<PAGE> 1
As Filed Pursuant to Rule 424(b)(5)
Registration No. 333-56869
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 18, 1998
$131,394,000
FRANKLIN AUTO TRUST 1998-1
[FRANKLIN CAPITAL CORP. LOGO] ISSUER
$109,000,000 CLASS A-1 5.50% ASSET BACKED NOTES
$22,394,000 CLASS A-2 5.65% ASSET BACKED NOTES
----------------------
FRANKLIN RECEIVABLES LLC
SELLER
FRANKLIN CAPITAL CORPORATION
SERVICER
----------------------
The Franklin Auto Trust 1998-1 (the "Trust" or the "Issuer") will be formed
pursuant to a Trust Agreement (the "Trust Agreement") to be entered into by and
among Franklin Receivables LLC, as seller (the "Seller") and Bankers Trust
(Delaware), as owner trustee ("Owner Trustee"), and will issue $109,000,000
aggregate principal amount of Class A-1 5.50% Asset Backed Notes (the "Class A-1
Notes") and $22,394,000 aggregate principal amount of Class A-2 5.65% Asset
Backed Notes (the "Class A-2 Notes" and together with the Class A-1 Notes, the
"Notes"). The Notes will be issued pursuant to an Indenture, to be dated as of
September 1, 1998 (the "Indenture"), between the Trust and The Chase Manhattan
Bank, as indenture trustee and as indenture collateral agent (the "Indenture
Trustee" and the "Indenture Collateral Agent", respectively).
The assets of the Trust will include a pool of prime, non-prime and
sub-prime motor vehicle retail installment sale contracts (the "Receivables")
secured by new and used automobiles and light trucks financed thereby (the
"Financed Vehicles"), certain amounts received under each Receivable on and
after September 1, 1998 (the "Cutoff Date"), security interests in the Financed
Vehicles, the Note Policy (as defined herein) and other specified property, as
more fully described herein. The Note Policy will be issued by MBIA Insurance
Corporation.
(MBIA LOGO)
The Note Policy is not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law. The
Property/Casualty Insurance Fund provides for the payment of certain insurance
claims against insolvent insurers. The Property and Casualty Insurance Fund will
offer no protection to the Noteholders.
(Cover continued on next page)
----------------------
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" AT PAGE S-11 HEREIN
AND AT PAGE 15 IN THE ACCOMPANYING PROSPECTUS.
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN THE SELLER, THE SERVICER, FRANKLIN RESOURCES,
INC., FRANKLIN CAPITAL CORPORATION OR ANY OF THEIR RESPECTIVE AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO THE
OFFERING PRICE(1) DISCOUNT(2) SELLER (1)(3)
----------------- ------------ ---------------
<S> <C> <C> <C>
Per Class A-1 Note....................... 99.993741% 0.500000% 99.493741%
Per Class A-2 Note....................... 99.886419% 0.500000% 99.386419%
Total.................................... $131,361,742.36 $656,970.00 $130,704,772.36
</TABLE>
- ---------------
(1) Plus accrued interest if any from September 15, 1998.
(2) The Seller has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(3) Before deducting expenses payable by the Seller estimated to be $650,000.00.
----------------------
The Notes offered hereby are offered by Goldman, Sachs & Co. (the
"Underwriters"), as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that the Notes will be ready for delivery through the facilities of The
Depository Trust Company ("DTC") or through Cedel Bank, societe anonyme
("Cedel") or the Euroclear System ("Euroclear") on or about September 29, 1998
against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
----------------------
The date of this Prospectus Supplement is September 24, 1998.
<PAGE> 2
(Continued from preceding page)
The Notes will be secured by the assets of the Trust pursuant to the
Indenture. Interest on the Class A-1 Notes and Class A-2 Notes will accrue at
the per annum interest rates specified on the cover page. Interest on the Notes
will generally be payable on the 15th day of each month (each, a "Distribution
Date"), commencing October 15, 1998. Principal on the Notes will be payable on
each Distribution Date to the extent described herein, except that no principal
will be paid on the Class A-2 Notes until the principal due on the Class A-1
Notes has been paid in full.
The final scheduled distribution date ("Final Scheduled Distribution Date")
shall mean for each Class of Notes the date set forth below. The Final Scheduled
Distribution Date for the Class A-1 Notes and Class A-2 Notes will be the
January 2002 and the January 2006 Distribution Date, respectively. However,
payment in full of a Class of Notes may occur earlier than such date as
described herein. In addition, the Notes will be subject to redemption in whole,
but not in part, on any Distribution Date on which the Servicer exercises its
option to purchase the Receivables. The Servicer may purchase the Receivables
when the aggregate principal balance of the Receivables shall have declined to
10% or less of the Original Pool Balance.
The full and timely payment of the interest portion of the Guaranteed Note
Distributions in respect of the Notes on each Distribution Date and the full and
ultimate payment of the principal portion of the Guaranteed Note Distributions
in respect of the Notes on their respective Final Scheduled Distribution Dates
are unconditionally and irrevocably guaranteed pursuant to a financial guaranty
insurance policy (the "Note Policy") to be issued by MBIA Insurance Corporation.
There currently is no secondary market for the Notes. The Underwriters
expect to make a market in the Notes but have no obligation to do so. There is
no assurance that any such market will develop or continue or that it will
provide the holders of the Notes (the "Noteholders") with sufficient liquidity
of investment.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS AND
PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS IN FULL. SALES OF THE NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED A FINAL PROSPECTUS SUPPLEMENT AND THE FINAL PROSPECTUS.
TO THE EXTENT ANY STATEMENTS IN THIS PROSPECTUS SUPPLEMENT CONFLICT WITH
STATEMENTS IN THE PROSPECTUS, THE STATEMENTS IN THIS PROSPECTUS SUPPLEMENT SHALL
CONTROL.
THE UNDERWRITERS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR
OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING OVER-ALLOTMENT, STABILIZING
AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES AND THE IMPOSITION OF PENALTY
BIDS, IN EACH CASE IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING" HEREIN.
THE NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL CONSTITUTE A SEPARATE
SERIES OF SECURITIES BEING OFFERED BY THE SELLER PURSUANT TO ITS PROSPECTUS
DATED SEPTEMBER 18, 1998, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND
WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. IN PARTICULAR, INVESTORS SHOULD CONSIDER CAREFULLY THE
FACTORS SET FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS AND IN THIS PROSPECTUS
SUPPLEMENT.
S-2
<PAGE> 3
FORWARD-LOOKING STATEMENTS
IF AND WHEN INCLUDED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS OR IN DOCUMENTS INCORPORATED HEREIN OR THEREIN BY REFERENCE, THE
WORDS "EXPECTS," "INTENDS," "ANTICIPATES," "ESTIMATES" AND ANALOGOUS EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ANY SUCH STATEMENTS, WHICH
MAY INCLUDE STATEMENTS CONTAINED IN "RISK FACTORS", ARE INHERENTLY SUBJECT TO A
VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG
OTHERS, GENERAL ECONOMIC AND BUSINESS CONDITIONS, COMPETITION, CHANGES IN
POLITICAL, SOCIAL AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, CUSTOMER PREFERENCES AND VARIOUS OTHER MATTERS,
MANY OF WHICH ARE BEYOND THE SELLER'S CONTROL. THESE FORWARD-LOOKING STATEMENTS
SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS SUPPLEMENT. THE SELLER EXPRESSLY
DISCLAIMS ANY OBLIGATIONS OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR
REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO REFLECT ANY
CHANGE IN THE SELLER'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS,
CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
----------------------
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, unaudited monthly and annual
reports containing information concerning the Receivables will be sent on behalf
of the Trust to Cede & Co., as registered holder of the Notes and the nominee of
DTC. See "Certain Information Regarding the Securities -- Statements to
Securityholders" and "-- Book-Entry Registration" in the accompanying Prospectus
(the "Prospectus"). Such reports will not constitute financial statements
prepared in accordance with generally accepted accounting principles. None of
the Seller, the Servicer, Franklin Capital Corporation, Franklin Resources, Inc.
or MBIA Insurance Corporation intends to send any of its financial reports to
Noteholders. The Servicer, on behalf of the Trust, will file with the Securities
and Exchange Commission (the "Commission") periodic reports concerning the Trust
to the extent required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the Commission
thereunder. The Trust may suspend the filing of such reports under the Exchange
Act when and if the filing of such reports is no longer required.
AVAILABLE INFORMATION
The consolidated financial statements of MBIA Insurance Corporation, a New
York domiciled insurance company (the "Insurer") are included in, or as exhibits
to, the following documents which have been filed with the Commission by the
Insurer's parent company MBIA, Inc., a Connecticut corporation ("Holdings") and
are hereby incorporated by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1997,
and
(b) Quarterly Report on Form 10-Q for the period ended June 30, 1998.
Investors are encouraged to review such documents, including such financial
statements, as well as all financial statements of the Insurer included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus Supplement and prior to
the termination of the offering of the Notes for information about the Insurer.
S-3
<PAGE> 4
SUMMARY OF TERMS
The following summary of principal economic terms does not purport to be
complete and is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
Prospectus. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings ascribed to such terms elsewhere in this Prospectus
Supplement or the Prospectus.
Issuer........................ Franklin Auto Trust 1998-1 (the "Trust" or the
"Issuer"), a Delaware business trust to be
formed pursuant to a Trust Agreement, dated as
of September 1, 1998 (the "Trust Agreement"),
between the Seller and the Owner Trustee. See
"The Trust" herein and "The Trusts" in the
Prospectus.
Seller........................ Franklin Receivables LLC, a Delaware limited
liability company (the "Seller") and
wholly-owned subsidiary of Franklin Capital
Corporation. See "The Sellers" in the
Prospectus.
Servicer...................... Franklin Capital Corporation (in its individual
capacity, "Franklin Capital" and, as servicer,
the "Servicer"), a Utah corporation and
wholly-owned subsidiary of Franklin Resources,
Inc., a Delaware corporation ("Franklin
Resources"). See "Franklin Capital Corporation"
and "Franklin Resources, Inc." in the
Prospectus.
Insurer....................... MBIA Insurance Corporation (the "Insurer"), a
New York domiciled insurance company. See "The
Insurer" herein.
Indenture Trustee............. The Chase Manhattan Bank (the "Indenture
Trustee"). See "The Notes -- The Indenture
Trustee" in the Prospectus.
Owner Trustee................. Bankers Trust (Delaware) (the "Owner Trustee").
See "The Trust -- The Owner Trustee" herein and
"The Trusts -- The Owner Trustee" in the
Prospectus.
Cutoff Date................... September 1, 1998.
Closing Date.................. September 29, 1998.
The Notes..................... The Trust will issue Class A-1 5.50% Asset
Backed Notes (the "Class A-1 Notes") in the
aggregate original principal amount of
$109,000,000 and Class A-2 5.65% Asset Backed
Notes (the "Class A-2 Notes") in the aggregate
original principal amount of $22,394,000. The
Class A-1 Notes and the Class A-2 Notes
(collectively, the "Notes") will be issued
pursuant to an Indenture, dated as of September
1, 1998, among the Issuer, the Indenture
Trustee and The Chase Manhattan Bank, as
Indenture Collateral Agent (the "Indenture
Collateral Agent"). The Notes will be offered
for purchase in denominations of $1,000 and
integral multiples thereof in book-entry form
only. Persons acquiring beneficial interests in
the Notes will hold their interests through DTC
in the United States or Cedel Bank, societe
anonyme ("Cedel") or the Euroclear System
("Euroclear") in Europe. See "Certain
Information Regarding The Securities --
Book-Entry Registration" in the Prospectus and
Annex I thereto.
S-4
<PAGE> 5
The Notes will be secured by the assets of the
Trust pursuant to the Indenture.
Trust Property................ Each Note will represent an obligation of the
Trust. The Trust's assets (the "Trust
Property") will include certain prime,
non-prime and sub-prime motor vehicle retail
installment sale contracts (the "Receivables"),
secured by new and used automobiles and light
trucks (the "Financed Vehicles"), certain
monies representing interest payments and
principal payments received thereunder on and
after the Cutoff Date and, with respect to
Receivables which are Precomputed Receivables,
monies received thereunder prior to the Cutoff
Date that are due on or after the Cutoff Date,
an assignment of the security interests in the
Financed Vehicles securing the Receivables, the
related Receivables Files (as defined in the
related Trust Documents), all rights to
proceeds from claims on certain physical
damage, credit life and disability insurance
policies covering the Financed Vehicles or the
Obligors, as the case may be, all rights to
liquidation proceeds with respect to the
Receivables, certain proceeds from the exercise
of rights against Dealers under agreements
between Franklin Capital and such Dealers, all
proceeds of the foregoing, such amounts as from
time to time may be held in the Collection
Account, the Payahead Account and the Note
Distribution Account and certain rights under
the Trust Documents. The Receivables will be
purchased by the Seller from Franklin Capital
pursuant to a purchase agreement dated as of
September 1, 1998 between the Seller and
Franklin Capital (the "Purchase Agreement") on
or prior to the date of issuance of the Notes
and sold to the Trust on the Closing Date
pursuant to a Sale and Servicing Agreement
dated as of the Cutoff Date among the Seller,
the Servicer, Franklin Resources and the Owner
Trustee (the "Sale and Servicing Agreement").
The Trust Property also will include an
assignment of the Seller's rights against
Franklin Capital under the Purchase Agreement
upon the occurrence of certain breaches of
representations and warranties.
Receivables................... The Receivables consist of prime, non-prime and
sub-prime motor vehicle retail installment sale
contracts originated by motor vehicle dealers
("Dealers") and then acquired by Franklin
Capital. See "Franklin Capital
Corporation -- General" in the Prospectus.
The statistical information presented in this
Prospectus Supplement is based on the
Receivables as of the Cutoff Date.
The Receivables have, as of the Cutoff Date, a
weighted average annual percentage rate ("APR")
of approximately 11.62%, a weighted average
original maturity of 62.49 months and a
weighted average remaining maturity of 42.86
months. The Receivables have an aggregate
principal balance of $131,394,490.64 as of the
Cutoff Date. See "The Receivables" herein. Each
of the Receivables also will have
S-5
<PAGE> 6
a remaining term of not less than seven months
as of the Cutoff Date.
The Receivables transferred to the Trust, will
consist of Prime Receivables, Non-Prime
Receivables and Sub-Prime Receivables ("Prime,"
"Non-Prime" and "Sub-Prime" each as defined in
the Prospectus). See "Franklin Capital
Corporation -- General" and "Description of the
Purchase Agreements and The Trust
Documents -- Eligibility Criteria" in the
Prospectus. The Prime, the Non-Prime and
Sub-Prime Receivables have principal balances
of $78,430,885.03, $45,967,290.63 and
$6,996,314.98 as of the Cutoff Date,
respectively, which represent 59.7%, 35.0% and
5.3% of the aggregate principal balance of the
Receivables as of the Cutoff Date.
All of the Receivables must satisfy the
eligibility criteria set forth under "The
Receivables -- Eligibility Criteria" herein.
Terms of the Notes............ The principal terms of the Notes will be as
described below:
A. Distribution Dates....... Payments of interest and principal on the Notes
will be made on the 15th day of each month or,
if the 15th day is not a Business Day, on the
next following Business Day (each, a
"Distribution Date") commencing October 15,
1998. Each reference to a "Payment Date" in the
accompanying Prospectus shall refer to a
Distribution Date. Payments will be made to
holders of record of the Notes (the
"Noteholders") as of the Business Day
immediately preceding such Distribution Date (a
"Record Date"). A "Business Day" is a day other
than a Saturday, Sunday or other day on which
commercial banks located in the states of
California or New York are authorized or
obligated to be closed.
B. Interest Rates........... The Class A-1 Notes will bear interest at the
fixed per annum rate set forth on the cover
page hereof. The Class A-2 Notes will bear
interest at the fixed per annum rate set forth
on the cover page hereof. Each such interest
rate for a Class of Notes is referred to as the
"Interest Rate." As used herein, the term
"Class" refers to either the Class A-1 or Class
A-2 Notes or both collectively, as the context
requires.
C. Interest................. Interest on the principal amount of the Notes
of each Class outstanding immediately prior to
a Distribution Date will accrue at the
applicable Interest Rate from and including the
fifteenth day of the calendar month preceding
the Distribution Date to, but excluding, the
fifteenth day of the following calendar month
(each, an "Interest Period"). Interest on the
Notes for any Distribution Date due but not
paid on such Distribution Date will be due on
the next Distribution Date together with, to
the extent permitted by law, interest on such
amount at the applicable Interest Rate. The
amount of interest distributable on the Notes
on each Distribution Date will equal interest
accrued during the related Interest Period.
Interest on the Class A-1 Notes and Class A-2
Notes will be calculated on the basis of a
360-day year consisting of
S-6
<PAGE> 7
twelve 30-day months. See "Description of the
Notes -- Payments of Interest" herein.
D. Principal................ Principal of the Notes will be payable on each
Distribution Date in an amount equal to the
Principal Distributable Amount (as defined
below) for the calendar month (the "Monthly
Period") preceding such Distribution Date. The
Principal Distributable Amount will equal the
excess of (i) the aggregate outstanding
principal balance of the Notes as of the
preceding Distribution Date (after giving
effect to distributions thereon) or in the case
of the first Distribution Date as of the
Closing Date, over (ii) the Month-End Pool
Balance as of the end of the preceding Monthly
Period; provided, however, that on the Final
Scheduled Distribution Date for any Class of
Notes, the Principal Distributable Amount will
not be less than the outstanding principal
balance of such Class of Notes. The "Month-End
Pool Balance" as of the end of any Monthly
Period (other than the initial Monthly Period)
represents the Pool Balance for the immediately
preceding Monthly Period, or in the case of the
initial Monthly Period the Original Pool
Balance, less an amount equal to the sum of the
following amounts with respect to the related
Monthly Period, computed, with respect to
Simple Interest Receivables, in accordance with
the simple interest method, and, with respect
to Precomputed Receivables, in accordance with
the actuarial method: (i) that portion of all
collections on Receivables allocable to
principal, including full and, with respect to
Simple Interest Receivables, partial principal
prepayments, received during such Monthly
Period (including, with respect to Precomputed
Receivables, amounts withdrawn from the
Payahead Account but excluding amounts
deposited into the Payahead Account) with
respect to such Monthly Period, (ii) the
principal balance of each Receivable that was
repurchased by Franklin Capital, the Seller,
the Servicer or any affiliate of any of them as
of the last day of such Monthly Period, (iii)
at the option of the Insurer, the outstanding
principal balance of those Receivables that
were required to be repurchased by the Seller
and/or Franklin Capital during such Monthly
Period but were not so repurchased, (iv)
without duplication of amounts in clause (ii),
the principal balance of each Receivable that
became a Liquidated Receivable during such
Monthly Period, and (v) the aggregate amount of
Cram Down Losses during such Monthly Period.
The Pool Balance as of the Cutoff Date (the
"Original Pool Balance") will be
$131,394,490.64.
No principal will be paid on the Class A-2
Notes until the principal of the Class A-1
Notes has been paid in full. In addition, the
outstanding principal amount of the Notes of
any Class, to the extent not previously paid,
will be payable on the respective Final
Scheduled Distribution Date for such Class.
S-7
<PAGE> 8
E. Distribution
Priorities.................... On each Distribution Date, for so long as any
Class of Notes remains outstanding, and except
as otherwise described herein, the Principal
Distributable Amount for such date will be
distributed to the holders of the respective
Classes of Notes for the following purposes and
the following order of priority:
First, to the Class A-1 Notes, until the
principal balance of such Notes is reduced to
zero; and
Second, to the Class A-2 Notes, until the
principal balance of such Notes is reduced to
zero.
F. Optional Redemption...... The Class A-1 Notes and Class A-2 Notes, to the
extent still outstanding, may be redeemed in
whole, but not in part, on any Distribution
Date on which the Servicer exercises its option
to purchase the Receivables, which, subject to
certain provisions in the Sale and Servicing
Agreement, can occur after the Pool Balance
declines to 10% or less of the Original Pool
Balance (with the consent of the Insurer, if
such purchase would result in a claim on the
Note Policy or would result in any amount owing
to the Insurer remaining unpaid), at a
redemption price equal to the unpaid principal
amount of the Notes of each outstanding Class
plus accrued and unpaid interest thereon. See
"Description of the Notes -- Optional
Redemption" herein. The Original Pool Balance
will equal the aggregate principal balance of
the Receivables as of the Cutoff Date.
G. Mandatory Redemption..... The Notes may be accelerated and subject to
immediate payment at par plus accrued and
unpaid interest upon the occurrence of an Event
of Default under the Indenture. So long as no
Insurer Default shall have occurred and be
continuing, an Event of Default under the
Indenture will occur only upon delivery by the
Insurer to the Indenture Trustee of notice of
the occurrence of certain events of default
under the Insurance and Reimbursement
Agreement, dated as of the Closing Date (the
"Insurance Agreement"), among the Insurer, the
Trust, Franklin Resources, the Seller and the
Servicer. In the case of such an Event of
Default, the Notes will automatically be
accelerated and subject to immediate payment at
par plus accrued and unpaid interest. See
"Description of the Notes -- Events of Default"
herein. The Note Policy does not guarantee
payment of any amounts that become due on an
accelerated basis.
The Note Policy............... On the Closing Date, the Insurer will issue a
financial guaranty insurance policy (the "Note
Policy") to the Indenture Trustee pursuant to
the Insurance Agreement. Pursuant to the Note
Policy, the Insurer will unconditionally and
irrevocably guarantee to the Noteholders
payment of the Guaranteed Note Distributions
(as defined herein) for each Distribution Date.
See "The Note Policy" and "Description of the
Purchase Agreement and the Trust
Documents -- Distributions" herein. On the
Closing Date, the Seller will make an
S-8
<PAGE> 9
initial deposit into the Insurance Spread
Account (as defined in "The Note Policy -- Note
Policy" herein) of an amount to be agreed to by
the Seller and Insurer for the benefit of the
Insurer. Amounts in the Insurance Spread
Account will be used to reimburse the Insurer
for any Guaranteed Note Distributions or
Insurer Optional Deposits. Such account may be
funded from amounts received on the
Receivables. Additional amounts may be
deposited in such account from time to time. In
addition, the Seller and Franklin Resources
will agree to deposit certain amounts into the
Insurance Spread Account (subject to a maximum
limit on such deposits). The Insurance Spread
Account will not be an asset of the Trust and
Noteholders will have no right to payments
therefrom.
Collection Account............ The Servicer will establish one or more
accounts in the name of the Indenture
Collateral Agent (the "Collection Account") for
the benefit of the Indenture Trustee, on behalf
of the Noteholders, and the Insurer. All
payments from Obligors that are received by the
Servicer on behalf of the Trust must be
deposited into the Collection Account no later
than two Business Days prior to the related
Distribution Date. Upon the occurrence of
certain events specified herein, all payments
from Obligors that are received by the Servicer
on behalf of the Trust will be deposited in the
Collection Account no later than two Business
Days after receipt thereof.
Pursuant to the Sale and Servicing Agreement,
the Indenture Trustee will, on each
Distribution Date, apply the Distribution
Amount with respect to such Distribution Date
to the following (in the priority indicated):
(i) to the Servicer, the Servicing Fee (as
defined herein) for the related Monthly Period
(to the extent due and unpaid) and any overdue
Servicing Fees, (ii) to the Insurer, any
accrued and unpaid fees of the Insurer (to the
extent such fees have not been previously paid
by the Servicer or Franklin Capital), (iii)
into the Note Distribution Account, the
Noteholders' Interest Distributable Amount,
(iv) into the Note Distribution Account, the
Principal Distributable Amount, (v) to the
Insurer, any interest due on outstanding Surety
Draws (as defined below), (vi) to the Insurer,
any payments previously made by the Insurer
under the Note Policy, and any other
discretionary amounts paid by the Insurer
(including Insurer Optional Deposits) with
respect to Principal Distributable Amounts on
any prior Distribution Date (such insurance
payments and amounts, the "Surety Draws"),
(vii) into the Insurance Spread Account, to the
extent the amount therein is less than the
required amount, (viii) to the Servicer, the
Excess Servicing Fee (as defined herein) for
the related monthly period (to the extent due
and unpaid) and any overdue Excess Servicing
Fees, and (ix) the remaining balance, if any,
to the Seller. See "Description of the Purchase
Agreement and the Trust Documents --
Distributions" and "-- Servicing Compensation
and Trustees' Fees" herein and "Description of
the
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<PAGE> 10
Purchase Agreements and the Trust Documents --
Collections" in the Prospectus.
The Servicer may deposit collections net of the
Servicing Fee for any Monthly Period.
Tax Status.................... In the opinion of Weil, Gotshal & Manges LLP,
special tax counsel to the Trust, for federal
income tax purposes the Notes will be
characterized as debt and the Trust will not be
characterized as an association (or a publicly
traded partnership) taxable as a corporation.
Each Noteholder, by the acceptance of a Note,
will agree to treat the Notes as debt for
federal income tax purposes. See "Federal
Income Tax Consequences" herein and "Federal
Income Tax Consequences" in the Prospectus.
Investors are encouraged to consult their own
advisors concerning state, local and foreign
tax consequences of an investment in the Notes.
See "State, Local and Foreign Tax
Considerations" herein.
ERISA Considerations.......... Subject to the conditions and considerations
discussed under "ERISA Considerations," the
Notes are eligible for purchase by pension,
profit-sharing or other employee benefit plans
as well as individual retirement accounts and
certain types of Keogh Plans (each, a "Benefit
Plan"). See "ERISA Considerations" herein and
in the Prospectus.
Ratings....................... It is a condition to issuance that the Class
A-1 Notes and Class A-2 Notes be rated AAA by
Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P"), and Aaa by
Moody's Investors Service, Inc. ("Moody's" and
together with S&P, the "Rating Agencies"). The
ratings by the Rating Agencies of the Notes
will be based primarily on the Note Policy.
There is no assurance that the ratings
initially assigned to the Notes will not
subsequently be lowered or withdrawn by the
Rating Agencies. See "Risk Factors -- Ratings
on Securities" herein.
S-10
<PAGE> 11
RISK FACTORS
Prospective Noteholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following risk factors in
connection with the purchase of the Notes.
REINVESTMENT RISKS FROM PREPAYMENTS
The weighted average life of the Notes will be reduced by full prepayments
on the Receivables and partial prepayments on the Simple Interest Receivables. A
partial prepayment in respect of a Precomputed Receivable less than the amount
required to prepay such Receivable in full will be treated as a Payahead until
such later Monthly Period with respect to which such Payahead may be applied to
either the scheduled payment in respect of such Monthly Period or to prepay such
Receivable in full. The Receivables are prepayable at any time without penalty.
Prepayments (or, for this purpose, equivalent payments to the Trust) may result
from payments by Obligors, liquidations due to default, the receipt of proceeds
from physical damage or credit insurance, repurchases by the Seller, Franklin
Capital or any affiliate of either of them as a result of certain uncured
breaches of the representations and warranties with respect to the Receivables,
purchases by the Servicer as a result of certain uncured breaches of the
covenants made by it in the Sale and Servicing Agreement with respect to the
Receivables, payment of Insurer Optional Deposits by the Insurer, or the
Servicer exercising its option to purchase all of the remaining Receivables when
the Pool Balance is less than 10% of the Original Pool Balance.
The Servicer has limited historical experience with respect to prepayments,
has not prepared data on prepayment rates and is not aware of publicly available
industry statistics that set forth principal prepayment experience for motor
vehicle retail installment sale contracts similar to the Receivables. For these
reasons, none of Franklin Resources, Franklin Capital, the Servicer or the
Seller can make any prediction as to the actual prepayment rates that will be
experienced on the Receivables.
The amounts paid to Noteholders with respect to any Distribution Date will
include all prepayments on the Receivables received thereon during the related
Monthly Period which are not amounts representing Payaheads. As a result, the
Notes may be paid in full prior to their respective Final Scheduled Distribution
Dates. The Noteholders will bear all reinvestment risk resulting from the timing
of payments of principal on the Notes. See "Yield and Prepayment Considerations"
in the Prospectus.
CONCENTRATION OF RECEIVABLES
Economic conditions where Obligors reside may affect the delinquency, loan
loss and repossession experience of the Trust with respect to the Receivables.
As of the Cutoff Date, Obligors with respect to 72.7%, 9.3% and 6.5% of the
Receivables (based on the principal balance of the Receivables and mailing
addresses of the Obligors thereon as of the Cutoff Date) were located in
California, Nevada and New Mexico, respectively. Economic conditions in
California are often volatile and from time to time have been adversely affected
by natural disasters, contractions in key industries and declining real estate
values. No predictions, however, can be made regarding future economic
conditions in California or any other states where Obligors reside. See "The
Receivables" herein and in the Prospectus.
LIMITED ASSETS
The Trust will not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the Receivables and the Note
Policy. Holders of the Notes must rely for repayment upon payments on the
Receivables and payments of claims made under the Note Policy. Similarly,
although the Note Policy will be available on each Distribution Date to cover
shortfalls in distributions of the Noteholders' Interest Distributable Amount on
such Distribution Date and to cover shortfalls in distributions of the Principal
Distributable Amount on the Final Scheduled
S-11
<PAGE> 12
Distribution Date, if the Insurer defaults on its obligations under the Note
Policy, the Trust will depend on current distributions on the Receivables to
make payments on the Notes. See "The Insurer" and "The Note Policy" herein.
RATINGS ON NOTES
A rating is not a recommendation to purchase, hold or sell Notes. The
ratings of the Notes address the likelihood of the timely payment of interest on
the Notes and the ultimate payment of the principal of the Notes at their
maturity. There is no assurance that a rating will remain in effect for any
given period of time or that a rating will not be lowered or withdrawn entirely
by a Rating Agency if in its judgment circumstances in the future so warrant. In
the event that any ratings initially assigned to the Notes were subsequently
lowered or withdrawn for any reason, including by reason of a downgrading of the
claims-paying ability of the Insurer, no person or entity will be obligated to
provide any additional credit enhancement with respect to the Notes. Any
reduction or withdrawal of a rating of the Insurer likely would result in a
reduction or withdrawal of ratings of the Notes, and may have an adverse effect
on the liquidity and market price of the Notes.
EVENTS OF DEFAULT UNDER THE INDENTURE
So long as no Insurer Default shall have occurred and be continuing,
neither the Indenture Trustee nor the Noteholders may declare an Event of
Default under the Indenture. So long as an Insurer Default shall not have
occurred and be continuing, an Event of Default will occur only upon delivery by
the Insurer to the Indenture Trustee of notice of the occurrence of certain
events of default under the Insurance Agreement. Upon the occurrence of an Event
of Default under the Indenture (so long as an Insurer Default shall not have
occurred and be continuing), the Insurer will have the right, but not the
obligation, to cause the liquidation, in whole or in part, of the Trust
Property, which will result in redemption, in whole or in part, of the Notes.
Following the occurrence of an Event of Default, the Indenture Trustee will
continue to submit claims under the Note Policy as necessary to enable the Trust
to continue to make payments of the Noteholders' Interest Distributable Amount
on each Distribution Date and to pay the outstanding Principal Balance on any
outstanding Notes on their Final Scheduled Distribution Date. Insurer decisions
with respect to defaults may have a significant impact on the weighted average
life of the Notes.
RISK OF YEAR 2000
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems may be unable to recognize, interpret or use dates
beyond the year 1999 correctly. Because the activities of many businesses are
affected by dates or are date-related, the inability to use such date
information correctly could lead to business disruptions both in the United
States and internationally (the "Year 2000 Problem").
Franklin Capital's primary exposure, if any, to the Year 2000 Problem would
be with regards to the systems it utilizes to service its automobile retail
installment sales contracts. Loan servicing systems utilize date calculations
to, among other things: (i) determine interest accrued on loans, (ii) properly
allocate payments received between interest and principal, and (iii) determine
payment due dates. Were the Year 2000 Problem to impact Franklin Capital's
servicing systems, problems could result due to, among other things, the (a)
misapplication of payments received, leading to disputes with borrowers and (b)
inability to properly determine delinquency status which could hinder Franklin
Capital's ability to pursue delinquent borrowers. The occurrence of such
disruptions could negatively impact cash flow to the Trust and thereby affect
the likelihood of receipt of timely payments of interest and ultimate payments
of principal by investors in the Notes.
Franklin Capital uses a combination of internal and external systems to
carry out the servicing of its portfolio of loans. The internal system is
currently used for limited purposes only such that its functionality should not
be affected by the Year 2000 Problem. The external system is provided by a
S-12
<PAGE> 13
non-affiliated, third-party vendor. The third-party vendor has already completed
what it believes to be the necessary systems modifications required to make its
system year 2000 compliant. The third-party vendor is currently in the testing
phase of its modifications, whereby the vendor in conjunction with several of
its clients is verifying that the modifications are indeed effective. The
third-party vendor currently expects this testing and the subsequent full
implementation to be completed by early 1999. Franklin Capital anticipates that
its testing will be completed shortly thereafter.
Franklin Capital also shares certain auxiliary systems with Franklin
Resources, such as accounting, e-mail, networks and telephone switches. Franklin
Resources has been working to address the Year 2000 Problem since 1996 and
presently anticipates having all of its mission critical systems compliant by
February 28, 1999. The Trust will not bear any of the costs and expenses
incurred by either Franklin Capital or Franklin Resources in preparing their
systems against the Year 2000 Problem.
Franklin Capital could also be impacted by the Year 2000 Problem through
its reliance on other third-party systems, such as externally managed data
lines, communications systems, telephone or electrical systems, among others. A
failure of such systems would materially and adversely affect Franklin Capital's
ability to carry on business in any regular fashion. Although Franklin
Resources, on behalf of Franklin Capital, is investigating potential contingency
plans for such circumstances, it is not clear that adequate contingency plans
could be developed for such failures.
USE OF PROCEEDS
The net proceeds to be received by the Trust from the sale of the Notes
will be used to pay to the Seller, and in turn, Franklin Capital, the purchase
price for the Receivables.
S-13
<PAGE> 14
THE TRUST
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Noteholders should consider, in addition to the information below,
the information under "The Trusts" in the accompanying Prospectus.
GENERAL
The Issuer, Franklin Auto Trust 1998-1, is a business trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Receivables and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes, (iii) making payments on the Notes and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith. The
proceeds of the initial sale of the Notes will be used by the Trust to purchase
the Receivables from the Seller pursuant to the Sale and Servicing Agreement.
The Trust's principal offices are in Delaware, in care of Bankers Trust
(Delaware), as Owner Trustee, at the address listed below under "-- The Owner
Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Notes had taken place on such
date:
<TABLE>
<S> <C>
Class A-1 Notes............................................ $109,000,000
Class A-2 Notes............................................ $ 22,394,000
------------
Total............................................ $131,394,000
============
</TABLE>
THE OWNER TRUSTEE
Bankers Trust (Delaware) is the Owner Trustee under the Trust Agreement, is
a Delaware banking corporation and its principal offices are located at 1011
Centre Road, Suite 200, Wilmington, Delaware 19825. The Seller, Franklin
Resources, the Servicer and their respective affiliates may maintain commercial
banking relations with the Owner Trustee and its affiliates. The Owner Trustee
will perform limited administrative functions under the Trust Agreement. The
Owner Trustee's liability in connection with the issuance and sale of the Notes
is limited solely to the express obligations of the Owner Trustee set forth in
the Trust Agreement and the Sale and Servicing Agreement.
THE TRUST PROPERTY
The Trust Property will include the following: (a) prime, non-prime and
sub-prime motor vehicle retail installment sale contracts secured by new and
used automobiles and light trucks; (b) all payments received thereunder on and
after the Cutoff Date, and, with respect to Precomputed Receivables, certain
monies representing interest payments and principal payments received thereunder
prior to the Cutoff Date that are due on or after the Cutoff Date; (c) such
amounts as from time to time may be held in the Collection Account, the Payahead
Account and the Note Distribution Account, if any; (d) an assignment of the
security interests of Franklin Capital in the Financed Vehicles; (e) certain
proceeds from the exercise of rights against Dealers under agreements between
Franklin Capital and such Dealers (the "Dealer Agreements"); (f) an assignment
of the right to receive proceeds from claims on certain physical damage, credit
life and disability insurance policies covering the Financed Vehicles or the
Obligors; (g) the rights of the Seller under the Purchase Agreement; (h) the
Receivables Files; and (i) certain other rights under
S-14
<PAGE> 15
the Trust Documents (including, among others, the right of the Seller under the
Purchase Agreement to require Franklin Capital to repurchase a Receivable upon
breach of certain representations).
The Receivables were originated by Dealers in accordance with Franklin
Capital's requirements under agreements with Dealers for assignment to Franklin
Capital, have been so assigned and evidence the indirect financing made
available to the Obligors. The Dealers generally assign the Receivables without
recourse, except that Dealer Agreements may provide for repurchase or recourse
against the Dealer in the event of a breach of a representation or warranty by
the Dealer. Although Franklin Capital's rights under the Dealer Agreements have
not been assigned to the Trust, and the Trust will not have any rights against
any Dealer, Franklin Capital has assigned or will assign to the Seller, and the
Seller has assigned or will assign to the Trust, the proceeds from any
Receivable repurchased by a Dealer as a result of a breach of a representation
or warranty in the related Dealer Agreement. See "The Trusts" in the Prospectus.
The "Pool Balance" as of the end of any Monthly Period represents the
aggregate principal balance of the Receivables (exclusive of Liquidated
Receivables) at the end of such Monthly Period, after giving effect to all
payments (other than Payaheads remaining in the Payahead Account) received from
Obligors and any Purchase Amounts to be remitted by Franklin Capital, the Seller
or Servicer, as the case may be, on the Determination Date following such
Monthly Period and all losses, including Cram Down Losses, realized on
Receivables liquidated during such Monthly Period. The Pool Balance as of the
Cutoff Date (the "Original Pool Balance") will be $131,394,490.64. Prior to the
Closing Date certain Receivables may be removed and additional Receivables
substituted therefor. All of the Receivables must satisfy the eligibility
criteria set forth under "The Receivables -- Eligibility Criteria" herein.
The initial aggregate principal balance of the Receivables may include a
small amount in respect of amounts owing from Obligors, in respect of
force-placed insurance. Prior to August 1997, Franklin Capital from time to time
acquired insurance for the accounts of Obligors who failed to maintain required
insurance of their vehicles. An amount in respect of the premiums for such
force-placed insurance was added to the principal balance of the related
Receivables. In the event that an Obligor later obtains his own insurance, any
unearned premiums rebated by the insurer are applied as a prepayment of the
related Receivables. The Seller believes that the amount, if any, included in
the Original Pool Balance in respect of force-placed insurance is immaterial and
that the rebate of any unearned premiums would not result in a material
prepayment. As of the date hereof, it is no longer Franklin Capital's policy to
force-place insurance. Losses on the Receivables resulting from uninsured losses
on the Financed Vehicles will be borne by the Trust.
Pursuant to the Indenture, the Trust will grant a security interest in the
Trust Property in favor of the Indenture Collateral Agent for the benefit of the
Indenture Trustee on behalf of the Noteholders and for the benefit of the
Insurer in support of the obligations owing to it under the Insurance Agreement.
Any proceeds of such security interest in the Trust Property would be
distributed according to the Indenture, as described below under "Description of
the Purchase Agreement and the Trust Documents -- Distributions." The Insurer
would be entitled to such distributions only after payment of amounts owing to,
among others, holders of the Notes.
S-15
<PAGE> 16
THE RECEIVABLES
The following information supplements the information contained under "The
Receivables" in the accompanying Prospectus.
GENERAL
The Receivables were purchased by Franklin Capital in the ordinary course
of business from motor vehicle dealers ("Dealers"). The Receivables will consist
of Prime, Non-Prime and Sub-Prime (each as defined in the Prospectus) motor
vehicle retail installment sale contracts. See "Risk Factors -- Nature of
Receivables; Underwriting Process; Sufficiency of Interest Rates to Cover
Losses," "Franklin Capital Corporation -- General" and "-- Credit Evaluation
Procedures" in the Prospectus.
ELIGIBILITY CRITERIA
The Receivables were selected according to several criteria, including
those specified under "The Receivables -- General" in the accompanying
Prospectus. In addition, the Receivables were selected from Franklin Capital's
portfolio of motor vehicle retail installment contracts based on several
criteria, including the following: (i) each Receivable has an APR equal to or
greater than 6%; (ii) each Receivable has an original term to maturity of not
more than 84 months; (iii) as of the Cutoff Date, the most recent Scheduled
Payment of each Receivable was made by or on behalf of the Obligor or was not
contractually delinquent more than 30 days; (iv) no Financed Vehicle has been
repossessed without reinstatement as of the Cutoff Date; and (v) as of the
Cutoff Date, no Obligor on any Receivable was the subject of a bankruptcy
proceeding commenced following the execution of the related contract. For
purposes of clause (iii), a Receivable is considered 30 days delinquent as of
the end of the month following the date on which a second consecutive Scheduled
Payment has not been made.
COMPOSITION
The statistical information presented in this Prospectus Supplement,
including the summary statistical information set forth below, is based on the
Receivables as of the Cutoff Date.
The distribution by credit quality, the distribution by new and used
Financed Vehicles, the geographic distribution, the distribution by interest
allocation method, the distribution by remaining principal balance, the
distribution by APR, the distribution by original term and the distribution by
remaining term, in each case of the Receivables as of the Cutoff Date, are set
forth below.
CREDIT QUALITY OF THE RECEIVABLES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
AGGREGATE WEIGHTED AVERAGE AVERAGE AVERAGE ORIGINAL
CLASS OF PRINCIPAL NUMBER OF AVERAGE ORIGINAL TERM REMAINING TERM PRINCIPAL AMOUNT
RECEIVABLES(1) BALANCE RECEIVABLES APR (IN MONTHS) (IN MONTHS) BALANCE FINANCED
- -------------- --------- ----------- -------- ------------- -------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Prime................ $ 78,430,885.03 7,160 9.68% 62.45 45.10 $10,954.03 $16,441.68
Non-Prime............ 45,967,290.63 5,194 13.83% 63.18 39.53 8,850.08 15,203.47
Sub-Prime............ 6,996,314.98 924 18.77% 58.46 39.66 7,571.77 11,856.34
--------------- ------ ----- ----- ----- ---------- ----------
Total................ $131,394,490.64 13,278 11.62% 62.49 42.86 $ 9,895.65 $15,638.24
</TABLE>
- ---------------
(1) The Receivables have been allocated to the Prime, Non-Prime and Sub-Prime
catgories based on Franklin Capital's underwriting criteria. There can be no
assurance that greater percentages would not be classified as Non-Prime or
Sub-Prime under criteria used by other auto lenders. See "Franklin Capital
Corporation" in the Prospectus.
S-16
<PAGE> 17
DISTRIBUTION BY NEW AND USED FINANCED VEHICLES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE(1)
----------- --------- -------------
<S> <C> <C> <C>
New............................................ 6,227 $ 66,504,503.04 50.6%
Used........................................... 7,051 64,889,987.60 49.4%
------ --------------- -----
Total................................ 13,278 $131,394,490.64 100.0%
</TABLE>
- ---------------
(1) Percentages may not add to 100.0% because of rounding.
GEOGRAPHIC DISTRIBUTION OF THE RECEIVABLES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE OF AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
STATE(1) RECEIVABLES BALANCE BALANCE(3)
- -------- ----------- --------- ------------
<S> <C> <C> <C>
Arizona........................................ 538 $ 4,422,512.18 3.4%
California..................................... 9,416 95,529,775.57 72.7%
Kansas......................................... 130 1,857,136.26 1.4%
Nevada......................................... 1,123 12,247,677.28 9.3%
New Mexico..................................... 975 8,535,662.78 6.5%
Utah........................................... 389 3,389,616.73 2.6%
Other(2)....................................... 707 5,412,109.84 4.1%
------ --------------- ------
Total................................ 13,278 $131,394,490.64 100.0%
====== =============== ======
</TABLE>
- ---------------
(1) Based on billing addresses of the Obligors as of the Cutoff Date.
(2) Includes states with concentrations less than 1% by principal balance.
(3) Percentages may not add to 100.0% because of rounding.
DISTRIBUTION BY INTEREST ALLOCATION METHOD OF THE RECEIVABLES
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE OF AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
INTEREST ALLOCATION METHOD RECEIVABLES BALANCE BALANCE(2)
- -------------------------- ----------- --------- ------------
<S> <C> <C> <C>
Precomputed Receivables(1)..................... 6,267 $ 53,284,201.42 40.6%
Simple Interest Receivables.................... 7,011 78,110,289.22 59.4%
------ --------------- -----
Total................................ 13,278 $131,394,490.64 100.0%
====== =============== =====
</TABLE>
- ---------------
(1) All of the Precomputed Receivables are Rule of 78's Receivables.
(2) Percentages may not add to 100.0% because of rounding.
S-17
<PAGE> 18
DISTRIBUTION BY REMAINING PRINCIPAL BALANCE OF THE RECEIVABLES
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE OF AGGREGATE
RANGE OF REMAINING NUMBER OF PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE RECEIVABLES BALANCE BALANCE(1)
- ------------------ ----------- --------- ------------
<S> <C> <C> <C>
$ 0.00 to $ 4,999.99...................... 3,197 $ 10,815,411.38 8.2%
$ 5,000.00 to $ 9,999.99....................... 4,187 31,298,338.57 23.8%
$10,000.00 to $14,999.99....................... 3,617 44,209,633.27 33.6%
$15,000.00 to $19,999.99....................... 1,457 24,851,952.89 18.9%
$20,000.00 to $24,999.99....................... 553 12,244,826.53 9.3%
$25,000.00 to $29,999.99....................... 176 4,720,319.66 3.6%
$30,000.00 or greater.......................... 91 3,254,008.34 2.5%
------ --------------- -----
Total................................ 13,278 $131,394,490.64 100.0%
====== =============== =====
</TABLE>
- ---------------
(1) Percentages may not add to 100.0% because of rounding.
