<PAGE>
FILE PURSUANT TO RULE 424
REGISTRATION NO. 333-49261
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 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 eighteenth
(18th) month following the release of funds from escrow 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 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.
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BROKER'S
COMMISSIONS
PRICE TO PUBLIC AND EXPENSES(1)
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Per Note.......................................................... 100% 8.5%
Total Minimum..................................................... $250,000 $21,250
Total Maximum..................................................... $10,000,000 $850,000
<CAPTION>
PROCEEDS TO
COMPANY(2)
<S> <C>
Per Note.......................................................... 91.5%
Total Minimum..................................................... $228,750
Total Maximum..................................................... $9,150,000
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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.
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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 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.
THIS PROSPECTUS IS DATED JULY 14, 1998
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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.
------------------------
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).
------------------------
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.
------------------------
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.
2
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
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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."
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
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profitably 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 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
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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 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 lease 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, sale or re-lease of any Leased Vehicle
that is leased under a Contract that is in default, 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
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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 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.
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
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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 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,
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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
the Contracts, following payment of the 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
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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 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.
</TABLE>
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<TABLE>
<S> <C>
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 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
</TABLE>
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<TABLE>
<S> <C>
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 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."
</TABLE>
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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, and 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.
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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. 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.
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<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 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.
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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 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.
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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
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."
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CONSUMER PROTECTION LAWS. Numerous federal and state consumer protection
laws impose requirements upon the origination, form, and collection of
automobile lease contracts. State laws 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 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.
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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 subject to the right of TAF-I
to acquire automobile lease contracts with proceeds realized from repossession
of leased vehicles and prepayments of lease contracts.
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) 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 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
18
<PAGE>
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, (b) will reimburse TAF-I for
the marketing fee paid to Transition Leasing by TAF-I with respect to the Leased
Vehicle, and (c) 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 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
relative 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
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<PAGE>
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.
20
<PAGE>
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
----------------------
AS ADJUSTED
ACTUAL MINIMUM
--------- -----------
<S> <C> <C>
LIABILITIES
11% Secured Redeemable Notes Due June 30, 2002........................................... -- 250,000(1)
--------- -----------
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 connection with the repossession, remarketing, repair and
resale of Leased Vehicles,
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<PAGE>
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."
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.
<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)....................................... $ 20,000 850,000
Purchase of Contracts and Leased Vehicles.......................... $ 226,250 9,000,000
---------- -------------
$ 250,000 $ 10,000,000
---------- -------------
---------- -------------
</TABLE>
- ------------------------
(1) These offering and organizational expenses will be paid to 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 July 8, 1998
(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
22
<PAGE>
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.
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.
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 11%
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" into the Operating Account.
23
<PAGE>
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.)
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.)
24
<PAGE>
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, in general, will be 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 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, subject only to the right of
TAF-I to acquire vehicle lease contracts and vehicles with proceeds realized
from repossession of its leased vehicles and prepayments of its lease contracts.
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
25
<PAGE>
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
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;
26
<PAGE>
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.)
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 payments 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
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Servicing Fees
Contract Servicing Fee (paid to Transition Leasing) $20 per month per Contract
Purchase Administration Fee (paid to Transition $100 per Contract purchased
Leasing)
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
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
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 with volume) per month
Operating Account $2,000 per year (varies with number of transactions)
Subscription Escrow Account $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 Damage $2.00 per Leased Vehicle per month
Total Annual Servicing, Trustee, Bank, Legal, Accounting Estimated to average (i) $279,650 (or $362 per Contract)
and Insurance Fees and Premiums 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 Expense (to Estimated to average $100 to $400 for each repossessed
reimburse Transition Leasing for such expenses) 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
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
</TABLE>
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
28
<PAGE>
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 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."
29
<PAGE>
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
Leases Installments Master Weekly Operating Monthly Proceeds
Collections Account Applications(1)
Account
<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 Contracts.
* Applications described in 3 and 4.B 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).
30
<PAGE>
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)404-0042. 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.
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
31
<PAGE>
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,
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>
AVERAGE NEW PERCENTAGE OF INCOME
AUTOMOBILE MEDIAN FAMILY NEEDED TO
YEAR EXPENDITURE(1) INCOME(2) 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.
32
<PAGE>
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 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
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
33
<PAGE>
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 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
34
<PAGE>
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 July 8,
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 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 sum of (a) the depreciated
value of the Leased Vehicle as of the date of the Company's purchase plus (b)
57.5% of the down payment received by TAF-I with respect to such Leased Vehicles
(which percentage amount represents the marketing fee paid by TAF-I to
Transition Leasing with respect to such Leased Vehicle). 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
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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 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;
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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;
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
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amount from a Lessee under any Contract. (Servicing Agreement, Exhibit A.) To
maximize its return, the Company anticipates that 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
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
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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.
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
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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 directors as a group (4 persons)........ 0(2) 0%
</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.
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.
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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
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.
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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 Executive 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.
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
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<PAGE>
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 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 Fee 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.
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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.
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 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, 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.
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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. 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
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
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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.)
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.
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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.)
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
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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.
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
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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.
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
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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 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
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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 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
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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, 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
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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 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 agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes, unless an adverse
53
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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 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.
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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 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
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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.
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 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
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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
<TABLE>
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<S> <C>
INDEPENDENT AUDITORS' REPORT............................................................................... F-2
FINANCIAL STATEMENT
Balance Sheet............................................................................................ F-3
Notes to Financial Statement............................................................................. F-4
</TABLE>
F-1
<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
F-2
<PAGE>
TRANSITION AUTO FINANCE II, INC.
BALANCE SHEET
MARCH 30, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash.............................................................................. $ 1,000
---------
TOTAL ASSETS........................................................................ $ 1,000
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
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
F-3
<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.
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.
F-4
<PAGE>
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TABLE OF CONTENTS
<TABLE>
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Summary................................................................... 3
Risk Factors.............................................................. 12
Capitalization............................................................ 21
Use of Proceeds........................................................... 21
Description of the Notes.................................................. 22
Collateral for the Notes.................................................. 25
The Company............................................................... 31
Purchase, Acquisition and Collection of Contracts......................... 35
Security Ownership of Certain Beneficial Owners and Management............ 39
Management................................................................ 40
Litigation................................................................ 43
Management's Discussion and Analysis of Plan of Operation................. 44
Additional Indenture Provisions........................................... 45
Certain Legal Aspects of the Contracts.................................... 48
Certain Federal Income Tax Considerations................................. 53
Plan of Distribution...................................................... 55
Experts................................................................... 57
Legal Matters............................................................. 57
Financial Statements...................................................... F-1
</TABLE>
-------------------
UNTIL AUGUST 8, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN
THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$10,000,000
REDEEMABLE SECURED NOTES
DUE JUNE 30, 2002
TRANSITION AUTO
FINANCE II, INC.
---------------------
PROSPECTUS
---------------------
GREAT NATION
INVESTMENT CORPORATION
JULY 14, 1998
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