PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MARCH 24, 1999
$100,000,000
Paragon Auto Receivables Owner Trust 1999-A
Issuer
PARAGON AUTO RECEIVABLES CORPORATION
Seller
PARAGON ACCEPTANCE CORPORATION
Servicer
The trust will issue the following notes --
Consider carefully the risk
factors beginning on page S-10
in this prospectus supplement
and on page 3 in the
prospectus.
The notes represent obligations
of the trust only and do not
represent obligations of or
interests in Paragon Auto Receivables
Corporation, Paragon Acceptance
Corporation or any of their affiliates.
This prospectus supplement may be
used to offer and sell the notes only
if accompanied by the prospectus.
A note is not a deposit and neither
the notes nor the underlying accounts
or receivables are insured or guaranteed
by any governmental agency or
instrumentality.
Class A Notes
- -------------------------------------------------
Principal Amount $100,000,000
- -------------------------------------------------
Interest Rate (per 5.95%
annum)
- -------------------------------------------------
Payment Dates Monthly
- -------------------------------------------------
First Payment Date April 15, 1999
- -------------------------------------------------
Final Scheduled November 15, 2005
Payment Date
- -------------------------------------------------
Price to Public1 99.96875%
- -------------------------------------------------
Underwriting Discount2 0.500%
- -------------------------------------------------
Proceeds to Seller3 99.46875%
- -------------------------------------------------
1 Plus accrued interest from March 1, 1999. Total price to public
(excluding accrued interest) = $99,968,750.
2 Total underwriting discount = $500,000.
3 Total proceeds to issuer = $99,468,750, before deducting expenses
estimated to be $200,000.
Credit Enhancement
o The trust will also issue to Paragon Auto Receivables Corporation
$2,564,102.56 asset backed certificates, which are subordinated to
the notes.
o A reserve account, with an initial balance of $1,530,978.93 (2% of
the principal balance of the initial receivables), will serve as
credit enhancement for the notes. Each time that the trust
purchases additional receivables during its funding period, an
amount equal to 2% of their aggregate principal balances will be
transferred from the pre-funding account to the reserve account.
o MBIA Insurance Corporation will unconditionally and irrevocably
guarantee the notes to the extent described in this prospectus
supplement.
This prospectus supplement and the accompanying prospectus relate only to
the offering of the notes. The certificates are not offered under
these documents. Delivery of the notes, in book-entry form
only, will be made through The Depository Trust
Company on or about March 30, 1999against
payment in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this
prospectus supplement or the prospectus is accurate or
complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
March 24, 1999
S-1
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the notes in two separate documents that
progressively provide more detail: (a) the accompanying prospectus, which
provides general information, some of which may not apply to this series of
notes; and (b) this prospectus supplement, which describes the specific
terms of your series of notes. You should rely only on the information
contained or incorporated by reference in this prospectus supplement and
the prospectus. We have not authorized anyone to provide you with different
information.
If the terms of your series of notes vary between this prospectus
supplement and the prospectus, you should rely on the information in this
prospectus supplement.
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the notes and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the notes
will deliver a prospectus supplement and prospectus until June 22, 1999.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The Table of Contents on the next page and the
Table of Contents included in the accompanying prospectus provide the pages
on which these captions are located.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement are defined under the caption "Index of Terms"
on page S-39 of this prospectus supplement and under the caption "Index of
Terms" on page 49 of the prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents described in the prospectus under "Incorporation of
Certain Documents by Reference" and the consolidated financial statements
of MBIA Insurance Corporation ("MBIA") included in, or as exhibits to, the
following documents, which have been filed with the Securities and Exchange
Commission by MBIA, are hereby incorporated by reference in this prospectus
supplement:
(a) Annual Report on Form 10-K for the year ended December 31, 1997; and
(b) Quarterly Reports on Form 10-Q for the periods ended March 31,
1998, June 30, 1998 and September 30, 1998.
All financial statements of MBIA included in documents filed by MBIA
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this prospectus supplement and prior to the termination of the
offering of the Securities will be deemed to be incorporated by reference
into this prospectus supplement and to be a part hereof from the respective
dates of filing of such documents.