DISTRIBUTION BY ANNUAL PERCENTAGE RATE OF THE RECEIVABLES
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE OF AGGREGATE
RANGE OF ANNUAL NUMBER OF PRINCIPAL PRINCIPAL
PERCENTAGE RATE RECEIVABLES BALANCE BALANCE(1)
- --------------- ----------- --------- ------------
<S> <C> <C> <C>
7.00% to 7.99%............................... 1,857 $ 16,368,587.52 12.5%
8.00% to 8.99%............................... 2,048 21,004,582.00 16.0%
9.00% to 9.99%............................... 2,135 22,435,157.29 17.1%
10.00% to 10.99%............................... 1,654 17,048,120.41 13.0%
11.00% to 11.99%............................... 1,081 10,963,664.76 8.3%
12.00% to 12.99%............................... 936 9,319,917.21 7.1%
13.00% to 13.99%............................... 621 5,941,108.77 4.5%
14.00% to 14.99%............................... 496 4,391,265.21 3.3%
15.00% to 15.99%............................... 520 4,385,253.15 3.3%
16.00% to 16.99%............................... 451 4,414,554.36 3.4%
17.00% to 17.99%............................... 294 3,067,040.37 2.3%
18.00% to 18.99%............................... 336 3,473,857.88 2.6%
19.00% to 19.99%............................... 384 4,323,530.22 3.3%
20.00% and greater............................. 465 4,257,851.49 3.2%
------ --------------- -----
Total................................ 13,278 $131,394,490.64 100.0%
====== =============== =====
</TABLE>
- ---------------
(1) Percentages may not add to 100.0% because of rounding.
S-18
<PAGE> 19
DISTRIBUTION BY ORIGINAL TERM OF THE RECEIVABLES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE OF AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF ORIGINAL TERM RECEIVABLES BALANCE BALANCE(1)
- ---------------------- ----------- --------- ------------
<S> <C> <C> <C>
24 Months and under............................ 46 $ 242,069.92 0.2%
25 to 36 Months................................ 341 2,229,364.10 1.7%
37 to 48 Months................................ 948 7,599,713.85 5.8%
49 to 60 Months................................ 8,559 78,908,867.64 60.1%
61 to 72 Months................................ 3,318 41,167,730.71 31.3%
73 to 84 Months................................ 66 1,246,744.42 0.9%
------ --------------- -----
Total................................ 13,278 $131,394,490.64 100.0%
====== =============== =====
</TABLE>
- ---------------
(1) Percentages may not add to 100.0% because of rounding.
DISTRIBUTION BY REMAINING TERM OF THE RECEIVABLES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENTAGE
AGGREGATE OF AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF REMAINING TERM RECEIVABLES BALANCE BALANCE(1)
- ----------------------- ----------- --------- ------------
<S> <C> <C> <C>
24 Months and under............................ 4,604 $ 21,049,042.33 16.0%
25 to 36 Months................................ 2,400 21,670,383.00 16.5%
37 to 48 Months................................ 2,596 31,790,008.59 24.2%
49 to 60 Months................................ 2,919 42,500,558.47 32.3%
61 to 72 Months................................ 739 13,896,753.91 10.6%
73 to 84 Months................................ 20 487,744.34 0.4%
------ --------------- -----
Total................................ 13,278 $131,394,490.64 100.0%
====== =============== =====
</TABLE>
- ---------------
(1) Percentages may not add to 100.0% because of rounding.
DELINQUENCY AND LOSS EXPERIENCE
Franklin Capital began operations in November 1993. The table below sets
forth the delinquency and loss experience as of the end of each of the periods
indicated. The information set forth in the following table may be affected by
the size, growth and decline, and seasoning of the Receivables. Accordingly, no
assurances can be given that the delinquency and loss experience presented in
the tables below will be indicative of such experience on the Receivables.
FRANKLIN CAPITAL CORPORATION
HISTORICAL DELINQUENCY AND LOSS EXPERIENCE
<TABLE>
<CAPTION>
AS OF AS OF
------------------------------------------------------------ -------------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 JUNE 30 JUNE 30
DELINQUENCY EXPERIENCE 1994(1) 1995 1996 1997 1997 1998
- ---------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio Outstanding at end of
period(2)...................... $160,635,623 $225,575,436 $174,589,677 $154,271,605 $154,995,826 $164,182,493
Delinquencies at end of
period(3)
30-59 days..................... $ 2,442,313 $ 9,217,070 $ 4,129,543 $ 1,929,654 $ 2,385,855 $ 1,190,679
60-89 days..................... 733,619 3,252,750 1,969,257 729,097 1,078,090 428,597
90 days or more................ 400,740 3,761,131 2,067,850 1,326,175 1,135,224 693,176
------------ ------------ ------------ ------------ ------------ ------------
Total delinquencies............. $ 3,576,672 $ 16,230,951 $ 8,166,650 $ 3,984,926 $ 4,599,169 $ 2,312,452
------------ ------------ ------------ ------------ ------------ ------------
Total delinquencies as a
percentage of portfolio
outstanding at end of period... 2.2% 7.2% 4.7% 2.6% 3.0% 1.4%
============ ============ ============ ============ ============ ============
</TABLE>
S-19
<PAGE> 20
<TABLE>
<CAPTION>
DURING FISCAL YEARS ENDED DURING NINE MONTHS ENDED
------------------------------------------------------------ -------------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 JUNE 30 JUNE 30
CREDIT/LOSS EXPERIENCE 1994(1) 1995 1996 1997 1997 1998
- ---------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Average portfolio outstanding
during period(2)(4)............ $ 66,586,803(b) $225,203,667(b) $196,747,716 $162,745,276 $165,496,266 $156,829,260
Average number of loans
outstanding during period...... n/a n/a n/a 14,780 14,855 15,065
Number of repossessions during
period......................... n/a n/a n/a 760 598 390
Repossessions as a percentage of
average number of loans
outstanding during period...... n/a n/a n/a 5.1% 5.4%(a) 3.5%(a)
Gross charge-off(5)............. $ 210,842 $ 7,039,263 $ 12,082,834 $ 6,580,261 $ 5,270,050 $ 2,409,242
Recoveries(6)................... 4,242 649,374 1,408,190 1,854,461 1,521,453 773,821
------------ ------------ ------------ ------------ ------------ ------------
Net losses...................... $ 206,600 $ 6,389,889 $ 10,674,644 $ 4,725,800 $ 3,748,597 $ 1,635,421
------------ ------------ ------------ ------------ ------------ ------------
Net losses as a percentage of
average portfolio outstanding
during the period.............. 0.3% 2.8% 5.4% 2.9% 3.0%(a) 1.4%(a)
============ ============ ============ ============ ============ ============
</TABLE>
- ---------------
Key -- (a) Annualized
(b) Simple average using Franklin Capital figures
Notes
(1) Franklin Capital commenced lending operations in December 1993 and
consequently 1994 data represents 9 months of activity.
(2) For simple interest contracts, Portfolio Outstanding represents the
outstanding principal balance plus the insurance receivable (if any). For
Rule of 78's contracts, Portfolio Outstanding represents the gross
receivable less unearned discount, unearned insurance receivable (if any),
and unearned insurance interest receivable (if any). Portfolio Outstandings
are reduced by any rejected or unapplied payments, but such amounts are not
subtracted from the balances of delinquent contracts. Starting in February
1996, Portfolio Outstanding also includes unearned dealer reserve.
(3) The period of delinquency is based on the number of days scheduled payments
are contractually past due. Includes receivables on hand that have not been
charged-off.
(4) Average calculated on a daily basis, except as noted.
(5) Gross charge-offs represents the outstanding balance (calculated as per 2
above) of contracts charged off in the period less proceeds from the
disposition of the collateral, net of any repossession expenses, and
unearned dealer reserve.
(6) Recoveries represents amounts received on previously charged off contracts
net of recovery expenses.
Franklin Capital's motor vehicle retail installment sale contracts
portfolio experienced an upward trend in losses that peaked roughly at the end
of 1996. During this period, Franklin Capital significantly increased its
origination volume. The rapid expansion brought with it, among other things,
greater occurrences of Dealer fraud and applicant fraud, and a decreased ability
of Franklin Capital to manage its rapid expansion. As a result, Franklin Capital
curtailed its expansion plans and proceeded to reexamine its origination and
servicing processes. Franklin Capital implemented an extensive verification
process to detect and thwart Dealer and applicant fraud as well as new
underwriting guidelines. From the end of 1996 through the present, Franklin
Capital's portfolio motor vehicle retail installment sale contracts experienced
a reversal of the upward trend of losses on receivables. Franklin Capital
believes that the improved loss and delinquency experience is attributable to a
large degree to its revised underwriting procedures adopted in early 1996.
S-20
<PAGE> 21
THE INSURER
The following information has been obtained from MBIA Insurance Corporation
(the "Insurer") and has not been verified by the Seller, the Servicer or the
Underwriters. No representations or warranty are made by the Seller, the
Servicer or the Underwriters with respect thereto.
The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts of or
claims against the Insurer. The Insurer is domiciled in the State of New York
and licensed to do business in and subject to regulation under the laws of all
50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and Territory of Guam. The Insurer has two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Insurer, changes in control and
transactions among affiliates. Additionally, the Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings, Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Insurer. MBIA Inc. is not obligated to pay the debts of or
claims against CMAC.
The consolidated financial statements of the Insurer, a wholly owned
subsidiary of MBIA Inc. and its subsidiaries as of December 31, 1997 and
December 31, 1996 and for each of the three years in the period ended December
31, 1997, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1997 and the consolidated financial statements of the Insurer and
its subsidiaries as of June 30, 1998 and for the six month periods ending June
30, 1998 and June 30, 1997 included in the Quarterly Report on Form 10-Q of MBIA
Inc. for the period ending June 30, 1998, are hereby incorporated by reference
into this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated by reference herein shall be
modified or superseded for purposes of this Prospectus Supplement to the extent
that a statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Insurer and its subsidiaries included in
documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Notes
shall be deemed to be incorporated by reference into this Prospectus Supplement
and to be a part hereof from the respective dates of filing such documents.
S-21
<PAGE> 22
The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
----------------------------------
DECEMBER 31, 1997 JUNE 30, 1998
(AUDITED) (UNAUDITED)
----------------- -------------
(IN MILLIONS)
<S> <C> <C>
Admitted Assets..................................... $5,256 $6,048
Liabilities......................................... 3,496 3,962
Capital and Surplus................................. 1,760 2,086
</TABLE>
<TABLE>
<CAPTION>
GAAP
----------------------------------
DECEMBER 31, 1997 JUNE 30, 1998
(AUDITED) (UNAUDITED)
----------------- -------------
(IN MILLIONS)
<S> <C> <C>
Assets.............................................. $5,988 $6,794
Liabilities......................................... 2,624 2,977
Shareholder's Equity................................ 3,364 3,817
</TABLE>
Copies of the financial statements of the Insurer referenced herein and
copies of the Insurer's 1997 year-end audited financial statements prepared in
accordance with statutory accounting practices are available, without charge,
from the Insurer. The address of the Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Insurer is (914) 273-4545.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Insurer set forth under the heading "The
Insurer." Additionally, the Insurer makes no representation regarding the Notes
or the advisability of investing in the Notes.
The Note Policy is not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law. The
Property/Casualty Insurance Fund will offer no protection to the Noteholders.
The Property/Casualty Insurance Fund provides for the payment of certain
insurance claims against insolvent insurers.
S&P rates the claims paying ability of the Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the claims paying ability of the Insurer "AAA."
Moody's rates the claims paying ability of the Insurer "Aaa."
Each rating of the Insurer should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of the Insurer and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Notes,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the Notes. The Insurer does
not guaranty the market price of the Notes nor does it guaranty that the ratings
on the Notes will not be revised or withdrawn.
S-22
<PAGE> 23
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. The following
summary describes certain terms of the Notes and the Indenture. The summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Notes and the Indenture. The
following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Notes of
any given series and the related Indenture set forth in the accompanying
Prospectus, to which description reference is hereby made.
The Notes will be offered for purchase in denominations of $1,000 and
integral multiples thereof in book-entry form only. Persons acquiring beneficial
interests in the Notes will hold their interests through DTC in the United
States or Cedel or Euroclear in Europe. See "Certain Information Regarding the
Securities -- Book-Entry Registration" in the Prospectus and Annex 1 thereto.
PAYMENTS OF INTEREST
Interest on the principal amount of each Class of Notes will accrue at the
applicable Interest Rate and will be payable to the Noteholders of such Class
monthly on each Distribution Date, commencing October 15, 1998. Interest will
accrue from and including the fifteenth day of the calendar month preceding the
Distribution Date to but excluding the fifteenth day of the following calendar
month (each, an "Interest Period"). Interest on the Class A-1 Notes and Class
A-2 Notes will be calculated on the basis of a 360-day year consisting of twelve
30-day months. Interest accrued as of any Distribution Date but not paid on such
Distribution Date will be due on the next Distribution Date, together with, to
the extent permitted by law, interest on such amount at the applicable Interest
Rate. Interest payments on the Notes will be made from the Distribution Amount
(as defined herein) after payment of accrued and unpaid Servicing Fee and
payment of any accrued and unpaid fees of the Insurer. See "Description of the
Purchase Agreement and the Trust Documents -- Distributions" herein.
PAYMENTS OF PRINCIPAL
Principal payments will be made to the Noteholders on each Distribution
Date in an amount equal to the sum of the Principal Distributable Amount for the
calendar month (the "Monthly Period") preceding such Distribution Date. The
Principal Distributable Amount will equal the excess of (i) the aggregate
outstanding principal balance of the Notes as of the preceding Distribution Date
(after giving effect to distributions thereon) or in the case of the first
Distribution Date as of the Closing Date, over (ii) the Month-End Pool Balance
as of the end of the preceding Monthly Period; provided, however, that on the
Final Scheduled Distribution Date for any Class of Notes, the Principal
Distributable Amount will not be less than the outstanding principal balance of
such Class of Notes. The "Month-End Pool Balance" as of the end of any Monthly
Period (other than the initial Monthly Period) represents the Pool Balance for
the immediately preceding Monthly Period, or in the case of the initial Monthly
Period the Original Pool Balance, less an amount equal to the sum of the
following amounts with respect to the related Monthly Period, computed, with
respect to Simple Interest Receivables, in accordance with the simple interest
method, and, with respect to Precomputed Receivables, in accordance with the
actuarial method: (i) that portion of all collections on Receivables allocable
to principal, including full and, with respect to Simple Interest Receivables,
partial principal prepayments, received during such Monthly Period (including,
with respect to Precomputed Receivables, amounts withdrawn from the Payahead
Account but excluding amounts deposited into the Payahead Account) with respect
to such Monthly Period, (ii) the principal balance of each Receivable that was
repurchased by Franklin Capital, the Seller, the Servicer or any affiliate of
any of them as of the last day of such Monthly Period, (iii) at the option of
the Insurer, the outstanding principal balance of those Receivables that were
required to be repurchased by the
S-23
<PAGE> 24
Seller and/or Franklin Capital during such Monthly Period but were not so
repurchased, (iv) without duplication of amounts in clause (ii), the principal
balance of each Receivable that became a Liquidated Receivable during such
Monthly Period, and (v) the aggregate amount of Cram Down Losses during such
Monthly Period. The Pool Balance as of the Cutoff Date (the "Original Pool
Balance") will be $131,394,490.64. Principal payments on the Notes will be made
from the Distribution Amount after payment of the accrued and unpaid Servicing
Fee, payment of any accrued and unpaid fees of the Insurer, and after
distribution of the Noteholders' Interest Distributable Amount. See "Description
of the Purchase Agreement and the Trust Documents -- Distributions" herein.
Principal payments on the Notes will be applied on each Distribution Date
sequentially, to the Class A-1 Notes and the Class A-2 Notes in that order,
until the respective principal amount of each such Class of Notes has been paid
in full so that no principal will be paid on the Class A-2 Notes until the
principal of the Class A-1 Notes has been paid in full. In addition, the
outstanding principal amount of the Notes of any Class, to the extent not
previously paid, will be payable on the respective Final Scheduled Distribution
Date for such Class. The actual date on which the aggregate outstanding
principal amount of any Class of Notes is paid may be earlier than the Final
Scheduled Distribution Date for such Class, depending on a variety of factors.
DISTRIBUTION PRIORITIES
On each Distribution Date, for so long as any Class of Notes remains
outstanding, and except as otherwise described herein, the Principal
Distributable Amount (as defined herein) for such date will be distributed to
the holders of the respective Classes of Notes for the following purposes and
the following order of priority: first, to the Class A-1 Notes, until the
principal balance of such Notes is reduced to zero; and second, to the Class A-2
Notes, until the principal balance of such Notes is reduced to zero.
OPTIONAL REDEMPTION
The Class A-1 Notes and Class A-2 Notes, to the extent still outstanding,
may be redeemed in whole, but not in part, on any Distribution Date on which the
Servicer exercises its option to purchase the Receivables. The Servicer may
purchase the Receivables when the Pool Balance has declined to 10% or less of
the Original Pool Balance (with the consent of the Insurer, if such purchase
would result in a claim on the Note Policy or would result in any amount owing
to the Insurer remaining unpaid), as described in the accompanying Prospectus
under "Description of the Purchase Agreements and the Trust
Documents -- Termination." Such redemption will effect early retirement of the
Notes of such Class. The redemption price will be equal to the unpaid principal
amount of the Notes of each Class, plus accrued and unpaid interest thereon (the
"Redemption Price"). To the extent that there are subsequent recoveries on
Receivables charged off prior to termination of the Trust, such recoveries will
not be remitted to Noteholders.
EVENTS OF DEFAULT
Unless an Insurer Default shall have occurred and be continuing, "Events of
Default" under the Indenture will consist of those events defined in the
Insurance Agreement as Insurance Agreement Trigger Events, and will constitute
an Event of Default under the Indenture only if the Insurer shall have delivered
to the Indenture Trustee, and not rescinded, a written notice specifying that
any such Insurance Agreement Trigger Events constitutes an Event of Default
under the Indenture. "Insurance Agreement Trigger Events" consist of: (i) a
demand for payment being made under the Note Policy in excess of the amount
available from the Insurance Spread Account; (ii) certain events of bankruptcy,
insolvency, receivership or liquidation of the Trust, the Seller or the
Servicer; (iii) the Trust becoming taxable as an association (or publicly traded
partnership) taxable as a corporation for federal or state income tax purposes;
(iv) on any Distribution Date, the sum of the Available Funds with respect to
such Distribution Date being less than the sum of the amounts described in
S-24
<PAGE> 25
clauses 1-6 under "Description of the Purchase Agreement and the Trust
Documents -- Distributions" herein; (v) any failure to observe or perform in any
material respect any other covenants or agreements in the Indenture, or any
representation or warranty of the Trust made in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith proving to have been incorrect in any material respect when made, and
such failure continuing or not being cured, or the circumstance or condition in
respect of which such misrepresentation or warranty was incorrect not having
been eliminated or otherwise cured, for 30 days after the giving of written
notice of such failure or incorrect representation or warranty to the Trust, the
Servicer and the Indenture Trustee by the Insurer; (vi) any failure by the
Seller or the Servicer, to perform in a material respect any other covenants or
agreements in the Trust Documents or Insurance Agreement, and such failure
continuing or not being cured, for 30 days after the giving of written notice of
such failure to the defaulting party by the Insurer; (vii) any of the Indenture
or Trust Documents ceases to be in full force and effect; and (viii) the
security interest of the Indenture Trustee in the Trust Property ceases to be in
effect or ceases to be a first priority perfected security interest, for 30 days
after written notice of such is delivered to the Servicer by the Insurer.
Upon the occurrence of an Event of Default, so long as an Insurer Default
shall not have occurred and be continuing, the Insurer will have the right, but
not the obligation, to cause the Indenture Collateral Agent to liquidate the
Trust Property in whole or in part, on any date or dates following the
acceleration of the Notes due to such Event of Default as the Insurer, in its
sole discretion, shall elect, and to deliver the proceeds of such liquidation to
the Indenture Trustee for distribution in accordance with the terms of the
Indenture. The Insurer may not, however, cause the Indenture Collateral Agent to
liquidate the Trust Property in whole or in part if the proceeds of such
liquidation would not be sufficient to pay all outstanding principal of and
accrued interest on the Notes, unless such Event of Default arose from a claim
being made on the Note Policy or from certain events of bankruptcy, insolvency,
receivership or liquidation of the Trust. Following the occurrence of any Event
of Default, the Indenture Trustee and the Owner Trustee will continue to submit
claims under the Note Policy for any shortfalls in the Guaranteed Note
Distributions on the Notes. Following any Event of Default under the Indenture,
the Insurer may elect to pay all or any portion of the outstanding principal
amount due on the Notes (to the extent of the Principal Distributable Amount),
plus accrued interest thereon. See "The Note Policy" herein.
If an Insurer Default has occurred and is continuing, "Events of Default"
under the Indenture will consist of the Events of Default described in the
accompanying Prospectus under "The Notes -- The Indenture," and the Indenture
Trustee will have the rights under the Indenture described therein.
S-25
<PAGE> 26
WEIGHTED AVERAGE LIFE CONSIDERATIONS
The rate of payment of principal of each Class of Notes will depend on the
rate of payment (including prepayments) of the principal balance of the
Receivables. As a result, final payment of any Class of Notes could occur
significantly earlier than the Final Scheduled Distribution Date for such Class
of Notes. Reinvestment risk associated with early payment of the Notes will be
borne exclusively by the Noteholders.
Prepayments on automotive receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the receivables are the same size and amortize at
the same rate and that each receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of receivables, including the Receivables.
The table captioned "Percent of Initial Note Principal Balance at Various
ABS Percentages" (the "ABS Table") has been prepared on the basis of the
following assumptions: (i) the Trust includes 3 pools of Receivables with the
characteristics set forth in the following table; (ii) the Receivables prepay in
full at the specified constant percentage of ABS monthly, with no defaults,
losses or repurchases; (iii) each scheduled monthly payment on the Receivables
is made on the last day of each month and each month has 30 days; (iv) the
initial principal amount of each Class of Notes are as set forth on the cover
page hereof; (v) interest accrues during each Interest Period at the applicable
Interest Rate; (vi) payments on the Notes are made on the 15th day of each month
whether or not a Business Day; (vii) the Notes are purchased on the Closing
Date; (viii) the scheduled monthly payment for each Receivable has been
calculated on the basis of the assumed characteristics in the following table
such that each Receivable will amortize in amounts sufficient to repay the
principal balance of such Receivable by its indicated remaining term to
maturity; (ix) the first due date for each Receivable is in the month after the
Cutoff Date; (x) the Cutoff Date is September 1, 1998; and (xi) the Servicer
does not exercise its option to purchase the Receivables.
<TABLE>
<CAPTION>
ORIGINAL TERM REMAINING TERM
AGGREGATE TO MATURITY TO MATURITY
POOL PRINCIPAL BALANCE APR (IN MONTHS) (IN MONTHS)
---- ----------------- --- ------------- --------------
<S> <C> <C> <C> <C>
1.......................... $ 42,414,475.13 11.36% 72 49
2.......................... $ 78,908,867.64 11.64% 60 41
3.......................... $ 10,071,147.87 12.54% 45 32
Total............ $131,394,490.64 11.62% 63 43
</TABLE>
The ABS Table indicates, based on the assumptions set forth above, the
percentages of the initial principal amount of each Class of Notes that would be
outstanding after each of the Distribution Dates shown at various percentages of
ABS and the corresponding weighted average lives of such Notes. The actual
characteristics and performance of the Receivables will differ from the
assumptions used in constructing the ABS Table. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity or that all of the Receivables will prepay at the
same level of ABS. Moreover, the diverse terms of Receivables could produce
slower or faster principal distributions than indicated in the ABS Table at the
various constant percentages of ABS specified, even if the original and
remaining terms to maturity of the Receivables are as assumed. Any difference
between such assumptions and the actual characteristics and performance of the
Receivables, or actual prepayment experience, will affect the percentages of
initial balances outstanding over time and the weighted average lives of each
Class of Notes.
S-26
<PAGE> 27
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES
<TABLE>
<CAPTION>
CLASS A-1 NOTES (1) CLASS A-2 NOTES (2)
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0.50% 1.00% 1.50% 2.00% 0.50% 1.00% 1.50% 2.00%
- ----------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
10/15/98................ 97.03 96.21 95.15 93.73 100.00 100.00 100.00 100.00
11/15/98................ 94.05 92.45 90.37 87.60 100.00 100.00 100.00 100.00
12/15/98................ 91.09 88.72 85.68 81.59 100.00 100.00 100.00 100.00
01/15/99................ 88.12 85.04 81.06 75.73 100.00 100.00 100.00 100.00
02/15/99................ 85.16 81.39 76.53 70.00 100.00 100.00 100.00 100.00
03/15/99................ 82.20 77.78 72.07 64.41 100.00 100.00 100.00 100.00
04/15/99................ 79.25 74.21 67.70 58.97 100.00 100.00 100.00 100.00
05/15/99................ 76.30 70.67 63.41 53.66 100.00 100.00 100.00 100.00
06/15/99................ 73.36 67.18 59.21 48.51 100.00 100.00 100.00 100.00
07/15/99................ 70.42 63.73 55.10 43.51 100.00 100.00 100.00 100.00
08/15/99................ 67.49 60.32 51.08 38.65 100.00 100.00 100.00 100.00
09/15/99................ 64.56 56.96 47.14 33.95 100.00 100.00 100.00 100.00
10/15/99................ 61.64 53.63 43.30 29.41 100.00 100.00 100.00 100.00
11/15/99................ 58.72 50.35 39.55 25.02 100.00 100.00 100.00 100.00
12/15/99................ 55.81 47.12 35.89 20.79 100.00 100.00 100.00 100.00
01/15/00................ 52.90 43.93 32.33 16.73 100.00 100.00 100.00 100.00
02/15/00................ 50.00 40.78 28.87 12.83 100.00 100.00 100.00 100.00
03/15/00................ 47.11 37.69 25.51 9.10 100.00 100.00 100.00 100.00
04/15/00................ 44.22 34.64 22.24 5.54 100.00 100.00 100.00 100.00
05/15/00................ 41.34 31.64 19.08 2.16 100.00 100.00 100.00 100.00
06/15/00................ 38.47 28.68 16.02 0.00 100.00 100.00 100.00 94.88
07/15/00................ 35.60 25.78 13.07 0.00 100.00 100.00 100.00 80.12
08/15/00................ 32.74 22.93 10.22 0.00 100.00 100.00 100.00 66.23
09/15/00................ 29.89 20.13 7.49 0.00 100.00 100.00 100.00 53.24
10/15/00................ 27.05 17.39 4.86 0.00 100.00 100.00 100.00 41.16
11/15/00................ 24.21 14.69 2.34 0.00 100.00 100.00 100.00 29.99
12/15/00................ 21.39 12.05 0.00 0.00 100.00 100.00 99.69 19.76
01/15/01................ 18.57 9.47 0.00 0.00 100.00 100.00 88.54 13.88
02/15/01................ 15.76 6.94 0.00 0.00 100.00 100.00 77.97 8.66
03/15/01................ 12.96 4.47 0.00 0.00 100.00 100.00 67.97 4.12
04/15/01................ 10.17 2.06 0.00 0.00 100.00 100.00 58.56 0.27
05/15/01................ 7.39 0.00 0.00 0.00 100.00 98.57 49.74 0.00
06/15/01................ 4.90 0.00 0.00 0.00 100.00 88.44 42.16 0.00
07/15/01................ 2.41 0.00 0.00 0.00 100.00 78.57 35.14 0.00
08/15/01................ 0.00 0.00 0.00 0.00 99.72 68.98 28.68 0.00
09/15/01................ 0.00 0.00 0.00 0.00 87.73 59.66 22.80 0.00
10/15/01................ 0.00 0.00 0.00 0.00 75.80 50.63 17.50 0.00
11/15/01................ 0.00 0.00 0.00 0.00 63.91 41.88 12.78 0.00
12/15/01................ 0.00 0.00 0.00 0.00 52.08 33.42 8.67 0.00
01/15/02................ 0.00 0.00 0.00 0.00 40.30 25.25 5.16 0.00
02/15/02................ 0.00 0.00 0.00 0.00 28.57 17.39 2.27 0.00
03/15/02................ 0.00 0.00 0.00 0.00 24.93 14.86 1.25 0.00
04/15/02................ 0.00 0.00 0.00 0.00 21.31 12.43 0.43 0.00
05/15/02................ 0.00 0.00 0.00 0.00 17.71 10.10 0.00 0.00
06/15/02................ 0.00 0.00 0.00 0.00 14.13 7.87 0.00 0.00
07/15/02................ 0.00 0.00 0.00 0.00 10.57 5.75 0.00 0.00
08/15/02................ 0.00 0.00 0.00 0.00 7.02 3.73 0.00 0.00
09/15/02................ 0.00 0.00 0.00 0.00 3.50 1.81 0.00 0.00
10/15/02................ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Weighted Average
Life(3)............... 1.43 1.23 1.00 0.77 3.33 3.14 2.73 2.05
</TABLE>
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(1) The Class A-1 Final Scheduled Distribution Date is the January 2002
Distribution Date; payment of interest and principal in full of the Class
A-1 Notes on such date is guaranteed by the Note Policy to the extent
described herein.
(2) The Class A-2 Final Scheduled Distribution Date is the January 2006
Distribution Date; payment of interest and principal in full of the Class
A-2 Notes on such date is guaranteed by the Note Policy to the extent
described herein.
(3) The weighted average life of the Notes is determined by (a) assuming that
the Servicer does not exercise its option to purchase the Receivables, and
(b) (i) multiplying the amount of each principal payment on a note by the
number of years from the date of the issuance of the note to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum by the
related initial principal amount of the note.
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DESCRIPTION OF THE PURCHASE AGREEMENT AND THE TRUST DOCUMENTS
The following summary describes certain terms of the Purchase Agreement
(the "Purchase Agreement"), and the Sale and Servicing Agreement and the Trust
Agreement (together, the "Trust Documents"). Forms of the Purchase Agreement and
the Trust Documents have been filed as exhibits to the Registration Statement.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, all the provisions of the Purchase Agreement and
the Trust Documents. The following summary supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Purchase Agreement and the Trust Documents (as such terms are
used in the Prospectus) set forth in the Prospectus, to which description
reference is hereby made.
SALE AND ASSIGNMENT OF RECEIVABLES
Certain information with respect to the sale of the Receivables by Franklin
Capital to the Seller pursuant to the Purchase Agreement and the conveyance of
the Receivables from the Seller to the Trust on the Closing Date pursuant to the
Sale and Servicing Agreement is set forth in the accompanying Prospectus.
Franklin Capital will have certain obligations to repurchase Receivables as a
result of breaches of representations and warranties. See "Description of the
Purchase Agreements and the Trust Documents -- Sale and Assignment of
Receivables" in the Prospectus.
ACCOUNTS
The Servicer will establish and maintain one or more accounts, in the name
of the Indenture Collateral Agent, for the benefit of the Indenture Trustee, on
behalf of the Noteholders and the Insurer, into which all payments made on or
with respect to the Receivables will be deposited (the "Collection Account").
All payments from Obligors that are received by the Servicer on behalf of the
Trust may be commingled with other assets of the Servicer and need not be
deposited in the Collection Account until two Business Days prior to the related
Distribution Date. Such collections may be remitted less any payments owed
thereon to the Servicer. However, at any time that and for so long as (i) there
exists a Servicer Default, (ii) there exists an Insurer Default, (iii) Franklin
Capital is not the Servicer, (iv) the Servicer's (or if the Servicer is Franklin
Capital, and Franklin Resources has entered into an agreement, guaranty, surety
or other arrangement backing Franklin Capital's obligations, acceptable to the
Rating Agencies, then Franklin Resources') short term obligations are not rated
at least A-1 by S&P and P-1 by Moody's, or (v) any other condition to making
deposits less frequently than every two Business Days as may be specified by the
Rating Agencies is not satisfied, the Servicer will be required to deposit into
the Collection Account all payments from Obligors received by the Servicer on
behalf of the Trust, no later than two Business Days after receipt thereof.
Pending deposit into the Collection Account, collections may be invested by the
Servicer at its own risk and for its own benefit and will not be segregated from
its own funds.
The Servicer will also establish and maintain an account, in the name of
the Indenture Collateral Agent, for the benefit of the Indenture Trustee, on
behalf of the Noteholders, and the Insurer in which amounts released from the
Collection Account for distribution to Noteholders will be deposited and from
which all distributions to Noteholders will be made (the "Note Distribution
Account").
In addition, the Servicer will also establish and will maintain the
Payahead Account in the name of the Indenture Collateral Agent for the benefit
of the Indenture Trustee, on behalf of the Noteholders and the Insurer.
All such Accounts shall be Eligible Deposit Accounts (as defined in the
Prospectus) and acceptable to the Insurer (so long as no Insurer Default has
occurred and is continuing).
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SERVICING COMPENSATION AND TRUSTEES' FEES
The Servicer is entitled under the Sale and Servicing Agreement on each
Distribution Date to (i) a servicing fee (the "Servicing Fee") for the related
Monthly Period equal to the lesser of (1) one-twelfth of 1.25% per annum
multiplied by the outstanding Pool Balance, and (2) the sum of (a) with respect
to Prime Receivables, one-twelfth of 1.0% per annum (the "Prime Servicing Fee
Rate") multiplied by that portion of the Pool Balance consisting of Prime
Receivables, (b) with respect to Non-Prime Receivables, one-twelfth of 1.5% per
annum (the "Non-Prime Servicing Fee Rate") multiplied by that portion of the
Pool Balance consisting of Non-Prime Receivables, and (c) with respect to
Sub-Prime Receivables, one-twelfth of 2.0% per annum (the "Sub-Prime Servicing
Fee Rate", and collectively with the Prime Servicing Fee Rate and the Non-Prime
Servicing Fee Rate, the "Servicing Fee Rate") multiplied by that portion of the
Pool Balance consisting of Sub-Prime Receivables, in each case determined as of
the first day of such Monthly Period, and (ii) the investment earnings (net of
losses) on the Collection Account. The Servicer may also be paid an additional
servicing fee (the "Excess Servicing Fee") equal to the excess, if any, of the
amount calculated in clause (2) over the amount calculated in clause (1) above.
The Servicer may retain from collections on Receivables the Servicing Fee and a
supplemental servicing fee (the "Supplemental Servicing Fee") for each Monthly
Period equal to any late fees, prepayment fees, rebates and other administrative
fees and expenses collected during the Monthly Period.
The Indenture Trustee and the Owner Trustee are entitled to a fee for their
services as trustees under the Indenture and the Trust Documents equal to an
amount agreed upon by the Indenture Trustee and Owner Trustee and the Servicer.
CERTAIN ALLOCATIONS
On or about the fifth Business Day immediately preceding each Distribution
Date (the "Determination Date"), the Servicer will be required to deliver the
Servicer's Certificate to the Indenture Trustee, the Owner Trustee and the
Insurer specifying, among other things, the amount of aggregate collections on
the Receivables and the aggregate Purchase Amount of Receivables to be purchased
by the Seller, the Servicer, Franklin Capital or any affiliate of any of them
all with respect to the preceding Monthly Period.
On the fourth Business Day immediately preceding each Distribution Date
(the "Deficiency Claim Date") the Indenture Trustee and/or the Owner Trustee, as
applicable, will (based solely on the information contained in the Servicer's
Certificate delivered on the related Determination Date) deliver to the
Indenture Collateral Agent, the Insurer, the Chase Manhattan Bank, as insurer
agent ("Insurer Agent") and to its fiscal agent and the Servicer a Deficiency
Notice specifying the Note Policy Claim Amount, if any, for such Distribution
Date. Such Deficiency Notice will direct the Insurer's Agent and to the extent
funds in the Insurance Spread Account are insufficient, the Insurer, to remit
the Note Policy Claim Amount to the Indenture Collateral Agent for deposit into
the Collection Account.
On each Distribution Date, the Indenture Trustee (based solely on the
information contained in the Servicer's Certificate delivered on the related
Determination Date) will cause to be made the following transfers and
distributions in the amounts set forth in the Servicer's Certificate for such
Distribution Date:
(i) from the Collection Account to the Payahead Account in immediately
available funds, the aggregate Payaheads collected during the preceding
Monthly Period; and
(ii) from the Payahead Account (a) to the Collection Account, in
immediately available funds, the portion of Payaheads constituting
scheduled payments on Precomputed Receivables or that are to be applied to
prepay a Precomputed Receivable in full and (b) to the Seller, in
immediately available funds, all investment earnings on funds in the
Payahead Account with respect to the preceding Monthly Period.
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To the extent that collections on a Precomputed Receivable in the related
Monthly Period exceed the scheduled payment and late fees or other fees, if any,
for such Monthly Period but are insufficient to prepay the Precomputed
Receivable in full, such collections will be treated as "Payaheads."
The scheduled payment with respect to a Precomputed Receivable is that
portion of the payment required to be made by the related Obligor during each
calendar month sufficient to amortize the principal balance thereof under the
actuarial method over the term of the Receivable and to provide interest at the
APR of such Receivable.
DISTRIBUTIONS
On the Business Day prior to each Distribution Date, the Servicer is
required to instruct the Indenture Trustee to distribute the Distribution Amount
in the following order of priority:
1. To the Servicer, (i) the Servicing Fee for the related Monthly
Period and any overdue Servicing Fees (ii) certain other amounts relating
to mistaken deposits, postings or checks returned for insufficient funds to
the extent the Servicer has not reimbursed itself in respect of such amount
to the extent not retained by the Servicer.
2. To the Insurer, any accrued and unpaid fees of the Insurer (to the
extent such fees have not been previously paid by the Servicer or Franklin
Capital).
3. To the Note Distribution Account, the Noteholders' Interest
Distributable Amount.
4. To the Note Distribution Account, the Principal Distributable
Amount, to be distributed as described under "Description of the
Notes -- Payments of Principal."
5. To the Insurer, any interest due on outstanding Surety Draws (as
defined below).
6. To the Insurer, to the extent of available funds, the amount, if
any, to reimburse the Insurer for amounts paid under the Note Policy (to
the extent not reimbursed from other amounts available to the Insurer)
(such amounts paid, the "Surety Draws") to pay the Guaranteed Note
Distributions, the Note Policy Claim Amounts and the Insurer Optional
Deposits.
7. Into the Insurance Spread Account, to the extent the amount
therein is less than the required amount.
8. To the Servicer, the Excess Servicing Fee for the related Monthly
Period and any overdue Excess Servicing Fees, to the extent the Servicer
has not reimbursed itself in respect of such amount to the extent not
retained by the Servicer.
9. To the Seller, any remaining funds.
If the Notes are accelerated following an Event of Default under the
Indenture, amounts collected will be distributed in the order described above,
except that any accrued and unpaid trustees fees and any accrued and unpaid fees
of the Indenture Collateral Agent (in each case, to the extent such fees have
not been previously paid by the Servicer or Franklin Capital) will be paid from
the Distribution Amount after item 2 above.
In the event that the Indenture Trustee determines (based solely on the
information in the Servicer's Certificate delivered on the Determination Date)
on the fourth Business Day prior to a Distribution Date, that the Available
Funds remaining after the application of clauses 1 and 2 above are insufficient
on any Distribution Date (other than the Final Scheduled Distribution Date) to
cover the distributions required pursuant to clause 3 above on such Distribution
Date (other than the Final Scheduled Distribution Date for which clauses 3 and 4
above apply), the Indenture Trustee shall furnish to the Insurer a notice of
claim in accordance with the terms of the Note Policy. Amounts paid by the
Insurer pursuant to any such notice of claim in accordance with the terms of the
Note Policy
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<PAGE> 31
shall be deposited by the Insurer into the Note Distribution Account for payment
to Noteholders on the related Distribution Date.
For the purposes hereof, the following terms shall have the following
meanings:
"Amount Financed" means, with respect to a Receivable, the aggregate amount
advanced under such Receivable toward the purchase price of the Financed Vehicle
and related costs, including amounts advanced in respect of accessories,
insurance premiums, service, car club and warranty contracts, other items
customarily financed as part of retail automobile installment sale contracts or
promissory notes, and related costs.
"Available Funds" means, with respect to any Determination Date, the sum of
(i) the Collected Funds for such Determination Date (including amounts withdrawn
from the Payahead Account but excluding amounts deposited into the Payahead
Account) plus (ii) all Purchase Amounts deposited in the Collection Account
during the related Monthly Period.
"Collected Funds" means, with respect to any Determination Date, the amount
of funds in the Collection Account representing collections (excluding, late
fees, prepayment fees, rebates and other administrative fees and expenses
collected during the Monthly Period) on the Receivables during the related
Monthly Period, including all Net Liquidation Proceeds collected during the
related Monthly Period (but excluding any Purchase Amounts).
"Cram Down Loss" means, with respect to a Receivable if a court of
appropriate jurisdiction in an insolvency proceeding shall have issued an order
reducing the amount owed on such Receivable or otherwise modifying or
restructuring the scheduled payments to be made on such Receivable, an amount
equal to the excess of (i) the principal balance of such Receivable immediately
prior to such order over (ii)(a) the principal balance of such Receivable as so
reduced and/or (b) if such court shall have issued an order reducing the
effective rate of interest on such Receivable, the net present value (using as
the discount rate the higher of the APR on such Receivable or the rate of
interest, if any, specified by the court in such order) of the scheduled
payments as so modified or restructured. A "Cram Down Loss" shall be deemed to
have occurred on the date of issuance of such order.
"Deficiency Notice" means a written notice delivered by the Indenture
Trustee to the Insurer, the Servicer and any other person required under the
Insurance Agreement, specifying the Note Policy Claim Amount for such
Distribution Date.
"Distribution Amount" means, with respect to any Distribution Date the sum
of (i) the Available Funds for the immediately preceding Determination Date,
plus (ii) the Note Policy Claim Amount, if any, received by the Indenture
Trustee with respect to such Distribution Date, plus (iii) amounts deposited by
the Insurer as an Insurer Optional Deposit, if any.
"Eligible Investments" means investments in (i) direct obligations of, and
obligations fully guaranteed as to timely payment by, the United States of
America; (ii) demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of the
United States of America or any state thereof or the District of Columbia (or
any domestic branch of a foreign bank), provided, that at the time of the
investment, the commercial paper or other short-term senior unsecured debt
obligations of such depository institution or trust company shall have a minimum
credit rating satisfying the criteria of each of the Rating Agencies rating such
Securities; (iii) commercial paper having a minimum credit rating satisfying the
criteria of each of the Rating Agencies rating the Securities; (iv) investments
in money market funds having a minimum credit rating satisfying the criteria of
each of the Rating Agencies rating the Securities; (v) repurchase obligations
with respect to any security that is a direct obligation of, or fully guaranteed
by, the United States of America entered into with a depository institution or
trust company (acting as principal) referred to in clause (ii) above; and (vi)
other investments acceptable to the Rating Agencies rating Securities which are
consistent with the rating of the Securities.
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<PAGE> 32
"Insurer Optional Deposit" means, with respect to any Distribution Date, an
amount delivered by or on behalf of the Insurer, at its sole option, to the
Indenture Collateral Agent for deposit into the Collection Account for any of
the following purposes: (i) to provide funds in respect of the payment of fees
or expenses of any provider of services to the Trust with respect to such
Distribution Date; or (ii) to provide funds in respect of the payment of
principal on the Notes to the extent the amounts to be distributed pursuant to
clauses 1 through 4 above exceed the Available Funds; or (iii) to include such
amount as part of the Distribution Amount for such Distribution Date to the
extent that without such amount a draw would be required to be made on the Note
Policy.
"Interest Period" means, with respect to any Distribution Date, the period
from and including the fifteenth day of the calendar month preceding the related
Distribution Date to, but excluding, the fifteenth day of the following calendar
month.
"Interest Rate" means, (i) with respect to the Class A-1 Notes, a rate
equal to 5.50% per annum and (ii) with respect to the Class A-2 Notes, a rate
equal to 5.65% per annum.
"Liquidated Receivable" means, with respect to any Determination Date, a
Receivable as to which, as of the last day of the related Monthly Period, (i)
the Servicer has determined in good faith that all amounts it expects to recover
have been received, (ii) more than $25.00 of a scheduled payment is 180 or more
days delinquent, and the Servicer has repossessed the Financed Vehicle or the
Obligor has filed for bankruptcy, (iii) more than $25.00 of a scheduled payment
is 120 or more days delinquent, the Servicer has not repossessed the Financed
Vehicle and the Obligor has not declared bankruptcy, or (iv) the Financed
Vehicle has been sold and the proceeds received. In any case, if more than
$25.00 of principal and interest on a Receivable as of the last day of the
related Monthly Period is 180 or more days delinquent, then such Receivable
shall be a Liquidated Receivable and shall have a principal balance of zero.
"Month-End Pool Balance" means, as of the end of any Monthly Period (other
than the initial Monthly Period) the Pool Balance for the immediately preceding
Monthly Period, or in the case of the initial Monthly Period the Original Pool
Balance, less an amount equal to the sum of the following amounts with respect
to the related Monthly Period, computed, with respect to Simple Interest
Receivables, in accordance with the simple interest method, and, with respect to
Precomputed Receivables, in accordance with the actuarial method: (i) that
portion of all collections on Receivables allocable to principal, including full
and, with respect to Simple Interest Receivables, partial principal prepayments,
received during such Monthly Period (including, with respect to Precomputed
Receivables, amounts withdrawn from the Payahead Account but excluding amounts
deposited into the Payahead Account) with respect to such Monthly Period, (ii)
the principal balance of each Receivable that was repurchased by Franklin
Capital, the Seller, the Servicer or any affiliate of any of them as of the last
day of such Monthly Period, (iii) at the option of the Insurer, the outstanding
principal balance of those Receivables that were required to be repurchased by
the Seller, and/or Franklin Capital during such Monthly Period but were not so
repurchased, (iv) without duplication of amounts in clause (ii), the principal
balance of each Receivable that became a Liquidated Receivable during such
Monthly Period, and (v) the aggregate amount of Cram Down Losses during such
Monthly Period.
