVITIES Mil Thou Hun
<S> <C> <C> <C> <C> <C>
1. Gross Fees, Commissions & Other Fiduciary Income
1a. Employee Benefit Trust Accounts 1a
1b. Personal Trust & Estate Accounts 1b
1c Employee Benefit Agency Accounts 1c
1d Other Agency Accounts 1d
1e Corporate Trust & Agency Accounts 1e
1f All Other Fiduciary Income 1f
1g Gross Fiduciary Income (sum of 1a through 1f) 1g
2. Settlements, Surcharges & Other Losses
2a. Employee Benefit Trust Accounts - Discretionary Accounts 2a
2b Personal Trust & Estate Accounts - Discretionary Accounts 2b
2c Employee Benefit Agencies -Discretionary Accounts 2c
2d Other Agency Accounts - Discretionary Accounts 2e
2e Employee Benefit Trust Accounts - Non-Discretionary Accounts 2e
2f Personal Trust & Estate Accounts - Non-Discretionary Accounts 2f
2g Employee Benefit Agencies - Non-Discretionary Accounts 2g
2h Other Agency Accounts - Non-Discretionary Accounts 2h
2i Corporate Trust & Agency Accounts 2i
2j All Other Activities 2j
2k Gross Settlements, Surcharges & Other Losses (sum of 2a through 2j) 2k
3. Recoveries to Previously Reported Losses 3
4. Net Settlements, Surcharges & Other Losses (2k minus 3) 4
5. FIDUCIARY INCOME (LOSS) (1g minus 4) 5
Gross Settlements, Surcharges & Other Losses by Type
6. Investment 6
7. Administrative 7
8. Operational 8
9. Gross Settlements, Surcharges & Other Losses (sum of 6 through 8) 9
(line 9 must equal 2k)
- ----------------------------------------------------------------------------- ----------- ------------ --------- ---
</TABLE>
Page 9 of
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ---------------------------------------------------------
SCHEDULE D1 CONFIDENTIAL
- ---------------------------------------------------------- ---------------------------------------------------------
Income for Services Provided TO Affiliate(s) Mil Thou Hun
<S> <C> <C> <C> <C> <C>
1. Investment advisory services 1
2. Referral fees 2
3. Asset management/custodial 3
4. Data processing 4
5. All other 5
6. Total Affiliate Services (sum of 1 through 5) 6
- --------------------------------------------------------------------------------- --------- ---------- -------- ----
<CAPTION>
- ---------------------------------------------------------- ---------------------------------------------------------
SCHEDULE D2 CONFIDENTIAL
- ---------------------------------------------------------- ---------------------------------------------------------
Expenses for Services Provided BY Affiliate(s) Mil Thou Hun
<S> <C> <C> <C> <C> <C>
1. Broker/Dealer 1
2. Investment advisory services 2
3. Referral fees 3
4. Asset management/custodial 4
5. Data Processing 5
6. All Other 6
7. Total Affiliate Service (sum of 1 through 6) 7
- --------------------------------------------------------------------------------- --------- ---------- -------- ----
<CAPTION>
- ---------------------------------------------------------- ---------------------------------------------------------
MEMORANDA CONFIDENTIAL
- ---------------------------------------------------------- ---------------------------------------------------------
Number of Mil Thou Hun
Accounts
<S> <C> <C> <C> <C> <C>
Non-Fiduciary Advisory/Management Accounts 1
- --------------------------------------------------------------- ---------------- --------- ---------- -------- ----
</TABLE>
Page 10 of