---------------------------
S-2
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Summary of Terms............................................................S-5
Risk Factors...............................................................S-10
The Trust..................................................................S-14
The Receivables Pool.......................................................S-15
The Seller, the Servicer and Paragon.......................................S-21
Weighted Average Life of the Notes.........................................S-22
Description of the Notes...................................................S-22
Description of the Transfer and Servicing Agreements.......................S-23
Certain Legal Aspects of the Receivables...................................S-29
The Insurance Policy.......................................................S-29
Description of the Insurer.................................................S-31
Material Federal Income Tax Consequences...................................S-33
State Tax Consequences.....................................................S-36
ERISA Considerations.......................................................S-36
Underwriting...............................................................S-37
Legal Opinions.............................................................S-37
Experts....................................................................S-37
Index of Defined Terms.....................................................S-38
Prospectus
Available Information........................................................2
Incorporation of Certain Documents by Reference..............................2
Risk Factors.................................................................3
The Trusts...................................................................9
The Receivables Pools.......................................................10
Weighted Average Life of the Securities.....................................13
Pool Factors and Trading Information........................................14
Use of Proceeds.............................................................14
The Seller..................................................................14
Paragon and the Servicer....................................................15
Description of the Notes....................................................15
Description of the Certificates.............................................20
Description of the Transfer and Servicing Agreements........................28
Certain Legal Aspects of the Receivables....................................38
Material Federal Income Tax Consequences....................................43
State Tax Consequences......................................................45
ERISA Considerations........................................................45
Plan of Distribution........................................................47
Legal Opinions..............................................................48
Index of Defined Terms......................................................49
S-3
<PAGE>
Summary of Transaction Parties
PARAGON
ACCEPTANCE
CORPORATION
(Originator and Servicer)
PARAGON AUTO
RECEIVABLES
CORPORATION
Servicer (Seller)
WILMINGTON TRUST
COMPANY
(Owner Trustee)
PARAGON AUTO
RECEIVABLES
OWNER TRUST
1999-A
(Issuer)
NORWEST BANK
MINNESOTA,
NATIONAL
ASSOCIATION
MBIA (Indenture Trustee)
INSURANCE
CORPORATION
(Insurer)
CLASS A NOTES CERTIFICATES
(not offered hereby)
This chart provides only a simplified overview of the relations between the
key parties to the transaction. Refer to this prospectus supplement and the
prospectus for a further description.
S-4
<PAGE>
SUMMARY OF TERMS
o This summary highlights selected information from this prospectus.
It does not contain all of the information that you need to
consider in making your investment decision. To understand all the
terms of the offering of the notes, read carefully this entire
prospectus supplement and the prospectus.
o Capitalized terms used and not defined in this prospectus
supplement have the meanings set forth in the prospectus.
OFFERED NOTES
Paragon Auto Receivables Owner Trust 1999-A will issue the Class A 5.95%
Asset Backed Notes in the aggregate principal amount of $100,000,000. The
notes are being offered pursuant to this prospectus supplement and the
prospectus.
The notes offered in this prospectus supplement will be available only in
book-entry form through the facilities of The Depository Trust Company
except under the limited circumstances described under "Certain Information
Regarding the Securities--Book-Entry Registration" in the prospectus.
Closing Date
March 30, 1999.
Insurer
MBIA Insurance Corporation.
Indenture Trustee and Backup Servicer
Norwest Bank Minnesota, National Association.
Owner Trustee
Wilmington Trust Company.
Payment Dates; Record Dates
Payments on the notes will be made on the 15th day of each calendar month
(or, if that day is not a business day, the next business day), beginning
with April 15, 1999. Payments will be made on each payment date to holders
of record as of the day preceding that payment date.
Interest Payments
The interest rate for the notes is 5.95%. The indenture trustee will
calculate interest on the notes on the basis of a 360-day year of twelve
30-day months.
Principal Payments
The indenture trustee will pay principal on the notes on each payment date
in an amount equal to the noteholders' percentage of the decrease during
the prior calendar month in the total principal balance of the receivables.
The principal balance of a receivable is generally equal to the aggregate
amount of credit initially extended toward the purchase price of a vehicle
less the portion of all payments received that are allocable to principal.
The noteholders' percentage of the total amount of principal to be
distributed on each payment date will be (a) 100% until and including the
later of September 15, 1999 and the date when the aggregate principal
balance of the receivables exceeds the outstanding principal amount of the
notes by 4% of the aggregate principal balance of the receivables, (b)
thereafter, if September 15, 1999 was the later date in clause (a), zero
until the overcollateralization amount described in clause (a) is equal to
4%, and (c) thereafter, 96%.