"Net Liquidation Proceeds" means, with respect to Liquidated Receivables,
(i) proceeds from the disposition of the underlying automobile securing the
Liquidated Receivables, less reasonable Servicer out-of-pocket costs, including
repossession and resale expenses not already deducted from such proceeds, and
any amounts required by law to be remitted to the Obligor, (ii) any insurance
proceeds, or (iii) other monies received from the Obligor or otherwise.
"Noteholders' Distributable Amount" means, with respect to any Distribution
Date, the sum of the Principal Distributable Amount and the Noteholders'
Interest Distributable Amount.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date and a Class of Notes, the excess of the Noteholders' Interest
Distributable Amount for such Class for the
S-32
<PAGE> 33
preceding Distribution Date, over the amount in respect of interest that was
actually deposited in the Note Distribution Account with respect to such Class
on such preceding Distribution Date, plus interest on the amount of interest due
but not paid to Noteholders of such Class on the preceding Distribution Date, to
the extent permitted by law, at the Interest Rate borne by such Class of Notes
from the fifteenth day of the calendar month preceding the Distribution Date to
but excluding the fifteenth day of the following calendar month.
"Noteholders' Interest Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Interest Distributable
Amount for each Class of Notes for such Distribution Date and the Noteholders'
Interest Carryover Shortfall for each Class of Notes for such Distribution Date.
"Noteholder Monthly Interest Distributable Amount" means, with respect to
any Distribution Date and any Class of Notes, interest accrued during the
applicable Interest Period at the Interest Rate borne by such Class of Notes on
the outstanding principal amount of such Class immediately prior to such
Distribution Date, calculated on the basis of a 360-day year consisting of
twelve 30-day months.
"Note Policy Claim Amount" means, with respect to (i) any Determination
Date (other than the Determination Date relating to the Final Scheduled
Distribution Date), the excess, if any, of the sum of the amounts payable on the
related Distribution Date pursuant to clause 3 above over the amount of
Available Funds remaining after the application of clauses 1 and 2 above with
respect to such Determination Date, or (ii) the Determination Date related to
the Final Scheduled Distribution Date for any Class of Notes, the excess, if
any, of the sum of the amounts payable on such Final Scheduled Distribution Date
pursuant to clauses 3 and 4 above over the amount of Available Funds remaining
after the application of clauses 1 and 2 above with respect to such
Determination Date.
"Principal Balance" means, with respect to any Receivable, as of any date,
the Amount Financed minus (i) that portion of all amounts received (including
Payaheads applied to scheduled payments) on or prior to such date and allocable
to principal in accordance with the terms of the Receivable, and (ii) any Cram
Down Loss in respect of such Receivable.
"Principal Distributable Amount" means, with respect to any Distribution
Date, the amount equal to the excess of (i) the aggregate outstanding principal
balance of the Notes as of the preceding Distribution Date (after giving effect
to distributions thereon) or in the case of the first Distribution Date as of
the Closing Date, over (ii) the Month-End Pool Balance as of the end of the
preceding Monthly Period; provided, however, that on the Final Scheduled
Distribution Date for any Class of Notes, the Principal Distributable Amount
will not be less than the outstanding principal balance of such Class of Notes.
"Purchase Amount" means, with respect to a Receivable, the Principal
Balance and accrued interest on the Receivable (including one month's interest
thereon, in the month of payment, at the APR less, so long as Franklin Capital
is the Servicer, the Servicing Fee), after giving effect to the receipt of any
moneys collected (from whatever source) on such Receivable, if any.
STATEMENTS TO NOTEHOLDERS
On or prior to each Distribution Date, the Indenture Trustee will be
required to forward a statement to the Noteholders. Such statements will be
based on the information in the related Servicer's Certificate setting forth
certain information required under the Trust Documents. Each such statement to
be delivered to Noteholders will include the following information as to the
Notes, with respect to such Distribution Date or the period since the previous
Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of the Notes;
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<PAGE> 34
(ii) the amount of the distribution allocable to principal with
respect to each Class of the Notes;
(iii) the amount of the distribution payable pursuant to a claim on
the Note Policy;
(iv) the aggregate outstanding principal amount and the Note Factor
for each Class of Notes, after giving effect to all payments reported under
(ii) above on such date;
(v) the Noteholders' Interest Carryover Shortfall, if any, and the
change in such amount from the preceding statement; and
(vi) the amount of the Servicing Fee paid to the Servicer with respect
to the related Monthly Period.
Each amount set forth pursuant to subclauses (i), (ii), (iii) and (v) will
be expressed as a dollar amount per $1,000 of the initial principal amount of
the Notes.
Unless and until Definitive Notes are issued, such reports will be sent on
behalf of the Trust to Cede & Co., as registered holder of the Notes and the
nominee of DTC. See "Certain Information Regarding the Securities -- Statements
to Securityholders" in the Prospectus.
Within the required period of time after the end of each calendar year, the
Indenture Trustee and the Owner Trustee, as applicable, will furnish to each
person who at any time during such calendar year was a Noteholder, a statement
as to the aggregate amounts of interest and principal paid to such Noteholder,
information regarding the amount of servicing compensation received by the
Servicer and such other information as the Seller deems necessary to enable such
Noteholder to prepare its tax returns.
SERVICER DEFAULT; RIGHTS UPON SERVICER DEFAULT
Notwithstanding anything to the contrary set forth under "Description of
the Purchase Agreements and the Trust Documents -- Servicer Default" in the
Prospectus, a "Servicer Default" under the Sale and Servicing Agreement will
consist of (i) any failure by the Servicer to deliver to the Owner Trustee or
the Indenture Trustee any deposit or payment required to be so made, which
failure continues unremedied for 30 Business Days after written notice from the
Owner Trustee or the Indenture Trustee or the Insurer is received by the
Servicer or after discovery of such failure by the Servicer, (ii) any failure by
the Servicer duly to observe or perform in any material respect any other
covenant or agreement in the Sale and Servicing Agreement which failure
materially and adversely affects the rights of the Noteholders and which
continues unremedied for 60 days after the giving of written notice of such
failure (1) to the Servicer by the Owner Trustee or the Indenture Trustee or the
Insurer or (2) to the Servicer and to the Owner Trustee and the Indenture
Trustee by holders of the Notes evidencing not less than 25% in aggregate
principal amount of the outstanding Notes (or such longer period, not in excess
of 120 days, as may be reasonably necessary to remedy such default; provided
that such default is capable of remedy within 120 days or less and the Servicer
delivers an officer's certificate to the Owner Trustee, the Indenture Trustee
and the Insurer to such effect and to the effect that the Servicer has
commenced, or will promptly commence, and diligently pursue all reasonable
efforts to remedy such default); (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings with respect to the Servicer or the Seller and certain actions by
the Servicer or the Seller indicating its insolvency, reorganization pursuant to
bankruptcy proceedings, or inability to pay its obligations; and (iv) unless an
Insurer Default has occurred and is continuing, Insurance Agreement Trigger
Events under the Insurance Agreement.
As long as a Servicer Default under the Sale and Servicing Agreement
remains unremedied, the Insurer or, if an Insurer Default exists, either the
Indenture Trustee or the Noteholders holding not less than a majority of the
principal amount of Notes outstanding may terminate all of the rights and
obligations of the Servicer under the Sale and Servicing Agreement. All
authority, power, obligations
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and responsibilities of the Servicer under the Sale and Servicing Agreement will
automatically then pass to the Indenture Trustee, as backup servicer, or a
successor servicer appointed by the Insurer in accordance with the Sale and
Servicing Agreement.
"Insurer Default" shall mean the occurrence and continuance of any of the
following events:
(a) the Insurer shall have failed to make a payment required under the
Note Policy in accordance with its terms;
(b) the Insurer shall have (i) filed a petition or commenced any case
or proceeding under any provision or chapter of the United States
Bankruptcy Code or any other similar federal or state law relating to
insolvency, bankruptcy, rehabilitation, liquidation or reorganization, (ii)
made a general assignment for the benefit of its creditors, or (iii) had an
order for relief entered against it under the United States Bankruptcy Code
or any other similar federal or state law relating to insolvency,
bankruptcy, rehabilitation, liquidation or reorganization which is final
and nonappealable; or
(c) a court of competent jurisdiction, the New York Department of
Insurance or other competent regulatory authority shall have entered a
final and nonappealable order, judgement or decree (i) appointing a
custodian, trustee, agent or receiver for the Insurer or for all or any
material portion of its property or (ii) authorizing the taking of
possession by a custodian, trustee, agent or receiver of the Insurer (or
the taking of possession of all or any material portion of the property of
the Insurer).
WAIVER OF PAST DEFAULTS
Notwithstanding anything to the contrary set forth under "Description of
the Purchase Agreements and the Trust Documents -- Waiver of Past Defaults" in
the Prospectus, the Insurer may, on behalf of all holders of Notes, waive any
default by the Servicer in the performance of its obligations under the Sale and
Servicing Agreement and its consequences. No such waiver will impair the
Noteholders' rights with respect to subsequent defaults.
AMENDMENT
Notwithstanding anything to the contrary set forth under "Description of
the Purchase Agreements and the Trust Documents -- Amendment" in the Prospectus,
the Sale and Servicing Agreement and the Indenture may be amended by the Seller,
the Servicer and the Owner Trustee with the consent of the Indenture Trustee,
(which consent may not be unreasonably withheld) and with the consent of the
Insurer (so long as no Insurer Default has occurred and is continuing), but
without the consent of the Noteholders, to cure any ambiguity, or to correct or
supplement any provision therein which may be inconsistent with any other
provision therein; provided that such action shall not adversely affect in any
material respect the interests of any Noteholder; provided, further, that if an
Insurer Default has occurred and is continuing, such action shall not materially
adversely affect the interests of the Insurer. An amendment shall be deemed not
to adversely affect the interests of any such holder if either each Rating
Agency rating such Notes confirms in writing that such amendment will not result
in a reduction or withdrawal of such rating or none of the Rating Agencies
rating such Notes, within 10 days' after receipt of notice of such amendment,
shall have notified the Seller, the Servicer or the Owner Trustee in writing
that such amendment will result in a reduction or withdrawal of the then current
rating of the Notes. The Seller, the Servicer and the Owner Trustee may also
amend the Sale and Servicing Agreement and the Indenture with the consent of the
Insurer, the consent of the Indenture Trustee, the consent of Noteholders
holding a majority of the principal amount of the Notes outstanding to add,
change or eliminate any other provisions with respect to matters or questions
arising under the Sale and Servicing Agreement or affecting the rights of the
Noteholders; provided that such action will not (i) increase or reduce in any
manner the amount of, or accelerate or delay the timing of, collections of
payments on Receivables or distributions that are required to be made for the
benefit of the Noteholders or
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<PAGE> 36
(ii) reduce the aforesaid percentage of the Noteholders required to consent to
any such amendment, without, in either case, the consent of the holders of all
Notes outstanding; provided, further, that if an Insurer Default has occurred
and is continuing, such action shall not materially adversely affect the
interest of the Insurer. The Seller and Servicer must deliver to the Owner
Trustee, the Indenture Trustee and the Insurer upon the execution and delivery
of the Sale and Servicing Agreement and any amendment thereto an opinion of
counsel, satisfactory to the Indenture Trustee, that all financing statements
and continuation statements have been filed that are necessary to fully protect
and preserve the Trust's interest in the Receivables.
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<PAGE> 37
THE NOTE POLICY
NOTE POLICY
Simultaneously with the issuance of the Notes, the Insurer will deliver the
Note Policy to the Indenture Trustee for the benefit of each Noteholder. Under
the Note Policy, the Insurer will unconditionally and irrevocably guarantee to
the Indenture Trustee for the benefit of each Noteholder the full and complete
payment of (i) Guaranteed Note Distributions (as defined below) on the Notes and
(ii) the amount of any Guaranteed Note Distribution which subsequently is
avoided in whole or in part as a preference payment under applicable law. In the
event the Indenture Trustee fails to make a claim under the Note Policy,
Noteholders do not have the right to make a claim directly under the Note
Policy, but may sue to compel the Indenture Trustee to do so.
"Guaranteed Note Distributions" means payments which are scheduled to be
made on the Notes during the term of the Note Policy in accordance with the
original terms of the Notes when issued and without regard to any subsequent
amendment or modification of the Notes that has not been consented to by the
Insurer, which are (i) the timely payment of the Noteholders' Interest
Distributable Amount on each Distribution Date and (ii) the ultimate payment of
the Principal Distributable Amount on the Final Scheduled Distribution Date;
Guaranteed Note Distributions do not include payments which are made as a result
of an Insurer Optional Deposit or which become due on an accelerated basis as a
result of (a) a default by the Trust, (b) an election by the Trust to pay
principal on an accelerated basis, (c) the occurrence of an Event of Default
under the Indenture or (d) any other cause, unless the Insurer elects, in its
sole discretion, to pay such principal to the extent of the Principal
Distributable Amount due upon acceleration, together with any accrued interest
to the date of acceleration. In the event the Insurer does not so elect, the
Note Policy will continue to guarantee Guaranteed Note Distributions due on the
Notes in accordance with their original terms. Guaranteed Note Distributions
shall not include (x) any portion of a Noteholders' Interest Distributable
Amount due to Noteholders because the appropriate notice and certificate for
payment in proper form was not timely Received (as defined below) by the
Insurer, (y) any portion of a Noteholders' Interest Distributable Amount due to
Noteholders representing interest on any Noteholders' Interest Carryover
Shortfall accrued from and including the date of payment of the amount of such
Noteholders' Interest Carryover Shortfall pursuant to the Note Policy, or (z)
any Note Prepayment Amounts.
Payment of claims on the Note Policy made in respect of Guaranteed Note
Distributions will be made by the Insurer following Receipt by 12:00 noon, New
York City time on the fourth Business Day prior to the Distribution Date by the
Insurer of the appropriate notice for payment.
If payment of any amount guaranteed under the Note Policy is avoided as a
preference pursuant to any applicable bankruptcy, insolvency, receivership or
similar law in a proceeding by or against the Trust, the Seller, the Servicer or
Franklin Resources, Inc., the Insurer shall cause such payment to be made no
earlier than the first to occur of (a) the fourth Business Day following Receipt
by the Insurer from the Indenture Trustee of (i) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the Noteholder is required to return principal
or interest paid on the Notes during the term of the Note Policy because such
payments were avoidable as preference payments under applicable bankruptcy law,
(ii) a certificate of the Noteholder that the Order has been entered and is not
subject to any stay and (iii) an assignment duly executed and delivered by the
Noteholder, in such form as is reasonably required by the Insurer and provided
to the Noteholder by the Insurer, irrevocably assigning to the Insurer all
rights and claims of the Noteholder relating to or arising under the Notes
against the Trust or otherwise with respect to such preference payment, or (b)
the date of Receipt (as defined below) by the Insurer from the Indenture Trustee
of the items referred to in clauses (i), (ii) and (iii) above if, at least two
Business Days prior to such date of Receipt, the Insurer shall have received
written notice from the Indenture Trustee that such items were to be delivered
on such date and such date was specified in such notice. Such payment shall be
disbursed to the receiver,
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<PAGE> 38
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Indenture Trustee or any Noteholder directly (unless a Noteholder
has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Indenture Trustee for distribution to
such Noteholder upon proof of such payment reasonably satisfactory to the
Insurer). In connection with the foregoing, the Insurer shall have the rights
provided in the Indenture.
On the Closing Date, the Seller will make an initial deposit into an
account (the "Insurance Spread Account") of an amount to be agreed to by the
Seller and Insurer for the benefit of the Insurer. The Insurance Spread Account
may be funded from amounts received on the Receivables after distribution of
amounts set forth in clauses 1 through 6 of the first paragraph under the
caption "Description of the Purchase Agreement and the Trust
Documents -- Distribution" herein. Additional amounts may be deposited in the
Insurance Spread Account from time to time. In addition, the Seller or Franklin
Resources will deposit certain additional amounts in the Insurance Spread
Account (as defined herein) to the extent that funds on deposit therein are less
than the required amount (subject to a maximum limit on such deposits). The
Insurance Spread Account will not be an asset of the Trust and Noteholders will
have no right to payments therefrom.
In the event the Insurer's claims paying ratings have been reduced by any
of the Rating Agencies, the Seller may, but it is not obligated to, upon payment
of all amounts required to be paid to the Insurer pursuant to the Insurance
Agreement either (i) replace the Note Policy with a financial guaranty insurance
policy issued by another insurer provided that the ratings on the claims paying
ability of such replacement insurer are higher than those of the insurer sought
to be replaced (after giving effect to such reduction) or (ii) eliminate or
provide another form of credit enhancement; provided that in the case of clause
(ii), the Rating Agencies consent thereto and confirmation that the ratings of
the Notes will be increased from their then-current levels (after giving effect
to such reduction) as a result of such action shall have been obtained.
OTHER PROVISIONS OF THE NOTE POLICY
The terms "Receipt" and "Received" with respect to the Note Policy shall
mean actual delivery to the Insurer and to its fiscal agent, if any, prior to
12:00 noon, New York City time, on a Business Day; delivery either on a day that
is not a Business Day or after 12:00 noon, New York City time, shall be deemed
to be Received on the next succeeding Business Day. If any notice or certificate
given under the Note Policy by the Indenture Trustee is not in proper form or is
not properly completed, executed or delivered, it shall be deemed not to have
been Received, and the Insurer or its fiscal agent shall promptly so advise the
Indenture Trustee and the Indenture Trustee may submit an amended notice.
Under the Note Policy, "Business Day" means any day other than a Saturday,
Sunday, legal holiday or other day on which commercial banking institutions in
the City of New York or California are authorized or obligated by law, executive
order or governmental decree to be closed.
The Insurer's obligations under the Note Policy in respect of Guaranteed
Note Distributions shall be discharged to the extent funds are transferred to
the Indenture Trustee as provided in the related Note Policy whether or not such
funds are properly applied by the Indenture Trustee.
The Insurer shall be subrogated to the rights of each Noteholder to receive
payments of principal and interest to the extent of any payment by the Insurer
under the Note Policy.
Claims under the Note Policy constitute direct, unsecured and
unsubordinated obligations of the Insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the Insurer for borrowed
money. Claims against the Insurer under each other financial guaranty insurance
policy issued thereby constitute pari passu claims against the general assets of
the Insurer. The terms of the Note Policy cannot be modified or altered by any
other agreement or instrument, or by the merger, consolidation or dissolution of
the Trust. The Note Policy may not be
S-38
<PAGE> 39
canceled or revoked prior to distribution in full of all Guaranteed Note
Distributions. THE NOTE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE
SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. The Note
Policy is governed by the laws of the State of New York.
RATINGS
It is a condition to issuance that the Class A-1 Notes and Class A-2 Notes
be rated AAA by S&P and Aaa by Moody's. The ratings by the Rating Agencies of
the Notes will be based primarily on the issuances of the Note Policy. A rating
is not a recommendation to purchase, hold or sell Notes. In the event that the
rating initially assigned to any of the Notes is subsequently lowered or
withdrawn for any reason, including by reason of a downgrading of the
claims-paying ability of the Insurer, no person or entity will be obligated to
provide any additional credit enhancement with respect to the Notes. Any
reduction or withdrawal of a rating may have an adverse effect on the liquidity
and market price of the Notes. See "Ratings" in the Prospectus.
FEDERAL INCOME TAX CONSEQUENCES
PROSPECTIVE NOTEHOLDERS ARE ENCOURAGED TO CONSULT THEIR TAX ADVISORS WITH
REGARD TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, OR
DISPOSITION OF INTERESTS IN THE NOTES, AS WELL AS THE TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCALITY, FOREIGN COUNTRY OR OTHER TAXING
JURISDICTION.
Weil, Gotshal & Manges LLP, special tax counsel to the Trust, is of the
opinion that for federal income tax purpose the Notes will be characterized as
debt and the Trust will not be characterized as an association (or a publicly
traded partnership) taxable as a corporation. Each Noteholder, by the acceptance
of a Note, will agree to treat the Notes as debt for federal income tax
purposes.
Opinions of counsel are not binding on the Internal Revenue Service (the
"IRS") and there can be no assurance that the IRS could not successfully
challenge the above conclusions. Moreover, no ruling will be sought from the IRS
with respect to the transaction described herein. All potential investors are
advised to review "Federal Income Tax Consequences -- Trusts Treated As
Partnerships Or As Divisions -- Tax Consequences to Holders of the Notes Issued
by a Partnership or a Division" and "-- Certain Certificates Treated as
Indebtedness" in the Prospectus for a discussion of the material federal income
tax consequences of the purchase, ownership and disposition of the Notes for
federal income tax purposes.
STATE, LOCAL AND FOREIGN TAX CONSIDERATIONS
Potential Noteholders should consider the state, local and foreign income
tax effects on them of the purchase, ownership and disposition of the Notes.
State, local and foreign income tax laws may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state, or locality or foreign jurisdiction.
Therefore, potential Noteholders are encouraged to consult their own tax
advisors with respect to the various state, local and foreign tax consequences
of an investment in the Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Code, prohibits a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan") from engaging
in certain transactions with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other penalties and liabilities under ERISA and the Code for such persons. Title
I of ERISA also requires
S-39
<PAGE> 40
that fiduciaries of a Benefit Plan subject to ERISA make investments that are
prudent, diversified (except if prudent not to do so) and in accordance with
governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An Equity Interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. The Seller believes that the Notes should be treated as
indebtedness without substantial equity features for purposes of the Plan Assets
Regulation. However, without regard to whether the Notes are treated as an
Equity Interest for such purposes, the acquisition or holding of Notes by or on
behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust, the Owner Trustee or the Indenture Trustee, the owner
of collateral, or any of their respective affiliates is or becomes a party in
interest or a disqualified person with respect to such Benefit Plan. In such
case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 95-60, regarding investments by insurance
company general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers."
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the Seller has agreed to cause the Trust to sell the Notes to
Goldman, Sachs & Co. (the "Underwriters"), and the Underwriters have agreed to
purchase the Notes.
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Notes offered
hereby if any of the Notes are purchased. The Seller has been advised by the
Underwriters that they propose initially to offer the Notes to the public at the
prices set forth herein, and to certain dealers at such price less a concession
not in excess of 0.250% of the Note amounts. The Underwriters may allow and such
dealers may reallow a concession not in excess of 0.150% of the Note amounts to
certain other dealers. After the initial public offering, the public offering
price and such concessions may be changed.
The Underwriters may effect the distribution of the Notes by selling Notes
to or through dealers and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriters and any
purchasers of Notes for whom they may act as agents. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Notes
may be deemed to be underwriters, and any discounts or commissions received by
them and
S-40
<PAGE> 41
any profit on the resale of Notes by them may be deemed to be underwriting
discounts or commissions, under the Securities Act of 1933, as amended
("Securities Act").
The Servicer and Seller have jointly agreed to indemnify the Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or contribute to payments which the Underwriters may be required to make in
respect thereof.
The Underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions, and penalty bids with respect to
the Notes in accordance with Regulation M under the Securities and Exchange Act
of 1934. Over-allotment transactions involve syndicate sales in excess of the
offering size, which create syndicate short positions. Stabilizing transactions
permit bids to purchase the Notes so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
Notes in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit the initial Purchaser to
reclaim a selling concession from a syndicate member when the Notes originally
sold by such syndicate member are purchased in a syndicate covering transaction.
Such over-allotment transactions, stabilizing transactions, syndicate covering
transactions, and penalty bids may cause the prices of the Notes to be higher
than they would otherwise be in the absence of such transactions. Neither the
Company nor the Underwriters represent that the Underwriters will engage in any
such transactions or that such transactions, once commenced, will not be
discontinued without notice at any time.
The Indenture Trustee and the Indenture Collateral Agent may from time to
time invest the funds in the Collection Account the Payahead Account, the Note
Distribution Account, as the case may be, in Eligible Investments acquired from
the Underwriters.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1997, incorporated by
reference in this Prospectus Supplement, and the balance sheet of the Trust
included herein, have been incorporated and included herein, respectively, in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus, certain
federal income tax and other matters will be passed upon for the Seller and the
Trust by Weil, Gotshal & Manges LLP. Certain legal matters relating to the Notes
will be passed upon for the Servicer by Weil, Gotshal & Manges LLP. Certain
legal matters relating to the Notes will be passed upon for the Underwriters by
Stroock & Stroock & Lavan LLP. Certain legal matters will be passed upon for the
Insurer by Shaw Pittman Potts & Trowbridge.
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<PAGE> 42
INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and the pages on which the definitions of such terms may be found.
<TABLE>
<S> <C>
ABS......................................................... S-26
ABS Table................................................... S-26
Amount Financed............................................. S-31
APR......................................................... S-5
Available Funds............................................. S-31
Benefit Plan................................................ S-10, S-39
Business Day................................................ S-38
Cedel....................................................... S-1, S-4
Class....................................................... S-6
Class A-1 Notes............................................. S-1, S-4
Class A-2 Notes............................................. S-1, S-4
CMAC........................................................ S-21
Collected Funds............................................. S-31
Collection Account.......................................... S-9, S-28
Commission.................................................. S-3
Cram Down Loss.............................................. S-31
Cutoff Date................................................. S-1
Dealers..................................................... S-5, S-16
Dealer Agreements........................................... S-14
Deficiency Claim Date....................................... S-29
Deficiency Notice........................................... S-31
Determination Date.......................................... S-29
disqualified persons........................................ S-39
Distribution Amount......................................... S-31
Distribution Date........................................... S-2, S-6
DTC......................................................... S-1
Eligible Investments........................................ S-31
Equity Interest............................................. S-40
Euroclear................................................... S-1, S-4
Events of Default........................................... S-24
Excess Servicing Fee........................................ S-29
Exchange Act................................................ S-3
Final Scheduled Distribution Date........................... S-2
Financed Vehicles........................................... S-1, S-5
Franklin Capital............................................ S-4
Franklin Resources.......................................... S-4
GAAP........................................................ S-22
Guaranteed Note Distributions............................... S-37
Holdings.................................................... S-3
Indenture................................................... S-1
Indenture Collateral Agent.................................. S-1, S-4
Indenture Trustee........................................... S-1, S-4
Insurance Agreement......................................... S-8
Insurance Agreement Trigger Events.......................... S-24
</TABLE>
S-42
<PAGE> 43
<TABLE>
<S> <C>
Insurance Spread Account.................................... S-38
Insurer..................................................... S-3, S-4, S-21
Insurer Agent............................................... S-29
Insurer Default............................................. S-35
Insurer Optional Deposit.................................... S-32
Interest Period............................................. S-6, S-23, S-32
Interest Rate............................................... S-6, S-32
IRS......................................................... S-39
Issuer...................................................... S-1, S-4
Liquidated Receivable....................................... S-32
Month-End Pool Balance...................................... S-7, S-23, S-32
Monthly Period.............................................. S-7, S-23
Moody's..................................................... S-10
Net Liquidation Proceeds.................................... S-32
Non-Prime................................................... S-6
Non-Prime Servicing Fee Rate................................ S-29
Note Distribution Account................................... S-28
Note Policy................................................. S-2, S-8
Note Policy Claim Amount.................................... S-33
Noteholder Monthly Interest Distributable Amount............ S-33
Noteholders................................................. S-2, S-6
Noteholders' Distributable Amount........................... S-32
Noteholders' Interest Carryover Shortfall................... S-32
Noteholders' Interest Distributable Amount.................. S-33
Notes....................................................... S-1, S-4
Order....................................................... S-37
Original Pool Balance....................................... S-7, S-15, S-24
Owner Trustee............................................... S-1, S-4
parties in interest......................................... S-39
Payaheads................................................... S-30
Plan Assets Regulation...................................... S-40
Pool Balance................................................ S-15
Prime....................................................... S-6
Prime Servicing Fee Rate.................................... S-29
Principal Balance........................................... S-33
Principal Distributable Amount.............................. S-33
Prospectus.................................................. S-3
PTCE........................................................ S-40
Purchase Agreement.......................................... S-5, S-28
Purchase Amount............................................. S-33
Rating Agencies............................................. S-10
Receipt..................................................... S-38
Receivables................................................. S-1, S-5
Received.................................................... S-38
Record Date................................................. S-6
Redemption Price............................................ S-24
S&P......................................................... S-10
Sale and Servicing Agreement................................ S-5
SAP......................................................... S-22
</TABLE>
S-43
<PAGE> 44
<TABLE>
<S> <C>
Securities Act.............................................. S-41
Seller...................................................... S-1, S-4
Servicer.................................................... S-4
Servicer Default............................................ S-34
Servicing Fee............................................... S-29
Servicing Fee Rate.......................................... S-29
Sub-Prime................................................... S-6
Sub-Prime Servicing Fee Rate................................ S-29
Surety Draws................................................ S-9, S-30
Supplemental Servicing Fee.................................. S-29
Trust....................................................... S-1, S-4
Trust Agreement............................................. S-1, S-4
Trust Documents............................................. S-28
Trust Property.............................................. S-5
Underwriters................................................ S-1, S-40
Year 2000 Problem........................................... S-12
</TABLE>
S-44
<PAGE> 45
ANNEX 1
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
September 24, 1998
To the Trustee
Franklin Auto Trust 1998-1
We have audited the accompanying balance sheet of Franklin Auto Trust 1998-1
(the Trust) as of September 24, 1998. This balance sheet is the responsibility
of the management of the Trust. 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 Franklin Auto Trust 1998-1 as of
September 24, 1998, in conformity with generally accepted accounting principles.
/s/ PriceWaterhouseCoopers LLP
<PAGE> 46
FRANKLIN AUTO TRUST 1998-1
BALANCE SHEET
SEPTEMBER 4, 1998
<TABLE>
<S> <C>
Assets
Cash $200
----
$200
====
Interest of Equity Holder $200
----
$200
====
</TABLE>
See accompanying Notes to Balance Sheet.
A-2
<PAGE> 47
FRANKLIN AUTO TRUST 1998 -- 1
NOTES TO BALANCE SHEET
1. Nature of Operations
Franklin Auto Trust 1998 -- 1 (the Trust), formed on September 23, 1998, is
a Delaware business trust, the beneficial interest in which is owned by
Franklin Receivables LLC. The Trust's activities will consist of the
issuance and sale of securities (the Notes) collateralized by certain motor
vehicle installment sales contracts (the Receivables). The Trust intends to
purchase the Receivables simultaneously with the issuance of the Notes. The
Notes will represent obligations solely of the Trust. The Trust has not
commenced operations except for accepting the interest of the equity
holder.
2. Tax Status
For federal income tax purposes the Notes will be characterized as debt and
the Trust will not be characterized as an association (or publicly traded
partnership) taxable as a corporation. Each Noteholder, by the acceptance
of a Note, will agree to treat the Note as debt for federal income tax
purposes.
A-3
<PAGE> 48
PROSPECTUS
FRANKLIN AUTO TRUSTS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
------------------------
FRANKLIN RECEIVABLES LLC
SELLER
OR
FCC RECEIVABLES CORP.
SELLER
FRANKLIN CAPITAL CORPORATION
SERVICER
The Asset Backed Certificates (the "Certificates") and the Asset Backed
Notes (the "Notes" and, collectively with the Certificates, the "Securities")
described herein may be sold from time to time in one or more series, in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (a "Prospectus Supplement"). Each
series of Securities will include either one or more classes of Certificates or,
if Notes are issued as part of a series, one or more classes of Notes and one or
more classes of Certificates, as set forth in the related Prospectus Supplement.
At the time of issuance, each class of Securities of each series will be rated
investment grade by at least one Rating Agency (as defined herein).
The Certificates and the Notes, if any, of any series of Securities will be
issued by a trust (a "Trust") to be formed with respect to such series by
Franklin Receivables LLC or FCC Receivables Corp. (each the "Seller," as
specified in the related Prospectus Supplement, or collectively the "Sellers"),
each a wholly-owned subsidiary of Franklin Capital Corporation ("Franklin
Capital," or in its capacity as servicer, the "Servicer"). The assets of each
Trust (the "Trust Property") will include a specified pool of motor vehicle
retail installment sale contracts ("Receivables") originated (i) indirectly by
Franklin Capital or an affiliate thereof through the purchase thereof from motor
vehicle dealers or (ii) if specified in the related Prospectus Supplement,
directly by Franklin Capital or acquired in bulk and other purchases from
third-party lenders and/or its affiliate, Franklin Bank ("Franklin Bank"), and
secured by new and used automobiles and light trucks, certain monies received
thereunder on or after the Initial Cutoff Date set forth and defined in the
related Prospectus Supplement, security interests in motor vehicles financed
thereby, certain bank accounts and the proceeds thereof, any proceeds from
claims on certain insurance policies, certain rights under the related Trust
Documents (as defined herein) and all proceeds of the foregoing, all as more
fully described herein and in the related Prospectus Supplement. Each Trust will
be formed pursuant to either (i) a Pooling and Servicing Agreement (the "Pooling
and Servicing Agreement") to be entered into among the related Seller, the
Servicer in its individual capacity and as Servicer, and the trustee (the "Owner
Trustee") and any other party, if any, specified in the related Prospectus
Supplement or (ii) a Trust Agreement (the "Trust Agreement") to be entered into
between the related Seller and the Owner Trustee. If the Trust is formed
pursuant to a Trust Agreement, a Sale and Servicing Agreement (the "Sale and
Servicing Agreement") will be entered into among the related Seller, the
Servicer, in its individual capacity and as Servicer, the Trust and any other
party, if any, specified in the related Prospectus Supplement (which may
include, among others, any party providing credit support or other services, any
co-trustee or any fiscal agent or any other person, as specified in the related
Prospectus Supplement). In either case, the Pooling and Servicing Agreement or
the Trust Agreement and the Sale and Servicing Agreement are collectively
referred to herein as the "Trust Documents." The Notes, if any, of a series will
be issued and secured pursuant to an Indenture (the "Indenture") between the
Trust and the Indenture Trustee specified in the related Prospectus Supplement
(the "Indenture Trustee").
Each class of Securities will represent the right to receive distributions
or payments in the amounts, at the rates, and on the dates set forth in the
related Prospectus Supplement. The rate of distributions in respect of principal
on Certificates and payment in respect of principal on Notes, if any, of any
class will depend on the priority of payment of such class and the rate and
timing of payments (including prepayments, liquidations and repurchases of
Receivables) on the related Receivables. A rate of payment lower or higher than
that anticipated may affect the weighted average life of each class of
Securities in the manner described herein and in the related Prospectus
Supplement.
There currently is no secondary market for the Securities. There can be no
assurance that any such market will develop or, if it does develop, that it will
continue. Unless otherwise set forth in the related Prospectus Supplement, the
Securities will not be listed on any securities exchange.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" AT PAGE 15 HEREIN
AND AS MAY BE SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN AND THE NOTES REPRESENT OBLIGATIONS
OF THE RELATED TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF
THE SERVICER, THE SELLERS, FRANKLIN CAPITAL OR ANY OF THEIR RESPECTIVE
AFFILIATES. NONE OF THE SECURITIES OR ANY OF THE RELATED RECEIVABLES ARE ISSUED
OR GUARANTEED BY ANY GOVERNMENT OR GOVERNMENT AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is September 18, 1998
<PAGE> 49
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR
THE RELATED PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
SELLERS, THE SERVICER, FRANKLIN CAPITAL, FRANKLIN RESOURCES, INC. OR ANY
UNDERWRITER. THIS PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OFFERED THEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER AND SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO
WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT NOR ANY SALE MADE
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE HEREOF.
------------------------
AVAILABLE INFORMATION
Franklin Receivables LLC and FCC Receivables Corp. have filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
(together with all amendments and exhibits thereto, referred to herein as the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Securities offered pursuant to this Prospectus. Each Trust is
subject to the informational requirements of the Exchange Act, and in accordance
therewith each Seller files on behalf of each related Trust reports and other
information required under the Prospectus and related Prospectus Supplement with
the Commission. Reports and other information with respect to each Trust and the
Registration Statement, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048 and
at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials and the Registration Statement may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Registration Statement may be accessed electronically at the Commission's site
on the World Wide Web located at http://www.sec.gov. at which users can view the
Registration Statement through the Electronic Data Gathering Analysis and
Retrieval ("EDGAR"), system.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Servicer on behalf of each Trust with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to the date of
this Prospectus and prior to the termination of the offering of the related
Securities shall be deemed to be incorporated by reference into this Prospectus
and the related Prospectus Supplement and to be a part hereof and thereof from
the respective dates of filing of such documents. Any statement contained herein
or in a document all or any portion of which is deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus and the related Prospectus Supplement to the extent that a
statement contained herein or in any other subsequently filed document which
also is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus or
the related Prospectus Supplement.
The Servicer will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or verbal
request of any such person, a copy of any or all of the information that has
been incorporated herein by reference (not including exhibits to that
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that the Prospectus
incorporates). Requests for such copies should be directed to Les Kratter, Esq.,
777 Mariners Island Boulevard, San Mateo, California 94404 (telephone (605)
312-4018).
2
<PAGE> 50
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and by reference to the
information with respect to the Securities contained in the related Prospectus
Supplement to be prepared and delivered in connection with the offering of each
series of Securities. Certain capitalized terms used in this Prospectus Summary
are defined elsewhere herein. A listing of the pages on which some of such terms
are defined is found in the "Index of Terms."
ISSUER........................ With respect to each series of Securities, a
trust (the "Trust"), to be formed by a Seller
pursuant to a Pooling and Servicing Agreement
among the related Seller, the Servicer and the
Owner Trustee and any other party, if any,
specified in the related Prospectus Supplement,
or a Trust Agreement between the related Seller
and the Owner Trustee specified in the related
Prospectus Supplement. The term "Owner Trustee"
is used herein solely for purposes of reference
and nothing herein shall characterize each
Trust as an "owner trust" except as specified
in the related Prospectus Supplement. See "The
Trusts" herein and "The Trust" in the related
Prospectus Supplement.
SELLER........................ Franklin Receivables LLC, a Delaware limited
liability company or FCC Receivables Corp., a
Delaware Corporation (each the "Seller," as
specified in the related Prospectus Supplement,
or collectively, the "Sellers"). The Sellers
are wholly-owned subsidiaries of Franklin
Capital Corporation. See "The Sellers" herein.
SERVICER...................... Franklin Capital Corporation, a Utah
corporation. The Servicer is a wholly-owned
subsidiary of Franklin Resources, Inc., a
Delaware corporation ("Franklin Resources").
See "Franklin Capital Corporation" herein.
Franklin Resources is a financial services
company headquartered in San Mateo, California.
See "Franklin Resources, Inc." herein.
OWNER TRUSTEE................. The Owner Trustee will be specified in the
related Prospectus Supplement with respect to
any series of Securities. See "The
Trusts -- The Owner Trustee" herein and "The
Trust -- The Owner Trustee" in the related
Prospectus Supplement and "Description Of The
Purchase Agreements and The Trust
Documents -- Duties of the Owner Trustee and
Indenture Trustee" and "-- The Owner Trustee
and the Indenture Trustee" herein.
INDENTURE TRUSTEE............. The Indenture Trustee for any series of Notes
will be specified in the related Prospectus
Supplement. See "The Notes -- The Indenture
Trustee" and "Description of The Purchase
Agreements and The Trust Documents -- Duties of
the Owner Trustee and Indenture Trustee" and
"-- The Owner Trustee and the Indenture
Trustee" herein.
SECURITIES OFFERED............ The Securities offered from time to time may
include one or more series of Certificates
and/or one or more series of Notes, as
described herein and in the related Prospectus
Supplement. See "The Notes" and "The
Certificates".
3
<PAGE> 51
THE CERTIFICATES.............. Any series of Securities may include one or
more classes of Certificates, as specified in
the related Prospectus Supplement. The
Certificates may consist of one or more
classes, each of which will be issued pursuant
to a Pooling and Servicing Agreement or Trust
Agreement. Only a certain class or certain
classes of such Certificates, however, may be
offered hereby and by the related Prospectus
Supplement, as specified in the related
Prospectus Supplement. Each Certificate will
represent a fractional undivided ownership
interest in the related Trust. Each offered
Certificate may also represent a fractional
undivided interest in monies on deposit, if
any, in a trust account (as defined below, the
"Pre-Funding Account") to be established with
the Owner Trustee or Indenture Trustee, as
specified in the related Prospectus Supplement,
and any other account established for the
benefit of holders of Certificates
("Certificateholders"), as specified in the
related Prospectus Supplement. See "The
Certificates" herein and "Description of The
Certificates" in the related Prospectus
Supplement.
Unless otherwise specified in the related
Prospectus Supplement, the offered Certificates
shall be issued in fully registered form in
denominations of $1,000 and integral multiples
of $1,000 in excess thereof and will be
available in book-entry form only. Unless the
related Prospectus Supplement specifies that
the Certificates are offered in definitive
form, Certificateholders will be able to
receive Definitive Certificates (as defined
herein) only in the limited circumstances
described herein or in the related Prospectus
Supplement. See "Certain Information Regarding
The Securities -- Book-Entry Registration."
Each class of offered Certificates (other than
certain Strip Certificates (as defined below))
will have a stated Certificate Balance (as
defined for each class in the related
Prospectus Supplement) and will accrue interest
on such Certificate Balance at a specified rate
(with respect to each class of Certificates,
the "Pass-Through Rate"). Each class of offered
Certificates may have a different Pass-Through
Rate, which may be fixed, variable or
adjustable, or any combination of the
foregoing. The related Prospectus Supplement
will specify the Pass-Through Rate for each
class of offered Certificates, or the initial
Pass-Through Rate and the method for
determining subsequent Pass-Through Rates.
A series of Securities may include two or more
classes of Certificates which may differ as to
timing of distributions, sequential order,
priority of payment, seniority, allocation of
loss, Pass-Through Rate or amount of
distributions in respect of principal or
interest, or as to which distributions of
principal or interest on any class may or may
not be made upon the occurrence of specified
events or on the basis of collections from
designated portions of the Receivables (as
defined herein) related to such series. In
addition, a series
4
<PAGE> 52
may include one or more classes of Certificates
entitled to (i) distributions in respect of
principal with disproportionate, nominal or no
interest distributions, or (ii) interest
distributions with disproportionate, nominal or
no distributions in respect of principal (such
Certificates, "Strip Certificates").
With respect to any series of Securities
including one or more classes of Notes,
distributions in respect of the Certificates
may be subordinated in priority of payment to
payments on the Notes of such series, to the
extent specified in the related Prospectus
Supplement.
In connection with each Trust, the related
Seller may, with respect to any series of
Securities, retain one or more classes of
Certificates, which may or may not be evidenced
by physical certificates.
THE NOTES..................... Any series of Securities may include one or
more classes of Notes, as specified in the
related Prospectus Supplement, each of which
will be issued pursuant to an Indenture (as
defined herein). See "The Notes" herein and
"Description of The Notes" in the related
Prospectus Supplement.
Unless otherwise specified in the related
Prospectus Supplement, Notes will be available
for purchase in denominations of $1,000 and
integral multiples of $1,000 in book-entry form
only. Unless otherwise specified in the related
Prospectus Supplement, holders of Notes
("Noteholders") will be able to receive
Definitive Notes (as defined herein) only in
the limited circumstances described herein or
in the related Prospectus Supplement. See
"Certain Information Regarding the
Securities -- Book-Entry Registration."
Each class of Notes will have a stated
principal amount and will bear interest at a
rate or rates (with respect to each class of
Notes, the "Interest Rate"), as specified in
the related Prospectus Supplement, which may be
different for each class of Notes and may be
fixed, variable, adjustable or any combination
of the foregoing. The related Prospectus
Supplement will specify the Interest Rate for
each class of Notes or the method for
determining the Interest Rate. Each Note may
also represent a fractional undivided interest
in monies on deposit, if any, in the
Pre-Funding Account to be established with the
Indenture Trustee as specified in the related
Prospectus Supplement and any other account
established for the benefit of Noteholders, as
specified in the related Prospectus Supplement.
See "Description of The Notes -- Payments of
Interest" in the related Prospectus Supplement.
A series may include two or more classes of
Notes which differ as to the timing and
priority of payment, seniority, allocations of
loss, Interest Rate or amount of payments of
principal or interest, or as to which payments
of principal or interest may or may not be made
upon the occurrence of specified events or on
the basis collections from designated
5
<PAGE> 53
portions of the Receivables for such series. In
addition, a series may include one or more
classes of Notes entitled to (i) principal
payments with disproportionate, nominal or no
interest payments or (ii) interest payments
with disproportionate, nominal or no principal
payments (such Notes, "Strip Notes").
TRUST PROPERTY................ The Trust property will include certain motor
vehicle retail installment sale contracts
initially transferred to the Trust (the
"Initial Receivables"), as specified in the
related Prospectus Supplement, secured by new
and used automobiles and light trucks (the
"Initial Financed Vehicles"), certain monies
received under the motor vehicle retail
installment sale contracts (which may include
interest payments, principal payments, late
fees, penalty charges, extension fees,
modification fees, other processing fees, and
such other payments, as specified in the
related Prospectus Supplement) on or after a
date as specified in the related Prospectus
Supplement (the "Initial Cutoff Date"),
security interests in the Initial Financed
Vehicles securing the Initial Receivables,
certain bank accounts (which may include the
Collection Account, the Distribution Account,
the Spread Account, the Yield Supplement
Account, and such other accounts, as specified
in the related Prospectus Supplement) and the
proceeds thereof, all proceeds of the
foregoing, any proceeds from claims on certain
insurance policies, and certain rights under
the related Trust Documents (as defined herein)
(which may include the rights of the related
Sellers under the related Purchase Agreement,
to require Franklin Capital to repurchase a
Receivable upon breach of certain
representations and such other rights, as
specified in the related Prospectus
Supplement). If specified in the related
Prospectus Supplement, motor vehicle retail
installment sale contracts to be sold to the
Trust after the date of issuance of the
Securities and on or before a date specified in
the related Prospectus Supplement (the
"Subsequent Receivables"), secured by
additional new or used automobiles and light
trucks (the "Subsequent Financed Vehicles"),
certain monies received thereunder on or after
a date or dates as specified in the related
Prospectus Supplement (the "Subsequent Cut-Off
Date"), security interests in the Subsequent
Financed Vehicles securing the Subsequent
Receivables, certain bank accounts and the
proceeds thereof may be purchased by the Trust
from the related Seller from funds on deposit
in the related Pre-Funding Account. The Initial
Receivables and any Subsequent Receivables
related to each series of Securities are
hereinafter, collectively, referred to as the
"Receivables" and the Initial Financed Vehicles
and the Subsequent Financed Vehicles related to
each series of securities are hereinafter,
collectively, referred to as the "Financed
Vehicles."
The Receivables transferred to the Trust, will
consist of receivables financed under Franklin
Capital's Prime (as de-
6
<PAGE> 54
fined herein) credit programs ("Prime
Receivables"), Franklin Capital's Non-prime (as
defined herein) credit programs ("Non-Prime
Receivables") and Franklin Capital's Sub-prime
(as defined herein) credit programs ("Sub-Prime
Receivables"). Currently, there is no maximum
limit on the amount of Non-Prime Receivables
and Sub-Prime Receivables that may constitute
the Trust Property for any Trust. See
"Description of The Purchase Agreements and The
Trust documents -- Eligibility Criteria."
RECEIVABLES................... The Receivables will be purchased by the
Sellers from Franklin Capital Corporation (in
its individual capacity, "Franklin Capital")
pursuant to a Purchase Agreement (the "Purchase
Agreement") between the related Seller and
Franklin Capital providing for such purchase.
The Receivables comprising the property of the
Trust consist of motor vehicle retail
installment sale contracts, with such
characteristics, including their weighted
average annual percentage rate and their
weighted average remaining maturity, as shall
be specified in the related Prospectus
Supplement. The Receivables arise or will arise
from loans originated by motor vehicle dealers
("Dealers") and purchased by Franklin Capital
pursuant to agreements with the Dealers or
other third parties for subsequent sale to the
related Seller. If so specified in the related
Prospectus Supplement, the Receivables will
also include motor vehicle retail installment
sale contracts or loans originated directly by
Franklin Capital or acquired in bulk and other
purchases from third-party lenders and/or its
affiliate the Franklin Bank. The Receivables
for any Trust will be selected from the
contracts owned by the related Seller based on
the criteria specified in the related Sale and
Servicing Agreement or Pooling and Servicing
Agreement, as applicable, and as described
herein and in the related Prospectus
Supplement. See "The Receivables" and
"Description of the Purchase Agreements and The
Trust Documents -- Eligibility Criteria."
PRE-FUNDING ACCOUNT........... If and to the extent so specified in the
related Prospectus Supplement, a portion of the
net proceeds from the offering of the
Securities of a series (such amount, the
"Pre-Funded Amount") may be deposited in a
segregated account (the "Pre-Funding Account")
with the Owner Trustee or Indenture Trustee, as
the case may be, for the benefit of the
Securityholders. During the period specified in
the related Prospectus Supplement (the "Funding
Period") the Pre-Funded Amount will be reduced
as it is used to purchase Subsequent
Receivables subject to the satisfaction of
certain conditions specified under "Description
of the Purchase Agreements and Trust
Documents -- Eligibility Criteria" herein and
otherwise in accordance with the Trust
Documents. The maximum amount of the initial
Pre-Funding Amount will not exceed 25% of the
aggregate principal amount of the Securities as
of the date of issuance of the related
Securities. The maximum length of the Funding
Pe-
7
<PAGE> 55
riod will not exceed 90 days from the date of
issuance of the Securities. The length of the
Funding Period will be set forth in the related
Prospectus Supplement. In any event, the amount
of the initial Pre-Funded Amount and the
maximum length of the Funding Period is
intended not to exceed the aggregate principal
balance of Subsequent Receivables satisfying
the eligibility criteria that Franklin Capital
anticipates it will be able to acquire and
convey to the Trust during the Funding Period.
The Subsequent Receivables purchased by the
Trust with the Pre-Funding Amount will be
underwritten under the same criteria and
standards utilized by Franklin Capital to
underwrite the Initial Receivables. Amounts in
the Pre-Funding Account may be invested by the
Owner Trustee or Indenture Trustee, as
applicable, in Eligible Investments.
Prior to the conveyance of any Subsequent
Receivables to the Trust, Franklin Capital will
be required to give notice to the Trustee(s),
the Rating Agencies (as defined herein) and any
third-party credit enhancement provider of the
Subsequent Receivables to be conveyed to the
related Seller and from the related Seller to
the Trust. Upon the satisfaction of the
conditions set forth in the Trust Documents,
including the receipt by the Owner Trustee
and/or Indenture Trustee, as applicable, of an
executed assignment, an Officer's Certificate
(as defined therein) and a legal opinion, the
Owner Trustee and/or Indenture Trustee, as
applicable, will release from the Pre-Funding
Account the necessary funds to purchase the
Subsequent Receivables to be conveyed to the
Trust on such date. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account
at the end of the Funding Period, such amount,
in the amounts and in the manner specified in
the related Prospectus Supplement, will be used
to prepay some or all classes of the Notes
and/or Certificates.
If so specified in the related Prospectus
Supplement, funds remaining in the Pre-Funding
Account at the end of the Pre-Funding Period,
may be applied to make payments on the
principal of the Securities. Such payment which
will have the same effect as if there were
prepayments on the principal balance of the
Receivables equal to the amount remaining in
the Pre-Funding Account, thereby reducing the
weighted average life of the Securities.
Securityholders will bear all reinvestment risk
associated with the prepayment of principal due
to application of excess funds in the
Pre-funding Account. Any reinvestment risk
resulting from faster than expected prepayments
of Receivables held by a given Trust will be
borne entirely by the Securityholders of the
related series of Securities. Faster rates of
prepayments on the Receivables may shorten the
weighted average life of the Securities. If the
weighted average life of the Securities is
shortened, the expected rate and amount of
return on the Securities may be reduced. A
reinvestment of amounts received by
Securityholders in other investments at a lower
8
<PAGE> 56
rate of return than the Securities could result
in a lower yield to investors than they would
have received had the weighted average life of
the Securities remained unchanged. See "Risk
Factors -- Prepayments on Receivables Effect on
Yield of Securities" and "Yield and Prepayment
Considerations."
REVOLVING PERIOD AND
AMORTIZATION PERIOD; RETAINED
INTEREST.................... If the related Prospectus Supplement so
provides, there may be a period commencing on
the date of issuance of a class or classes of
Notes or Certificates of a series and ending on
the date set forth in the related Prospectus
Supplement (the "Revolving Period") during
which no principal payments will be made to one
or more classes of Notes or Certificates of the
related series as are identified in such
Prospectus Supplement. All collections of
principal otherwise allocated to such classes
of Notes or Certificates may be (i) utilized by
the Trust during the Revolving Period to
acquire additional Receivables which satisfy
the standards described under "The
Receivables -- General" herein and the criteria
set forth in the related Prospectus Supplement,
(ii) held in an account and invested in
Eligible Investments (as defined herein) for
later distribution to Securityholders, (iii)
applied to pay principal to those Notes or
Certificates of the related series as then are
in amortization, or (iv) otherwise applied as
specified in the related Prospectus Supplement.
An "Amortization Period" is the period during
which an amount of principal is payable to
holders of a series of Securities which, during
the Revolving Period, were not entitled to such
payments. If so specified in the related
Prospectus Supplement, during an Amortization
Period all or a portion of principal
collections on the Receivables may be applied
as specified above for a Revolving Period and,
to the extent not so applied, will be
distributed to the classes of Notes or
Certificates specified in the related
Prospectus Supplement as then being entitled to
payments of principal. In addition, if so
specified in the related Prospectus Supplement,
amounts deposited in certain accounts for the
benefit of one or more classes of Notes or
Certificates may be released from time to time
or on a specified date and applied as a payment
of principal on such classes of Notes or
Certificates. The related Prospectus Supplement
will set forth the circumstances which will
result in the commencement of an Amortization
Period.
Each Trust which has a Revolving Period may
also issue to the related Seller a certificate
evidencing an undivided beneficial interest
(the "Retained Interest") in the Trust not
represented by the other Securities issued by
such Trust. As further described in the related
Prospectus Supplement, the value of such
Retained Interest will fluctuate as the amount
of Trust Property fluctuates and the amount of
Notes and
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<PAGE> 57
Certificates of the related series of
Securities outstanding is reduced.
Each Trust will issue only one series of Notes
and/or Certificates, however, each series may
contain one or more classes of Notes and
Certificates. The terms of each class of
Securities will be fully disclosed in the
related Prospectus Supplement for each series.
YIELD AND PREPAYMENT
CONSIDERATIONS.............. The weighted average life of the Securities of
the related series will be reduced by full or
partial prepayments on the related Receivables.
The Receivables will generally be prepayable at
any time without penalty. Prepayments (or, for
this purpose, equivalent payments to the
related Trust) may result from payments by the
retail purchasers obligated under the
Receivables (each, an "Obligor"), liquidations
due to default, the receipt of proceeds from
physical damage or credit insurance,
repurchases by (if no other party is described
in the related Prospectus Supplement as
obligated to make such repurchases) Franklin
Capital and the related Seller as a result of
certain uncured breaches of representations and
warranties made with respect to the
Receivables, such repurchases by (if no other
party is described in the related Prospectus
Supplement as obligated to make sure purchases)
the Servicer as a result of certain uncured
breaches of the covenants made by it with
respect to the Receivables, if so specified in
the related Prospectus Supplement, amounts on
deposit, if any, in the Pre-Funding Account at
the end of the Funding Period being applied to
the payment of principal of the Securities, the
Servicer exercising its option, if any,
described in the related Prospectus Supplement
to purchase all of the remaining Receivables of
a Trust or, if and to the extent provided in
the related Prospectus Supplement, the receipt
of satisfactory bids for the purchase of the
Receivables of the related Trust in the manner
and on the respective terms and conditions
specified in the related Prospectus Supplement.
See "Risk Factors -- Prepayments on
Receivables' Effect on Yield of Securities" and
"Yield and Prepayment Considerations."
DISTRIBUTION ACCOUNT.......... With respect to each series of Securities, the
Owner Trustee or the Indenture Trustee will
establish and maintain one or more separate
accounts (each, a "Distribution Account") for
the benefit of the Certificateholders and the
Noteholders, if any, in the manner specified in
each related Prospectus Supplement. On each
Distribution Date (as specified in the related
Prospectus Supplement, the "Distribution
Date"), the Owner Trustee or the Indenture
Trustee, as the case may be, will be required
to pass through and distribute to the
Certificateholders, or pay to the Noteholders,
as the case may be, on the date specified in
the related Prospectus Supplement from amounts
held in the Distribution Account, the amounts
of interest, principal or otherwise
distributable
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with respect to the applicable classes of
Certificates and Notes as specified in the
related Prospectus Supplement.
SUBORDINATION AND CREDIT
ENHANCEMENT................. In the event of defaults and delinquencies on
the Receivables, certain distributions of
interest and/or principal with respect to one
or more classes of Securities may be
subordinated in priority of payment to
distributions due on other classes of
Securities as specified in the related
Prospectus Supplement. In addition, to the
extent specified in the related Prospectus
Supplement, one or more classes of Securities
may be entitled to the benefits of a spread
account, a reserve account, accelerated
payments of principal relative to the
amortization of the related Receivables, a
policy or policies of insurance, a letter or
letters of credit, surety bonds, credit or
liquidity facilities, guaranteed investment
contracts, swaps or other interest rate
protection agreements, repurchase obligations,
yield supplement agreements, other agreements
with respect to third party payments or other
support, cash deposits or other arrangements,
which may be subject to certain limitations and
exclusions as described in the related
Prospectus Supplement.
CERTAIN LEGAL ASPECTS OF THE
RECEIVABLES................. In connection with the sale of the Receivables
to a Trust, the security interests in the
Financed Vehicles securing the Receivables and
the Subsequent Receivables will be assigned by
the related Seller to such Trust. Due to
administrative burden and expense, the
certificates of title to the Financed Vehicles
will not be amended to reflect the assignment
of such security interests to the Trust. In the
absence of such an amendment, the Trust may not
have a perfected security interest in the
Financed Vehicles securing the Receivables in
some states. In the event that another person
obtains a perfected security interest in a
Financed Vehicle in such a state subsequent to
the transfer of such Receivable to the related
Trust, such person might acquire rights in such
Financed Vehicle prior to the rights of such
Trust and the Trust's ability to realize on
such Financed Vehicle in the event of a default
under the Receivable may be adversely affected.
See "Certain Legal Aspects of the Receivables."
REPURCHASES AND PURCHASES OF
CERTAIN RECEIVABLES......... The Seller will be obligated to repurchase any
Receivable sold to the Trust as to which a
security interest in the Financed Vehicle
securing such Receivable shall not have been
perfected in favor of Franklin Capital if the
Owner Trustee or the Indenture Trustee, as the
case may be, determines such breach shall
materially adversely affect the interest of the
Trust in such Receivable and if such failure or
breach shall not have been cured by the second
(or, if the related Seller elects, the first)
month following the discovery by or notice of
such breach. The Seller also will be obligated
to repurchase any Receivable if the Indenture
Trustee or the
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Owner Trustee, as the case may be, determines
the interest of the Trust therein is materially
adversely affected by a breach of any other
representation or warranty made by the related
Seller with respect to the Receivable, and if
the breach has not been cured by the last day
of the second (or, if the related Seller
elects, the first) month following the
discovery by or notice to the related Seller of
the breach.
SERVICING..................... The Servicer will be required to remit
collections (net of the Servicing Fee, the
Supplemental Servicing Fee and reimbursement
for Advances, if any (each as defined herein or
in the related Prospectus Supplement) included
in such collections) to one or more Collection
Accounts established with the Owner Trustee or
the Indenture Trustee as specified in the
related Prospectus Supplement. As specified in
the related Prospectus Supplement, the Servicer
will receive from the Trust or retain each
month a fee for servicing the Receivables in an
amount specified in the related Prospectus
Supplement out of the collections on the
Receivables. See "Description of The Purchase
Agreements and The Trust Documents -- Servicing
Compensation."
ADVANCES...................... If and to the extent specified in the related
Prospectus Supplement, the Servicer may be
required to advance (each, an "Advance")
monthly payments of interest or monthly
payments of principal and interest in respect
of a delinquent Receivable or Servicer approved
deferrals of monthly payments that the
Servicer, in its sole discretion, determines
are recoverable from subsequent payments on or
with respect to such Receivable or from other
Receivables. The Servicer shall be entitled to
reimbursement of Advances from subsequent
payments on or with respect to the Receivables
to the extent described in the related
Prospectus Supplement.
OPTIONAL PURCHASE............. With respect to each series of Securities, the
Servicer may purchase all of the Receivables
held by the related Trust as of the last day of
any month in which the Pool Balance (as defined
in the related Prospectus Supplement) of such
Trust at the close of business on the
Distribution Date (as defined herein or in the
related Prospectus Supplement) in such month is
10% or less (or such other percentage specified
in the related Prospectus Supplement, which
will not exceed 50%) of the Original Pool
Balance (as defined in the related Prospectus
Supplement) (calculated after giving effect to
the principal balance of any Subsequent
Receivables as of their respective Subsequent
Cutoff Dates). Any such sale will be without
recourse to either the Trust or the related
holders of Securities of such series. See
"Description of The Purchase Agreements and The
Trust Documents -- Termination."
TAX STATUS.................... With respect to a Trust issuing Certificates
and Notes, the Prospectus Supplement may
specify that the related Trust will be treated
as either (i) a partnership, or (ii) a division
of its single Certificateholder. In either
event, upon the issuance
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of the related series of Securities, Weil,
Gotshal & Manges LLP, federal tax counsel
("Federal Tax Counsel"), will deliver an
opinion (subject to the assumptions set forth
therein) to the effect that, for federal income
tax purposes: (i) any Notes of such series will
be characterized as debt and (ii) such Trust
will not be characterized as an association (or
a publicly traded partnership) taxable as a
corporation. In respect of any such series,
each Noteholder, if any, by the acceptance of a
Note of such series, will agree to treat such
Note as indebtedness for federal tax purposes,
and each Certificateholder, by the acceptance
of a Certificate of such series, will agree to
treat such Trust as either a partnership in
which such Certificateholder is a partner or as
a division, as the case may be, for federal,
state and local tax purposes. Alternative
characterizations of such Trust and such
Certificates are possible, but would not result
in materially adverse tax consequences to
Certificateholders.
If the Prospectus Supplement specifies that the
related Trust will be treated as a grantor
trust, upon the issuance of the related series
of Certificates, Federal Tax Counsel will
deliver an opinion (subject to the assumptions
set forth therein) to the effect that such
Trust will be treated as a grantor trust for
federal income tax purposes and will not be
subject to federal income tax.
If the Prospectus Supplement specifies that a
Trust issuing Securities will not be treated as
a partnership, but rather will be regarded as a
security device for the issuance of debt, upon
issuance of the related Series of Securities,
Federal Tax Counsel will deliver an opinion
(subject to the assumptions set forth therein)
to the effect that, for federal income tax
purposes, the Securities of the related series
will be treated as indebtedness for federal
income tax purposes and that the Trust will not
be characterized as an association (or publicly
traded partnership) taxable as a corporation.
In respect of any such series, the related
Seller will agree and each Securityholder, by
acquiring an interest in a Security, will be
deemed to agree to treat the Securities as
indebtedness for federal, state and local tax
purposes. Alternative characterizations of such
Trust and such Securities are possible and
potential investors are encouraged to consult
their tax advisors before purchasing such
Securities.
See "Federal Income Tax Consequences" for
additional information concerning the
application of federal income tax laws.
ERISA CONSIDERATIONS.......... Subject to the considerations discussed under
"ERISA Considerations" herein and in the
related Prospectus Supplement, and to the
extent specified in the related Prospectus
Supplement, any Notes included in the offered
Securities may be eligible for purchase by
employee benefit plans or other retirement
arrangements that are subject to either Title I
of the Employee Retirement Income Security Act
of
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1974, as amended ("ERISA") or Section 4975 of
the Internal Revenue Code of 1986, as amended
(such plans or arrangements, "Plans"). Certain
Certificates may be eligible for purchase by
Plans as specified in the related Prospectus
Supplement. See "ERISA Considerations" herein
and in the related Prospectus Supplement.
RATINGS....................... As a condition of issuance, the offered
Securities of each series will be rated
investment grade, that is, in one of the four
highest rating categories, by at least one
nationally recognized rating agency (a "Rating
Agency"), as specified in the related
Prospectus Supplement. The ratings will be
based on the Receivables related to each
series, the terms of the Securities, and the
subordination and any credit enhancement
provided therefor. There is no assurance that
the ratings initially assigned to such
Securities will not be subsequently lowered or
withdrawn by the Rating Agencies. In the event
the rating initially assigned to any Securities
is subsequently lowered for any reason, no
person or entity will be obligated to provide
any credit enhancement unless otherwise
specified in the related Prospectus Supplement.
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RISK FACTORS
LIMITED LIQUIDITY
There is currently no market for the Securities of any series. There can be
no assurance that a secondary market for the Securities will develop or, if such
a market does develop, that it will provide Securityholders with liquidity of
investment or that it will continue for the life of the Securities. See "Plan of
Distribution."
NATURE OF RECEIVABLES; UNDERWRITING PROCESS; SUFFICIENCY OF INTEREST RATES TO
COVER LOSSES
Although Franklin Capital believes that it carefully reviews and evaluates
each credit before acceptance, no assurance can be given that the standards
employed by Franklin Capital will be sufficient to protect the Securityholders
from loss due to default by the Obligors, who may not meet in all cases the
credit standards of other lenders. The Receivables supporting a particular
series of Notes or Certificates may include obligations of borrowers with
marginal credit history (often referred to as "non-prime" obligations) or
negative credit history ("sub-prime" obligations). Because of the greater credit
risk associated with non-prime and sub-prime motor vehicle retail installment
sale contracts, the interest rates charged on such contracts are generally
higher than those rates charged on prime motor vehicle retail installment sale
contracts. The range of APRs (as defined herein) of the Receivables will be set
forth in the related Prospectus Supplement. There can be no assurance, however,
that the interest rates on the Receivables in a particular pool will be
sufficient to cover losses on other Receivables in such pool. The investors bear
the risk of loss resulting from a failure of Franklin Capital's underwriting
standards to accurately assess the creditworthiness of the Obligors on the
Receivables supporting a particular series of Notes and/or Certificates, which
could result in greater than expected delinquencies and losses on such
Receivables. See "Franklin Capital Corporation -- General."
LIMITED ASSETS; SUBORDINATION
No Trust will have any significant assets or sources of funds other than
the Receivables and, to the extent provided in the related Prospectus
Supplement, a Pre-Funding Account and/or any credit enhancement specified in the
related Prospectus Supplement. The Notes, if any, of any series will represent
obligations solely of, and the Certificates of any series will represent
interests solely in, the related Trust, and neither the Notes nor the
Certificates of any series will be insured or guaranteed by the Sellers, the
Servicer, the applicable Owner Trustee, the applicable Indenture Trustee or,
except as specified in the related Prospectus Supplement, any other person or
entity. Consequently, Securityholders must rely for payment upon payments on the
related Receivables and, if and to the extent available, amounts on deposit in
the Pre-Funding Account, if any, and any credit enhancement, if any, specified
in the related Prospectus Supplement. In view of the reliance of Securityholders
for payment, on payment of the related Receivables, potential investors should
review the information set forth in the related Prospectus Supplement under the
heading "The Receivables -- Delinquency and Loss Experience." To the extent
specified in the related Prospectus Supplement, distributions with respect to
some or all classes of Certificates may be subordinated in priority of payment
to distributions on the Notes, if any, of such series and distributions on other
classes of Certificates of such series. Any such subordination or credit
enhancement will not cover all contingencies, and losses in excess of such
coverage will be required to be borne directly by the affected Securityholders.
In addition, holders of certain classes of Securities of a series may have the
right to take actions that are detrimental to the interests of the
Securityholders of certain other classes of Securities of such series, as
specified in the related Prospectus Supplement. See "Description of the Purchase
Agreements and Trust Documents -- Credit Enhancement" and "-- Amendment."
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RISK OF UNPERFECTED SECURITY INTERESTS IN FINANCED VEHICLES
As part of the sale and assignment of Receivables to a Trust, security
interests in the related Financed Vehicles will be assigned by the related
Seller to such Trust. In most states, such an assignment is an effective
conveyance of a security interest without amendment of any such security
interest noted on a motor vehicle's certificate of title, and the assignee
succeeds thereby to the assignor's rights as secured party. Such notation of a
secured party's security interest is generally effected in such states by
depositing with the applicable state motor vehicle registrar or similar state
authority, the motor vehicle's certificate of title, an application containing
the name and address of such secured party, and the necessary registration fees.
Due to the administrative burden and expense that would be entailed in
doing so, the certificates of title for the Financed Vehicles related to any
Trust will not be endorsed to identify the related Trustee as the secured party,
and will not be deposited with the motor vehicle registrar or other state
authorities in any state. In the absence of such action, the Owner Trustee or
the Indenture Trustee, as the case may be, may not have a perfected security
interest in the Financed Vehicles related to such Trust in certain states and,
in the event that another person obtains a perfected security interest in such a
Financed Vehicle subsequent to the transfer of the Receivables to the related
Trust, such person might acquire rights in such Financed Vehicle prior to the
rights of the Trust. The related Seller and/or another party, if any, designated
in the related Prospectus Supplement will covenant to repurchase any Receivable
if, on the date of transfer of a Receivable to a Trust, a valid, existing and
enforceable first priority security interest shall not have been perfected in
favor of Franklin Capital, which shall have been assigned to the Trust, in the
related Financed Vehicle. If such Trust does not have a perfected security
interest in a Financed Vehicle, its ability to realize on such Financed Vehicle
in the event of a default may be adversely affected. To the extent the security
interest is perfected, such Trust will have a prior claim over subsequent
purchasers of such Financed Vehicles and holders of subsequently perfected
security interests. However, as against liens for repairs of Financed Vehicles
or for taxes unpaid by an Obligor under a Receivable, or through fraud or
negligence, such Trust could lose the priority of its security interest or its
security interest in a Financed Vehicle. Except as described above, neither the
related Seller nor Franklin Capital will have any obligation to repurchase a
Receivable as to which any of the occurrences result in such Trust's losing the
priority of its security interest or its security interest in such Financed
Vehicle after the date such security interest was conveyed to such Trust.
Federal and state consumer protection laws impose requirements upon creditors in
connection with extensions of credit and collections of retail installment loans
and certain of these laws make an assignee of such a loan (such as such Trust)
liable to the related borrower for any violation by the lender. The related
Seller will be obligated to repurchase any Receivable which fails to comply with
such requirements. See "Certain Legal Aspects of the Receivables -- Security
Interests in Vehicles."
CERTAIN MATTERS RELATING TO BANKRUPTCY
Franklin Capital intends that any transfer of Receivables to a Seller will
constitute a sale, rather than a pledge of the Receivables to secure
indebtedness of Franklin Capital. However, if Franklin Capital were to become a
debtor under the federal bankruptcy code or similar applicable state laws
(collectively, the "Insolvency Laws"), a creditor or trustee in bankruptcy
thereof, or Franklin Capital as debtor-in-possession, might argue that such sale
of Receivables was a pledge of Receivables rather than a sale and/or that the
assets and liabilities of the related Seller should be consolidated with the
assets and liabilities of Franklin Capital. This position, if presented to or
accepted by a court, could result in a delay in or reduction of distributions to
Securityholders. In addition, a delay in or reduction of distributions to
Securityholders could result if the related Seller were to become a debtor under
any Insolvency Law and a creditor or trustee-in-bankruptcy of such debtor or
such debtor itself were to take the position that the sale of Receivables to
such Trust should instead be treated as a pledge of such Receivables to secure a
borrowing of such debtor. In addition, if the transfer of any Receivables is
recharacterized as a pledge, and a tax lien, other governmental lien,
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<PAGE> 64
or other lien created by operation of law is imposed on the property of the
Servicer, the holder of such lien may have priority over the Trust's interest in
such Receivables.
SOCIAL, ECONOMIC AND OTHER FACTORS AFFECTING THE RECEIVABLES
Economic conditions in states where Obligors reside may affect the
delinquency, loan loss and repossession experience of a Trust with respect to
the related Receivables. The related Prospectus Supplement will set forth any
restrictions imposed by any Trust on concentrations of Receivables thereunder.
The performance by such Obligors may be affected by a variety of social and
economic factors. Economic factors include, but are not limited to, interest
rates, unemployment levels, the rate of inflation and consumer perception of
economic conditions, generally. However, the related Seller is unable to
determine and has no basis to predict whether or to what extent economic or
social factors will affect the performance by any Obligors, or the availability
of Subsequent Receivables in cases where Subsequent Receivables are to be
transferred to a Trust as specified in the related Prospectus Supplement. See
"Franklin Capital Corporation."
CONCENTRATION OF RECEIVABLES
As of August 1, 1998, Franklin Capital Corporation originates motor vehicle
retail installment sale contracts in the following eight states: Arizona,
California, Kansas, Nevada, New Mexico, Oregon, Utah and Washington. Economic
conditions in these states and in the western United States are often volatile
and from time to time have been adversely affected by diverse factors including
disasters, contractions in the key industries and declining real estate values.
Generally, economic conditions in these states have been favorable during the
recent years. Thus economic conditions in recent years have not had an adverse
effect on the loss and delinquency experience of the Receivables. However, no
predictions can be made regarding future economic conditions in these states and
in the western United States. An economic downturn in one or more of these
states likely would result a deterioration of the loss and delinquency
experience of the Receivables which in turn could lead to losses for
Securityholders.
PREPAYMENTS ON RECEIVABLES' EFFECT ON YIELD OF SECURITIES
The weighted average life of the Securities of the related series will be
reduced by full or partial prepayments on the related Receivables. The
Receivables will generally be prepayable at any time without penalty.
Prepayments (or, for this purpose, equivalent payments to the related Trust) may
result from payments by Obligors, liquidations due to default, the receipt of
proceeds from physical damage or credit insurance, repurchases by (if no other
party is described in the related Prospectus Supplement as obligated to make
such repurchases) Franklin Capital and the related Seller as a result of certain
uncured breaches of representations and warranties made with respect to the
Receivables, purchases by (if no other party is described in the related
Prospectus Supplement as obligated to make such repurchases) the Servicer as a
result of certain uncured breaches of the covenants made by it with respect to
the Receivables, if so specified in the related Prospectus Supplement, amounts
on deposit in the Pre-Funding Account at the end of the Funding Period being
applied to the payment of principal of the Securities, the Servicer exercising
its option to purchase all of the remaining Receivables of a Trust or, if and to
the extent provided in the related Prospectus Supplement, the receipt of
satisfactory bids for the purchase of the Receivables of the related Trust in
the manner and on the respective terms and conditions specified in the related
Prospectus Supplement.
Franklin Capital has not as of the date of this Prospectus prepared data on
prepayment rates. Franklin Capital can make no prediction as to the actual
prepayment rates that will be experienced on the Receivables. Franklin Capital,
however, believes that the actual rate of prepayments will result in a
substantially shorter weighted average life than the scheduled weighted average
life of the Receivables. Generally, the amounts paid to Securityholders will
include all prepayments (which are
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not amounts representing Payaheads) on the Receivables. See "Yield and
Prepayment Considerations."
Any reinvestment risk, resulting from faster than expected prepayments of
Receivables held by a given Trust will be borne entirely by the Securityholders
of the related series of Securities. Faster rates of prepayments on the
Receivables, may shorten the weighted average life of the Securities. If the
weighted average life of the Securities is shortened, the expected rate and
amount of return on the Securities may be reduced. A reinvestment of amounts
received by Securityholders in other investments at a lower rate of return than
the Securities could result in a lower yield to investors than they would have
received had the weighted average life of the Securities remained unchanged.
RISK OF COMMINGLING
With respect to each Trust, unless otherwise provided in the related
Prospectus Supplement, the Servicer will deposit all payments (net of certain
fees) on the related Receivables (from whatever source) and all proceeds of such
Receivables collected during each Monthly Period (as defined in the related
Prospectus Supplement) into the Collection Account of such Trust within two
business days of receipt thereof. However, in the event that the Servicer, or
any successor Servicer, satisfies certain requirements for monthly or less
frequent remittances and the Rating Agencies (as such term is defined in the
related Prospectus Supplement, the "Rating Agencies") affirm their ratings of
the related Securities at the initial level and provided that (i) there exists
no Servicer Default (as defined herein and in the related Prospectus
Supplement), (ii) the credit enhancement provider, if any, consents, and (iii)
each other condition to making such monthly or less frequent deposits as may be
specified by the Rating Agencies and described in the related Prospectus
Supplement is satisfied, the Servicer will not be required to deposit such
amounts into the Collection Account of such Trust until on or before the
business day preceding each Distribution Date. If such requirements are
satisfied, the Servicer will deposit the aggregate Purchase Amount of
Receivables purchased by it into the applicable Collection Account on or before
the business day preceding each Distribution Date. Pending deposit into such
Collection Account, collections may be invested by the Servicer at its own risk
and for its own benefit and will not be segregated from funds of the Servicer.
If the Servicer were unable to remit such funds, the applicable Securityholders
might incur a loss. To the extent set forth in the related Prospectus
Supplement, the Servicer may, in order to satisfy the requirements described
above, obtain a letter of credit or other security for the benefit of the
related Trust to secure timely remittances of collections on the related
Receivables and payment of the aggregate Purchase Amount with respect to
Receivables purchased by the Servicer. See "Description of the Purchase
Agreements and Trust Documents -- Collections."
RISKS OF CERTIFICATEHOLDERS UPON WAIVER OF SERVICER DEFAULT
Unless otherwise provided in the related Prospectus Supplement with respect
to a series of Securities that includes Notes, in the event a Servicer Default
occurs, the Indenture Trustee or the Noteholders with respect to such series may
remove the Servicer without the consent of the Owner Trustee or any of the
Certificateholders with respect to such series. The Owner Trustee or the
Certificateholders with respect to such series will not have the ability to
remove the Servicer if a Servicer Default occurs. In addition, unless otherwise
specified in the related Prospectus Supplement, the Noteholders of such series,
evidencing at least a majority in principal amount of the then-outstanding Notes
of the related series have the ability, on behalf of all such Noteholders and
Certificateholders, to waive defaults by the Servicer in the performance of its
obligations under the related Sale and Servicing Agreement and its consequences,
except for a Servicer Default in making any required deposits to or payments
from any of the Accounts in accordance with such Sale and Servicing Agreement,
including defaults that could materially adversely affect the Certificateholders
of such series. See "The Notes -- The Indenture" and "Description of The
Purchase Agreements and The Trust Documents -- Waiver of Past Defaults."
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BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, each class
of Securities of a given series will be initially represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), or any other nominee
for The Depository Trust Company ("DTC") set forth in the related Prospectus
Supplement, and will not be registered in the names of the holders of the
Securities of such series or their nominees. Unless otherwise specified in the
related Prospectus Supplement, persons acquiring beneficial ownership interests
in any Series of Securities may hold their interests through DTC in the United
States or, in the case of any series of Notes, Cedel Bank, societe anonyme
("Cedel") or the Euroclear System ("Euroclear") in Europe. Because of this,
unless and until Definitive Securities for such series are issued, holders of
such Securities will not be recognized by the Owner Trustee or any applicable
Indenture Trustee as "Certificateholders," "Noteholders" or "Securityholders,"
as the case may be (as such terms are used herein or in the related Pooling and
Servicing Agreement or related Indenture and Trust Agreement, as applicable).
Hence, until Definitive Securities are issued, holders of such Securities will
only be able to exercise the rights of Securityholders indirectly through DTC
and its participating organizations. See "Certain Information Regarding the
Securities -- Book-Entry Registration."
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THE TRUSTS
Each Seller will establish a Trust with respect to each series of
Securities by selling and assigning the Trust Property, as described below, to
the Owner Trustee pursuant to the Trust Documents. Prior to the sale and
assignment of the related Receivables pursuant to the related Trust Documents,
such Trust will have no assets or obligations. Each Trust will not engage in any
business activity other than acquiring, holding and, if so specified in the
related Prospectus Supplement, selling the Trust Property, issuing Certificates
and Notes, if any, of such series and distributing payments thereon.
Each Certificate will represent a fractional undivided ownership interest
in, and each Note, if any, will represent an obligation of, the related Trust.
The property of the Trust will include, (i) motor vehicle retail installment
sale contracts, as specified in the related Prospectus Supplement, between
Dealers and retail purchasers (the "Obligors") of new and used automobiles and
light trucks and (ii) all payments received thereunder on or after the Initial
Cutoff Date or Subsequent Cutoff Date, as the case may be, as specified in the
related Prospectus Supplement and, with respect to Precomputed Receivables,
certain monies received thereunder on or prior to the related cutoff Date that
are due after such cutoff Date, as specified in the related Prospectus
Supplement. The Receivables were or will be originated by Dealers in accordance
with Franklin Capital's requirements under agreements with Dealers for
assignment to Franklin Capital, have been or will be so assigned, and evidence
or will evidence the indirect financing made available to the Obligors. If
specified in the related Prospectus Supplement, the Receivables may be
originated directly by Franklin Capital or acquired by Franklin Capital in bulk
and other purchases from third-party lenders or the Franklin Bank. On or before
the closing date specified in the related Prospectus Supplement, Franklin
Capital will sell the Initial Receivables to the related Seller for sale to the
Trust. Subsequent Receivables, if any, will be conveyed to the Trust during the
applicable Funding Period, as provided in the related Prospectus Supplement. Any
such Subsequent Receivables will constitute property of the Trust.
The property of each Trust also will include, to the extent set forth in
the Prospectus Supplement, (i) such amounts as from time to time may be held in
separate trust accounts (such as the "Collection Account," the "Certificate
Distribution Account," the "Payahead Account," and the "Distribution Account" as
may be specified in the related Prospectus Supplement) established and
maintained pursuant to the Trust Documents, and the proceeds of such accounts;
(ii) security interests in the related Financed Vehicles and any accessions
thereto; (iii) amounts payable to the Servicer under any dealer recourse
obligations (as specified in the related Prospectus Supplement) (in the event of
breach of the warranties of such Dealer); (iv) the right to proceeds of credit
life, credit disability, and physical damage insurance policies covering the
related Financed Vehicles; (v) the rights of the related Seller under the Trust
Documents; (vi) certain rebates of premiums and other amounts relating to
certain insurance policies and other items financed under the Receivables, (vii)
the Receivables Files; (viii) the Certificate Policy and/or the Note Policy, as
the case may be, as specified in the related Prospectus Supplement; (ix) any and
all proceeds of the foregoing; and (x) any other property assigned to the Trust,
as specified in the related Prospectus Supplement. To the extent specified in
the related Prospectus Supplement, a Payahead Account, a Pre-Funding Account, a
reserve account or other form of credit enhancement may be a part of the
property of any given Trust or may be held by the Owner Trustee or an Indenture
Trustee for the benefit of holders of the related Securities.
The Receivables transferred to the Trust, will consist of receivables
financed under Franklin Capital's Prime (as defined herein) credit programs
("Prime Receivables"), Franklin Capital's Non-prime (as defined herein) credit
programs ("Non-Prime Receivables") and Franklin Capital's Sub-prime (as defined
herein) credit programs ("Sub-Prime Receivables"). Currently, there is no
maximum limit on the amount of Non-Prime Receivables and Sub-Prime Receivables
that may constitute the Trust Property for any Trust.
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The Servicer will service the Receivables held by each Trust, and will be
compensated for acting as the Servicer. See "Description of the Purchase
Agreements and the Trust Documents -- Servicing Compensation." To facilitate
servicing and to minimize administrative burden and expense, the Servicer will
retain physical possession of the Receivables and documents relating thereto as
custodian for the Owner Trustee or the Indenture Trustee, as the case may be.
Due to the administrative burden and expense, the certificates of title to the
Financed Vehicles will not be amended to reflect the assignment of the security
interest in the Financed Vehicles to any Owner Trustee or Indenture Trustee. In
the absence of such amendment, an Owner Trustee or Indenture Trustee may not
have a perfected security interest in the related Financed Vehicles in certain
states. See "Certain Legal Aspects of the Receivables -- Security Interests in
Vehicles." The Owner Trustee and any Indenture Trustee will not be responsible
for the legality, validity or enforceability of any security interest in any
Financed Vehicle.
If the protection provided to the holders of any Securities by the
subordination of any Securities or by any credit enhancement is insufficient,
such Securityholders would have to look for payment on their Securities to the
Obligors on the related Receivables, the proceeds from the repossession and sale
of the related Financed Vehicles which secure such Receivables, and the
proceeds, if any, from Dealer Recourse Obligations. In such event, certain
factors, such as the Owner Trustee's or the Indenture Trustee's not having
perfected security interests in the related Financed Vehicles in certain states,
may affect such Trust's ability to repossess and sell the collateral securing
the Receivables, and thus may reduce the proceeds to be distributed to
Securityholders. See "Certain Legal Aspects of the Receivables."
THE OWNER TRUSTEE
The Owner Trustee for each Trust will be specified in the related
Prospectus Supplement. The Owner Trustee's liability in connection with the
issuance and sale of the Securities of such series will be limited solely to the
express obligations of such Owner Trustee set forth in the related Trust
Documents. An Owner Trustee may resign at any time, in which event the related
Seller or its successor will be obligated to appoint a successor trustee which
is eligible under the related Trust Documents. The related Seller also may
remove the Owner Trustee if the Owner Trustee ceases to be eligible to continue
as Owner Trustee under the related Trust Documents or if the Owner Trustee
becomes insolvent. In such circumstances, the related Seller will be obligated
to appoint a successor trustee eligible under the related Trust Documents. Any
resignation or removal of an Owner Trustee and appointment of a successor
trustee will be subject to any conditions or approvals specified in the related
Prospectus Supplement and will not become effective until acceptance of the
appointment by the successor trustee.
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THE RECEIVABLES
GENERAL
Unless the related Prospectus Supplement specifies that some or all of the
Receivables were or will be originated directly by Franklin Capital or are to be
acquired in bulk and other purchases from third-party lenders or its affiliate
the Franklin Bank, the Receivables held by each Trust will be purchased by
Franklin Capital in its ordinary course of business from Dealers pursuant to its
underwriting standards. Franklin Capital's underwriting standards emphasize a
review of the borrower's creditworthiness and ability to repay his or her
obligations underlying the related motor vehicle retail installment sale
contract, as well as the asset value of the related motor vehicle. Unless the
related Prospectus Supplement specifies otherwise, similar underwriting
standards will have been applied to Receivables originated by Franklin Bank or
any third-party lender from which Receivables are acquired. Each of the
Receivables to be held by Trust (i) will be originated in the United States,
(ii) will be secured by new or used automobiles and light trucks, (iii) will
provide for level monthly payments which fully amortize the amount financed over
its original term to maturity (except for the last payment which may be
minimally different), (iv) will be either a Precomputed Receivable or Simple
Interest Receivable (each as defined below), and (v) will satisfy the other
criteria, if any, set forth in the related Prospectus Supplement. No selection
procedures believed to be adverse to the Securityholders of any series will be
utilized in selecting the Receivables from qualifying motor vehicle retail
installment sale contracts owned by Franklin Capital. Franklin Capital's
underwriting criteria include specific limits as to the amount of financing that
may be provided to a particular borrower which is based on several factors,
including a borrower's credit history and the value of the vehicle to be
financed. However, the established underwriting procedures provide for financing
above such limits if certain conditions are satisfied. Accordingly, there is no
established maximum that may be financed in respect of any borrower or any
vehicle. Franklin Capital's underwriters may decide to approve financing in
excess of the value of a vehicle if they determine that other factors (such as a
borrower's income, employment history, credit history, length of residency and
total outstanding debt) compensate for the increased loan-to-value ratio of such
financing. To the extent financing is provided to a borrower in excess of the
value of the vehicle to be financed, a default by such borrower could result in
the Trust realizing a loss of the amount financed in excess of the value of such
vehicle. Any obligation of a Trust to purchase Subsequent Receivables shall be
subject to such additional conditions as may be specified in the related
Prospectus Supplement.
"Precomputed Receivables" consist of either (i) monthly actuarial
receivables ("Actuarial Receivables") or (ii) receivables that provide for
allocation of payments according to the "sum of periodic balances" or "sum of
monthly payments" method, similar to the "Rule of 78's" ("Rule of 78's
Receivables"). An Actuarial Receivable provides for amortization of the loan
over a series of fixed, level-payment monthly installments. Each monthly
installment, including the monthly installment representing the final payment on
the Receivable, consists of an amount of interest equal to 1/12 of the Annual
Percentage Rate ("APR") of the loan multiplied by the unpaid principal balance
of the loan, and an amount of principal equal to the remainder of the monthly
payment. A Rule of 78's Receivable provides for the payment by the borrower of a
specified total amount of payments, payable in equal monthly installments on
each due date, which total represents the principal amount financed and add-on
interest in an amount calculated on the stated APR for the term of the
receivable. The rate at which such amount of add-on interest is earned and,
correspondingly, the amount of each fixed monthly payment allocated to reduction
of the outstanding principal are calculated in accordance with the "Rule of
78's."
"Simple Interest Receivables" are receivables that provide for the
amortization of the amount financed under each receivable over a series of fixed
level monthly payments. However, unlike the monthly payment under an Actuarial
Receivable, each monthly payment consists of an installment of interest which is
calculated on the basis of the outstanding principal balance of the receivable
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<PAGE> 70
multiplied by the stated APR and further multiplied by the period elapsed since
the preceding payment of interest was made based on a 30 day month and a 360 day
year. As regular payments are received under a Simple Interest Receivable, the
amount received is applied first to interest accrued to the date of payment and
the balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a fixed monthly installment before its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be less than it would have been had the payment been made
as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. Conversely, if a borrower
pays a fixed monthly installment after its scheduled due date, the portion of
the payment allocable to interest for the period since the preceding payment was
made will be greater than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly less. In either case, the borrower pays a fixed
monthly installment until the final scheduled payment date, at which time the
amount of the final installment is increased or decreased as necessary to repay
the then outstanding principal balance.
If a Rule of 78's Receivable is prepaid, the borrower is required to pay
earned interest on such Receivable and is not required to pay any "unearned"
add-on interest included in the gross Receivable. If a Simple Interest
Receivable is prepaid, the borrower is required to pay interest only to the date
of prepayment. The amount of a rebate in respect of "unearned" add-on interest
under a Rule of 78's Receivable generally will be less than the amount of a
rebate on an Actuarial Receivable and generally will be less than the remaining
scheduled payments of interest that would have been due under a Simple Interest
Receivable for which all payments were made on schedule.
Unless otherwise specified in the related Prospectus Supplement, each Trust
will account for the Rule of 78's Receivables as if such Receivables were
Actuarial Receivables. Amounts received upon prepayment in full of a Rule of
78's Receivable in excess of the then outstanding Principal Balance of such
Receivable and accrued interest thereon (calculated pursuant to the actuarial
method) and not rebated to the borrower as described above will not be paid to
Noteholders or passed through to Certificateholders but will be paid to the
Servicer as additional servicing compensation. Unless otherwise specified in the
related Prospectus Supplement, each Trust will account for the Simple Interest
Receivables by allocating principal and interest payments thereon in accordance
with the simple interest method.
Information with respect to the Receivables held by each Trust will be set
forth in the related Prospectus Supplement, including, to the extent
appropriate, the composition, distribution by APR, states of origination and
portion secured by new and used automobiles and light trucks.
DELINQUENCIES, CHARGE-OFF POLICIES AND NET LOSSES
Certain information concerning Franklin Capital's delinquency and loss
experience with respect to its portfolio of retail installment sale contracts
for new and used automobiles and light trucks acquired will be set forth in the
related Prospectus Supplement.