See "Description of the Transfer and Servicing Agreements--Distributions"
in this prospectus supplement for additional detail on some of the
calculations described above and for special priority rules that would
apply in a default situation.
Final Scheduled Payment Date
The outstanding principal amount, if any, of the notes will be payable in
full on November 15, 2005.
Optional Redemption
The servicer may repurchase the receivables if the total outstanding
principal balance of the receivables declines to less than 10% of the total
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<PAGE>
initial principal balance of the receivables, as measured for each
receivable at the time of its sale to the trust. If the servicer does so,
the outstanding principal balance of the notes will be paid in full with
accrued interest.
Mandatory Redemption
As described below, the trust will have a funding period during which it
will purchase up to $26,015,156.02 of additional receivables. On the
payment date on or after the last day of the funding period, any funds
remaining in the trust's pre-funding account (after any purchase of
receivables on that payment date) will be applied to partially redeem the
notes then outstanding.
TRUST PROPERTY
The primary assets of the trust will be a pool of motor vehicle retail
installment contracts used to finance the purchase of new and used cars,
light duty trucks and sport utility vehicles. We refer to these contracts
as "receivables" and to the persons who financed their purchases with these
contracts as "obligors." The receivables in the trust will be sold by
Paragon to the seller, and then by the seller to the trust. The trust will
grant a security interest in the receivables and the other trust property
to the indenture trustee for the benefit of the noteholders and to MBIA in
support of the obligations owing to MBIA as the insurer under the insurance
agreement described below. The trust property will also include the
following:
o monies received under the initial receivables after a cutoff date
of February 28, 1999 and under additional receivables sold to the
trust after a later cutoff date;
o amounts held in bank accounts
established for the trust;
o security interests in the cars, light duty
trucks and sport utility vehicles financed
by the receivables;
o any proceeds from insurance policies
covering financed vehicles or obligors on
those vehicles;
o any recourse Paragon has against dealers
from which it purchased receivables; and
o rights of the seller under its purchase
agreement with Paragon.
The Initial Receivables
On the closing date, the trust will acquire motor
vehicle retail installment contracts with an
aggregate principal balance of $76,548,946.54 as
of the initial cutoff date of February 28, 1999. As
of the initial cutoff date:
o the weighted average annual percentage
rate of the initial receivables was
approximately 10.63%;
o the weighted average remaining term to
scheduled maturity of the initial
receivables was approximately
61 months;
o the weighted average original term to
scheduled maturity of the initial
receivables was approximately 64
months; and
o approximately 93.4% of the receivables by aggregate principal
balance were secured by used vehicles.
No initial receivable has a scheduled maturity later than May 15, 2005,
which is six months before the final scheduled payment date of the notes.
Pre-Funding
In addition to the initial receivables, the trust will purchase additional
receivables during a funding period beginning on the closing date and
ending not later than the close of business on May 15, 1999.
The trust will pay the purchase price for additional receivables with funds
on deposit in a pre-funding account established for the trust. The seller
will deposit $26,015,156.02 into the pre- funding account on the closing
date. We expect to sell additional receivables to the trust with an
aggregate principal balance approximately equal to the amount deposited in
the pre-funding account. Prior to being used to purchase receivables, funds
on deposit in the pre-funding account will be invested from time to time in
highly rated short-term securities.
The funding period will end earlier than May 15, 1999 if the balance in the
pre-funding account is
S-6
<PAGE>
reduced to less than $100,000. The funding period will also terminate early
if specified servicer defaults or events of default under the sale and
servicing agreement or the indenture occur. Any balance remaining in the
pre-funding account at the end of the funding period will be paid to
noteholders as described in "Offered Securities-- Mandatory Redemption"
above.
See "Risk Factors--Possible Prepayments as a Result of Pre-Funding" and
"--Changes in Pool Characteristics as a Result of Pre-Funding" and "The
Receivables Pool" for additional information on the trust's pre-funding
feature.
Interest Reserve Account
We anticipate that the average interest rate earned by the trust on
investment of funds in the pre-funding account will be less than the
interest rate on the notes. To provide a source of funds to cover any
shortfall resulting from this difference, we will deposit $260,000 into a
special interest reserve account of the trust. On each payment date during
the funding period, money from the interest reserve account will be used to
make up for this interest shortfall.