Franklin Capital measures delinquency on a contractual basis which
classifies the accounts into 30, 60, 90 and 120+ categories based on monthly
payment cycles elapsed from the date a payment is due under the motor vehicle
retail installment sale contract (the "due date"). Amounts delinquent must not
exceed $25.00 in the aggregate, after application of any portion of such
installment payment necessary to satisfy any prior shortfalls, for a contract to
be considered current.
Franklin Capital's collectors are assigned to specific delinquent accounts
and attempt to contact the delinquent borrower by telephone and letter, based on
the duration of the delinquency and history of the account. Repossession
procedures typically begin when a motor vehicle retail installment sale contract
becomes forty-five (45) to sixty (60) days delinquent, however, repossession
procedures for sub-prime contracts will typically begin earlier. Repossession is
carried out by independent contractors in conformity with specific procedures
adopted by Franklin Capital.
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Franklin Capital's policy is to charge off a delinquent account as follows:
(i) when a repossessed motor vehicle is sold; (ii) other than in the case of
bankruptcy, at the end of the month in which it becomes and remains 120 days
delinquent and the motor vehicle is in Franklin Capital's possession for at
least 45 days, the loan balance will be reduced to a value based on the blue
book value of the motor vehicle and the balance of the loan will be charged off;
(iii) in the case of bankruptcies, actual charge-off will not take place unless
and until (a) the motor vehicle is repossessed and sold or (b) if the borrower
resumes payments under a court-approved plan, once three payments have been
made, the loan will be removed from bankruptcy status and returned to current
status and any reduction or forgiveness of the balance of the loan by a
bankruptcy court, a "cram-down" loss, will be taken as a charge-off; or (iv) in
all other cases the loan will be charged-off at the end of the month in which it
becomes and remains 120 days delinquent.
Policies for charging-off an account do not differ based upon whether a
receivable is owned by Franklin Capital or sold to a Trust. The proceeds of
resale of repossessed financed motor vehicles generally will be applied first to
the expenses of repossession and resale and then to the satisfaction of the
indebtedness on the related Receivable.
Franklin Capital follows specific procedures with respect to extensions of
the contract maturity date. Generally, an extension requires the demonstration
of financial difficulties based on extraordinary circumstances and the approval
of management. In addition, contracts are not rewritten unless Franklin Capital
determines that this is the only method to realize some recovery on the
contract.
DELINQUENCY AND LOSS EXPERIENCE
Franklin Capital began operations in November 1993. The table below sets
forth the delinquency and loss experience as of the end of each of the periods
indicated. The information set forth in the following table may be affected by
the size, rapid growth and relative lack of seasoning of the Receivables.
Accordingly, no assurances can be given that the delinquency and loss experience
presented in the tables below will be indicative of such experience on the
Receivables.
FRANKLIN CAPITAL CORPORATION
HISTORICAL DELINQUENCY AND LOSS EXPERIENCE
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
DELINQUENCY EXPERIENCE 1994(1) 1995 1996 1997
---------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Portfolio Outstanding at end of
period(2).............................. $160,635,623 $225,575,436 $174,589,677 $154,271,605
Delinquencies at end of period(3)
30-59 days............................. $ 2,442,313 $ 9,217,070 $ 4,129,543 $ 1,929,654
60-89 days............................. 733,619 3,252,750 1,969,257 729,097
90 days or more........................ 400,740 3,761,131 2,067,850 1,326,175
------------ ------------ ------------ ------------
Total delinquencies...................... $ 3,576,672 $16,230,951 $ 8,166,650 $ 3,984,926
------------ ------------ ------------ ------------
Total delinquencies as a percentage of
portfolio outstanding at end of
period................................. 2.2% 7.2% 4.7% 2.6%
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DURING FISCAL YEARS ENDED
--------------------------------------------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
CREDIT/ LOSS EXPERIENCE 1994(1) 1995 1996 1997
----------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average portfolio outstanding during
period(2)(4)........................... $66,586,803(@) $225,203,667(@) $196,747,716 $162,745,276
Average number of loans outstanding
during period.......................... n/a n/a n/a 14,780
Number of repossessions during period.... n/a n/a n/a 760
Repossessions as a percentage of average
number of loans outstanding during
period................................. n/a n/a n/a 5.1%
</TABLE>
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<PAGE> 72
<TABLE>
<CAPTION>
DURING FISCAL YEARS ENDED
--------------------------------------------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
CREDIT/ LOSS EXPERIENCE 1994(1) 1995 1996 1997
----------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross charge-off(5)...................... $ 210,842 $ 7,039,263 $12,082,834 $ 6,580,261
Recoveries(6)............................ 4,242 649,374 1,408,190 1,854,461
------------ ------------ ------------ ------------
Net losses............................... $ 206,600 $ 6,389,889 $10,674,644 $ 4,725,800
------------ ------------ ------------ ------------
Net losses as a percentage of average
portfolio outstanding during the
period................................. 0.3% 2.8% 5.4% 2.9%
============ ============ ============ ============
</TABLE>
- ---------------
Key -- @ Simple average using Franklin Capital figures
Notes
(1) Franklin Capital commenced lending operations in December 1993 and
consequently 1994 data represents 9 months of activity.
(2) For simple interest contracts, Portfolio Outstanding represents the
outstanding principal balance plus the insurance receivable (if any). For
Rule of 78's contracts, Portfolio Outstanding represents the gross
receivable less unearned discount, unearned insurance receivable (if any),
and unearned insurance interest receivable (if any). Portfolio Outstandings
are reduced by any rejected or unapplied payments, but such amounts are not
subtracted from the balances of delinquent contracts. Starting in February
1996, Portfolio Outstanding also includes unearned dealer reserve.
(3) The period of delinquency is based on the number of days scheduled payments
are contractually past due. Includes receivables on hand that have not been
charged-off.
(4) Average calculated on a daily basis, except as noted.
(5) Gross charge-offs represents the outstanding balance (calculated as per 2
above) of contracts charged off in the period less proceeds from the
disposition of the collateral, net of any repossession expenses, and
unearned dealer reserve.
(6) Recoveries represents amounts received on previously charged off contracts
net of recovery expenses.
Franklin Capital's portfolio of motor vehicle retail installment sale
contracts experienced an upward trend in losses that peaked roughly at the end
of 1996. During this period, Franklin Capital significantly increased its
origination volume. The rapid expansion brought with it, among other things,
greater occurrences of Dealer fraud and applicant fraud, and a decreased ability
of Franklin Capital to manage its rapid expansion. As a result, Franklin Capital
curtailed its expansion plans and proceeded to reexamine its origination and
servicing processes. Franklin Capital implemented an extensive verification
process to detect and thwart Dealer and applicant fraud as well as new
underwriting guidelines. From the end of 1996 through the present, Franklin
Capital's portfolio of motor vehicle retail installment sale contracts
experienced a reversal of the upward trend of losses on receivables. Franklin
Capital believes that the improved loss and delinquency experience is
attributable to a large degree to its revised underwriting procedures adopted in
early 1996.
YIELD AND PREPAYMENT CONSIDERATIONS
Interest paid on the Receivables will be passed through or paid, as the
case may be as specified in the related Prospectus Supplement, to
Securityholders on each Distribution Date as defined in and set forth in the
related Prospectus Supplement, in an amount equal to one-twelfth of the
applicable annual Pass-Through Rate applied to the applicable Certificate
Balance or the applicable annual Interest Rate on the applicable Note Balance as
of the date specified in the Prospectus Supplement. In the event of prepayments
on Receivables, Securityholders will nonetheless be entitled to receive interest
for the full month in which such prepayment occurs.
All the Receivables are generally prepayable at any time. If prepayments
are received on the Receivables, the actual weighted average life of the
Receivables may be shorter than the scheduled
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<PAGE> 73
weighted average life (i.e., the weighted average life assuming that payments
will be made as scheduled, and that no prepayments will be made). (For this
purpose, the term "prepayments" also includes liquidations due to default, as
well as receipt of proceeds from credit life, credit disability, and casualty
insurance policies.) Weighted average life means the average amount of time
during which each dollar of principal on a Receivable is outstanding. The
payment characteristics of the Receivables held by a Trust will be specified in
the related Prospectus Supplement.
The rate of prepayments on the Receivables may be influenced by a variety
of economic, social, and other factors, including the fact that an Obligor may
not sell or transfer a Financed Vehicle without the consent of the Servicer.
Franklin Capital has not as of the date of this Prospectus prepared data on
prepayment rates. Franklin Capital can make no prediction as to the actual
prepayment rates that will be experienced on the Receivables. Franklin Capital,
however, believes that the actual rate of prepayments will result in a
substantially shorter weighted average life than the scheduled weighted average
life of the Receivables. Any reinvestment risks resulting from a faster or
slower incidence of prepayment of Receivables will be borne by the
Securityholders of the related Trust. See "Description of the Purchase
Agreements and the Trust Documents -- Termination" regarding (i) the Servicer's
option to purchase all of the Receivables of a Trust as of the last day of any
month in which the Pool Balance of such Trust at the close of business on the
last day of any Monthly Period is 10% (or such other percentage specified in the
related Prospectus Supplement, which will not exceed 50%) or less of the
Original Pool Balance (calculated after giving effect to the principal balance
of any Subsequent Receivables as of their respective Subsequent Cutoff Dates)
and (ii) the sale of the Receivables if so specified in the related Prospectus
Supplement if satisfactory bids for the purchase of the Receivables are
received.
Since the rate of payment of principal on the Receivables will depend on
future events and a variety of other factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of a class of Securities may vary from the anticipated yield may depend
upon the degree to which it is purchased at a discount or premium, and the
degree to which the timing of payments thereon is sensitive to prepayments,
liquidations and purchases of the Receivables. Further, an investor should
consider the risk that, in the case of any class of Securities purchased at a
discount, a slower than anticipated rate of principal payments (including
prepayments) on the Receivables could result in an actual yield to such investor
that is lower than the anticipated yield and, in the case of a class of
Securities purchased at a premium, a faster than anticipated rate of principal
payments on the Receivables could result in an actual yield to such investor
that is lower than the anticipated yield.
CERTIFICATE AND NOTE FACTORS AND TRADING INFORMATION
The Servicer will compute each month a "Certificate Factor" for each class
of Certificates which will be a fraction, expressed as a seven-digit decimal,
the numerator of which will be the Certificate Balance of a class of
Certificates as of the close of business on the Distribution Date as specified
in the related Prospectus Supplement in that month and the denominator of which
will be the respective original outstanding principal balances of such class of
Certificates of such series. The Certificate Factor will not change as a result
of the addition of Subsequent Receivables. The Servicer will compute each month
a "Note Factor" for each class of Notes, if any, which will be a fraction,
expressed as a seven-digit decimal, the numerator of which will be the remaining
outstanding principal balance with respect to such Notes as of each Payment Date
as specified in the related Prospectus Supplement and the denominator of which
will be the original outstanding principal balance of such class of Notes. Each
Certificate Factor and each Note Factor will be 1.0000000 as of the Initial
Cutoff Date for such series; thereafter, the Certificate Factor and the Note
Factor will decline to reflect reductions in the Certificate Balance of the
applicable class of Certificates and the Note Factor will decline to reflect
reductions in the outstanding principal balance of the applicable class of
Notes, as the case may be, as a result of scheduled payments collected,
prepayments and liquidations of the Receivables (and also as a result of a
prepayment arising from
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<PAGE> 74
application of amounts on deposit in the Pre-Funding Account). The amount of a
Certificateholder's pro rata share of the Certificate Balance for the related
class of Certificates can be determined on any date by multiplying the original
denomination of the holder's Certificate by the applicable Certificate Factor as
of the close of business on the most recent Distribution Date. The amount of a
Noteholder's pro rata share of the aggregate outstanding principal balance of
the applicable class of Notes can be determined by multiplying the original
denomination of such Noteholder's Note by the then applicable Note Factor.
Pursuant to each Trust and pursuant to the related Trust Documents, the
Securityholders thereunder will be entitled to receive monthly reports
concerning the payments received on the Receivables, additions of Subsequent
Receivables, if any, and the reduction in the Pre-Funded Amount, if any, the
Certificate Balance, the Note Balance, the Certificate Factor or Certificate
Factors for each class of Certificates, the Note Factor or Note Factors for each
class of Notes and various other items of information with respect to such
series. Securityholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date permitted
by law. See "Certain Information Regarding the Securities -- Statements to
Securityholders."
USE OF PROCEEDS
The net proceeds to be received by each Seller from the sale of each
related series of Securities will be applied to the purchase of the related
Receivables from Franklin Capital and, if specified in the related Prospectus
Supplement, to the deposit of the related Pre-Funded Amount, if any, in the
related Pre-Funding Account and/or to provide for other forms of credit
enhancement specified in the related Prospectus Supplement.
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<PAGE> 75
THE SELLERS
FRANKLIN RECEIVABLES LLC
Franklin Receivables LLC ("Franklin LLC"), a wholly-owned subsidiary of
Franklin Capital, was formed in the State of Delaware in June 1998. Franklin LLC
was organized for limited purposes, which include purchasing receivables from
Franklin Capital and transferring such receivables to third parties and any
activities incidental to and necessary or convenient for the accomplishment of
such purposes. The principal executive offices of Franklin LLC are located at 47
West 200 south, Suite 500, Salt Lake City, Utah 84101. The telephone number of
such offices is (801) 238-6700.
Franklin LLC has taken and will take steps in structuring the transactions
contemplated hereby and in the related Prospectus Supplement that are intended
to make it unlikely that the voluntary or involuntary application for relief by
Franklin Capital under any Insolvency Law will result in the consolidation of
the assets and liabilities of Franklin LLC with those of Franklin Capital. These
steps include the creation of Franklin LLC as a separate, limited-purpose
subsidiary pursuant to a limited liability company agreement, operational
agreement or other similar organizational documents containing certain
limitations (including restrictions on the nature of Franklin LLC's business and
a restriction on Franklin LLC's ability to commence a voluntary case or
proceeding under any Insolvency Law). Franklin LLC's organizational documents
will include a provision that requires that one of its members be a
special-purpose entity the board of directors of which has at least one director
who qualifies under its organizational documents as an "Independent Director."
FCC RECEIVABLES CORP.
FCC Receivables Corp. ("FCC Corp."), a wholly-owned subsidiary of the
Franklin Capital, was incorporated in the State of Delaware in February 1995.
FCC Corp. was organized for limited purposes, which include purchasing
receivables from Franklin Capital and transferring such receivables to third
parties and any activities incidental to and necessary or convenient for the
accomplishment of such purposes. The principal executive offices of FCC Corp.
are located at 47 West 200 South, Suite 500, Salt Lake City, Utah 84101. The
telephone number of such offices is (801) 238-6700.
FCC Corp. has taken and will take steps in structuring the transactions
contemplated hereby and in the related Prospectus Supplement that are intended
to make it unlikely that the voluntary or involuntary application for relief by
Franklin Capital, under any Insolvency Law will result in the consolidation of
the assets and liabilities of FCC Corp. with those of Franklin Capital. These
steps include the creation of the FCC Corp., as a separate, limited-purpose
subsidiary pursuant to Articles of Incorporation containing certain limitations
(including restrictions on the nature of FCC Corp.'s business and a restriction
on FCC Corp.'s ability to commence a voluntary case or proceeding under any
Insolvency Law without the unanimous affirmative vote of all of its directors).
FCC Corp.'s Articles of Incorporation include a provision that requires FCC
Corp. to have at least one director who qualifies under the Articles of
Incorporation as an "Independent Director."
If, notwithstanding the foregoing measures a court concluded that the
assets and liabilities of a Seller should be consolidated with the assets and
liabilities of Franklin Capital in the event of the application of any
Insolvency Law to Franklin Capital or a filing were made under any Insolvency
Law by or against a Seller, or if an attempt were made to litigate any of the
foregoing issues, delays in the distributions on the Securities (and possible
reductions in the amount of such distributions) could occur.
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<PAGE> 76
FRANKLIN CAPITAL CORPORATION
GENERAL
The material below describes Franklin Capital's business operation as of
the date hereof, which may change, as specified in the related Prospectus
Supplement.
Franklin Capital Corporation ("Franklin Capital"), a subsidiary of Franklin
Resources, Inc., is a Utah corporation which commenced operations in November
1993 to expand Franklin Resources' automotive lending activities. Franklin
Capital conducts its business primarily in the Western region of the United
States and originates its loans through a network of automotive dealerships
representing a wide variety of makes and models. Franklin Capital offers several
different loan programs to finance new and used motor vehicles. Franklin Capital
also acquires credit card receivables from its affiliate Franklin Bank. As of
March 31, 1998, Franklin Capital's total assets included $164 million of gross
motor vehicle retail installment sale contracts, $57 million of gross credit
card receivables and $4 million of television satellite dish financing
receivables. Franklin Capital indirectly originates and services motor vehicle
retail installment sale contracts for itself and for its affiliate, Franklin
Bank. Franklin Capital provides indirect financing (by the purchase of motor
vehicle retail installment sale contracts from automotive dealers) of automotive
purchases by individuals with prime, non-prime and sub-prime credit.
PRIME. The prime market segment is comprised of individuals who are deemed
to be relatively low credit risks due to, among other things, the dependable
manner in which they have handled previous credit, an extensive and favorable
prior credit history and/or their extensive financial resources. Because of the
lower credit risk associated with prime motor vehicle retail installment sale
contracts, the interest rates charged on such contracts are generally lower than
those rates charged on non-prime or sub-prime motor vehicle retail installment
sale contracts.
NON-PRIME. The non-prime market segment is comprised of individuals who
are deemed to be moderate credit risks due to, among other things, weaknesses in
prior credit history, limited prior credit history and/or limited financial
resources. Because of the greater credit risk associated with non-prime motor
vehicle retail installment sale contracts, the interest rates charged on such
contracts are generally higher than those rates charged on prime motor vehicle
retail installment sale contracts.
SUB-PRIME. The sub-prime market segment is comprised of individuals who
are deemed to be relatively high credit risks due to, among other things, the
poor manner in which they have handled previous credit as reflected in their
prior credit history or limited credit history. Because of the greater credit
risk associated with sub-prime motor vehicle retail installment sale contracts,
the interest rates charged on such contracts are generally much higher than
those rates charged on prime or non-prime motor vehicle retail installment sale
contracts. The range of APRs of the Receivables will be set forth in the related
Prospectus Supplement. There can be no assurance, however, that the interest
rates on the Receivables in a particular pool will be sufficient to cover losses
on other Receivables in such pool.
Franklin Capital serves as an alternative source of financing to automotive
dealers by offering them a portfolio of different motor vehicle financing
programs, each developed to target a different credit tier of borrower, thereby
providing automotive dealers a one-stop lending alternative for their prime,
non-prime and sub-prime borrowers. Franklin Capital currently purchases the
majority of its motor vehicle retail installment sale contracts through a
network of approximately 240 new and/or used car dealers ("Dealers") located in
the following eight states: Arizona, California, Kansas, Nevada, New Mexico,
Oregon, Utah, and Washington. Most of Franklin Capital's existing Dealers are
located in California and sell both new and used motor vehicles. The related
Prospectus Supplement will specify the geographic distribution of the specific
Receivables included in the related Trust.
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In the future, Franklin Capital may directly offer to consumers loans for
the purchase of motor vehicles. The related Prospectus Supplement will disclose
whether any Receivables to be sold to a Trust include loans originated directly
by Franklin Capital. Unless the related Prospectus Supplement provides
otherwise, the underwriting guidelines to be applied by Franklin Capital when
originating automobile loans will be the same as those it applies when reviewing
credit applications received from Dealers.
Franklin Capital has developed certain procedures and controls to
investigate and analyze each credit applicant in an effort to eliminate those
applicants whose credit characteristics indicate too great a probability of
loss. This procedure includes an investigation, verification, and evaluation
process of credit bureau reports as well as the general credit information
provided by both Dealer and applicant. In addition, Franklin Capital uses
collection procedures and systems that are designed to ensure that the borrowers
clearly understand their credit obligations. For example, Franklin Capital uses
a monthly billing system in order to continually remind borrowers of their
monthly payment obligations and has established a "welcoming" process that
educates each borrower, both verbally and in writing, of its obligations.
DEALER RELATIONSHIPS
Franklin Capital solicits business from Dealers through its marketing
representatives. The Franklin Capital marketing representatives mainly target
new and used dealerships. Used car only dealerships are contracted on an
exception basis. Before Franklin Capital will do business with a Dealer, a
marketing representative is required to physically visit the potential dealer in
order to evaluate its operations. Additionally, for Dealers in respect of which
Franklin Capital has recourse for the entire dealer reserve (as described
below), Franklin Capital will obtain a Dun and Bradstreet report annually to
evaluate the Dealer's ability to pay back the reserve with respect to loans
which prepay during a specified period of time. Once selected, if a Dealer is
interested in Franklin Capital's financing program, the Dealer and Franklin
Capital enter into a non-exclusive written dealer agreement (a "Dealer
Agreement"). Purchases of loans are generally without recourse to the Dealer,
except that Franklin Capital has recourse for breaches of representations and
warranties including, among others, that (i) the financed motor vehicle is
properly registered showing Franklin Capital as lienholder; (ii) unless
otherwise specified in the related motor vehicle retail installment sale
contract, the full down payment specified in the contract was received by the
Dealer in cash; (iii) certain representations and warranties by the Dealer
regarding the contract, the financed motor vehicle, the contract process and
manner of sale are true and correct; and (iv) the Dealer has complied with
applicable laws and may have recourse to the extent of some or all of the
"dealer reserve," constituting the Dealer's profit for the lending transaction.
Franklin Capital's representatives train Dealer's personnel in Franklin
Capital's finance programs. This training is continuous since dealerships
generally experience a relatively high degree of personnel turnover. The
training provided by Franklin Capital is designed to assist Dealers in
identifying consumers who will qualify for financing by Franklin Capital and
structuring transactions that meet Franklin Capital's requirements.
In the event that an individual elects to finance the purchase of a motor
vehicle through a Dealer, the Dealer will submit a borrower's credit application
to Franklin Capital and other financing sources for a review of the borrower's
credit worthiness and proposed transaction terms. Such reviews generally take
into account, among other things, the individual's credit history and capacity
to pay, residence and job stability. After reviewing the credit application,
each finance source will notify the Dealer whether it is willing to purchase the
contract and, if so, under what conditions. If more than one finance source has
offered to purchase the contract, the Dealer typically will select the source
based on its relationship with the lender, an analysis of the "buy rate" or
interest rate, discounts, fees, and/or other terms and conditions stipulated by
the finance source.
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LOAN ORIGINATION
CURRENT LOAN PROGRAMS. Franklin Capital currently offers eight different
loan programs (each priced according to the credit risk involved) designed to
meet the needs of different prime, non-prime, and sub-prime borrowers. Franklin
Capital's current financing programs include: (i) two programs (the "Platinum"
and "Gold") targeted to prime-quality borrowers with excellent credit history;
(ii) three programs (the "Silver," "Copper" and "Bronze") designed to meet the
needs of certain non-prime borrowers with slightly less credit worthiness than
Platinum and Gold borrowers; (iii) one program (the "First-Time Buyer" program)
for non-prime borrowers with limited or no credit history; and (iv) two programs
("Subprime 1" and "Subprime 2"), for borrowers who have negative credit history.
PRE-1996 PROGRAMS. Prior to January 1996, Franklin Capital offered four
loan programs entitled "Premier," "Preferred," "Standard" and "First-time Buyer"
which were targeted at a mix of prime and non-prime borrowers ("Pre-1996
Programs"). The Pre-1996 Programs were discontinued in December 1995. Franklin
Capital anticipates that a portion of the Receivables of the first Trust will
include motor vehicle retail installment sale contracts originated under the
Pre-1996 Programs. Subsequent Trusts may have some Receivables originated under
the Pre-1996 Programs. The related Prospectus Supplement will disclose the
percentage of Receivables, if any, originated under the Pre-1996 Programs
included in the related Trust.
CREDIT EVALUATION PROCEDURES
Each motor vehicle retail installment sale contract is purchased after a
review in accordance with Franklin Capital's current underwriting procedures
described below. These procedures are intended to assess the ability of all
applicants for a proposed motor vehicle retail installment sale contract to make
payments under such contract and the adequacy of the motor vehicle as
collateral.
Following its commencement of business in 1993, Franklin Capital
substantially expanded Franklin Resources' automotive lending business. Franklin
Capital experienced increased losses beginning in 1994 and as a result revised
its original credit underwriting procedures. The revised procedures were first
implemented in January, 1996. Set forth below is a description of the current
underwriting procedures, followed by a description of those applied prior to
1996.
CURRENT UNDERWRITING PROCEDURES. The Dealers require an applicant to
complete an application which generally includes such information as the
applicant's income, deposit accounts, liabilities, credit and employment history
and other personal information. The application is reviewed for completeness and
compliance with Franklin Capital's guidelines. Franklin Capital generally
requires verification of certain applicant and/or Dealer provided information
prior to funding a loan. Franklin Capital evaluates applicants by considering,
based on information provided in the application and the credit bureau reports
referred to below, certain credit factors, including, among others, such
applicant's credit bureau score, length and quality of credit history,
loan-to-value ratio, down payment percentage, employment history, residency
history, debt-to-income ratio and payment-to-income ratio. Of the foregoing
factors, Franklin Capital places primary emphasis on an applicant's credit
bureau score.
Each of the various current loan programs offered by Franklin Capital sets
forth specific criteria for the different credit factors reviewed by Franklin
Capital (including the credit bureau score) which must be met in order for the
applicant to qualify for a particular loan program. Franklin Capital's
underwriters are given a degree of discretion to purchase motor vehicle retail
installment sale contracts with credit factors outside specified ranges of the
credit criteria. Exceptions outside of the specified ranges require authorized
approval and must be documented. In addition, authorized approval is required
for approval (even those which fit the specified underwriting criteria for those
programs) of all contracts: (i) with outstanding balances greater than $35,000;
and (ii) under the Subprime 1 and Subprime 2 programs.
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The Subprime 1 and Subprime 2 programs were designed for borrowers with
negative credit histories but who are in the process of reestablishing good
credit. The Borrower may have experienced severe credit problems in the past
including bankruptcy and repossession, but has reestablished good credit. The
Borrower must demonstrate stable employment and residency and should not have
experienced any recent credit problems.
PRE-1996 UNDERWRITING PROCEDURES. Prior to January 1996 the underwriting
criteria was judgmental. The approval process relied heavily on the
underwriter's experience and a set of general underwriting guidelines and no
credit bureau score was used. Underwriters could make exceptions to the
underwriting criteria without additional authorization. Cursory verification of
Dealer and applicant information was performed. Except for applicants who were
first-time buyers, the maximum permitted loan-to-value ratio was 125% of dealer
invoice on new cars or Kelly Blue Book value on used cars. Borrowers were
offered loans under the various programs based on the depth of credit history
and stability of the applicant.
The first-time buyer program was designed for an applicant with minimal if
any credit history, but who had demonstrated some stability in income. The
amount financed was limited to the dealer invoice amount or the wholesale Kelly
Blue Book value. Borrowers had to provide proof of 18 months of continuous
full-time employment and 18 months at the same residence. The borrower was not
likely to have any credit history, but may have recently opened low credit limit
retail credit lines or bankcards. The Dealer was required to provide
documentation to verify the applicant's status as a first-time buyer.
LOSS EXPOSURE MANAGEMENT
Franklin Capital believes it has designed its finance programs to limit the
loss exposure on each transaction. The degree of exposure in any transaction is
a function of (i) determining the borrower's intent to pay; (ii) determining the
borrower's ability to pay; (iii) the extent of credit granted compared to the
value of the automobile; and (iv) the possibility of physical damage to the
automobile. Franklin Capital seeks to control loss exposure by: (i) careful
analysis of the applicant's credit history; (ii) determining whether the
applicant has sufficient disposable income to meet existing obligations,
including the obligation resulting from the proposed transaction; (iii) limiting
the credit it is willing to extend based upon its assessment of the value of the
underlying collateral and the applicant's other credit characteristics; and (iv)
contractually requires physical damage insurance to be maintained at all times
to protect its financial interest.
Additionally, to insure performance within established guidelines, Franklin
Capital monitors each underwriter's performance by tracking the amount and type
of contracts purchased by each underwriter and the ongoing performance of each
underwriter's contracts. To monitor compliance with underwriting guidelines,
both Franklin Capital's credit committee and an internal auditor from Franklin
Resources separately sample files post-funding on a monthly basis.
Upon purchase of a motor vehicle retail installment sale contract, Franklin
Capital's procedures require the acquisition of a security interest in the motor
vehicle financed. Unless otherwise specified in the related Prospectus
Supplement, all contracts purchased by Franklin Capital from Dealers are fully
amortizing and provide for equal payments over the term of the contract
(typically 24 to 84 months) other than the final payment which may be minimally
different. The portions of such payments allocable to principal and interest
are, for payoff and deficiency purposes, determined in accordance with the law
of the state in which the contract was originated.
Each applicant for a motor vehicle retail installment sale contract is
required to obtain insurance with respect to the motor vehicle being financed.
Franklin Capital made the decision to stop tracking the maintenance of insurance
and ceased force placing insurance in August 1997. Franklin Capital does not
currently have lender's comprehensive single interest insurance coverage, which
generally covers losses due to physical damage, in the event that the insurance
coverage maintained by a motor-vehicle owner is terminated. If so specified in
the related Prospectus Supplement, Franklin
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Capital or any subsequent servicer may force place insurance. In such event,
certain amounts in respect of a Receivable as to which insurance has been forced
placed after the applicable Cutoff Date or Subsequent Cutoff Date, as
applicable, may not be property of the Trust and may be payable to Franklin
Capital to the extent specified in the related Prospectus Supplement. Uninsured
losses on the Financed Vehicles will be borne by the related Trust.
CONTRACT PROCESSING, PURCHASE, SERVICING AND ADMINISTRATION
Once a loan application has been approved, Franklin Capital completes a
series of processes and procedures which are designed to (i) substantiate the
accuracy of information critical to Franklin Capital's original credit decision;
(ii) verify that the contract submitted by the Dealer complies with both the
conditions under which the credit approval was granted and Franklin Capital's
transaction structure criteria; and (iii) confirm that the documentation
complies with Franklin Capital's loss management requirements. The extent of
applicant verification is dependent on the perceived credit risk of the
borrower. The prime loans receive minimum verification; the non-prime loans are
more thoroughly investigated and the sub-prime loans are subjected to extensive
verification. Only senior management may waive the verification requirement.
Upon a contract being released for purchase, Franklin Capital issues funds
to the Dealer, and initiates a welcoming process through which Franklin Capital
begins to educate the borrower about their financial obligations upon the
purchase of their contract. This process is designed to ensure that borrowers
clearly understand their credit obligations, including their responsibility to
maintain insurance coverage on the financed motor vehicle.
SERVICING
Franklin Capital's servicing and administration activities have been
designed to address non-prime and sub-prime credits as well as prime credits.
Through such services, Franklin Capital (i) collects payments; (ii) accounts for
and posts all payments received; (iii) responds to borrower inquiries; (iv)
takes action to maintain the security interest granted in the financed motor
vehicle; (v) investigates delinquencies and communicates with the borrower to
obtain timely payments; (vi) reports tax information to the borrower; (vii)
monitors the contract and its related collateral; and (viii) when necessary,
attempts to repossess and dispose of the financed motor vehicle.
Franklin Capital maintains a Customer Service Department, currently staffed
with a supervisor and seven customer service representatives. Additionally, an
automated voice response system is generally available 24 hours a day, seven
days a week. This system allows borrowers to get payment, current balance,
payment posting and payment instruction information. Customer service will
notify the collections department should information come to their attention
that suggests a borrower is going to have a payment problem. Franklin Capital
currently utilizes a monthly billing statement system (rather than payment
coupon books) to remind borrowers of their monthly payment obligations,
including the due date for next payment, any past due amount, and late charges
or other fees. This system also serves as an early warning mechanism in the
event a borrower has failed to notify Franklin Capital of an address change.
Under special circumstances, Franklin Capital may, provided the borrower
has made 12 regular payments and is current, defer a payment by extending the
original contract maturity date by one month. Deferrals require the approval of
the Collections Department Manager. Borrowers are assessed a fee on all
deferrals.
For the past two years Franklin Capital has offered borrowers with simple
interest contract who have been current for the entire year and have not had an
extension in the prior twelve months a Holiday extension, allowing them to skip
their December or January payment. Interest continues to accrue on the contract
and the borrower will have to keep making payments until the principal balance
of the loan is paid in full. Franklin Capital anticipates that it will continue
to offer this promotion each December but is under no obligation to do so.
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For borrowers who need to coordinate their payments with the timing of
their incomes, Franklin Capital will allow them to modify the due date of their
loan.
DELINQUENCY CONTROL AND COLLECTION STRATEGY
Franklin Capital's collection procedure is organized on a "cradle-to-grave"
basis, with an individual collector working the same accounts from origination
through to any decision to repossess. As the accounts are assigned randomly,
each collector will be responsible for accounts from all of the different loan
programs that Franklin Capital offers, with the exception that all sub-prime
accounts are the responsibility of one experienced collector. Franklin Capital
believes that this cradle-to-grave approach avoids miscommunication with
delinquent borrowers, hinders subterfuge by experienced bill dodgers, and
generally gives collectors a greater feeling of ownership of and responsibility
for the collection process.
Franklin Capital's collection efforts are centralized in its Salt Lake City
headquarters. The focus of the collection effort is to make telephone contact
with the delinquent borrower and secure a promise to pay. While letters are
employed in the process, they are intended to supplement the calling effort, not
to replace it. The riskier the account the sooner contact is initiated.
Regardless of program type, all accounts that become delinquent on their first
payment date are called immediately upon the first day of delinquency in order
to avert a potential first payment default. Franklin Capital's collection
procedure usually begins with the borrower (and, if applicable, any co-borrower)
being contacted to inform him or her of the delinquency and the amount past due,
and an attempt is made to obtain a promise to pay, generally within 3 to 5
business days of the call. If the borrower fails to make payment on the date
agreed, the borrower is again contacted to discuss the delinquency and to obtain
another promise to pay. Collectors will continue to contact delinquent borrowers
until such delinquency has been satisfactorily resolved. Upon an account
becoming 30 days past due, the borrower (and, if applicable, any co-borrower) is
sent a collection letter that either threatens to accelerate the debt and
repossess the motor vehicle, or gives the borrower the option to pay amounts
past due, pay off the entire loan or surrender the motor vehicle. If the
borrower does not respond to the collection letter, within 30 to 45 days after
delinquency, Franklin Capital may have a local attorney send the borrower a
letter threatening legal action. Finally, for all non-sub-prime contracts
delinquent 45 to 60 days, Franklin Capital will generally make a decision to
repossess the motor vehicle (sub-prime contracts are handled more aggressively
with a decision to repossess generally made prior to the 45th day of
delinquency).
Franklin Capital rarely grants rewrites, and the situations have been
limited to ones in which a rewrite has been deemed to be the only method by
which Franklin Capital would be able to realize some recovery on the loan.
REPOSSESSION
Once a decision has been made to repossess a motor vehicle, Franklin
Capital will engage an outside repossession agency to recover the motor vehicle.
Generally, state law grants delinquent borrowers the right to redeem the motor
vehicle (i.e., pay off the loan in full plus any related repossession expenses)
within 10 days of repossession by the lender. In California, a borrower has a
right both to redemption and to reinstatement (i.e., if the borrower makes the
necessary payments to bring the loan current, Franklin Capital must return the
motor vehicle to the borrower, who must continue making payments under the
loan). The combined redemption and reinstatement period in California is 20 days
and the borrower may request a 10 day extension to this period. Accordingly,
Franklin Capital may have to wait 10 days (and up to 30 days in California)
before it can sell the motor vehicle. Furthermore, in California Franklin
Capital may not accelerate a contract if the borrower breaches its contractual
obligations (including the maintenance of insurance) if the borrower continues
to make monthly payments of principal and interest on the contract. Repossessed
motor vehicles are generally resold by Franklin Capital through auctions.
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If the net proceeds from the sale of the motor vehicle are not sufficient
to pay-off the outstanding loan balance, the loan is transferred to the Recovery
Department which is responsible for collecting any remaining deficiency balance
directly from the borrower to the extent permitted by law.
If the borrower fails to respond to request for payment, the account may be
referred to a local attorney who will file suit and obtain a judgment. Franklin
Capital will execute the judgment until the account is paid in full or the
borrower files for bankruptcy.
If at any time during the collection process a borrower files bankruptcy,
the account is immediately transferred to the Bankruptcy Department. The
Bankruptcy Department is responsible for asserting Franklin Capital's rights in
bankruptcy court.
FRANKLIN RESOURCES, INC.
Franklin Resources, Inc. ("Franklin Resources") and its predecessors have
been engaged in the financial services business since 1947. Franklin Resources
was organized in Delaware in November 1969. Franklin Resources's principal
executive and administrative offices are at 777 Mariners Island Boulevard, San
Mateo, California 94404. As of March 31, 1998, Franklin Resources employed
approximately 7500 employees on a worldwide basis, consisting of officers,
investment management, distribution, administrative, sales and clerical support
staff. Franklin Resources also employs additional temporary help as necessary to
meet unusual requirements.
Franklin Resources is the parent company of Franklin Capital and
principally a holding company primarily engaged, through various subsidiaries,
in providing investment management, marketing, distribution, transfer agency and
other administrative services to the open-end investment companies of the
Franklin Templeton Group and to U.S. and international managed and institutional
accounts. Franklin Resources, through its subsidiaries, also provides investment
management and related services to a number of closed-end investment companies
whose shares are traded on various major U.S. and some international stock
exchanges. In addition, Franklin Resources, through its subsidiaries, provides
investment management, marketing and distribution services to certain sponsored
investment companies organized in the Grand Duchy of Luxembourg, which are
distributed in marketplaces outside of North America and to certain investment
funds and portfolios in Canada as well as to certain other international
portfolios in the United Kingdom and elsewhere.
As of March 31, 1998, total assets under management in the Franklin
Templeton Group were $242 billion. This makes the Franklin Templeton Group one
of the largest investment management complexes in the United States. As of March
31, 1998, Franklin Resources had total assets of $3 billion, total liabilities
of $1 billion and total shareholder equity of $2 billion.
Franklin Resources, through certain subsidiaries, also provides advisory
services, variable annuity products, and sponsors and manages public and private
real estate programs. Other subsidiaries offer consumer banking services,
insured deposits, dealer auto loans, and credit cards. Franklin Resources also
provides custodial, trustee and fiduciary services to individual retirement
account and profit sharing or money purchase plans and to qualified retirement
plans and private trusts. From time to time, Franklin Resources also
participates in various investment management joint ventures. On a consolidated
worldwide basis, Franklin Resources provides U.S. and international individual
and institutional investors with a broad range of investment products and
services designed to meet varying investment objectives, which affords its
clients the opportunity to allocate their investment resources among various
alternative investment products as changing worldwide economic and market
conditions warrant.
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THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of Certificates of a given
series may be issued pursuant to Trust Documents to be entered into among the
related Seller, the Servicer, the Owner Trustee, the Indenture Trustee, if any,
and any other party identified in the related Prospectus Supplement, forms of
which have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The following summary does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all of the
material provisions of such forms of Trust Documents.
Unless otherwise specified in the related Prospectus Supplement, each class
of Certificates may initially be represented by a single Certificate registered
in the name of Cede & Co., the nominee of DTC (together with any successor
depository selected by the related Seller, the "Depository"). See "Certain
Information Regarding the Securities -- Book-Entry Registration." Unless higher
denominations are specified in the related Prospectus Supplement, the
Certificates evidencing interests in a Trust will be available for purchase in
denominations of $1,000 initial principal amount and integral multiples thereof,
except that one Certificate evidencing an interest in such Trust may be issued
in a denomination that is less than $1,000 initial principal amount.
Certificates may be transferred or exchanged without the payment of any service
charge other than any tax or governmental charge payable in connection with such
transfer or exchange. The Owner Trustee will initially be designated as the
registrar for the Certificates.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
The timing and priority of distributions, seniority, allocations of loss,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any series will be
described in the related Prospectus Supplement. Distributions of interest on the
Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and, except to the extent specified in
the related Prospectus Supplement, will be made prior to distributions with
respect to principal. A series may include one or more classes of Strip
Certificates entitled to (i) distributions in respect of principal with
disproportionate, nominal or no interest distribution, or (ii) interest
distributions, with disproportionate, nominal or no distributions in respect of
principal. Each class of Certificates may have a different Pass-Through Rate,
which may be a fixed, variable or adjustable Pass-Through Rate (and which may be
zero for certain classes of Strip Certificates), or any combination of the
foregoing. The related Prospectus Supplement will specify the Pass-Through Rate
for each class of Certificate, or the initial Pass-Through Rate and the method
for determining the subsequent Pass-Through Rate. Unless otherwise specified in
the related Prospectus Supplement, interest on the Certificates will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Distributions in respect of the Certificates may be subordinated to all or
certain payments in respect of the Notes, if any, to the extent described in the
related Prospectus Supplement. Distributions in respect of principal of any
class of Certificates will be made on a pro rata basis among all of the
Certificateholders of such class.
In the case of a series of Certificates which includes two or more classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof, of each such class shall be
as set forth in the related Prospectus Supplement.
In addition, if the related Prospectus Supplement so provides, one or more
classes of Certificates issued by a Trust may receive interest distributions
only during the Revolving Period or an Amortization Period to the extent
described in such Prospectus Supplement.
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THE NOTES
GENERAL
A series of Securities may include one or more classes of Notes issued
pursuant to the terms of an Indenture, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
Notes will be issued as a part of any series if and as specified in the related
Prospectus Supplement. The following summary does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, all of the
provisions of the Notes and the Indenture, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part, and
the following summary may be supplemented by the related Prospectus Supplement.
Each class of Notes will initially be represented by a single Note
registered in the name of Cede & Co., the nominee of DTC. See "Certain
Information Regarding the Securities -- Book-Entry Registration." Unless higher
denominations are specified in the related Prospectus Supplement, Notes will be
available for purchase in denominations of $1,000 and integral multiples
thereof. Notes may be transferred or exchanged without the payment of any
service charge other than any tax or governmental charge payable in connection
with such transfer or exchange. The Indenture Trustee will initially be
designated as the registrar for the Notes of any series.
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of loss,
Interest Rate and amount of or method of determining payments of principal and
interest on the Notes will be described in the related Prospectus Supplement.
The right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any class or
classes of Notes of such series, or any class of Certificates, as described in
the related Prospectus Supplement. Except to the extent provided in the related
Prospectus Supplement, payments of interest on the Notes will be made prior to
payments of principal thereon. A series may include one or more classes of Strip
Notes entitled to (i) principal payments with disproportionate, nominal or no
interest payment, or (ii) interest payments with disproportionate, nominal or no
principal payments. Each class of Notes may have a different Interest Rate,
which may be a fixed, variable or adjustable Interest Rate (and which may be
zero for certain classes of Strip Notes), or any combination of the foregoing.
The related Prospectus Supplement will specify the Interest Rate for each class
of Notes, or the initial Interest Rate and the method for determining the
Interest Rate. One or more classes of Notes of a series may be redeemable under
the circumstances specified in the related Prospectus Supplement.
In the case of a series of Securities which includes two or more classes of
Notes, the sequential order and priority of payments in respect of principal and
interest on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Payment Date"), and any schedule or formula or other
provisions applicable to the determination thereof, of each such class will be
set forth in the related Prospectus Supplement.
In addition, if the related Prospectus Supplement so provides, one or more
classes of Notes issued by a Trust may receive interest payments only during the
Revolving Period or an Amortization Period to the extent described in such
Prospectus Supplement.
THE INDENTURE
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The Sellers will provide a copy
of the applicable Indenture (without exhibits) upon request to any holder of
Notes issued thereunder.
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MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT. With respect to each
Trust, without the consent of the related Noteholders, and with notice to the
applicable Rating Agencies, the Indenture Trustee and the Owner Trustee (on
behalf of such Trust), and with (if so provided in the related Prospectus
Supplement) the consent of the third party credit enhancement provider, if any
(so long as no Insurer Default (as defined in the related Prospectus Supplement)
has occurred and is continuing) unless the related Prospectus Supplement
provides otherwise, may enter into one or more supplemental indentures for any
of the following purposes: (i) to correct or amplify the description of the
collateral or add additional collateral; (ii) to evidence and provide for the
assumption of the Note and the Indenture obligations by a permitted successor to
the Trust; (iii) to add additional covenants for the benefit of the related
Noteholders, or to surrender any rights or power conferred upon the Trust: (iv)
to convey, transfer, assign, mortgage or pledge any property to or with the
Indenture Trustee; (v) to cure any ambiguity or correct or supplement any
provision in the Indenture or in any supplemental indenture; (vi) to evidence
and provide for the acceptance of the appointment of a successor Indenture
Trustee or to add to or change any of the provisions of the Indenture as shall
be necessary and permitted to facilitate the administration by more than one
trustee; (vii) to modify, eliminate or add to the provisions of the Indenture in
order to comply with the Trust Indenture Act of 1939, as amended; and (viii) to
add any provisions to, change in any manner, or eliminate any of the provisions
of, the Indenture or modify in any manner the rights of Noteholders under such
Indenture; provided that any action specified in this clause (viii) shall not
adversely affect in any material respect the interests of any related
Noteholder. An amendment described in such clause (viii) shall be deemed not to
adversely affect the interests of any Noteholder if each Rating Agency rating
such Notes confirms in writing that such amendment will not result in a
reduction or withdrawal of the then current ratings of such Notes or the
applicable Rating Agencies rating such Notes, within 10 days' after receipt of
notice of such amendment, shall not have notified the related Seller, the
Servicer or the Trust in writing that such amendment will result in a reduction
or withdrawal of the current ratings of the Notes.