CREDIT ENHANCEMENT
The Insurance Policy
On the closing date, MBIA will issue an insurance policy in favor of the
indenture trustee for the benefit of the noteholders. Under the insurance
policy, the insurer will irrevocably and unconditionally guarantee timely
payment in full of interest and payment of principal (to the extent set
forth in the "Policy Payment Amount" definition under "The Insurance
Policy" below) on the notes on each payment date, as well as ultimate
payment in full of principal on the final scheduled payment date. See "The
Insurance Policy" in this prospectus supplement. The insurer's obligations
under the insurance policy will be discharged to the extent that amounts
due under the insurance policy are received by the indenture trustee,
whether or not these amounts are properly applied by the indenture trustee.
For a description of the insurer, see "Description of the Insurer" in this
prospectus supplement.
Reserve Account
As credit enhancement for the notes, the servicer (or the indenture trustee
on behalf of and at the direction of the servicer) will establish and
maintain a reserve account in the name of the indenture trustee. The
reserve account will be funded as follows:
o On the closing date, the seller will deposit $1,530,978.93 (2% of the
initial principal balance of the receivables) into the reserve
account.
o On the date of each subsequent sale of receivables to the trust, the
indenture trustee will transfer cash equal to 2% of the principal
balance of the additional receivables as of the subsequent cutoff date
from the pre-funding account into the reserve account.
o On each payment date, the indenture trustee
will deposit into the reserve account any
amounts remaining after making all other
distributions required to be made prior to
distributions into the reserve account.
However, the indenture trustee will make
this deposit only to the extent necessary so
that the amount on deposit in the reserve
account will not be less than the reserve
account required amount.
Except as described below, the amount required to be on deposit in the
reserve account on any payment date will equal 2% of the outstanding
principal amount of the receivables. However, the required amount of the
reserve account will not be less than the lesser of (1) 1% of the
outstanding principal amount of the initial receivables and the additional
receivables as of their respective cutoff dates and (2) the then
outstanding principal amount of the notes. If a "reserve event" or a
"trigger event" described in the sale and servicing agreement occurs and is
not cured, the required amount of the reserve account will increase to 6%
and 100% of the outstanding principal amount of the receivables,
respectively.
The required amount of the reserve account may be reduced with the consent
of MBIA, but without the consent of the noteholders if the rating agencies
confirm in writing that such reduction will not result in a reduction or
withdrawal of any rating of the notes. See "Description of the Transfer and
Servicing Agreements--Reserve Account" in this prospectus supplement.
S-7
<PAGE>
Funds on deposit in the reserve account will be available on each payment
date to cover shortfalls in amounts available to pay the indenture trustee,
the owner trustee, the backup servicer and the servicer and in
distributions of interest and principal on the notes to the extent
described in this prospectus supplement. Funds on deposit in the reserve
account may not be used to cover shortfalls in any distributions on the
certificates.
The indenture trustee will release to the certificateholder(s) amounts in
the reserve account on any payment date, after giving effect to all
distributions to be made on such payment date, in excess of the required
amount of the reserve account for that payment date.
The Certificates
On the closing date, the trust will issue certificates in an aggregate
principal amount of $2,564,102.56. The seller will retain the entire
principal amount of the certificates. The certificates will be subordinated
in priority of payment to interest and principal on the notes to the extent
described in this prospectus supplement. The subordination of the
certificates will provide credit enhancement for the notes.
COLLECTION ACCOUNT; PRIORITY OF
DISTRIBUTIONS
The servicer (or the indenture trustee on behalf of and at the direction of
the servicer) will establish and maintain a collection account in the name
of the indenture trustee into which all payments made on the receivables
will be deposited and held pending distribution to noteholders. On each
payment date, funds on deposit in the collection account relating to the
prior collection period will be applied in the priority indicated:
(1) accrued and unpaid fees and expenses of the indenture trustee,
owner trustee and backup servicer, subject in each case to a
maximum amount of expenses except after an event of default under
the indenture;
(2) servicing fees;
(3) interest on the notes; (4) principal on the notes;
(5) to MBIA, any amounts owing and not
paid under the insurance agreement;
(6) to the reserve account, to the extent necessary so that the amount
on deposit in the reserve account will not be less than the
reserve account required amount;
(7) any accrued and unpaid fees and expenses of the indenture trustee,
owner trustee, backup servicer or any successor servicer, not paid
under (1) or (2) above;
(8) the remaining balance, if any, together
with any funds in the reserve account in
excess of the reserve account required
amount, to the notes as an additional
payment of principal, until the excess
of the total principal balance of the
receivables over the outstanding
principal amount of the notes is equals
4% of the total principal balance of
receivables;
(9) to the servicer, accrued and unpaid servicing fees and other
amounts not paid at the discretion of the servicer under (2)
above; and
(10) the remaining balance, if any, together with any funds in the
reserve account in excess of the reserve account required amount,
to the certificateholder(s).