MODIFICATIONS OF INDENTURE WITH NOTEHOLDER CONSENT. With respect to each
Trust, with the consent of the holders representing a majority of the aggregate
principal balance of the outstanding related Notes (a "Note Majority"), with the
consent of the third party credit enhancement provider, if any (so long as no
Insurer Default (as defined in the related Prospectus Supplement) has occurred
and is continuing) unless the related Prospectus Supplement provides otherwise,
and with notice to the applicable Rating Agencies, the Indenture Trustee may
execute a supplemental indenture to add provisions to change in any manner or
eliminate any provisions of, the related Indenture, or modify in any manner the
rights of the related Noteholders.
Unless the related Prospectus Supplement provides otherwise, without the
consent of the third party credit enhancement provider, if any (so long as no
Insurer Default (as defined in the related Prospectus Supplement) has occurred
and is continuing), and the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate thereon or the redemption price with respect
thereto, change the provisions of the Indenture relating to the application of
collections on or the proceeds of the sale of, the collateral for the Notes to
payment of principal of or interest on the Notes or change any place of payment
where or the coin or currency in which any Note or any interest thereon is
payable, (ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment, (iii) reduce the percentage of
the aggregate principal amount of the outstanding Notes the consent of the
holders of which is required for any such supplemental indenture or the consent
of the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture, (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Trust, the
related Seller, an affiliate of either of them or any obligor on the Notes, (v)
reduce the percentage of the aggregate outstanding amount of the Notes the
consent of the holders of which is required to direct the Indenture Trustee on
behalf of the Trust to sell or liquidate the Receivables if the proceeds of
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such sale would be insufficient to pay the principal amount and accrued but
unpaid interest on the outstanding Notes, (vi) decrease the percentage of the
aggregate principal amount of the Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements, (vii) modify any of the provisions of the Indenture in such manner
as to affect the calculation of the amount of any payment of interest on any
Distribution Date or principal due on any Note on any Distribution Date
(including the calculation of any of the individual components of such
calculation) or to affect the rights of the Noteholders to the benefit of any
provision for the mandatory redemption of the Notes contained in the Indenture
or (viii) permit the creation of any lien ranking prior to or on a parity with
the lien of the Indenture with respect to any of the collateral for the Notes
or, except as otherwise permitted or contemplated in the Indenture, terminate
the lien of the Indenture on any such collateral or deprive the holder of any
Note of the security provided by the lien of the Indenture.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to each
Trust, unless otherwise specified in the related Prospectus Supplement, "Events
of Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note after the same becomes due and
payable; (ii) a default in the payment of the principal or of any installment of
the principal of any Note when the same becomes due and payable; (iii) a default
in the observance or performance of any covenant or agreement of the Trust made
in the Indenture and the continuation of any such default for a period of 30
days after notice thereof is given to the Trust by the Indenture Trustee or to
the Trust and the Indenture Trustee by the holders of at least 25% in aggregate
principal amount of the related Notes then outstanding (or for such longer
period, not in excess of 90 days, as may be reasonably necessary to remedy such
default; provided that such default is capable of remedy within 90 days or less
and the Owner Trustee delivers an officer's certificate to the Indenture Trustee
to the effect that the Trust has commenced, or will promptly commence and
diligently pursue, all reasonable efforts to remedy such default); (iv) any
representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not having
been cured within 30 days after notice thereof is given to the Trust by the
Indenture Trustee or to the Trust and the Indenture Trustee by the holders of a
least 25% in aggregate principal amount of the Notes then outstanding (or for
such longer period, not in excess of 90 days as may be reasonably necessary to
remedy such default; provided that such default is capable of remedy within 90
days or less and the Owner Trustee delivers an officer's certificate to the
Indenture Trustee to the effect that the Trust has commenced, or will promptly
commence and diligently pursue, all reasonable efforts to remedy such default)
or (v) certain events of bankruptcy, insolvency, receivership or liquidation of
the Trust. However, the amount of principal due and payable on any class of
Notes on any Payment Date (prior to the final scheduled Payment Date, if any,
for such class) will generally be determined by the amount available to be
deposited in the Note Distribution Account for such Payment Date. Therefore, the
failure to pay principal on a class of Notes generally will not result in the
occurrence of an Event of Default unless such class of Notes has a final
scheduled Payment Date, and then not until such final scheduled Payment Date for
such class of Notes.
Unless otherwise specified in the related Prospectus Supplement, if an
Event of Default should occur and be continuing with respect to the Notes of any
series, the related Indenture Trustee or a Note Majority may declare the
principal of the Notes to be immediately due and payable. Such declaration may
be rescinded by a Note Majority if (i) the Trust has paid to the Indenture
Trustee a sum sufficient to pay all amounts then due with respect to the Notes
(without giving effect to such acceleration) and certain amounts payable to the
Indenture Trustee and (ii) all Events of Default (other than nonpayment of the
principal of the Notes due solely as a result of such acceleration) have been
cured or waived.
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Unless otherwise specified in the related Prospectus Supplement, if the
Notes of any series have been declared due and payable following an Event of
Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust Property, exercise
remedies as a secured party, sell the related Receivables or elect to have the
Trust maintain possession of such Receivables and continue to apply collections
on such Receivables as if there had been no declaration of acceleration. The
Indenture Trustee, however, will be prohibited from selling the related
Receivables following an Event of Default, other than a default in the payment
of any principal or a default for five days or more in the payment of any
interest on any Note, unless (i) the holders of all the outstanding related
Notes consent to such sale; (ii) the proceeds of such sale are sufficient to pay
in full the principal of and the accrued interest on such outstanding Notes at
the date of such sale; or (iii) the Indenture Trustee determines that the
proceeds of the Receivables would not be sufficient on an ongoing basis to make
all payments on the Notes as such payments would have become due if such
obligations had not been declared due and payable, and the Indenture Trustee
obtains the consent of the holders representing 66 2/3% of the aggregate
principal balance of the outstanding related Notes. In the event the Notes are
accelerated and the Receivables are sold, no distributions will be made on the
Certificates until all of the interest on and principal of the Notes has been
paid in full. In such event, all the funds, if any, on deposit in any reserve
account or received from another source of credit support will be available to
first pay interest on and principal of the Notes.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default occurs and is continuing with respect
to a series of Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of such Notes, if the Indenture Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, a Note Majority in a series will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Indenture Trustee with respect to the Notes or exercising any
trust or power conferred on the Indenture Trustee and a Note Majority may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all of the holders of such outstanding Notes.
No holder of a Note of any series will have the right to institute any
proceeding with respect to the related Indenture unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such series have made written request of the Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee, (iii)
such holder or holders have offered the Indenture Trustee reasonable indemnity,
(iv) the Indenture Trustee has for 60 days failed to institute such proceeding,
(v) no direction inconsistent with such written request has been given to the
Indenture Trustee during such 60-day period by the holders of a majority in
principal amount of such outstanding Notes, and (vi) in the case of a series of
Notes with respect to which a guaranty insurance policy has been issued, unless
otherwise specified in the related Prospectus Supplement, an Insurer Default (as
defined in the related Prospectus Supplement) has occurred and is continuing.
If an Event of Default occurs and is continuing and if it is known to the
Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice of
the Event of Default within 90 days after it occurs. Except in the case of a
failure to pay principal of or interest on any Note, the Indenture Trustee may
withhold the notice if and so long as it determines in good faith that
withholding the notice is in the interests of the Noteholders.
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In addition, each Indenture Trustee and the related Noteholders, by
accepting the related Notes, will covenant that they will not at any time
institute against the related Trust and the Seller any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
No recourse may be taken, directly or indirectly, with respect to the
obligations of a Trust, the related Seller, the Servicer, the Owner Trustee or
the Indenture Trustee on the related Notes or under the Indenture or any
certificate or other writing delivered in connection therewith, against (i) the
related Seller, the Servicer, the Indenture Trustee or the Owner Trustee in its
individual capacity or (ii) any partner, owner, beneficiary, agent, officer,
director, employee or agent of the related Seller, the Servicer, such Trust, the
Owner Trustee or the Indenture Trustee or of any successor or assignee of the
related Seller, the Servicer, the Indenture Trustee or the Owner Trustee in its
individual capacity, except as any such person may have expressly agreed (it
being understood that the Indenture Trustee and the Owner Trustee will have no
such obligations in their individual capacity) and except that any such partner,
owner or beneficiary shall be fully liable, to the extent provided by applicable
law, for any unpaid consideration for stock, unpaid capital contribution or
failure to pay any installment or call owing to such entity.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States, any state or the District of Columbia, (ii) such entity
expressly assumes the Trust's obligation to make due and punctual payments upon
the Notes and the performance or observance of every agreement and covenant of
the Trust under the Indenture, (iii) no Default or Event of Default shall have
occurred and be continuing immediately after such merger or consolidation, (iv)
none of the applicable Rating Agencies, after 10 days' prior notice, shall have
notified the related Seller, the Servicer or the Trust in writing that such
transaction will result in a reduction or withdrawal of the then current ratings
of the Notes, (v) unless the related Prospectus Supplement provides otherwise,
the third party credit enhancement provider, if any, has consented to such
merger or consolidation except that no such consent shall be required if an
Insurer Default (as defined in the related Prospectus Supplement) has occurred
and is continuing, (vi) the Trust has received an opinion of counsel to the
effect that such transaction would have no material adverse federal tax
consequence to the Trust or to any Certificateholder or Noteholder, (vii) any
action necessary to maintain the lien and security interest created by the
Indenture has been taken and (viii) the Trust has delivered to the Indenture
Trustee an officers' certificate of the Trust and an opinion of counsel each
stating that such transaction and the supplemental indenture executed in
connection with such transaction comply with the Indenture and that all
conditions precedent relating to the transaction have been complied with
(including any filing required by the Exchange Act).
Also, each Trust may not convey or transfer all or substantially all its
properties or assets to any other entity, unless (i) the entity that acquires
the assets of the Trust (A) agrees that all right, title and interest conveyed
or transferred shall be subject and subordinate to the rights of Noteholders,
(B) unless otherwise agreed, expressly agrees to indemnify, defend and hold
harmless the Trust against and from any loss, liability or expense arising under
or related to the Indenture and the Notes, (C) expressly agrees to make all
filings with the Securities and Exchange Commission (and any other appropriate
entity) required by the Exchange Act in connection with the Notes and (D) is
organized under the laws of the United States or any state; and (ii) the
criteria specified in clauses (ii) through (vii) of the preceding paragraph have
been complied with.
Each Trust will not, among other things, (i) except as expressly permitted
by the Indenture, the Purchase Agreement, the Trust Documents or certain related
documents for such Trust (collectively, the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of the Trust, (ii)
claim any credit on or make any deduction from the principal and interest
payable in respect of the related Notes (other than amounts withheld under the
Internal Revenue Code of 1986, as amended, or applicable state law) or assert
any claim against any present or former holder of such Notes because of the
payment of taxes levied or assessed upon the collateral for the Notes,
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(iii) except as contemplated by the Related Documents, dissolve or liquidate in
whole or in part, (iv) permit the validity or effectiveness of the related
Indenture to be impaired or permit any person to be released from any covenants
or obligations with respect to the related Notes under such Indenture except as
may be expressly permitted thereby, (v) permit any lien, charge, excise, claim,
security interest, mortgage or other encumbrance to be created on or extend to
or otherwise arise upon or burden the collateral for the Notes or any part
thereof, or any interest therein or proceeds thereof except as expressly
permitted by the Related Documents or (vi) permit the lien of the Indenture not
to constitute a valid first priority security interest in the Receivables.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust." No Trust will
incur, assume or guarantee any indebtedness other than indebtedness incurred
pursuant to the related Notes and the related Indenture or otherwise in
accordance with the Related Documents.
ANNUAL COMPLIANCE STATEMENT. Each Trust will be required to file annually
with the related Indenture Trustee a written statement as to the fulfillment of
its obligations under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. The Indenture Trustee will be required
to mail each year to all related Noteholders a brief report relating to, among
other things, its eligibility and qualification to continue as Indenture Trustee
under the related Indenture, any amounts advanced by it under the Indenture, the
amount, interest rate and maturity date of certain indebtedness owing by the
Trust to the Indenture Trustee in its individual capacity, the property and
funds physically held by the Indenture Trustee as such and any action taken by
it that materially affects the Notes and that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. The Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds sufficient
for the payment in full of all of such Notes.
TRUST INDENTURE ACT. The Indenture will comply with applicable provisions
of the Trust Indenture Act of 1939, as amended.
THE INDENTURE TRUSTEE
The Indenture Trustee for a series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for one series of Notes may
serve as the Owner Trustee with respect to another series of Securities. The
Indenture Trustee may resign at any time, in which event the related Seller will
be obligated to appoint a successor trustee eligible under the Indenture which,
unless the related Prospectus Supplement provides otherwise, shall be acceptable
to the third party credit enhancement provider, if any, so long as no Insurer
Default (as defined in the related Prospectus Supplement) has occurred and is
continuing. The Seller may also remove the Indenture Trustee, with the consent
of the third party credit enhancement provider, if any, if the Indenture Trustee
ceases to be eligible to continue as such under the Indenture or if the
Indenture Trustee becomes insolvent. In such circumstances, the related Seller
will be obligated to appoint a successor trustee eligible under the Indenture
which, unless the related Prospectus Supplement provides otherwise, shall be
acceptable to the third party credit enhancement provider, if any, so long as no
Insurer Default (as defined in the related Prospectus Supplement) has occurred
and is continuing. Any resignation or removal of the Indenture Trustee and
appointment of a successor trustee will be subject to any conditions or
approvals, including the approval of the issuer of any credit enhancement, if
any, specified in the related Prospectus Supplement and will not become
effective until acceptance of the appointment by a successor trustee.
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CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, persons
acquiring beneficial ownership interests in the Securities of each Series may
hold their interests through DTC in the United States or, in the case of any
series of Notes, Cedel or Euroclear in Europe. Each class of Certificates will
be registered in the name of Cede as nominee for DTC. Cedel and Euroclear will
hold omnibus positions with respect to the Notes and, if the related Prospectus
Supplement so provides, the Certificates on behalf of Cedel Participants and
Euroclear Participants, respectively, through customers' securities accounts in
Cedel's and Euroclear's name on the books of their respective depositories
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
For additional information regarding clearance and settlement procedures see
Annex I hereto.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("indirect participants"). The rules applicable to DTC
and its participants are on file with the Commission.
Certificate owners and Note owners who are not Participants but desire to
purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate owners and
Note owners will receive all distributions of principal of, and interest on, the
Securities, from the Owner Trustee or the Indenture Trustee, as applicable,
through DTC and Participants. Certificate owners and Note owners will not
receive or be entitled to receive certificates representing their respective
interests in the Securities, except under the limited circumstances described
below and such other circumstances, if any, as may be specified in the related
Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated that
the only Certificateholder of the Certificates and the only Noteholder of the
Notes, if any, will be Cede & Co., as nominee of DTC. Certificate owners and
Note owners will not be recognized by the Owner Trustee as Certificateholders or
by the Indenture Trustee as Noteholders as those terms are used in the related
Trust Documents or Indenture. Certificate owners and Note owners will be
permitted to exercise the rights of Certificateholders or Noteholders, as the
case may be, only indirectly through Participants and DTC.
With respect to any series of Securities issued in book-entry form, while
such Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants with whom Certificate owners or Note owners have
accounts with respect to Securities are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate owners and Note owners. Accordingly, although Certificate
owners and Note owners will not possess Securities, the Rules provide a
mechanism by which
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Certificate owners and Note owners will receive distributions and will be able
to transfer their interests.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date, and any such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of Notes and, if the related Prospectus
Supplement so provides, Certificates by or through a Cedel Participant or
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
Cross-market transfers between persons directly holding Notes and, if the
related Prospectus Supplement so provides, Certificates or indirectly through
DTC, on the one hand, and directly or indirectly through Cedel Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC Rules on behalf of the relevant European international clearing system by
its Depository; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadline (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depository to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions to the Depositories.
With respect to any series of Securities, Certificates and Notes (if any)
will be issued in registered form to Certificate owners and Note owners, or
their nominees, rather than to DTC (such Certificates and Notes being referred
to herein as "Definitive Certificates" and "Definitive Notes," respectively),
only if (i) the related Seller advises the Owner Trustee or the Indenture
Trustee, as the case may be, in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Certificates or the Notes and the related Seller is unable to locate a
qualified successor, (ii) the related Seller at its sole option has advised the
Owner Trustee or the Indenture Trustee, as the case may be, in writing that it
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default, the holders representing a majority of the
Certificate Balance (a "Certificate Majority") or a Note Majority advises the
Owner Trustee or the Indenture Trustee, as the case may be, through DTC that
continuation of a book-entry system is no longer in their best interests. Upon
issuance of Definitive Certificates or Definitive Notes to Certificate owners or
Note owners, such Certificates or Notes will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Owner Trustee or the Indenture Trustee, as the case may be, with
respect to transfers, notices and distributions.
DTC has advised the Sellers that, unless and until Definitive Certificates
or Definitive Notes are issued, DTC will take any action permitted to be taken
by a Certificateholder or a Noteholder under the related Trust Documents or
Indenture only at the direction of one or more Participants to whose DTC
accounts the Certificates or Notes are credited. DTC has advised the Sellers
that DTC will take such action with respect to any fractional interest of the
Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the related
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Participants, with respect to some Certificates or Notes which conflict with
actions taken with respect to other Certificates or Notes.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Euroclear Operator"), under contract with
Euroclear Clearance Systems, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through, or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear, and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to Notes and, if the related Prospectus
Supplement so provides, Certificates held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depository. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. Cedel or the
Euroclear Operator,
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as the case may be, will take any other action permitted to be taken by a
beneficial holder of Notes and, if the related Prospectus Supplement so
provides, Certificates under the Trust Documents on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depository's ability to effect such actions on
its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Notes and, if the related
Prospectus Supplement so provides, the Certificates among Direct Participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
NEITHER THE TRUST, THE SELLERS, THE SERVICER, FRANKLIN CAPITAL, FRANKLIN
RESOURCES, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE, NOR ANY OF THE UNDERWRITERS
WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS, CEDEL
PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC,
CEDEL, EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL, EUROCLEAR OR
ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE
PRINCIPAL BALANCE OF, OR INTEREST ON, THE NOTES AND, IF THE RELATED PROSPECTUS
SUPPLEMENT SO PROVIDES, THE CERTIFICATES, (3) THE DELIVERY BY ANY PARTICIPANT,
CEDEL PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER
WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE AGREEMENT TO BE GIVEN TO
NOTEHOLDERS AND, IF THE RELATED PROSPECTUS SUPPLEMENT SO PROVIDES,
CERTIFICATEHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC OR ITS NOMINEE AS THE
NOTEHOLDER AND, IF THE RELATED PROSPECTUS SUPPLEMENT SO PROVIDES, THE
CERTIFICATEHOLDER.
Issuance of Certificates and Notes in book-entry form rather than as
physical certificates or notes may adversely affect the liquidity of
Certificates or Notes in the secondary market and the ability of the Certificate
owners or Note owners to pledge them. In addition, since distributions on the
Certificates and the Notes will be made by the Owner Trustee or the Indenture
Trustee to DTC unless and until Definitive Certificates and Definitive Notes are
issued and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect participants or Certificate owners or Note owners,
Certificate owners and Note owners may experience delays in the receipt of such
distributions.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and
provide to the Owner Trustee a statement to be delivered to the related
Certificateholders on such Distribution Date. On or prior to each Payment Date,
the Servicer will prepare and provide to the Indenture Trustee a statement to be
delivered to the related Noteholders on such Payment Date. Such statements will
be based on the information in the related Servicer's certificate setting forth
certain information required under the Trust Documents (the "Servicer's
Certificate"). Each such statement to be delivered to Certificateholders will
include the following information as to the Certificates with respect to such
Distribution Date or the period since the previous Distribution Date, as
applicable, and each such statement to be delivered to Noteholders will include
the following information as to the Notes with respect to such Payment Date or
the period since the previous Payment Date, as applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each class of Securities;
(ii) the amount of the distribution allocable to principal on or with
respect to each class of Securities;
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(iii) the Certificate Balance and the Certificate Factor for each
class of Certificates and the aggregate outstanding principal balance and,
if applicable, the Note Factor for each class of Notes, after giving effect
to all payments reported under (ii) above on such date;
(iv) the amount of the Servicing Fee paid to the Servicer with respect
to the related Monthly Period or Periods, as the case may be;
(v) the Pass-Through Rate, Interest Rate or other applicable rate of
return, if any, for the next period for any class of Certificates or Notes
with variable or adjustable rates;
(vi) the amount, if any, distributed to Certificateholders and
Noteholders applicable to payments under any credit enhancement; and
(vii) such other information as may be specified in the related
Prospectus Supplement.
Unless higher denominations are specified in the related Prospectus
Supplement, each amount set forth pursuant to subclauses (i), (ii), (iv), (vi)
and (vii) with respect to Certificates or Notes will be expressed as a dollar
amount per $1,000 of the initial Certificate Balance or the initial principal
balance of the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are issued,
such reports with respect to a series of Securities will be sent on behalf of
the related Trust to the Owner Trustee, the Indenture Trustee and Cede & Co., as
registered holder of the Certificates and the Notes and the nominee of DTC.
Certificate owners and Note owners may receive copies of such reports upon
written request, together with a certification that they are Certificate owners
or Note owners, as the case may be, and payment of any expenses associated with
the distribution of such reports, from the Owner Trustee or the Indenture
Trustee, as applicable. See "-- Statements to Securityholders" and
"-- Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of a Trust, the Owner Trustee and the
Indenture Trustee, as applicable, will mail to each holder of a class of
Securities who at any time during such calendar year has been a Securityholder,
and received any payment thereon, a statement containing certain information for
the purposes of such Securityholder's preparation of federal income tax return.
See "Federal Income Tax Consequences."
LIST OF SECURITYHOLDERS
At such time, if any, as Definitive Certificates have been issued, the
Owner Trustee will, upon written request by three or more Certificateholders or
one or more holders of Certificates evidencing not less than 25% of the
Certificate Balance, within five Business Days after provision to the Owner
Trustee of a statement of the applicants' desire to communicate with other
Certificateholders about their rights under the related Trust Documents or the
Certificates and a copy of the communication that the applicants propose to
transmit, afford such Certificateholders access during business hours to the
current list of Certificateholders for purposes of communicating with other
Certificateholders with respect to their rights under the Trust Documents. The
Trust Documents will not provide for holding any annual or other meetings of
Certificateholders.
At such time, if any, as Definitive Notes have been issued, the Indenture
Trustee will, upon written request by three or more Noteholders or one or more
holders of Notes evidencing not less than 25% of the aggregate principal balance
of the related Notes, within five Business Days after provision to the Indenture
Trustee of a statement of the applicants' desire to communicate with other
Noteholders about their rights under the related Indenture or the Notes and a
copy of the communication that the applicants propose to transmit, afford such
Noteholders access during business hours to the current list of Noteholders for
purposes of communicating with other Noteholders with respect to their rights
under the Indenture. The Indenture will not provide for holding any annual or
other meetings of Noteholders.
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DESCRIPTION OF THE PURCHASE AGREEMENTS AND THE TRUST DOCUMENTS
The following summary describes certain terms of the Purchase Agreements
(each a "Purchase Agreement") pursuant to which the Sellers will purchase
Receivables from Franklin Capital and certain terms of either (i) the Pooling
and Servicing Agreements or (ii) the Sale and Servicing Agreements and the Trust
Agreements (in either case collectively referred to as the "Trust Documents")
pursuant to which the Sellers will sell and assign such Receivables to a Trust
and Franklin Capital will agree to service such Receivables on behalf of the
Trust, and pursuant to which such Trust will be created and Certificates will be
issued. Forms of the Purchase Agreement and the Trust Documents have been filed
as exhibits to the Registration Statement of which this Prospectus forms a part.
Each Seller will provide a copy of such agreements (without exhibits) upon
request to a Securityholder described therein. This summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the forms of Purchase Agreement and the Trust
Documents.
SALE AND ASSIGNMENT OF RECEIVABLES
On or prior to the Closing Date with respect to a series of Securities
specified in the related Prospectus Supplement, Franklin Capital will enter into
a Purchase Agreement with the related Seller pursuant to which Franklin Capital
will, on or prior to such Closing Date, sell and assign to the related Seller,
without recourse, its entire interest in and to the related Receivables,
including its security interest in the Financed Vehicles securing such
Receivables and its rights to receive all payments on, or proceeds with respect
to, such Receivables to the extent paid or payable after the applicable Cutoff
Date. Pursuant to the Purchase Agreement, unless another party is identified in
the related Prospectus Supplement as having so agreed, Franklin Capital will
agree that, upon the occurrence of a breach of a representation or warranty
under the related Trust Documents with respect to any of the Receivables of a
Trust which causes the related Seller to be obligated to repurchase a
Receivable, the Owner Trustee will be entitled to require Franklin Capital to
repurchase such Receivables from the Trust, without recourse to either the Trust
or Securityholders of such series. Such rights of the Trust under the Purchase
Agreement will constitute part of the property of the Trust and may be enforced
directly by the Owner Trustee and, unless the related Prospectus Supplement
provides otherwise, the third party credit enhancement provider, if any. In
addition, the Owner Trustee will pledge such rights to the Indenture Trustee as
collateral for the Notes, if any, and such rights may be enforced directly by
the Indenture Trustee.
On the Closing Date, the related Seller will sell and assign to the Owner
Trustee, without recourse, the related Seller's entire interest in the related
Receivables and the proceeds thereof, including its security interest in the
Financed Vehicles. Each Receivable transferred by the related Seller to the
Trust will be identified in a schedule appearing as an exhibit to the related
Trust Documents (the "Schedule of Receivables"). Concurrently with such transfer
and assignment, the Owner Trustee will execute and deliver the related
certificates representing the Certificates to or upon the order of the related
Seller, and the Owner Trustee will execute and the Indenture Trustee will
authenticate and deliver the Notes, if any, to or upon the order of the related
Seller. The net proceeds received from the sale of the Certificates and the
Notes of a given series will be applied to the purchase of the related
Receivables from the related Seller and, to the extent specified in the related
Prospectus Supplement, to the deposit of the Pre-Funded Amount into the
Pre-Funding Account.
ELIGIBILITY CRITERIA
In the Purchase Agreement, Franklin Capital will represent and warrant to
the related Seller, and in the Trust Documents the related Seller will represent
and warrant to the Owner Trustee and/or the Indenture Trustee, as the case may
be, among other things, that (i) the information provided with respect to the
Receivables is correct in all material respects; (ii) the Obligor on each
Receivable is required to maintain physical damage insurance in accordance with
the Servicer's
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normal requirements; (iii) at the date of issuance of the Certificates and any
Notes, the Initial Receivables and on the applicable Subsequent Transfer Date,
if any, the related Subsequent Receivables, as the case may be, are, to the best
of its knowledge, free and clear of all security interests, liens, charges and
encumbrances and no offsets, defenses, or counterclaims against it have been
asserted or threatened; (iv) at the date of issuance of the Certificates and any
Notes, and on the applicable Subsequent Transfer Date, if any, each of the
Initial Receivables or Subsequent Receivables, as the case may be, is or will be
secured by a first perfected security interest in the Financed Vehicle in favor
of Franklin Capital; and (v) each Receivable, at the time it was originated,
complied, and at the date of issuance of the Certificates and any Notes, and on
the applicable Subsequent Transfer Date, if any, the related Subsequent
Receivables, as the case may be, complies in all material respects with
applicable federal and state laws, including consumer credit, truth in lending,
equal credit opportunity and disclosure laws.
If the related Prospectus Supplement specifies that Subsequent Receivables
are to be acquired by a Trust, then during the related Funding Period, pursuant
to the Purchase Agreement, the related Seller will be obligated to purchase from
Franklin Capital and, pursuant to either a Pooling and Servicing Agreement or a
Sale and Servicing Agreement, as applicable, sell to the Trust Subsequent
Receivables. The aggregate principal balance of the Subsequent Receivables will
be in an amount that Franklin Capital anticipates will equal the amount
deposited in the Pre-Funding Account on the date of the issuance of the related
series. On each Subsequent Transfer Date, Franklin Capital will sell and assign
to the related Seller, without recourse, its entire interest in the Subsequent
Receivables identified in a schedule attached to a supplemental conveyance
relating to such Subsequent Receivables executed by Franklin Capital and the
related Seller. In connection with each purchase of Subsequent Receivables, the
Trust will be required to pay to the related Seller a cash purchase price equal
to the outstanding principal balance of each Subsequent Receivable as of its
Subsequent Cutoff Date, which price the related Seller will pay to Franklin
Capital. The purchase price will be withdrawn from the Pre-Funding Account and
paid to the related Seller for payment to Franklin Capital so long as the
representations and warranties set forth in the preceding paragraph and under
"The Receivables -- General" apply to each Subsequent Receivable to be conveyed,
and the conditions set forth below are satisfied. Franklin Capital will convey
the Subsequent Receivables to the related Seller on each such Subsequent
Transfer Date pursuant to the Purchase Agreement and the applicable Subsequent
Transfer Agreement (each, a "Subsequent Transfer Agreement") executed by
Franklin Capital and the related Seller on the Subsequent Transfer Date and
including as an exhibit a schedule identifying the Subsequent Receivables
transferred on such date. The related Seller will convey the Subsequent
Receivables to the Trust on such Subsequent Transfer Date pursuant to either a
Pooling and Servicing Agreement or a Sale and Servicing Agreement, as
applicable, and the applicable Subsequent Transfer Assignment (each, a
"Subsequent Transfer Assignment") executed by the related Seller and the Trustee
on the Subsequent Transfer Date and including as an exhibit a schedule
identifying the Subsequent Receivables transferred on such date.
Any conveyance of Subsequent Receivables will be subject to the following
conditions, among others specified in the related Prospectus Supplement: (i)
each such Subsequent Receivable must satisfy the eligibility criteria specified
in the preceding paragraph as of its Subsequent Cutoff Date and such additional
criteria as may be specified in the related Prospectus Supplement; (ii) if and
to the extent specified in the related Prospectus Supplement, the third-party
credit enhancement provider, if any, shall have approved the transfer of such
Subsequent Receivables to the Trust; and (iii) neither Franklin Capital nor the
related Seller will have selected such Subsequent Receivables in a manner that
either believes is adverse to the interests of the Securityholders.
As of the last day of the second (or, if the related Seller elects, the
first) month following the discovery by the related Seller or receipt by the
related Seller of notice from the Servicer, the Owner Trustee, the Indenture
Trustee or the third party credit enhancement provider, if any, of a breach of
any representation or warranty of the related Seller which the Owner Trustee, or
the Indenture
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Trustee, as the case may be, determines materially and adversely affects the
interests of the Securityholders in a Receivable, the related Seller, unless it
cures the breach, will be required to purchase the Receivable from the Owner
Trustee and Franklin Capital will be required to purchase the Receivable from
the related Seller, at a price equal to the amount of outstanding principal and
accrued interest of the Receivable (including one month's interest thereon, in
the month of payment, at the APR less, so long as Franklin Capital is the
Servicer, the Servicing Fee and other fees and expenses), after giving effect to
the receipt of any moneys collected (from whatever source) on such Receivable,
if any (such price is hereinafter referred to as the "Purchase Amount"). The
"second month" shall mean the month following the month in which discovery
occurs or notice is given, and the "first month" shall mean the month in which
discovery occurs or notice is given. The purchase obligation will constitute the
sole remedy available to the Securityholders, the Owner Trustee and the
Indenture Trustee, if any, and the third party credit enhancement provider, if
any, for any such uncured breach.
CUSTODY OF RECEIVABLE FILES
Pursuant to the Trust Documents, the Servicer will service and administer
the Receivables. The Trust Documents will also designate the Servicer as
custodian to maintain possession, as the Owner Trustee's and Indenture
Trustee's, if any, agent, of the motor vehicle retail installment sale contracts
and any other documents relating to the Receivables. The documents will not be
physically segregated from other similar documents that are in the Servicer's
possession and will not be stamped or marked to reflect the transfer to a Trust.
However, Uniform Commercial Code financing statements reflecting the sale and
assignment of the Receivables to the related Seller and by the related Seller to
the Owner Trustee will be filed, and Franklin Capital's accounting records and
computer systems will be marked to reflect such sale and assignment. See
"Certain Legal Aspects of the Receivables -- Security Interests in Vehicles."
ACCOUNTS
With respect to each Trust that issues Notes, the Servicer will establish
and maintain with the related Indenture Trustee one or more accounts, in the
name of the Indenture Trustee on behalf of the related Noteholders and
Certificateholders, into which all payments made on or with respect to the
related Receivables will be deposited (the "Collection Account"). The Servicer
will establish and maintain with such Indenture Trustee an account, in the name
of such Indenture Trustee on behalf of such Noteholders, into which amounts
released from the Collection Account and any Pre-Funding Account, reserve
account or other credit enhancement for payment to such Noteholders will be
deposited and from which all distributions to such Noteholders will be made (the
"Note Distribution Account"). The Servicer will establish and maintain with the
related Owner Trustee an account, in the name of such Owner Trustee on behalf of
such Certificateholders, into which amounts released from the Collection Account
and any Pre-Funding Account, reserve account or other credit or cash flow
enhancement for distribution to such Certificateholders will be deposited and
from which all distributions to such Certificateholders will be made (the
"Certificate Distribution Account," and together with the Note Distribution
Account, the "Distribution Accounts"). With respect to each Trust that does not
issue Notes, the Servicer will also establish and maintain the Collection
Account and any other Trust Account specified in the related Prospectus
Supplement in the name of the related Owner Trustee on behalf of the related
Certificateholders.
The Servicer will also establish an additional account (the "Payahead
Account") in the name of the Owner Trustee or the Indenture Trustee, into which
early payments by or on behalf of the Obligors which constitute neither
scheduled payments, full prepayments, nor certain partial prepayments as
described below ("Payaheads") will be deposited until such time as the payment
falls due. Unless otherwise specified in the related Prospectus Supplement, if
the Trust elects to be treated as a grantor trust, the Payahead Account will not
be an asset of such Trust, but will be pledged to the Owner Trustee for the
benefit of Certificateholders and any third-party credit
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enhancement provider and all Investment Earnings thereon will be for the benefit
of, and will be distributable to, the applicable Seller.
In addition, the Servicer will establish as additional segregated trust
accounts, if specified in the related Prospectus Supplement, a Pre-Funding
Account and one or more spread accounts or reserve or other accounts in the name
of the Owner Trustee or the Indenture Trustee on behalf of the Securityholders.
If so specified in the related Prospectus Supplement, funds remaining in the
Pre-Funding Account at the end of the Pre-Funding Period, may be applied to make
payments in respect of the principal of the Securities.
For any series of Securities, funds in the Collection Account, the Note
Distribution Account, the Certificate Distribution Account and any Payahead
Account and any Pre-Funding Account, reserve account and other accounts
identified as such in the related Prospectus Supplement (collectively, the
"Accounts") will be invested as provided in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement in Eligible Investments. "Eligible
Investments" are limited to (a) direct obligations of, and obligations fully
guaranteed as to timely payment by, the United States of America; (b) demand
deposits, time deposits or certificates of deposit of any depository institution
or trust company incorporated under the laws of the United States of America or
any state thereof or the District of Columbia (or any domestic branch of a
foreign bank), provided, that at the time of the investment, the commercial
paper or other short-term senior unsecured debt obligations of such depository
institution or trust company shall have a minimum credit rating satisfying each
of the Rating Agencies rating such Securities; (c) commercial paper having a
minimum credit rating satisfying each of the Rating Agencies rating such
Securities; (d) investments in money market funds having a minimum credit rating
satisfying each of the Rating Agencies rating such Securities; (e) repurchase
obligations with respect to any security that is a direct obligation of, or
fully guaranteed by, the United States of America entered into with a depository
institution or trust company (acting as principal) referred to in clause (b)
above; and (f) other investments acceptable to the Rating Agencies rating such
Securities which are consistent with the rating of such Securities. The related
Prospectus Supplement will specify whether and the extent to which investment
earnings on funds deposited in the Accounts, net of losses and investment
expenses (collectively, "Investment Earnings"), will be deposited in the
applicable Collection Account on each Distribution Date and treated as
collections of interest on the related Receivables or distributed to the
Servicer, as additional servicing compensation, the related Seller or any other
person. Investment Earnings on a Pre-Funding Account will be deposited in the
applicable Collection Account on each Distribution Date and treated as
collections of interest on the Receivables.
The Accounts will be maintained as Eligible Deposit Accounts. "Eligible
Deposit Account" means either (a) a segregated account with an Eligible
Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means, with respect to a Trust, (a) the corporate trust
department of the related Indenture Trustee or the related Owner Trustee, as
applicable, or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), (i) which has either (A) a
long-term unsecured debt rating acceptable to the Rating Agencies or (B) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies and (ii) whose deposits are insured by the FDIC.
Notwithstanding the foregoing, if the Servicer meets the rating or other
requirements, if any, specified in the related Prospectus Supplement, the
Servicer may maintain the Accounts in its own name and may commingle funds
therein with its own funds, and remit funds monthly to the Owner Trustee or
Indenture Trustee.
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SERVICING PROCEDURES
The Servicer will be required to make reasonable efforts to collect all
payments due with respect to the Receivables and will be required to continue
such collection procedures as it follows with respect to its own motor vehicle
retail installment sale contracts, in a manner consistent with the Trust
Documents. Consistent with its normal procedures, the Servicer may, in its
discretion, arrange with the Obligor on a Receivable to extend or modify the
payment schedule, but no such arrangement will, for purposes of any Sale and
Servicing Agreement or Pooling and Servicing Agreement, modify the original due
dates (other than to permit payment on a different date in the same month in
which the original due date falls) or the amount of the scheduled payments
(unless the obligor is in default or, in the judgment of the Servicer, such
default is imminent) or extend the final payment date of any Receivable beyond
the Final Scheduled Distribution Date (as such term is defined with respect to
any pool of Receivables in the related Prospectus Supplement). Some of such
arrangements may result in the Servicer being required to purchase the
Receivable for the Purchase Amount, while others may result in the Servicer
being required to make Advances. If the Servicer determines that eventual
payment in full of a Receivable is unlikely, the Servicer will follow its normal
practices and procedures to realize upon the Receivable, including the
repossession and disposition of the Financed Vehicle securing the Receivable at
a public or private sale, or the taking of any other action permitted by
applicable law.
COLLECTIONS
The Servicer will be required to deposit all payments on Receivables
received (net of amounts in respect of the Servicing Fee, the Supplemental
Servicing Fee and reimbursement for Advances, if any, included in such payments)
and all proceeds of Receivables collected during each Monthly Period (net of
amounts in respect of the Servicing Fee, the Supplemental Servicing Fee and
reimbursement for Advances, if any, included in such proceeds) into the
Collection Account as specified in the related Prospectus Supplement. However,
at any time that and for so long as (i) there exists no Servicer Default, (ii)
the credit enhancement provider, if any, consents and (iii) each other condition
to making deposits less frequently than daily as may be specified by the Rating
Agencies or set forth in the related Prospectus Supplement is satisfied, the
Servicer will not be required to deposit such amounts into the Collection
Account until on or before the applicable Distribution Date or Payment Date.
Pending deposit into the Collection Account, collections may be invested by the
Servicer at its own risk and for its own benefit and will not be segregated from
its own funds. If the Servicer were unable to remit such funds, Securityholders
might incur a loss. To the extent set forth in the related Prospectus
Supplement, the Servicer may in order to satisfy the requirements described
above, obtain a letter of credit or other security for the benefit of the
related Trust to secure timely remittances of collections on the related
Receivables and payment of the aggregate Purchase Amount with respect to
Receivables purchased by the Servicer. If the conditions specified above are
satisfied, the Servicer and the related Seller, as the case may be, will be
required to remit the aggregate Purchase Amount of Receivables to be purchased
from the Trust to the Collection Account on the Business Day immediately
preceding the Distribution Date.
For purposes of the Trust Documents, collections on a Receivable made
during a Monthly Period are required to be applied first to the scheduled
payment thereof. To the extent that such collections on a Receivable during a
Monthly Period exceed the scheduled payment on such Receivable, the collections
(other than Payaheads) are required to be applied to prepay the Receivable in
full. In the case of Precomputed Receivables, if the collections are
insufficient to prepay the Receivable in full, they generally are required to be
treated as Payaheads until such later Monthly Period as such Payaheads may be
applied either to the scheduled payment or to prepay the Receivable in full.
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ADVANCES
If and to the extent specified in the related Prospectus Supplement, the
Servicer may be required to advance (each, an "Advance") monthly payments of
interest or monthly payments of principal and interest in respect of a
delinquent Receivable or Servicer approved deferrals of monthly payments that
the Servicer, in its sole discretion, expects to receive from subsequent
payments on or with respect to such Receivable or from other Receivables. The
Servicer shall be entitled to reimbursement of Advances from subsequent payments
on or with respect to the Receivables to the extent described in the related
Prospectus Supplement.
SERVICING COMPENSATION
The Servicer is entitled under the Trust Documents to receive or retain, as
specified in the related Prospectus Supplement on each Distribution Date a
servicing fee (the "Servicing Fee") for the related Monthly Period at the rate
specified in the related Prospectus Supplement (the "Servicing Fee Rate")
multiplied by the Pool Balance as of the first day of such Monthly Period. The
Servicer is also entitled to retain from collections a supplemental servicing
fee (the "Supplemental Servicing Fee") for each Monthly Period equal to any late
fees, prepayment fees, rebates and other administrative fees and expenses
collected during the Monthly Period plus reinvestment proceeds on any payments
received in respect of Receivables. If specified in the related Prospectus
Supplement, the Servicer may be entitled to additional compensation from
investment earnings (net of losses) on certain accounts or otherwise. The
Servicer, in its discretion at its election, may defer receipt of all or any
portion of the Servicing Fee, the Supplemental Servicing Fee or any additional
compensation from investment earnings for any Monthly Period to and until a
later Monthly Period for any reason, including in order to avoid a shortfall in
any payments due on any Securities. Any such deferred amount shall be payable to
(or may be retained from subsequent collections by) the Servicer on demand.
The Servicing Fee and the Supplemental Servicing Fee and any other amounts
specified in the related Prospectus Supplement (collectively, the "Servicer
Fee") are intended to compensate the Servicer for performing the functions of a
third-party servicer of the Receivables as an agent for the Securityholders,
including collecting and posting all payments, responding to inquiries of
Obligors on the Receivables, investigating delinquencies, reporting tax
information to Obligors, paying costs of collections and policing the
collateral. The Servicer Fee will also compensate the Servicer for administering
the Receivables, including accounting for collections, furnishing monthly and
annual statements to the Owner Trustee and any Indenture Trustee with respect to
distributions and generating federal income tax information for the Trust. The
Servicer Fee also will reimburse the Servicer for certain taxes, the Trustee's
fees, accounting fees, outside auditor fees, data processing costs and other
costs incurred in connection with administering the Receivables.
MANDATORY PREPAYMENT
To the extent a Pre-Funding Account is specified in the related Prospectus
Supplement, the Securities will be prepaid in part on the Distribution Date on
which the Funding Period ends (or on the Distribution Date immediately following
the last day of the Funding Period, if the Funding Period does not end on a
Distribution Date) in the event that any amount remains on deposit in the Pre-
Funding Account after giving effect to the purchase of Subsequent Receivables,
if any, on such Distribution Date. The aggregate principal amount of Securities
to be prepaid will be an amount equal to the amount then on deposit in the
Pre-Funding Account in such portions as specified in the related Prospectus
Supplement. In such event, if and to the extent specified in the related
Prospectus Supplement, a limited recourse mandatory prepayment premium (the
"Prepayment Premium") may be payable by the Trust to the offered Securityholders
if the aggregate principal amount of the offered Securities to be prepaid
pursuant to such mandatory prepayment exceeds such threshold amount as will be
specified in the related Prospectus Supplement. The amount of such Prepayment
Premium, if any, will be specified in the related Prospectus Supplement. A
Trust's
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obligation to pay the Prepayment Premium shall be limited to funds which are
received from the related Seller under the Purchase Agreement as liquidated
damages for the failure to deliver Subsequent Receivables. No other assets of
the Trust will be available for the purpose of making such payment. The ratings
of any series of Securities with respect to which a Prepayment Premium is
payable does not evaluate the Prepayment Premium or the likelihood that the
Prepayment Premium will be paid.
DISTRIBUTIONS
With respect to each Trust, beginning on the Distribution Date or Payment
Date, as applicable, specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal or
interest only) on each class of Securities entitled thereto will be made by the
Owner Trustee or the Indenture Trustee, as applicable, to the Securityholders.
The timing, calculation, allocation, order, source and priorities of, and
requirements for, all distributions to each class of Certificateholders and all
payments to each class of Noteholders will be set forth in the related
Prospectus Supplement.
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a class or classes of Notes or
Certificates of a series and ending in the date set forth on the related
Prospectus Supplement (the "Revolving Period") during which no principal
payments will be made to one or more classes of Notes or Certificates of the
related series as are identified in such Prospectus Supplement. All collections
of principal otherwise allocated to such classes of Notes or Certificates may be
(i) utilized by the Trust during the Revolving Period to acquire additional
Receivables which satisfy the criteria described under "The Receivables --
General" herein and the criteria set forth in the related Prospectus Supplement,
(ii) held in an account and invested in Eligible Investments for later
distribution to Securityholders, (iii) applied to those Notes or Certificates of
the related series as then are in amortization, if any, or (iv) otherwise
applied as specified in the related Prospectus Supplement.
An "Amortization Period" is the period during which an amount of principal
is payable to holders of a series of Securities which, during the Revolving
Period, were not entitled to such payments. If so specified in the related
Prospectus Supplement, during an Amortization Period all or a portion of
principal collections on the Receivables may be applied as specified above for a
Revolving Period and, to the extent not so applied, will be distributed to the
classes of Notes or Certificates specified in the related Prospectus Supplement
as then being entitled to payments of principal. In addition, if so specified in
the related Prospectus Supplement, amounts deposited in certain accounts for the
benefit of one or more classes of Notes or Certificates may be released from
time to time or on a specified date and applied as a payment of principal on
such classes of Notes or Certificates. The related Prospectus Supplement will
set forth the circumstances which will result in the commencement of an
Amortization Period.
Each Trust which has a Revolving Period may also issue to the related
Seller a certificate evidencing a Retained Interest in the Trust not represented
by the other Securities issued by such Trust. As further described in the
related Prospectus Supplement, the value of such Retained Interest will
fluctuate as the amount of Trust Property fluctuates and the amount of Notes and
Certificates of the related series of Securities outstanding is reduced. Each
Trust will issue only one series of Notes and/or Certificates, however, each
series may contain one or more classes of Notes and Certificates. The terms of
each class of Securities will be fully disclosed in the related Prospectus
Supplement for each series.
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NET DEPOSITS
As an administrative convenience, unless otherwise specified in the related
Prospectus Supplement, the Servicer will be permitted to make the deposit of
collections, aggregate Advances and Purchase Amounts on the related Receivables
for any Trust for or with respect to the related Monthly Period net of
distributions to be made to the Servicer for such Trust with respect to such
Monthly Period. The Servicer may cause to be made a single, net transfer from
the Collection Account to the related Payahead Account, if any, or vice versa.
The Servicer, however, will account to the Trustee, any Indenture Trustee, the
third party credit enhancement provider, if any, the Noteholders, if any, and
the Certificateholders with respect to each Trust as if all deposits,
distributions and transfers were made individually. With respect to any Trust
that issues both Certificates and Notes, if the related Payment Dates do not
coincide with Distribution Dates, all distributions, deposits or other
remittances made on a Payment Date will be treated as having been distributed,
deposited or remitted on the Distribution Date for the applicable Monthly Period
for purposes of determining other amounts required to be distributed, deposited
or otherwise remitted on such Distribution Date.
CREDIT ENHANCEMENT
The amounts and types of credit enhancement, and the provider of any credit
enhancement, if any, with respect to each class of Securities will be set forth
in the related Prospectus Supplement. If and to the extent provided in the
related Prospectus Supplement, credit enhancement may be in the form of the
subordination of one or more classes of Securities, a spread account or other
type of reserve account, accelerated payments of principal relative to the
amortization of the related Receivables, financial guaranty insurance policy or
surety bond, letter of credit, credit or liquidity facility, repurchase
obligation, third party payment or other support, cash deposit or such other
arrangement, or any combination of two or more of the foregoing, as may be
described in the related Prospectus Supplement. A Trust may also include a
guaranteed investment contract or reinvestment agreement pursuant to which funds
held in one or more accounts will be invested at a specified rate. If any class
of Certificates or Notes of a series has a floating interest rate, or if any of
the Receivables has a floating interest rate, the related Trust may include an
interest rate swap contract, an interest rate cap agreement or similar contract
providing limited protection against interest rate risks. If specified in the
applicable Prospectus Supplement, credit enhancement for a series of Securities
may cover one or more other series of Securities.
The presence of credit enhancement is intended to enhance the likelihood of
receipt by the credit enhanced Securityholders of the full amount of principal
and interest due thereon and to decrease the likelihood that such
Securityholders will experience losses. The credit enhancement for a class of
Securities will not provide protection against all risks of loss and may not
guarantee repayment of the entire principal and interest thereon. If losses
occur which exceed the amount covered by any credit enhancement or which are not
covered by any credit enhancement, Securityholders will bear their allocable
share of deficiencies. In addition, if a form of credit enhancement covers more
than one series of Securities, Securityholders of any such series may be subject
to the risk that such credit enhancement will be exhausted by the claims of
Securityholders of other series.
EVIDENCE AS TO COMPLIANCE
The Trust Documents will provide that a firm of independent public
accountants will furnish to the Owner Trustee and the Indenture Trustee, if any,
and the third party credit enhancement provider, if any, on or before April 30
of each year, beginning in the calendar year following the establishment of the
related Trust, a statement as to compliance by the Servicer during the preceding
twelve months ended December 31 (or, for the initial report with respect to any
Securities for such longer or shorter period as shall have elapsed from the date
of issuance of the related
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Securities) with certain standards relating to the servicing of the Receivables,
the Servicer's accounting and computer systems with respect thereto, and certain
other matters.
The Trust Documents will also provide for delivery to the Owner Trustee and
the Indenture Trustee, if any, and the third party credit enhancement provider,
if any, on or before December 31 of each year, commencing in the calendar year
following the establishment of the related Trust, of a certificate signed by an
officer of the Servicer stating that the Servicer has fulfilled its obligations
under the applicable Trust Documents throughout the preceding twelve months
ended April 30 (or, for the initial report with respect to any Securities for
such longer or shorter period as shall have elapsed from the date of issuance of
the related Securities) or, if there has been a default in the fulfillment of
any such obligation, describing each such default.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Owner Trustee or the
Indenture Trustee, as the case may be.
CERTAIN MATTERS REGARDING THE SERVICER
The Trust Documents will provide that the initial Servicer may not resign
from its obligations and duties as Servicer thereunder, except upon a
determination that the Servicer's performance of such duties is no longer
permissible under applicable law. No such resignation will become effective
until the Owner Trustee or, if Notes have been issued, the Indenture Trustee, or
a successor servicer has assumed the Servicer's servicing obligations and duties
under the Trust Documents, and the third-party credit enhancer, if any, does not
elect to waive the obligations of the Servicer to perform the duties which
render it legally unable to act or does not elect to delegate those duties to
another person.
The Trust Documents will further provide that neither the Servicer, nor any
of its directors, officers, employees, and agents will be under any liability to
any Trust or any Securityholders for taking any action or for refraining from
taking any action pursuant to the Trust Documents, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence (except for errors in judgment) in
the performance of duties, or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Trust Documents will provide that the
Servicer is under no obligation to appear in, prosecute or defend any legal
action that is not incidental to the Servicer's servicing responsibilities under
the Trust Documents and that, in its opinion, may cause it to incur any expense
or liability. The Servicer may, however, undertake any reasonable action that it
may deem necessary or desirable in respect of the Trust Documents, the rights
and duties of the parties thereto and the interests of the Securityholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Servicer, and the Servicer will not be entitled to be reimbursed therefor out of
any Account held by the Owner Trustee or the Indenture Trustee, as applicable.
Any entity into which the Servicer or the Sellers, as the case may be, may
be merged or consolidated, or any entity resulting from any merger, conversion
or consolidation to which the Servicer or the Sellers, as the case may be, is a
party, or any entity succeeding to the business of the Servicer or the Sellers,
as the case may be, which assumes the obligations of the Servicer or the
Sellers, as the case may be, will be the successor of the Servicer or the
Sellers, as the case may be, under the Trust Documents. The Servicer may at any
time perform its duties as Servicer through one or more subservicers, but no
such delegation shall relieve the Servicer of its obligations under the Trust
Documents.
SERVICER DEFAULT
"Servicer Default" under the Pooling and Servicing Agreements or the Sale
and Servicing Agreements, as the case may be, will consist of (i) any failure by
the Servicer and/or any other party identified in the related Prospectus
Supplement as so obligated to deliver to the Owner
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Trustee or the Indenture Trustee, as applicable, to make any required
distributions therefrom, which failure continues unremedied for five business
days after written notice from the Owner Trustee or Indenture Trustee is
received by the Servicer or after discovery of such failure by the Servicer,
(ii) any failure by the related Seller or the Servicer duly to observe or
perform in any material respect any other covenant or agreement in the Trust
Documents which failure materially and adversely affects the rights of
Securityholders and which continues unremedied for 60 days after the giving of
written notice of such failure (1) to the related Seller or the Servicer, as
applicable, by the Owner Trustee or the Indenture Trustee, or (2) to the related
Seller or the Servicer, as applicable, and to the Owner Trustee or the Indenture
Trustee by Securityholders evidencing not less than 25% of a class of Securities
constituting at least 25% of the then Pool Balance for such series; (or such
longer period, not in excess of 120 days, as may be reasonably necessary to
remedy such default; provided that such default is capable of remedy within 120
days or less and the Servicer delivers an officer's certificate to the Owner
Trustee and, if applicable, Indenture Trustees to such effect and to the effect
that the Servicer has commenced, or will promptly commence and diligently
pursue, all reasonable efforts to remedy such default); and (iii) certain events
of insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings with respect to the Servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings, or acknowledgement in writing
of its inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT
In the case of any Trust that has issued Notes, as long as a Servicer
Default under a Sale and Servicing Agreement remains unremedied, the related
Indenture Trustee or holders of Notes of the related series evidencing more than
50% of principal amount of such Notes then outstanding may terminate all the
rights and obligations of the Servicer under such Sale and Servicing Agreement,
whereupon such Indenture Trustee or a successor servicer appointed by such
Indenture Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Sale and Servicing Agreement and will be
entitled to similar compensation arrangements. In the case of any Trust that has
not issued Notes, as long as a Servicer Default under the related Sale and
Servicing Agreement or Pooling and Servicing Agreement remains unremedied, the
related Owner Trustee or holders of Certificates of the related series
evidencing more than 50% of the principal amount of such Certificates then
outstanding may terminate all the rights and obligations of the Servicer under
such Sale and Servicing Agreement or Pooling and Servicing Agreement, whereupon
such Owner Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Sale and Servicing Agreement or Pooling
and Servicing Agreement and will be entitled to similar compensation
arrangements. If, however, a bankruptcy trustee or similar official has been
appointed for the Servicer, and no Servicer Default other than such appointment
has occurred, such trustee or official may have the power to prevent such
Indenture Trustee, such Noteholders, such Owner Trustee or such
Certificateholders from effecting a transfer of servicing. In the event that
such Indenture Trustee or Owner Trustee is unwilling or unable to so act, it may
appoint, or petition a court of competent jurisdiction for the appointment of, a
successor with a net worth of at least $50,000,000 and whose regular business
includes the servicing of motor vehicle retail installment sale contracts. Such
Indenture Trustee or Trustee may make such arrangements for compensation to be
paid, which in no event may be greater than the servicing compensation to the
Servicer under such Sale and Servicing Agreement or Pooling and Servicing
Agreement. Notwithstanding the foregoing, if and to the extent specified in the
related Prospectus Supplement, a third-party credit enhancement provider may
exercise the rights and remedies of the Owner Trustee, Indenture Trustee,
Noteholders and Certificateholders specified above.
WAIVER OF PAST DEFAULTS
With respect to each Trust that has issued Notes, the holders of Notes
evidencing at least a majority in principal amount of the then-outstanding Notes
of the related series (or the holders of the Certificates of such series
evidencing not less than a majority of the outstanding Certificate
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Balance, in the case of any Servicer Default which does not adversely affect the
related Indenture Trustee or such Noteholders) may, on behalf of all such
Noteholders and Certificateholders, waive any default by the Servicer in the
performance of its obligations under the related Sale and Servicing Agreement
and its consequences, except a Servicer Default in making any required deposits
to or payments from any of the Accounts in accordance with such Sale and
Servicing Agreement. With respect to each Trust that has not issued Notes,
holders of Certificates of such series evidencing not less than a majority of
the principal amount of such Certificates then outstanding may, on behalf of all
such Certificateholders, waive any default by the Servicer in the performance of
its obligations under the related Sale and Servicing Agreement or Pooling and
Servicing Agreement, except a Servicer Default in making any required deposits
to or payments from the Certificate Distribution Account or the related Accounts
in accordance with such Sale and Servicing Agreement or Pooling and Servicing
Agreement. No such waiver will impair such Noteholders' or Certificateholders'
rights with respect to subsequent defaults. Notwithstanding the foregoing, if
and to the extent specified in the related Prospectus Supplement, a third-party
credit enhancement provider may exercise the rights and remedies of the Owner
Trustee, Indenture Trustee, Noteholders and Certificateholders specified above.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, each of
the Sale and Servicing Agreements and the Pooling and Servicing Agreements, as
applicable, may be amended by the parties thereto, without the consent of the
related Noteholders or Certificateholders, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such agreements or of modifying in any manner the rights of such Noteholders of
Certificateholders; provided that such action will not materially and adversely
affect the interest of any such Noteholder or Certificateholder. An amendment
shall be deemed not to adversely affect the interests of any such holder if
either each Rating Agency rating such Securities confirms in writing that such
amendment will not result in a reduction or withdrawal of such rating or none of
Rating Agencies rating such Securities, within 10 days after receipt of notice
of such amendment, shall have notified the related Seller, the Servicer or the
Trust in writing that such amendment will result in a reduction or withdrawal of
the then current rating of the Securities. Unless otherwise specified in the
related Prospectus Supplement, the Purchase Agreements, Pooling and Servicing
Agreements and Sale and Servicing Agreements may also be amended by the related
Seller, the Servicer, the related Owner Trustee and any related Indenture
Trustee with the consent of the holders of Notes evidencing at least a majority
in principal amount of then outstanding Notes, if any, of the related series and
the holders of the Certificates of such series evidencing at least a majority of
the principal amount of such Certificates then outstanding, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such agreements or of modifying in any manner the rights of such
Noteholders or Certificateholders; provided, however, that no such amendment may
(i) increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments on the related Receivables or distributions
that are required to be made for the benefit of such Noteholders or
Certificateholders or (ii) reduce the aforesaid percentage of the Notes or
Certificates of such series which are required to consent to any such amendment,
without the consent of the holders of all the outstanding Notes or Certificates,
as the case may be, of such series.
In addition, holders of certain classes of Securities of a series may have
the right to take actions that are detrimental to the interests of the
Securityholders of certain other classes of Securities of such series, as
specified in the related Prospectus Supplement. In certain cases, the senior
classes of securities may have the exclusive right to remove the Servicer, waive
defaults or control the disposition of collateral. In addition, because of the
relative size of the senior classes to the subordinate classes in most
senior/subordinate structures, the senior classes may effectively have voting
control over the Trust on matters that require the vote of all classes of
securities. In no event,
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however, will any class of securities have the right to affect the interest rate
or payment priorities of another class of securities.
Notwithstanding any of the foregoing, if and to the extent specified in the
related Prospectus Supplement, the consent of the third-party credit enhancement
provider, if any, for the related series may be required to any such amendment.
INSOLVENCY EVENT
Each Trust Agreement will provide that the applicable Trustee does not have
the power to commence a voluntary proceeding in bankruptcy with respect to the
related Owner Trust without the unanimous prior approval of all
Certificateholders of such Trust and the delivery to such Trustee by each such
Certificateholder of a certificate certifying that such Certificateholder
reasonably believes that such Trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and the
satisfaction and discharge of the related Indenture, the related Owner Trustee
will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Sale and Servicing Agreement,
except as otherwise provided therein.
TERMINATION
With respect to each Trust, the obligations of the Servicer, the related
Seller, the related Owner Trustee and the related Indenture Trustee, if any,
pursuant to the Pooling and Servicing Agreement or Sale and Servicing Agreement,
as applicable, will terminate upon the latest of (i) the maturity or other
liquidation of the last related Receivable and the disposition of any amounts
received upon liquidation of any such remaining Receivables, (ii) the payment to
Noteholders, if any, and Certificateholders of the related series of all amounts
required to be paid to them pursuant to the Pooling and Servicing Agreement or
Sale and Servicing Agreement, as applicable, and the payment of any fees or
other amounts owing to the third party credit enhancement provider, if any, for
such Trust, and (iii) the occurrence of either event described below or such
other events provided in the related Prospectus Supplement.
The related Prospectus Supplement will specify whether the Servicer will be
permitted at its option to purchase from each Trust, as of the end of any
applicable Monthly Period, when the then outstanding Pool Balance with respect
to the Receivables held by such Trust is 10% (or such other percentage specified
in the related Prospectus Supplement, which will not exceed 50%) or less of the
Original Pool Balance (calculated after giving effect to the principal balance
of any Subsequent Receivables as of their respective Cutoff Dates), all
remaining related Receivables at a price equal to the aggregate of the Purchase
Amounts thereof as of the end of such Monthly Period. If specified in the
related Prospectus Supplement, any such repurchase may require the consent of
the third-party credit enhancement provider, if any, of the related series. Any
such sale will be without recourse to either the Trust or Securityholders of
such series.
If and to the extent provided in the related Prospectus Supplement with
respect to a Trust, the Owner Trustee or, if Notes are outstanding, the
Indenture Trustee, will, within ten days following a Distribution Date as of
which the Pool Balance is equal to or less than the percentage of the Original
Pool Balance (calculated after giving effect to the principal balance of any
Subsequent Receivables as of their respective Subsequent Cutoff Dates) specified
in the related Prospectus Supplement, solicit bids for the purchase of the
Receivables remaining in such Trust, in the manner and subject to the terms and
conditions set forth in such Prospectus Supplement. If the Owner Trustee or
Indenture Trustee, as applicable, receives satisfactory bids as described in
such Prospectus Supplement, then the Receivables remaining in such Trust will be
sold to the highest bidder. If
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specified in the related Prospectus Supplement, any such sale may require the
consent of the third-party credit enhancement provider, if any, of the related
series.
As more fully described in the related Prospectus Supplement, any
outstanding Notes of the related series will be redeemed concurrently with
either of the events specified above and the subsequent distribution to the
related Certificateholders of all amounts required to be distributed to them
pursuant to the applicable Trust Agreement or Pooling and Servicing Agreement
will effect early retirement of the Certificates of such series.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee and any Indenture Trustee will make no representations as
to the validity or sufficiency of the Trust Documents, the Certificates (other
than the authentication of the Certificates) or the Notes or any Receivables or
related documents, and is not accountable for the use or application by the
Servicer of any funds paid to the Sellers or the Servicer in respect of the
Certificates, the Notes or the Receivables. The Owner Trustee and any Indenture
Trustee have not independently verified the Receivables. If no Event of Default
has occurred, the Owner Trustee or the Indenture Trustee is required to perform
only those duties specifically required of it under the Trust Documents.
Generally, those duties are limited to the receipt of the various certificates,
reports or other instruments required to be furnished to the Owner Trustee or
the Indenture Trustee under the Trust Documents, in which case it is only
required to examine them to determine whether they conform to the requirements
of the Trust Documents. The Owner Trustee and any Indenture Trustee shall not be
charged with knowledge of a breach of a representation or warranty, or a failure
by the Servicer to perform its duties under the Trust Documents which failure
constitutes an Event of Default unless the Owner Trustee or the Indenture
Trustee obtains actual knowledge of such breach or such failure as specified in
the Trust Documents.
The Owner Trustee and any Indenture Trustee are under no obligation to
exercise any of the rights or powers vested in them by the Trust Documents or to
make any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Securityholders, unless such Securityholders have
offered to the Owner Trustee or the Indenture Trustee, as the case may be,
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No Securityholder will have any right
under the Trust Documents to institute any proceeding with respect to such Trust
Document or any related agreement, unless such holder previously has given to
the Owner Trustee or the Indenture Trustee written notice of default and unless
the Securityholders then outstanding evidencing not less than 25% of a class of
Securities constituting at least 25% of the then Pool Balance for such series
have made written request upon the Owner Trustee or the Indenture Trustee to
institute such proceeding in its own name as Owner Trustee or Indenture Trustee
thereunder and have offered to the Owner Trustee or Indenture Trustee reasonable
indemnity and the Owner Trustee or Indenture Trustee for 30 days has neglected
or refused to institute any such proceeding.
THE OWNER TRUSTEE AND THE INDENTURE TRUSTEE
The Owner Trustee and any Indenture Trustee for each Trust will be
specified in the related Prospectus Supplement. The Owner Trustee or the
Indenture Trustee, in its individual capacity or otherwise, may hold Securities
in its own name or as pledgee. For the purpose of meeting the legal requirements
of certain jurisdictions, the Servicer and the Owner Trustee acting jointly (or
in some instances, the Owner Trustee acting alone) with (unless the related
Prospectus Supplement provides otherwise) the consent of the third party credit
enhancement provider, if any, so long as no Insurer Default (as defined in the
related Prospectus Supplement) has occurred and is continuing, shall have the
power to appoint co-trustees or separate trustees of all or any part of the
Trust. In the event of such appointment, all rights, powers, duties, and
obligations conferred or imposed upon the Owner Trustee by the Trust Documents
shall be conferred or imposed upon the Owner Trustee and
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such separate trustee or co-trustee jointly, or, in any jurisdiction in which
the Owner Trustee shall be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who shall exercise and perform
such rights, powers, duties and obligations solely at the direction of the Owner
Trustee.
The Owner Trustee and any Indenture Trustee may resign at any time, in
which event the related Seller with (unless the related Prospectus Supplement
provides otherwise) the consent of the third party credit enhancement provider,
if any, so long as no Insurer Default (as defined in the related Prospectus
Supplement) has occurred and is continuing, will be obligated to appoint a
successor trustee. The related Seller with (unless the related Prospectus
Supplement provides otherwise) the consent of the third party credit enhancement
provider, if any (so long as no Insurer Default (as defined in the related
Prospectus Supplement) has occurred and is continuing), may also remove the
Owner Trustee if the Owner Trustee ceases to be eligible to continue as such
under the Trust Documents, becomes legally unable to act or becomes insolvent.
In such circumstances, the related Seller will be obligated to appoint a
successor trustee. Any resignation or removal of the Owner Trustee and
appointment of a successor trustee does not become effective until acceptance of
the appointment by the successor trustee. Any Indenture Trustee may be removed
as set forth in the related Prospectus Supplement.
The Trust Documents will provide that the Servicer will pay the Owner
Trustee's and any Indenture Trustee's fees. The Trust Documents will further
provide that the Owner Trustee and any Indenture Trustee will be entitled to
indemnification by the related Seller and the Servicer for, and will be held
harmless against, any loss, liability, fee, disbursement or expense incurred by
the Owner Trustee or any Indenture Trustee not resulting from its own willful
misfeasance, bad faith or negligence (other than by reason of a breach of any of
its representations or warranties set forth in the Trust Documents). The Trust
Documents will further provide that the Servicer will indemnify the Owner
Trustee and any Indenture Trustee for certain taxes that may be asserted in
connection with the transaction.
INDEMNIFICATION OF THE INSURER
The Trust Documents may provide that the third party credit enhancement
provider with respect to a Trust will be indemnified by the related Seller and
the Servicer for, and held harmless against, any loss, liability, fee,
disbursement or expense incurred by such third party credit enhancement provider
not resulting from its own willful misfeasance, bad faith or negligence (other
than by reason of a breach of any of its representations or warranties set forth
in the Trust Documents) and arising out of or resulting from the use, ownership
or operation by the Servicer or any affiliate thereof of a Financial Vehicle.
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
GENERAL
The retail installment sale contracts ("Contracts") are "chattel paper" as
defined in the Uniform Commercial Code as in effect in California and the other
states in which the Contracts are originated ("UCC"). Pursuant to the UCC, an
ownership interest in chattel paper may be perfected by possession of the
chattel paper or filing a UCC-1 financing statement with the Secretary of State
or other central filing office in the appropriate state as required by the
applicable UCC.
Franklin Capital will take or cause to be taken such action as is required
to perfect the Trust's rights in the Contracts and will represent and warrant
that the Trust, subject to the interest of the provider of credit enhancement,
if any, has good title, free and clear of liens and encumbrances, to each
Contract on the Closing Date. Under the Trust Documents, Franklin Capital, as
Servicer, will have possession of the Contracts following the sale of the
Contracts to the Trust and will hold the Contracts as custodian and agent of the
Owner Trustee and Indenture Trustee, if any. The Contracts will not be
physically marked to indicate the ownership interest thereof by the Trust. UCC-1
financing statements will also be filed with the California and Utah Secretary
of State to perfect by filing and give notice of the Trust's ownership interest
in the Contracts. Franklin Capital will agree in the Trust Documents to take all
necessary action to preserve and protect the Trust's ownership interest in the
Contracts. Each Seller will represent and warrant that each Contract is secured
by a Financed Vehicle.
SECURITY INTERESTS IN VEHICLES
All of the Financed Vehicles were registered in the states where the
related Contracts were originated. Security interests in motor vehicles
registered in the State of California may be perfected by depositing with the
California Department of Motor Vehicles a properly endorsed certificate of title
showing the secured party as legal owner or an application for an original
registration together with an application for registration of the secured party
as legal owner. Security interests in motor vehicles registered in most other
states are perfected, generally, in a similar manner. The related Seller will
represent and warrant to each related Trust in the Trust Documents that all
steps necessary to obtain a perfected first priority security interest with
respect to the Financed Vehicles securing the Contracts have been taken. If the
Servicer fails, because of clerical error or otherwise, to effect or maintain
such notation for a Financed Vehicle, the Trust may not have a first priority
security interest in such Financed Vehicle. Each Receivable in a pool, unless
that related Prospectus Supplement indicates otherwise, typically prohibits the
sale or transfer of the Financed Vehicle without the Servicer's consent.
Perfection of security interests in the motor vehicles is generally
governed by the motor vehicle registration laws of the state in which the motor
vehicle is registered. In California and the other states in which the
Receivables have been originated, a security interest in a motor vehicle
generally may be perfected only by causing such motor vehicle's certificate of
title to be amended to note the security interest of the secured party. Such
notation of a secured party's security interest is generally effected in
California and such other states by depositing with the applicable state motor
vehicles registrar, or similar authority, along with any necessary registration
fees, the motor vehicle's certificate of title and an application containing the
name and address of the secured party.
Pursuant to the Purchase Agreement, Franklin Capital will assign its
security interests in the Financed Vehicles securing the Receivables to the
related Seller and, pursuant to the Trust Documents, the related Seller will
assign its security interests in the Financed Vehicles securing the Receivables
to the Owner Trustee. However, because of the administrative burden and expense,
the Servicer, the related Seller and the Owner Trustee will not amend any
certificate of title to identify the Trust as the new secured party on the
certificates of title relating to the Financed Vehicles. Also,
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the Servicer will continue to hold any certificates of title relating to the
Financed Vehicles in its possession as custodian for the Owner Trustee pursuant
to the Trust Documents.
Under the law of California and most other states, assignments such as
those under the Purchase Agreement and the Trust Documents are an effective
conveyance of a security interest without amendment of any security interest
noted on a motor vehicle's certificate of title, and the assignee succeeds
thereby to the assignor's rights as secured party. In the absence of fraud or
forgery by the motor vehicle owner or the Servicer or administrative error by
state or local agencies, the notation of the Servicer's security interest on the
certificates of title or the Servicer's possession of the certificate of title
will be sufficient to protect the Trust against the rights of subsequent
purchasers of a Financed Vehicle or subsequent lenders who take a security
interest in a Financed Vehicle. If there are any Financed Vehicles as to which a
perfected security interest was not obtained, the Trust's security interest
would be subordinate to, among others, subsequent purchasers of the Financed
Vehicles, lienholders and holders of perfected security interests. Such a
failure, however, would constitute a breach of Franklin Capital's warranties
under the Purchase Agreement and of the related Seller's warranties under the
Trust Documents and would create an obligation of Franklin Capital and/or
another party, if any, designated, in the related Prospectus Supplement, under
the Purchase Agreement and of the related Seller and/or another party, if any,
designated, in the related Prospectus Supplement, under the Trust Documents to
purchase the related Receivable unless the breach is cured. The related Seller
will assign its rights under the Purchase Agreement to the Trust. By not
identifying the Trust as the secured party on the certificate of title, the
security interest of the Trust in the Financed Vehicle could be defeated through
fraud or negligence.
Under the laws of most states, the perfected security interest in a motor
vehicle would continue for four months after a motor vehicle is moved to a state
other than the state in which it is initially registered and thereafter until
the motor vehicle owner re-registers the motor vehicle in the new state. A
majority of states, including California, generally require surrender of a
certificate of title to re-register a motor vehicle; accordingly, a secured
party must surrender possession if it holds the certificate of title to the
motor vehicle, or, in the case of motor vehicles registered in states providing
for the notation of a security interest on the certificate of title but not
possession by the secured party, the secured party would receive notice of
surrender if the security interest is noted on the certificate of title. Thus,
the secured party would have the opportunity to re-perfect its security interest
in the motor vehicle in the state of relocation. In states that do not require a
certificate of title for registration of a motor vehicle, re-registration could
defeat perfection. In the ordinary course of servicing receivables, Franklin
Capital takes steps to effect re-perfection upon receipt of notice of
re-registration or information from the Obligor as to relocation. Similarly,
when an Obligor sells a motor vehicle, Franklin Capital must surrender
possession of the certificate of title or will receive notice as a result of its
security interest noted thereon and accordingly will have an opportunity to
require satisfaction of the related Receivable before release of the security
interest. Under the Trust Documents, the Servicer is obligated to take
appropriate steps, at the Servicer's expense, to maintain perfection of security
interests in the Financed Vehicles.
Under the laws of California, Texas and most other states, liens for
repairs performed on, and for storage of, a motor vehicle and liens for certain
unpaid taxes take priority over even a perfected security interest in a Financed
Vehicle. The Internal Revenue Code of 1986, as amended, also grants priority to
certain federal tax liens over the security interest of a secured party. The
laws of certain states and federal law permit the confiscation of motor vehicles
under certain circumstances if used in unlawful activities, which may result in
the loss of a secured party's perfected security interest in the confiscated
motor vehicle. Franklin Capital will represent to each Seller and the related
Seller will represent to each related Trust that each security interest in a
Financed Vehicle is or will be prior to all other present liens (other than tax
liens and liens that arise by operation of law) upon and security interests in
such Financed Vehicle. However, liens for repairs or taxes, or the confiscation
of a Financed Vehicle, could arise or occur at any time during the term of a
Receivable. No notice will
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be given to the Owner Trustee, the Indenture Trustee, if any, or any
Securityholders in the event such a lien arises or confiscation occurs.
REPOSSESSION
In the event of a default by motor vehicle purchasers, the holder of the
motor vehicle retail installment sale contract has all the remedies of a secured
party under the UCC, except where specifically limited by other laws. In
addition to the provisions of the UCC, under California law the Contracts
originated in California are subject to the provisions of its Rees-Levering
Motor Vehicle Sales and Finance Act (the "Rees-Levering Act"). Contracts
originated in other states are subject to retail installment sale laws and
similar laws of those states. The provisions of the Rees-Levering Act and
similar laws of other states control in the event of a conflict with the
provisions of the UCC. The UCC remedies of a secured party include the right to
repossession by self-help means, unless such means would constitute a breach of
the peace. Unless a motor vehicle is voluntarily surrendered, self-help
repossession by outside agencies is the method employed by Franklin Capital in
the majority of instances in which a default occurs and is accomplished by
retaking possession of the financed motor vehicle. The Rees-Levering Act and
similar laws of other states place restrictions on repossession sales, including
notice to the debtor of the intent to sell and of the debtor's right to redeem
the motor vehicle. In addition, the UCC requires commercial reasonableness in
the conduct of the sale. In cases where the Obligor objects or raises a defense
to repossession, or if otherwise required by applicable state law, a court order
must be obtained from the appropriate state court, and the motor vehicle must
then be repossessed in accordance with that order. In certain states under
certain circumstances after the motor vehicle has been repossessed, the Obligor
may reinstate the contract by paying the delinquent installments on the contract
and other amounts due.
NOTICE OF SALE; REDEMPTION RIGHTS
In the event of default by the Obligor, some jurisdictions require that the
Obligor be notified of the default and be given a time period within which the
Obligor may cure the default prior to repossession. Generally, this right of
reinstatement may be exercised on a limited number of occasions in any one-year
period.
The UCC and other state laws require the secured party to provide the
Obligor with reasonable notice of the date, time, and place of any public sale
and/or the date after which any private sale of the collateral may be held. In
some states the Obligor has the right to redeem the collateral prior to actual
sale by paying the secured party the unpaid principal balance of the obligation
plus reasonable expenses for repossessing, holding, and preparing the collateral
for disposition and arranging for this sale, plus, in some jurisdictions,
reasonable attorneys' fees, or, in some other states, by payment of delinquent
installments or the unpaid balance. Repossessed motor vehicles are generally
resold by Franklin Capital through automobile auctions which are attended
principally by automotive dealers.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of the repossessed motor vehicles generally will be
applied to the expenses of resale and repossession and then to the satisfaction
of the indebtedness of the Obligor on the Receivable. While some states impose
prohibitions or limitations on deficiency judgments if the net proceeds from
resale do not cover the full amount of the indebtedness, a deficiency judgment
can be sought in those states that do not prohibit or limit such judgments.
Under California law the proceeds from the resale of the motor vehicle securing
the debtor's loan are required to be applied first to the expenses of resale and
repossession, and if the remaining proceeds are not sufficient to repay the
indebtedness, the creditor may seek a deficiency judgment for the balance. The
priority of application of proceeds of sale as to repossessed motor vehicles
under Contracts originated in most other states is similar. However, the
deficiency judgment would be a personal
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judgment against the Obligor for the shortfall, and a defaulting Obligor can be
expected to have very little capital or sources of income available following
repossession. Therefore, in many cases, it may not be useful to seek a
deficiency judgment or, if one is obtained, it may be settled at a significant
discount.
Occasionally, after resale of a motor vehicle and payment of all expenses
and indebtedness, there is a surplus of funds. In that case, the UCC requires
the lender to remit the surplus to any other holder of any lien with respect to
the motor vehicle or, if no such lienholder exists or there are remaining funds,
the UCC requires the lender to remit the surplus to the former Obligor.
INSOLVENCY MATTERS
Franklin Capital intends that any transfer of Receivables to the Sellers
will constitute a sale, rather than a pledge of the Receivables to secure
indebtedness of Franklin Capital. However, if Franklin Capital were to become a
debtor under the federal bankruptcy code or similar applicable state laws
(collectively, the "Insolvency Laws"), a creditor or trustee in bankruptcy
thereof, or Franklin Capital as debtor-in-possession, might argue that such sale
of Receivables was a pledge of Receivables rather than a sale and/or that the
assets and liabilities of the Seller should be consolidated with the assets and
liabilities of Franklin Capital. Each Seller has taken and will take steps in
structuring the transactions contemplated hereby and by any Prospectus
Supplement that are intended to minimize the risk that the voluntary or
involuntary application for relief under any Insolvency Law would result in the
assets and liabilities of the related Seller being consolidated with the assets
and liabilities of any other person. Nevertheless, if Franklin Capital were to
become a debtor under any Insolvency Laws, and such positions -- that the
transfer of Receivables was a pledge rather than a sale or otherwise should be
treated as part of its bankruptcy estate and/or that the assets and liabilities
of the related Seller should be consolidated -- were presented to or accepted by
a court, then delays in payments to Securityholders could occur or reductions in
the amounts of such payments could result. In addition, if a Seller were to
become a debtor under any Insolvency Law and a creditor or trustee-in-bankruptcy
of such debtor or such debtor itself were to take the position that the sale of
Receivables to such Trust should instead be treated as a pledge of such
Receivables to secure a borrowing of such debtor, delays in payments of
collections of Receivables to the related Securityholders could occur or
reductions in the amounts of such payments could result. In addition, if the
transfer of any Receivables is recharacterized as a pledge, a tax lien, other
governmental lien, or other lien created by operation of law on the property of
the Servicer, the holder of such lien may have priority over the Trust's
interest in such Receivables. See "The Sellers."
In addition, in a case recently decided by the United States Court of
Appeals for the Tenth Circuit, Octagon Gas System, Inc. v. Rimmer, such Circuit
Court found that "accounts," a defined term under the Uniform Commercial Code,
sold prior to a bankruptcy should be treated as part of the bankruptcy estate of
the seller of such accounts. If Franklin Capital or a Seller were to become a
debtor in a bankruptcy proceeding and a court applied the reasoning of the
Circuit Court reflected in the case described above, delays in payments to
Securityholders could occur or reductions in the amounts of such payments could
result.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. These laws include the Truth-in-Lending Act, the Equal Credit
Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting
Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the
Federal Reserve Board's Regulations B and Z, state adaptations of the National
Consumer Act and of the Uniform Consumer Credit Code, the Rees-Levering Act and
state motor vehicle retail installment sale acts, retail installment sale acts
and other similar laws. Also, state laws impose finance charge ceilings and
other restrictions on consumer transactions and require contract
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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 (such
as the Trust's) ability to enforce consumer finance contracts such as the
Receivables.
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, state statutes or the common law in certain
states, has the effect of subjecting a seller (and certain related lenders and
their assignees, such as the Trust) in a consumer credit transaction and any
assignee of the seller to all claims and defenses which the obligor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by the obligor under the contract, and
the holder of the contract may also be unable to collect any balance remaining
due thereunder from the obligor.
Most of the Receivables will be subject to the requirements of the FTC
Rule. Accordingly, the Owner Trustee, as holder of the Receivables, will be
subject to any claims or defenses that the purchaser of the Financed Vehicle may
assert against the seller of the Financed Vehicle. Such claims are limited to a
maximum liability equal to the amounts theretofore paid by the obligor on the
Receivable. 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 motor vehicles furnish a written statement signed by the seller certifying
the accuracy of the odometer reading. If a seller is not properly licensed or if
an Odometer Disclosure Statement was not provided to the purchaser of the
related financed motor vehicle, the obligor may be able to assert a defense
against the seller of the motor vehicle.
Courts have imposed general equitable principles on secured parties
pursuing repossession of collateral or litigation involving deficiency balances.
These equitable principles may have the effect of relieving an obligor from some
or all of the legal consequences of a default.
In several cases, obligors have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. Courts have generally upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by the
creditor do not involve sufficient state action to afford constitutional
protection to consumers.
In addition to those parties, if any, identified in the related Prospectus
Supplement, Franklin Capital and each Seller will warrant under the Purchase
Agreement and the Trust Documents, that each Receivable complies with all
requirements of law in all material respects. Accordingly, if an Obligor has a
claim against the Trust for violation of any law and the Owner Trustee or the
Indenture Trustee, as the case may be, determines such claim materially and
adversely affects the Trust's interest in a Receivable, such violation would
constitute a breach of warranty under the Purchase Agreement and the Trust
Documents and would create an obligation of Franklin Capital, the related Seller
and the party, if any, identified in the related Prospectus Supplement, to
repurchase the Receivable, without recourse to the Trust or the related
Securityholders, unless the breach is cured.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
resale upon collateral or enforce a deficiency judgment. For example, in a
proceeding under the federal bankruptcy law, a court may prevent a lender from
repossessing a motor vehicle, and, as part of the rehabilitation plan, reduce
the amount of the secured indebtedness to the market value of the motor vehicle
at the time of bankruptcy (as determined by the court), leaving the party
providing financing as a general unsecured creditor for the remainder of the
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indebtedness. A bankruptcy court may also reduce the monthly payments due under
a contract or change the rate of interest and time of repayment of the
indebtedness.
TRANSFERS OF VEHICLES
The Receivables in a pool, unless the related Prospectus Supplement
indicates otherwise, typically prohibit the sale or transfer of the motor
vehicle securing a Receivable without the Servicer's consent and permit the
Servicer to accelerate the maturity of the Receivable upon a sale or transfer
without its consent. The Servicer generally will not consent to a sale or
transfer without prepayment of the Receivable. However, in certain circumstances
the Servicer may enter into a transfer of equity agreement with the secondary
purchaser for the purpose of effecting the transfer of the Financed Vehicle.
FEDERAL INCOME TAX CONSEQUENCES
The entire discussion which follows under the caption "Federal Income Tax
Consequences," insofar as it constitutes statements of law or legal conclusions,
represents the opinion of Weil, Gotshal & Manges LLP ("Federal Tax Counsel") and
is subject to the qualifications set forth herein. The discussion summarizes the
material federal income tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. The summary does not purport to
deal with federal income tax consequences or special rules that are applicable
to certain categories of holders such as dealers in securities or foreign
currency, banks, other financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, tax exempt entities, persons
that hold the Notes as a position in a "straddle," or as part of a synthetic
security or "hedge," "conversion transaction" or other integrated investment and
persons that have a "functional currency" other than the U.S. dollar. In
addition, this summary is generally limited to investors who will hold the
Certificates as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). Prospective investors are encouraged to consult their own
tax advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the Notes and
the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended, the Treasury regulations promulgated
thereunder and judicial or ruling authority, all of which are subject to change,
which change may be retroactive. Moreover, there are no cases or Internal
Revenue Service ("IRS") rulings on many of the issues discussed below and no
ruling on any of the issues discussed below will be sought from the IRS. The
opinion of Federal Tax Counsel is not binding on the IRS or the courts. As a
result, the IRS may disagree with all or a part of the discussion below. For
purposes of the following summary, references to the Trust, the Notes, the
Certificates and related terms, parties and documents shall be deemed to refer,
unless otherwise specified herein, to each Trust and the Notes, Certificates and
related terms, parties and documents applicable to such Trust.
The federal income tax consequences to Certificateholders will vary
depending on whether the Trust will be treated for federal income tax purposes
as a partnership, as a division of its sole Certificateholder rather than as a
separate entity, as a grantor trust, or as a security device for the issuance of
Certificates that are to be treated as indebtedness for federal income tax
purposes. The Prospectus Supplement for each series of Certificates will specify
whether the Trust will be treated as a partnership, a division, a grantor trust,
or as a security device as just described.
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TRUSTS TREATED AS PARTNERSHIPS OR AS DIVISIONS
TAX CHARACTERIZATION OF THE TRUST AS A DIVISION
With respect to any Trust which has only one Certificateholder, the related
Prospectus Supplement may specify that for federal income tax purposes the Trust
is intended to be disregarded as a separate entity and is intended to be treated
as a division of its sole Certificateholder. With respect to any such Trust,
upon issuance of the related Securities, Federal Tax Counsel will issue its
opinion, subject to the assumptions set forth therein, that the Trust will not
be an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion, subject to the assumptions
set forth therein, that a Trust which is intended to be a partnership, as
specified in the related Prospectus Supplement, will not be an association (or
publicly traded partnership) taxable as a corporation for federal income tax
purposes.
If the IRS were to successfully assert that the Trust was a publicly traded
partnership taxable as a corporation for federal income tax purposes, the Trust
would be subject to corporate income tax on its taxable income. The Trust's
taxable income would include all its income on the Receivables, possibly reduced
by its interest expense on the Notes. Any such corporate income tax could
materially reduce cash available to make payments on the Notes and distributions
on the Certificates, and Certificateholders could be liable for any such tax
that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR A DIVISION
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Sellers will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Federal Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, deliver its opinion, subject to
the assumptions set forth therein, that the Notes will be classified as debt for
federal income tax purposes. The discussion below assumes this income tax
characterization of the Notes is correct.
OID. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars, that the Notes are not Strip Notes and that the
Notes have a fixed maturity greater than one year after their issue date.
Moreover, the discussion assumes that the interest formula for the Notes meets
the requirements for "qualified stated interest" under Treasury regulations (the
"OID regulations") relating to original issue discount ("OID"), and that any OID
on the Notes (i.e, any excess of the "stated redemption price at maturity" of
the Notes over their issue price) does not exceed a de minimis amount (i.e.,
generally 1/4% of their principal amount multiplied by the number of full years
included in their term), all within the meaning of the OID regulations. If these
conditions are not satisfied with respect to any given series of Notes,
additional tax considerations with respect to such Notes will be disclosed in
the applicable Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions the Notes
generally will not be considered issued with OID. The stated interest thereon
will be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's regular method of tax accounting.
Under the OID regulations, a holder of a Note issued with a de minimis amount of
OID generally must include such OID in income, on a pro rata basis, only as
principal payments are made on the Note. However, a holder may elect to accrue
de minimis OID under a constant yield method in connection with an election to
accrue all interest, discount and premium on the Note using the constant yield
method. See "-- Trusts Treated as Grantor Trusts -- Taxation of Holders if
Stripped Bond Rules Do Not Apply -- Election to Treat All Interest as OID" for a
discussion of such election. A purchaser who buys a Note for more or less than
its principal amount will generally be subject, respectively, to the bond
premium amortization or market discount rules of the Code.
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SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale (not including accrued but unpaid interest) and the
holder's adjusted tax basis in the Note (not including accrued but unpaid
interest). The adjusted tax basis of a Note to a particular Noteholder will
equal the holder's cost for the Note, increased by any market discount,
acquisition discount, OID, if any, and gain previously included by such
Noteholder in income with respect to the Note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss generally 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. Any such gain or loss would
be long-term capital gain or loss if the holder's holding period exceeded one
year. The maximum rate of federal income taxation on net long-term capital gains
realized by a non-corporation is 20% with respect to capital assets held for
more than one year. Capital losses generally may be used only to offset capital
gains.
BACKUP WITHHOLDING. Payments made on, and proceeds from the sale of Notes
may be subject to a "back up" withholding tax of 31% unless the holder complies
with certain identification requirements. Any amounts withheld will be allowed
as a credit against the holder's federal income tax, provided that the required
information is provided to the IRS.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust. If so treated, the Trust might be
treated as a publicly traded partnership that would be taxable as a corporation
with the adverse consequences described above unless it met certain qualifying
income tests. Even if the trust qualified for such exception, treatment of the
Notes as equity interests in a publicly traded partnership could have adverse
tax consequences to certain holders. For example, income to foreign investors
generally would be subject to U.S. federal income tax payments, tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of Trust expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE TRUST AS A PARTNERSHIP. With respect to any Trust
intended to be a partnership for tax purposes, as set forth in the related
Prospectus Supplement, each Seller and Franklin Capital will agree, and the
Certificateholders, by their purchase of Certificates will be deemed to have
agreed, to treat the Trust as a partnership for federal, state and local tax
purposes, with the assets of the partnership being the assets held by the Trust,
the partners of the partnership being the Certificateholders, and the Notes
being debt of the partnership. However, the proper characterization of such an
arrangement involving the Trust, the Certificates, the Notes, the Sellers and
Franklin Capital is not clear because there is no authority on any closely
comparable transaction.
For example, because the Certificates may have certain features
characteristic of debt, the Certificates might be considered debt of either the
related Seller or the Trust. Generally, provided such Certificates are issued at
or close to face value, any such characterization should not result in
materially adverse tax consequences to Certificateholders as compared to the
consequences from treatment of the Certificates as equity in a partnership,
described below. If Certificates are issued at a substantial discount, a
discussion of the relevant tax consequences will be set forth in the related
Prospectus Supplement. The following discussion assumes that the Certificates
represent equity interests in a partnership for federal income tax purposes.
STRIP CERTIFICATES, ETC. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Strip Certificates, and that a series of Securities includes a
single class of Certificates. If these conditions are not satisfied with respect
to
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any given series of Certificates, additional tax considerations with respect to
such Certificates will be disclosed in the applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. In certain instances, however, the
Trust could have an obligation to make payments of withholding tax on behalf of
a Certificateholder. See "Backup Withholding" below. The Trust's income will
consist primarily of interest and finance charges earned on the Receivables
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Receivables. The Trust's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Receivables.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Receivables that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Receivables that corresponds to any excess of the issue price of
Certificates over their principal amount. Although not free from doubt, based on
the economic arrangement of the parties, this approach for allocating Trust
income should be permissible under applicable Treasury regulations. The IRS may,
however, require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis regardless of their normal method of tax accounting and
Certificateholders may become liable for taxes on Trust income even if they have
not received cash from the Trust to pay such taxes.
All or some of the taxable income allocated to a Certificateholder that is
a pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
Depending upon whether the Trust is deemed engaged in a trade or business,
an individual taxpayer's share of expenses of the Trust (including fees to the
Servicer but not interest expense) could be miscellaneous itemized deductions.
Such deductions might be disallowed to the individual in whole or in part and
might result in such holder being taxed on an amount of income that exceeds the
amount of cash actually distributed to such holder over the life of the Trust.
Such deductions may also be subject to reduction under Section 68 of the Code if
the individual's adjusted gross income exceeds certain limits. Moreover,
non-corporate Certificateholders might not be able to deduct such expenses for
purposes of the alternative minimum tax.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the Trust
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Receivables will not be
issued with OID and, therefore, the Trust should not have OID income. However,
the purchase price paid by the Trust for
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the Receivables may be greater or less than the remaining principal balance of
the Receivables at the time of purchase. If so, the Receivables will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
Trust will make this calculation on an aggregate basis, but might be required to
recompute it on a Receivable-by-Receivable basis.)
If the Trust acquires the Receivables at a market discount or premium, the
Trust will elect to include any such discount in income currently as it accrues
over the life of the Receivables or to offset any such premium against interest
income on the Receivables. As indicated above, a portion of such market discount
income or premium deduction will be allocated to Certificateholders if the
related Trust Agreement so provides. Any such allocation will be disclosed in
the related Prospectus Supplement.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
have contributed its assets to the Trust, as a new partnership, and to have
distributed the interests in the new partnership in liquidation to the
Certificate owners. The Trust does not intend to comply with certain technical
requirements that might apply should such a constructive termination occur. As a
result, the Trust may be subject to certain tax penalties and to additional
expenses if it is required to comply with those requirements. Moreover, the
Schedule K-1 information thereafter distributed to Certificateholders may be
incorrect. Furthermore, the Trust might not be able to comply due to lack of
data.
DISPOSITION OF CERTIFICATES. Generally, gain or loss will be recognized on
a sale or exchange of Certificates in an amount equal to the difference between
the amount realized and the seller's tax basis in the Certificates sold. A
Certificateholder's tax basis in a Certificate will generally equal the holder's
cost increased by the holder's share of Trust income includeable in income
(including for the taxable year of sale) and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificates and the amount realized on a sale of a Certificate would
include the holder's share of liabilities of the Trust (including the Notes). A
holder acquiring Certificates at different prices may be required to maintain a
single aggregate adjusted tax basis in such Certificates and, upon sale or other
disposition of some of the Certificates, to allocate a portion of such aggregate
tax basis to the Certificates sold (rather than maintaining a separate tax basis
in each Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. To avoid those special reporting requirements, the Trust
will elect to include market discount in income as it accrues, thereby
eliminating any ordinary income amount to a selling Certificateholder.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Any gain or loss on a sale or exchange of a Certificate would be capital
gain or loss. The maximum rate of federal income taxation for an individual
Certificateholder on net long-term capital gains is 20% with respect to capital
assets held for more than one year.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual purchase takes place.
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The use of such a monthly convention may not be permitted by existing
Treasury regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. In that event or
in the event future Treasury regulations provide for an additional allocation
method the Trust's method of allocation between transferors and transferees may
be revised to conform.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Owner Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of Trust
income and expense to holders and the IRS on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and taxpayer identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
Each Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS with respect to partnership
items. The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. As discussed below, an
investment in a Certificate is not suitable for any Foreign Person, as defined
below, which is not eligible for a
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complete exemption from U.S. withholding tax on interest under a tax treaty with
the United States. Accordingly, no interest in a Certificate should be acquired
by or on behalf of any such Foreign Person.
For purposes of this tax discussion, a Foreign Person is any person other
than (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate whose income
is includeable in gross income for United States federal income taxation
regardless of source, or (iv) a trust with respect to which a court in the
United States is able to exercise primary authority over its administration and
one or more United States persons have the authority to control all of its
substantial decisions.
No regulations, published rulings or judicial decisions exist that would
discuss the characterization for federal withholding tax purposes with respect
to a Foreign Person of a partnership with activities substantially the same as
the Trust. Depending upon the particular terms of the related Trust Agreement
and Sale and Servicing Agreement, a trust may be considered to be engaged in a
trade or business in the United States for purposes of federal withholding taxes
with respect to Foreign Persons. If the Trust is considered to be engaged in a
trade or business in the United States for such purposes, the income of the
Trust distributable to a Foreign Person would be subject to Federal withholding
tax at a rate of 35% for persons taxable as a corporation and 39.6% for all
other Foreign Persons. Also, in such cases, a Foreign Person that is a
corporation may be subject to the branch profits tax. If the Trust is notified
that a Certificateholder is a Foreign Person, the Trust intends to withhold as
if it were engaged in a trade or business in the United States in order to
protect the Trust from possible adverse consequences of a failure to withhold.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
If a Trust is engaged in a trade or business, each foreign
Certificateholder will be required to file a United States federal individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the Trust's income. A Foreign Person generally
would be entitled to file with the IRS a claim for refund with respect to
withheld taxes, taking the position that no taxes were due because the Trust was
not engaged in a United States trade or business. However, interest payments
made to (or accrued by) a Certificateholder who is a Foreign Person may be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust and for that reason or because of the
nature of the Receivables, the interest may not be considered "portfolio
interest" which may qualify for certain exemption from taxation. As a result,
even if the Trust is not considered to be engaged in a U.S. trade or business,
Certificateholders could be subject to United States federal income tax which
must be withheld at a rate of 30% on their share of the Trust's income (without
reduction for interest expense), unless reduced or eliminated pursuant to an
applicable income tax treaty. If the Trust is notified that a Certificateholder
is a Foreign Person, the Trust may be required to withhold and pay over such
tax, which can exceed the amounts otherwise available for distribution to such a
Certificateholder. A Foreign Person would generally be entitled to file with the
IRS a refund claim for such withheld taxes, taking the position that the
interest was portfolio interest and therefore not subject to U.S. tax. However,
the IRS may disagree and no assurance can be given as to the appropriate amount
of tax liability. As a result, each potential foreign Certificateholder is
encouraged to consult its tax advisor as to whether the tax consequences of
holding an interest in a Certificate make it an unsuitable investment.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
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TRUSTS TREATED AS GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE TRUST AS A GRANTOR TRUST
As specified in the related Prospectus Supplement, Federal Tax Counsel will
deliver its opinion, subject to the assumptions set forth therein, that a Trust
which is intended to be a grantor trust for federal income tax purposes will not
be classified as an association taxable as a corporation and that such Trust
will be classified as a grantor trust under the Code. In this case, owners of
Certificates (referred to herein as "Grantor Trust Certificateholders") will be
treated for federal income tax purposes as owners of a portion of the Trust's
assets as described below. The Certificates issued by a Trust that is treated as
a grantor trust are referred to herein as "Grantor Trust Certificates."
CHARACTERIZATION. Each Grantor Trust Certificateholder will be treated for
federal income tax purposes as the owner of a pro rata undivided interest in
each of the Receivables in the Trust. Any amounts received by a Grantor Trust
Certificateholder in lieu of amounts due with respect to any Receivable because
of a default or delinquency in payment will be treated for federal income tax
purposes as having the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Receivables in the Trust represented by Grantor Trust Certificates,
including interest, market discount, premium, OID, if any, prepayment fees,
assumption fees, any gain recognized upon an assumption and late payment charges
received by the Servicer. Under Code Sections 162 or 212 each Grantor Trust
Certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the Servicer, provided that such amounts
are reasonable compensation for services rendered to the Trust. Grantor Trust
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent such expenses plus such
holder's other miscellaneous itemized deductions exceed two percent of such
holder's adjusted gross income. Such deductions may also be limited by Code
Section 68 for an individual whose adjusted gross income exceeds certain limits.
Moreover, non-corporate Grantor Trust Certificateholders cannot deduct such
expenses for purposes of the alternative minimum tax.
A Grantor Trust Certificateholder using the cash method of accounting must
take into account its pro rata share of income and deductions as and when
collected by or paid to the Servicer. A Grantor Trust Certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the Servicer, whichever is
earlier. If the servicing fees or other amounts paid to the Servicer exceed
reasonable servicing compensation, the amount of such excess would be considered
as an ownership interest retained by the Servicer (or any person to whom the
Servicer assigned all or a portion of the servicing fees) in a portion of the
interest payments on the Receivables. The Receivables would then be subject to
the stripped bond rules of the Code discussed below.
TAXATION OF HOLDERS IF STRIPPED BOND RULES APPLY
In the absence of comprehensive regulations, the tax treatment of stripped
bonds is unclear. The preamble to certain stripped bond regulations suggests
that each purchaser of a Grantor Trust Certificate will be treated with respect
to each Receivable as the purchaser of a single stripped bond consisting of all
of the stripped portions of the applicable Receivable (such portions with
respect to a Receivable are referred to herein as a "Stripped Bond") which
generally should be treated as a single debt instrument issued on the day it is
purchased for purposes of calculating any original issue discount. Generally,
under Treasury regulations relating to Stripped Bonds (the "Section 1286
Treasury Regulations"), if the discount on a Stripped Bond is larger than a de
minimis amount (as calculated for purposes of the OID rules of the Code) such
Stripped Bond will be considered to have been issued with OID. See "-- Original
Issue Discount" below. Based on the preamble to the
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Section 1286 Treasury Regulations, although the matter is not entirely clear,
the interest income on the Certificates up to the sum of the Pass-Through Rate
and the portion of the Servicing Fee Rate that does not constitute excess
servicing should be treated as "qualified stated interest" within the meaning of
the Section 1286 Treasury Regulations, assuming all other requirements for
treatment as qualified stated interest are satisfied, and such income will be so
treated in the Trustee's tax information reporting.
ORIGINAL ISSUE DISCOUNT. When Stripped Bonds have more than a de minimis
amount of OID, the special rules of the Code relating to "original issue
discount" (currently Sections 1271 through 1275) will be applicable to a Grantor
Trust Certificateholder's interest in those Stripped Bonds. Generally, a Grantor
Trust Certificateholder that acquires an interest in a Stripped Bond issued or
acquired with OID must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Stripped Bond for each day on which it owns
a Certificate, including the date of purchase but excluding the date of
disposition. Although the proper method is not entirely clear, the Trust intends
to calculate the daily portions of OID with respect to a Stripped Bond generally
as follows: A calculation will be made of the portion of OID that accrues on the
Stripped Bond during each successive monthly accrual period (or shorter period
in respect of the date of original issue or the final Distribution Date). This
will be done, in the case of each full monthly accrual period, by adding (i) the
present value of all remaining payments to be received on the Stripped Bond
under the prepayment assumption, if any, used in respect of the Stripped Bonds
and (ii) any payments received during such accrual period, and subtracting from
that total the "adjusted issue price" of the Stripped Bond at the beginning of
such accrual period. No representation is made that the Stripped Bonds will
prepay at any prepayment assumption. The "adjusted issue price" of a Stripped
Bond at the beginning of the first accrual period is its issue price (as
determined for purposes of the OID rules of the Code) and the "adjusted issue
price" of a Stripped Bond at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment (other than "qualified stated interest") made at the
end of or during that accrual period. The OID accruing during such accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the period. With respect to an initial
accrual period shorter than a full monthly accrual period, the daily portions of
OID must be determined according to an appropriate allocation under either an
exact or approximate method set forth in the OID Regulations, or some other
reasonable method, provided that such method is consistent with the method used
to determine the yield to maturity of the Receivables.
With respect to the Stripped Bonds, the method of calculating OID as
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in any given accrual period to reflect the fact that
prepayments are occurring at a faster or slower rate than the prepayment
assumption used in respect of the Stripped Bonds.
The Trust intends to account for OID, if any, reportable by Grantor Trust
Certificateholders by reference to the price paid for a Certificate by an
initial purchaser, although the amount of OID will differ for subsequent
purchasers. Such subsequent purchasers are encouraged to consult their tax
advisors regarding the proper calculation of OID taxable to them.
TAXATION OF HOLDERS IF STRIPPED BOND RULES DO NOT APPLY
PREMIUM. The price paid for a Grantor Trust Certificate by a holder will
be allocated to such holder's undivided interest in each Receivable based on
each Receivable's relative fair market value, so that such holder's undivided
interest in each Receivable will have its own tax basis. A Grantor Trust
Certificateholder that acquires an interest in Receivables at a premium may
elect to amortize such premium under a constant yield method. Amortizable bond
premium will be treated as an offset to interest income on such Grantor Trust
Certificate. The tax basis to such Grantor Trust Certificateholder in such
Certificate will be reduced to the extent that amortizable premium is applied to
offset interest payments. It is unclear whether a reasonable prepayment
assumption should be
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used in computing amortization of premium allowable under Code Section 171. A
Grantor Trust Certificateholder that makes this election for Receivables that
are construed to be acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Grantor Trust Certificateholder acquires
during the year of the election or thereafter. Upon a prepayment of a
Receivable, the Certificateholder should recognize a loss with respect to any
unamortized premium.
MARKET DISCOUNT. A Grantor Trust Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 to the extent an undivided
interest in a Receivable is considered to have been purchased at a "market
discount." Generally, the amount of market discount is equal to the excess of
the portion of the principal amount of such Receivable allocable to such
holder's undivided interest over such holder's tax basis in such interest.
Market discount with respect to a Receivable will be considered to be zero if
the amount allocable to the Receivable is less than 0.25% of the Receivable's
stated redemption price at maturity multiplied by its weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond shall be
treated as ordinary income to the extent that it does not exceed the accrued
market discount at the time of such payment. The amount of accrued market
discount for purposes of determining the tax treatment of subsequent principal
payments or dispositions of the market discount bond is to be reduced by the
amount so treated as ordinary income. The Code also grants the Treasury
Department authority to issue regulations providing for the computation of
accrued market discount on debt instruments, the principal of which is payable
in more than one installment. Because the regulations described above have not
been issued, it is unclear as to what effect those regulations might have on the
tax treatment of a Grantor Trust Certificate purchased at a discount.
A holder who acquires a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred to above applies. Any such deferred
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includeable in income. If such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
ELECTION TO TREAT ALL INTEREST AS OID. The OID regulations permit a
Grantor Trust Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were to be
made with respect to a Grantor Trust Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Grantor Trust Certificateholder acquires during the
year of the election or thereafter. See "-- Market Discount" above. Similarly, a
Grantor Trust Certificateholder that makes this election for a Grantor Trust
Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Grantor Trust Certificateholder owns or
acquires. See "-- Premium" above. The election to accrue interest, discount and
premium on a constant yield method with respect to a Grantor Trust Certificate
is irrevocable.
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TAXATION OF HOLDERS REGARDLESS OF WHETHER STRIPPED BOND RULES APPLY
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the owner's
adjusted basis in the Grantor Trust Certificate. Such adjusted basis generally
will equal the seller's purchase price for the Grantor Trust Certificate,
increased by the amount of OID and market discount (if any) included in the
seller's gross income with respect to the Grantor Trust Certificate, and reduced
by payments (other than qualified stated interest) on the Grantor Trust
Certificate and any amortized premium. Subject to the discussion of market
discount above, such gain or loss generally will be capital gain or loss to an
owner for which a Grantor Trust Certificate is a "capital asset" within the
meaning of Section 1221, and will be long-term if the Grantor Trust Certificate
has been owned for the requisite holding period.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Servicer will furnish or
make available, within a reasonable time after the end of each calendar year, to
each person who was a Grantor Trust Certificateholder at any time during such
year, such information as may be deemed necessary or desirable to assist Grantor
Trust Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to beneficial owners or
financial intermediaries that hold Grantor Trust Certificates as nominees on
behalf of beneficial owners. Backup withholding will be required with respect to
any payments on the Grantor Trust Certificates and the sales proceeds there of
unless the recipient has complied with certain certification requirements. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability,
provided that the required information is provided to the IRS.
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CERTAIN CERTIFICATES TREATED AS INDEBTEDNESS
Upon the issuance of Certificates that are intended to be treated as
indebtedness for federal income tax purposes, Federal Tax Counsel will opine,
subject to the assumptions set forth therein, that based upon its analysis of
the factors discussed below and certain assumptions and qualifications the
Certificates will be treated as indebtedness for federal income tax purposes.
However, opinions of counsel are not binding on the IRS and there can be no
assurance that the IRS could not successfully challenge this conclusion. Such
Certificates that are intended to be treated as indebtedness are herein referred
to as "Debt Certificates" and holders of such Certificates are herein referred
to as "Debt Certificateholders."
Each Seller will express in the Trust Documents its intent that, for
federal, state and local tax purposes, the Debt Certificates be indebtedness
secured by the Receivables. Each Seller will agree and each Debt
Certificateholder, by acquiring an interest in a Debt Certificate, will be
deemed to agree to treat the Debt Certificates as indebtedness for federal,
state and local tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transactions
contemplated by the Trust Documents, the Sellers expects to treat such
transactions, for regulatory and financial accounting purposes, as a sale of
ownership interests in the Receivables and not as debt obligations.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property, or a loan the repayment of which is secured by
the property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction. The form of a transaction, while a
relevant factor, is not conclusive evidence of its economic substance. In
appropriate circumstances, the courts have allowed taxpayers, as well as the
IRS, to treat a transaction in accordance with its economic substance, as
determined under federal income tax laws, notwithstanding that the participants
characterize the transaction differently for non-tax purposes. (In some
instances, however, courts have held that a taxpayer is bound by a particular
form it has chosen for a transaction, even if the substance of the transaction
does not accord with its form. It is expected that Federal Tax Counsel will
advise that the rationale of those latter cases will not apply to the
transactions evidenced by a series of Debt Certificates.)
While the IRS and the courts have set forth several factors to be taken
into account in determining whether the substance of a transaction is a sale of
property or a secured indebtedness for federal income tax purposes, the primary
factor in making this determination is whether the transferee has assumed the
risk of loss or other economic burdens relating to the property and has obtained
the economic benefits of ownership thereof. Federal Tax Counsel will analyze and
rely on several factors in reaching its opinion that the weight of the benefits
and burdens of ownership of the Receivables has not been transferred to the Debt
Certificateholders and that the Debt Certificates are properly characterized as
indebtedness for federal income tax purposes. Contrary characterizations that
could be asserted by the IRS are described below under "-- Possible
Classification of the Transaction as a Partnership or as an Association Taxable
as a Corporation."
TAXATION OF INCOME OF DEBT CERTIFICATEHOLDERS
As set forth above, it is expected that Federal Tax Counsel will advise the
Sellers that the Debt Certificates will constitute indebtedness for Federal
income tax purposes and, accordingly, holders of Debt Certificates generally
will be taxed in the manner described above in "-- Trusts Treated as
Partnerships or as Divisions -- Tax Consequences to Holders of the Notes Issued
by a Partnership or a Division."
If the Debt Certificates are issued with OID that is more than a de minimis
amount as defined in the Code and Treasury regulations, a United States holder
of a Debt Certificate (including a cash basis holder) generally would be
required to accrue the OID on its interest in a Certificate in income for
federal income tax purposes on a constant yield basis, resulting in the
inclusion of OID in income in advance of the receipt of cash attributable to
that income. See "-- Trusts Treated as Grantor
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Trusts -- Taxation of Holders If Stripped Bond Rules Apply -- Original Issue
Discount." Under Code Section 1272(a)(6), special provisions apply to debt
instruments on which payments may be accelerated due to prepayments of other
obligations securing those debt instruments. However, no regulations have been
issued interpreting those provisions, and the manner in which those provisions
would apply to the Debt Certificates is unclear. Additionally, the IRS could
take the position based on Treasury regulations that none of the interest
payable on a Debt Certificate is "unconditionally payable" and hence that all of
such interest should be included in the Debt Certificate's stated redemption
price at maturity. Accordingly, it is unclear whether interest payable on a Debt
Certificate constitutes "qualified stated interest" that is not included in a
Certificate's stated redemption price at maturity. Consequently, prospective
investors in Debt Certificates should consult their own tax advisors concerning
the impact to them in their particular circumstances. The Prospectus Supplement
will indicate whether the Trust intends to treat the interest on the
Certificates as "qualified stated interest."
TAX CHARACTERIZATION OF TRUST
Consistent with the treatment of the Debt Certificates as indebtedness, the
Trust will be treated as a security device to hold Receivables securing the
repayment of the Debt Certificates. In connection with the issuance of Debt
Certificates of any series, Federal Tax Counsel will render an opinion that,
based on the assumptions set forth therein, under then current law, the issuance
of the Debt Certificates of such series will not cause the applicable Trust to
be characterized for federal income tax purposes as an association (or publicly
traded partnership) taxable as a corporation.
POSSIBLE CLASSIFICATION OF THE TRANSACTION AS A PARTNERSHIP OR AS AN ASSOCIATION
TAXABLE AS A CORPORATION
The opinion of Federal Tax Counsel with respect to Debt Certificates will
not be binding on the courts or the IRS. It is possible that the IRS could
assert that, for federal income tax purposes, the transactions contemplated
constitute a sale of the Receivables (or an interest therein) to the Debt
Certificateholders and that the proper classification of the legal relationship
between the related Seller and some or all of the Debt Certificateholders
resulting from the transactions is that of a partnership or a publicly traded
partnership taxable as a corporation. The Sellers currently do not intend to
comply with the federal income tax reporting requirements that would apply if
any Debt Certificates were treated as interests in a partnership or corporation.
If a transaction were treated as creating a partnership (but not a publicly
traded partnership) between the related Seller and the Debt Certificateholders,
the partnership itself would not be subject to federal income tax (unless it
were characterized as a publicly traded partnership taxable as a corporation);
rather, the partners of such partnership, including the Debt Certificateholders,
would be taxed individually on their respective distributive shares of the
partnership's income, gain, loss, deductions and credits. The amount and timing
of items of income and deductions of a Debt Certificate could differ if the Debt
Certificates were held to constitute partnership interests, rather than
indebtedness. See "-- Tax Consequences to Holders of the Certificates Issued by
a Partnership -- Partnership Taxation."
If it were determined that a transaction created an entity classified as a
publicly traded partnership taxable as a corporation, the Trust would be subject
to federal income tax at corporate income tax rates on the income it derives
from the Receivables, which would reduce the amounts available for distribution
to the Debt Certificateholders. Such classification may also have adverse state
and local tax consequences that would reduce amounts available for distribution
to Debt Certificateholders. Moreover, distributions on Debt Certificates that
are recharacterized as equity in an entity taxable as a corporation would not be
deductible in computing the entity's taxable income, and cash distributions on
such Debt Certificates generally would be treated as dividends for tax purposes
to the extent of such deemed corporation's earnings and profits.
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FOREIGN PERSONS
If the IRS were to contend successfully that the Debt Certificates are
interests in a partnership and if such partnership were considered to be engaged
in a trade or business in the United States, the partnership would be subject to
a withholding tax on income of the Trust that is allocable to a Foreign Person
and such Foreign Person would be credited for his or her share of the
withholding tax paid by the partnership. In such case, the holder generally
would be subject to United States federal income tax at regular income tax
rates, and possibly a branch profits tax in the case of a corporate holder.
Alternatively, although there may be arguments to the contrary, if such
partnership is not considered to be engaged in a trade or business within the
United States and if income with respect to the Debt Certificates is not
otherwise effectively connected with the conduct of a trade or business in the
United States by the Foreign Person, the Foreign Person could be subject to
United States income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the holder's distributive share of the partnership's
interest income. See "Federal Income Tax Consequences -- Trusts Treated as
Partnerships or as Divisions -- Tax Consequences to Holders of the Certificates
Issued by a Partnership -- Tax Consequences to Foreign Certificateholders" for a
more detailed discussion of the consequences of an equity investment by a
Foreign Person in an entity characterized as a partnership.
If the Trust were taxable as a corporation, distribution to foreign
investors, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced or eliminated by
an applicable income tax treaty.
STATE AND LOCAL TAXATION
The discussion above does not address the tax treatment of a Trust, the
Certificates, the Notes or the holders of Certificates or Notes of any series
under state and local tax laws. Prospective investors are encouraged to consult
their own tax advisors regarding state and local tax treatment of the Trust, the
Certificates, the Notes and the consequences of purchase, ownership or
disposition of the Certificates and Notes under any state or local tax law.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), should consider
the fiduciary standards under ERISA in the context of the plan's particular
circumstances before authorizing an investment of a portion of such plan's
assets in the Securities. Accordingly, among other factors, such fiduciary
should consider (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
diversification requirements of Section 404 of ERISA; (iii) whether the
investment is in accordance with the documents governing the plan and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of such plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as certain plans or other retirement arrangements not subject to
ERISA, but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or
partners), or any entity (including an insurance company general account) whose
underlying assets include plan assets by reason of such plans or arrangements
investing in such entity (collectively, "Plan(s)") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA, and excise taxes are imposed
upon such persons by Section 4975 of
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the Code. The Sellers, the Trustee, the Owner Trustee and any underwriter of the
offered Securities and certain of their affiliates might be considered "parties
in interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition, holding or transfer of Securities by, or on behalf of, such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless a regulatory exception or administrative
exemption is available.
Moreover, the Department of Labor ("DOL") has issued a regulation (29
C.F.R. Section 2510.3-101) (the "Plan Assets Regulation") concerning the
definition of what constitutes the assets of a Plan, which provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment will be deemed for purposes of ERISA to be assets of the
investing Plan unless certain exceptions apply. If an investing Plan's assets
were deemed to include an interest in the Trust Property and not merely an
interest in the Securities, transactions occurring in connection with the
servicing, management and operation of the Trust between the Sellers, the Owner
Trustee, the Trustee, the Servicer (or any other servicer), any insurer or any
of their respective affiliates might constitute prohibited transactions, and the
Trust Property would become subject to the fiduciary investment standards of
ERISA, unless a regulatory exception or administrative exemption applies.
With respect to offered Securities which are Certificates, the DOL has
issued to a number of underwriters of pass-through certificates, similar to the
Certificates, administrative exemptions (collectively, the "Exemption"), which
generally exempt from the application of the prohibited transaction provisions
of Section 406(a), Section 406(b)(1) and Section 406(b)(2) of ERISA, and the
excise taxes imposed pursuant to Section 4975(a) and (b) of the Code, the
initial purchase, holding and subsequent resale of mortgage-backed or
asset-backed pass-through certificates representing a beneficial undivided
interest in certain fixed pools of assets held in a trust (as defined in
paragraph III.B of Section III of the Exemption), along with certain
transactions relating to the servicing and operation of such asset pools,
provided that certain conditions set forth in the Exemption are satisfied.
Paragraph III.B of Section III of the Exemption provides in part that a trust
means an investment pool the corpus of which is held in trust and consists
solely of: (1) secured consumer receivables, (2) secured credit instruments, (3)
obligations secured by residential or commercial real property, (4) obligations
secured by motor vehicles or equipment or qualified motor vehicle leases, (5)
guaranteed governmental mortgage pool certificates or (6) an undivided
fractional interest in any of the obligations listed in clauses (1)-(5) above.
If the general conditions of Section II of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code) in connection with the direct or indirect sale, exchange or transfer
of Certificates by Plans in the initial issue of Certificates, the holding of
Certificates by Plans or the direct or indirect acquisition or disposition in
the secondary market of Certificates by Plans. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Certificate on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes of the Certificates,
an Excluded Plan is a Plan sponsored by (1) an underwriter which has been
granted an Exemption (or certain specified entities affiliated or associated
with such underwriter) ("Underwriter"), (2) the Sellers, (3) the Servicer (or
any other servicer), (4) the Trustee or Owner Trustee, (5) any obligor with
respect to Receivables constituting more than 5 percent of the aggregate
unamortized principal balance of the Receivables as of the date of initial
issuance, (6) any insurer and (7) any affiliate or successor of a person
described in (1) to (6) above (the "Restricted Group").
If the specific conditions of paragraph I.B of Section I of the Exemption
are also satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c)(I)(E) of the
Code in connection with (1) the direct or indirect sale, exchange or
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transfer of Certificates in the initial issuance of Certificates between the
related Seller or Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in Certificates is (a) an obligor with respect to 5 percent or less of
the fair market value of the Receivables or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Certificates by Plans and (3) the holding of Certificates by Plans.
If the specified conditions of paragraph I.C of Section I of the Exemption
are satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Trust and the Trust Property.
The Exemption may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" or a "disqualified person" with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
such Plan's ownership of Certificates.
The Exemption sets forth the following seven general conditions which must
be satisfied for a transaction to be eligible for exemptive relief thereunder.
(1) The acquisition of the Certificates by a Plan is on terms (including
the price for the Certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Securities issued by the Trust;
(3) The Certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from either Standard & Poor's Structured Ratings Group, Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
("National Credit Rating Agencies");
(4) Neither the Trustee or the Owner Trustee is an affiliate of any other
member of the Restricted Group (as defined above);
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made and retained by the related Seller pursuant to the assignment of
the loans to the trust fund represents not more than the fair market value of
such loans. The sum of all payments made to and retained by the Servicer or any
other servicer represents not more than reasonable compensation for such
person's services under the pooling and servicing agreement and reimbursement of
such person's reasonable expenses in connection therewith; and
(6) The Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D under the Securities Act of 1933. Each
Seller assumes that only Plans which are accredited investors under the federal
securities laws will be permitted to purchase the Certificates.
(7) The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
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(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of one of the National Credit
Rating Agencies for at least one year prior to the Plan's acquisition of
Certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of certificates.
The Exemption may apply to a Plan's purchase, holding and transfer of
Certificates and the operation, management and servicing of the Trust and the
Trust Property as specified in the related Prospectus Supplement. In addition,
in the event the Exemption is not available, certain exemptions from the
prohibited transaction rules may be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a
Certificate. Included among these exemptions are: Prohibited Transaction Class
Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 91-38 regarding investments by bank collective
investment funds PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers."
Certain transactions involving the purchase of Securities which are Notes
might be deemed to constitute prohibited transactions under ERISA and the Code
if the Trust Property were deemed to be assets of a Plan. Under the Plan Assets
Regulation, the Trust Property would be treated as plan assets of a Plan for the
purposes of ERISA and the Code only if the Plan acquires an "Equity Interest" in
the Trust and none of the exceptions contained in the Plan Assets Regulation is
applicable. An Equity Interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The Sellers
believe that the Notes should be treated as indebtedness without substantial
equity features for purposes of the Plan Assets Regulation. In addition, even in
the event that the Notes are deemed to be an Equity Interest in the Trust, the
Exemption may be applicable to both a Plan's purchase, holding and transfer of
Notes (which in this situation are considered Certificates for purposes of the
Exemption) and the operation, management and servicing of the Trust and the
Trust Property, if so specified in the related Prospectus Supplement.
Without regard to whether the Notes are characterized as Equity Interests,
the acquisition, transfer or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Trust, the Owner
Trustee or the Trustee or any of their respective affiliates is or becomes a
party in interest or a disqualified person with respect to such Plan. In such
case, PTCE 90-1, PTCE 91-38, PTCE 95-60, PTCE 96-23 and PTCE 84-14 may be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Note.
Any Plan fiduciary considering the purchase of Securities should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility and prohibited transaction provisions of ERISA and the Code to
such investment.
RATINGS
As a condition of issuance, the offered Securities of each series will be
rated an investment grade, that is, in one of its four highest rating
categories, by at least one nationally recognized rating agency (a "Rating
Agency") as specified in the related Prospectus Supplement. The ratings will be
based on the Receivables related to each series, the terms of the Securities,
and the subordination and any credit enhancement provided therefor. There is no
assurance that the ratings initially assigned to such Securities will not be
subsequently lowered or withdrawn by the Rating Agencies. In the event the
rating initially assigned to any Securities is subsequently lowered for any
reason, no person or entity will be obligated to provide any credit enhancement
unless otherwise specified in the related Prospectus Supplement. The ratings of
any Securities with respect to which a prepay-
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ment premium may be payable do not evaluate such prepayment premium payable to
such Securityholders or the likelihood that such prepayment premium will be
paid.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement") with respect to each Trust, the related Seller will
agree to sell to each of the underwriters named therein and in the related
Prospectus Supplement, and each of such underwriters will severally agree to
purchase from the related Seller, the principal amount of each class of
Securities of the related series set forth therein and in the related Prospectus
Supplement.
In each Underwriting Agreement, the several underwriters will agree,
subject to the terms and conditions set forth therein, to purchase all the
Securities described therein which are offered hereby and by the related
Prospectus Supplement if any of such Securities are purchased. In the event of a
default by any such underwriter, each Underwriting Agreement will provide that,
in certain circumstances, purchase commitments of the nondefaulting underwriters
may be increased or the Underwriting Agreement may be terminated.
Each Prospectus Supplement will either (i) set forth the price at which
each class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities, or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
Securities, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that the related Seller will
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act.
The Owner Trustee or the Indenture Trustee, if any, may, from time to time,
invest funds held by it in any accounts in Eligible Investments acquired from
one or more of the underwriters.
Under each Underwriting Agreement, the closing of the sale of any class of
Securities subject thereto will be conditioned on the closing of the sale of all
other classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of any Series of Securities in Canada ("Canadian
Securities") is being made only on a private placement basis exempt from the
requirement that the Trust prepare and file a prospectus with the securities
regulatory authorities in each province where trades of any Canadian Securities
are effected. Accordingly, any resale of any Canadian Securities must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of any Canadian Securities.
REPRESENTATIONS OF PURCHASERS
Each purchaser of any Canadian Securities who receives a purchase
confirmation will be deemed to represent to the related Seller, the Trust and
the dealer from whom such purchase confirmation is received that (i) such
purchaser is entitled under applicable provincial securities laws to purchase
such Canadian Securities without the benefit of a prospectus qualified under
such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
The Trust, the Sellers, the Servicer, the Owner Trustee, the Indenture
Trustee and their respective directors and officers, if any, as well as the
experts named herein, may be located outside of Canada and, as a result, it may
not be possible for Ontario purchasers to effect service of process within
Canada upon the Issuer or such persons. All or a substantial portion of the
assets of the Issuer and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the Issuer or such
persons in Canada or to enforce a judgment obtained in Canadian courts against
such Issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of any Canadian Securities to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any of the Securities acquired by such purchaser pursuant to this offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #88/5. Only one such report must be filed in respect of any
Canadian Securities acquired on the same date and under the same prospectus
exemption.
LEGAL OPINIONS
Unless otherwise specified in the Prospectus Supplement, certain legal
matters relating to the validity of the issuance of the Certificates and the
Notes, if any, of each series will be passed upon for the Sellers and the
Servicer by Weil, Gotshal & Manges LLP, and certain legal matters relating to
the validity of the issuance of the Certificates and the Notes, if any, of such
series will be passed upon for the Underwriter of the Certificates and the
Notes, if any, of such series by Stroock & Stroock & Lavan LLP, New York, New
York.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, any globally offered Series of
Securities (the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, Cedel or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes and, if the related Prospectus Supplement so
provides, Certificates will be effected on a delivery-against-payment basis
through the respective Depositories of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their Participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their Participants through their respective Depositories,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices specified by the Underwriters. Investor securities
custody accounts will be credited with their holdings against payment in
same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global securities
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to insure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a
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Euroclear Participant, the purchaser will send instructions to Cedel or
Euroclear through a Cedel Participant or Euroclear Participant at least one
business day prior to settlement. Cedel or Euroclear will instruct the
respective Depository, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the respective Depository of
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance the settlement.
Under this procedure, Cedel Participants or Euroclear Participants purchasing
Global Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depository for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depository, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depository, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
interest payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its
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respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL WITHHOLDING TAXES AND DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities through Cedel or Euroclear (or
through DTC if the holder has an address outside the U.S.) will be subject to
30% U.S. withholding tax that generally applies to payments of interest
(including original issue discount) on registered debt issued by U.S. Persons,
unless (i) each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in the
chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owners take one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are beneficial owners of Global Securities
residing in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the
Certificateholder or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The holder of a Global
Securities or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the
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<PAGE> 136
person through whom it holds (the clearing agency, in the case of persons
holding directly on the books of the clearing agency). Form W-8 and Form 1001
are effective for three calendar years and Form 4224 is effective for one
calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includeable in gross income for United States tax purposes,
regardless of its source, or (iv) a trust that is not a "Foreign Trust," as such
term is defined in Section 7701(a)(31) of the Internal Revenue Code of 1986, as
amended. This summary of documentation requirements does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
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<PAGE> 137
INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found.
<TABLE>
<S> <C>
Accounts.................................................... 51
Actuarial Receivables....................................... 22
adjusted issue price........................................ 75
Advance..................................................... 12, 53
Amortization Period......................................... 9, 54
APR......................................................... 22
Bronze...................................................... 31
Canadian Securities......................................... 85
capital assets.............................................. 67
Cede........................................................ 19
Cedel....................................................... 19
Cedel Participants.......................................... 45
Certificate Distribution Account............................ 20, 50
Certificate Factor.......................................... 26
Certificate Majority........................................ 44
Certificateholders.......................................... 4, 19
Certificates................................................ 1
clearing agency............................................. 43
clearing corporation........................................ 43
Code........................................................ 67
Collection Account.......................................... 20, 50
Commission.................................................. 2
Contracts................................................... 62
Cooperative................................................. 45
Copper...................................................... 31
cram-down................................................... 24
Dealer Agreement............................................ 30
dealer reserve.............................................. 30
Dealers..................................................... 7, 29
Debt Certificateholders..................................... 78
Debt Certificates........................................... 78
Definitive Certificates..................................... 44
Definitive Notes............................................ 44
Depositories................................................ 43
Depository.................................................. 36
disqualified person......................................... 82
disqualified persons........................................ 80, 81
Distribution Account........................................ 10, 20
Distribution Accounts....................................... 50
Distribution Date........................................... 10, 36
DOL......................................................... 81
DTC......................................................... 19
due date.................................................... 23
EDGAR....................................................... 2
Eligible Deposit Account.................................... 51
</TABLE>
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<PAGE> 138
<TABLE>
<S> <C>
Eligible Institution........................................ 51
Eligible Investments........................................ 51
Equity Interest............................................. 83
ERISA....................................................... 14, 80
Euroclear................................................... 19
Euroclear Operator.......................................... 45
Euroclear Participants...................................... 45
Events of Default........................................... 39
Exchange Act................................................ 2
Excluded Plan............................................... 81
Exemption................................................... 81
FCC Corp. .................................................. 28
Federal Tax Counsel......................................... 13, 67
Financed Vehicles........................................... 6
first month................................................. 50
First-Time Buyer............................................ 31
Foreign Person.............................................. 73
Foreign Trust............................................... I-4
Franklin Bank............................................... 1
Franklin Capital............................................ 1, 7, 29
Franklin LLC................................................ 28
Franklin Resources.......................................... 3, 35
FTC Rule.................................................... 66
Funding Period.............................................. 7
Global Securities........................................... I-1
Gold........................................................ 31
Grantor Trust Certificateholders............................ 74
Grantor Trust Certificates.................................. 74
Indenture................................................... 1
Indenture Trustee........................................... 1
Independent Director........................................ 28
indirect participants....................................... 43
Initial Cutoff Date......................................... 6
Initial Financed Vehicles................................... 6
Initial Receivables......................................... 6
Insolvency Laws............................................. 16, 65
Interest Rate............................................... 5
Investment Earnings......................................... 51
IRS......................................................... 67
National Credit Rating Agencies............................. 82
Non-Prime................................................... 29
non-prime................................................... 15
Non-Prime Receivables....................................... 7, 20
Note Distribution Account................................... 50
Note Factor................................................. 26
Note Majority............................................... 38
Noteholders................................................. 5, 19
Notes....................................................... 1
Obligor..................................................... 10
</TABLE>
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<PAGE> 139
<TABLE>
<S> <C>
Obligors.................................................... 20
OID......................................................... 68
OID regulations............................................. 68
Owner Trustee............................................... 1, 3
Participants................................................ 43
parties in interest......................................... 80, 81
party in interest........................................... 82
Pass-Through Rate........................................... 4
Payahead Account............................................ 20, 50
Payaheads................................................... 50
Payment Date................................................ 37
Plan Assets Regulation...................................... 81
Plans....................................................... 14
Plan(s)..................................................... 80
Platinum.................................................... 31
Pooling and Servicing Agreement............................. 1
Pre-1996 Programs........................................... 31
Pre-Funded Amount........................................... 7
Pre-Funding Account......................................... 4, 7
Precomputed Receivables..................................... 22
Preferred................................................... 31
Premier..................................................... 31
Prepayment Premium.......................................... 53
prepayments................................................. 26
Prime....................................................... 29
Prime Receivables........................................... 7, 20
Prospectus Supplement....................................... 1
PTCE........................................................ 83
Purchase Agreement.......................................... 7, 48
Purchase Amount............................................. 50
Rating Agencies............................................. 18
Rating Agency............................................... 14, 83
Receivables................................................. 1, 6
Rees-Levering Act........................................... 64
Registration Statement...................................... 2
Related Documents........................................... 41
Restricted Group............................................ 81
Retained Interest........................................... 9
Revolving Period............................................ 9, 54
Rule of 78's Receivables.................................... 22
Rules....................................................... 43
Sale and Servicing Agreement................................ 1
Schedule of Receivables..................................... 48
second month................................................ 50
Section 1286 Treasury Regulations........................... 74
Securities.................................................. 1
Securityholders............................................. 19
Seller...................................................... 1, 3
Sellers..................................................... 1, 3
</TABLE>
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<TABLE>
<S> <C>
Servicer.................................................... 1
Servicer Default............................................ 56
Servicer Fee................................................ 53
Servicer's Certificate...................................... 46
Servicing Fee............................................... 53
Servicing Fee Rate.......................................... 53
Silver...................................................... 31
Simple Interest Receivables................................. 22
Standard.................................................... 31
Strip Certificates.......................................... 5
Strip Notes................................................. 6
Stripped Bond............................................... 74
Sub-Prime................................................... 29
sub-prime................................................... 15
Sub-Prime Receivables....................................... 7, 20
Subprime 1.................................................. 31
Subprime 2.................................................. 31
Subsequent Cut-Off Date..................................... 6
Subsequent Financed Vehicles................................ 6
Subsequent Receivables...................................... 6
Subsequent Transfer Agreement............................... 49
Subsequent Transfer Assignment.............................. 49
Supplemental Servicing Fee.................................. 53
Terms and Conditions........................................ 45
Trust....................................................... 1, 3
Trust Agreement............................................. 1
Trust Documents............................................. 1, 48
Trust Property.............................................. 1
U.S. Person................................................. I-4
UCC......................................................... 62
Underwriter................................................. 81
Underwriting Agreement...................................... 84
</TABLE>
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[This Page Intentionally Left Blank]
<PAGE> 142
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER
OR GOLDMAN, SACHS & CO. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
----------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward Looking Statements........................... S-3
Reports to Noteholders............................... S-3
Available Information................................ S-3
Summary of Terms..................................... S-4
Risk Factors......................................... S-11
Use of Proceeds...................................... S-13
The Trust............................................ S-14
The Trust Property................................... S-14
The Receivables...................................... S-16
The Insurer.......................................... S-21
Description of the Notes............................. S-23
Weighted Average Life Considerations................. S-26
Description of the Purchase Agreement and the Trust
Documents.......................................... S-28
The Note Policy...................................... S-37
Ratings.............................................. S-39
Federal Income Tax Consequences...................... S-39
State, Local and Foreign Tax Considerations.......... S-39
ERISA Considerations................................. S-39
Underwriting......................................... S-40
Experts.............................................. S-41
Legal Opinions....................................... S-41
Index of Terms....................................... S-42
Annex I: Report of Independent Accountants........... A-1
PROSPECTUS
Available Information................................ 2
Incorporation of Certain Documents by Reference...... 2
Prospectus Summary................................... 3
Risk Factors......................................... 15
The Trusts........................................... 20
The Receivables...................................... 22
Yield and Prepayment Considerations.................. 25
Certificate and Note Factors and Trading
Information........................................ 26
Use of Proceeds...................................... 27
The Sellers.......................................... 28
Franklin Capital Corporation......................... 29
Franklin Resources, Inc.............................. 35
The Certificates..................................... 36
The Notes............................................ 37
Certain Information Regarding the Securities......... 43
Description of the Purchase Agreements and the Trust
Documents.......................................... 48
Certain Legal Aspects of the Receivables............. 62
Federal Income Tax Consequences...................... 67
State and Local Taxation............................. 80
ERISA Considerations................................. 80
Ratings.............................................. 83
Plan of Distribution................................. 84
Notice to Canadian Residents......................... 85
Legal Opinions....................................... 85
Annex I.............................................. I-1
Index of Terms....................................... I-5
</TABLE>
UNTIL DECEMBER 23, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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$131,394,000
FRANKLIN AUTO TRUST
1998-1
$109,000,000
CLASS A-1 5.50%
ASSET BACKED NOTES
$22,394,000
CLASS A-2 5.65%
ASSET BACKED NOTES
FRANKLIN RECEIVABLES LLC
SELLER
FRANKLIN CAPITAL CORPORATION
SERVICER
----------------------
PROSPECTUS SUPPLEMENT
----------------------
GOLDMAN, SACHS & CO.
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