<PAGE>
See "Description of the Transfer and Servicing Agreements--Distributions"
in this prospectus supplement for additional details and for special
priority rules that would apply in a default situation.
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES
Mayer, Brown & Platt, special Federal tax
counsel to Paragon and the seller, is of the
opinion that 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 accepting a
note, will agree to treat the notes as debt. See
S-8
<PAGE>
"Material Federal Income Tax Consequences" and "State Tax Consequences" in
the prospectus for additional information concerning the application of
Federal and state tax laws to the trust and the notes.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations," the
notes will be eligible for purchase by employee benefit plans.
RATING OF THE NOTES
It is a condition to the issuance of the notes that Moody's Investors
Service, Inc. and Standard & Poor's Ratings Service (the "Rating Agencies")
rate the notes in their highest long-term rating category. The ratings of
the notes will be based primarily on the issuance of the insurance policy
by MBIA. The ratings of the notes address the likelihood of the timely
payment of interest and principal of the notes under their terms. The
ratings are not a recommendation to buy, sell or hold the notes. There can
be no assurance that such ratings will not be lowered or withdrawn by a
rating agency if circumstances so warrant.
S-9
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the notes.
Possible Prepayments as
a Result of Pre-Funding............ If the principal amount of eligible
receivables purchased or directly
originated by Paragon during the
trust's funding period is less than
the amount deposited in the trust's
pre-funding account, we will not have
sufficient receivables to sell to the
trust during the funding period. This
would result in a prepayment of
principal to the noteholders as
described below.
If the aggregate principal balance of
receivables we sell to the trust
during the funding period is less than
the $26,015,156.02 amount deposited in
the trust's pre-funding account, the
excess will be applied at the end of
the funding period to partially prepay
the notes. Any such prepayment will
shorten the weighted average life of
the notes to an extent that we cannot
predict with assurance, since we
cannot predict the amount of any such
prepayment with assurance.
Changes in Pool
Characteristics as a
Result of Pre-Funding.............. The only required characteristics of
the additional receivables transferred
to the trust during the funding period
will be the eligibility criteria
specified in the sale and servicing
agreement. These additional
receivables may be originated using
credit criteria different from those
that were applied to the initial
receivables and may be of a different
credit quality and seasoning. As a
result, following the transfer of
additional receivables to the trust,
the characteristics of the entire
receivables pool may vary from those
of the initial receivables described
in "The Receivables Pool." Since the
weighted average life of the notes
will be influenced by the rate at
which the principal balances of the
receivables are paid, some of these
variations may affect the weighted
average life of the notes.
Payments will be Made
Only from the Limited
Assets of the Trust.............. The trust does not have any
significant assets or sources of funds
other than the receivables and amounts
on deposit in the reserve account and
the interest reserve account. You must
rely on payments on the receivables,
amounts, if any, on deposit in the
reserve account and the interest
reserve account, and payments of
claims made against MBIA under the
insurance policy for repayment of the
notes. The insurance policy will
guarantee shortfalls in the payment to
noteholders of interest and, to the
extent set forth in the "Policy
Payment Amount" definition under "The
Insurance Policy" below, principal on
each payment date, as well as the
ultimate payment in full of principal
on the final scheduled payment date.
However, if MBIA defaults in its
obligations under the insurance
policy, the trust must depend solely
on collections on the receivables and
amounts, if any, on deposit in the
reserve account and the interest
reserve account to make payments on
the notes. See "Description of the
Insurer" and "The Insurance Policy"
herein.
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<PAGE>
Noteholders Bear
Reinvestment Risk and
Payment Delay Risk Due
to Repurchase of or
Variations in Payment
Rates on Receivables............... The receivables may be prepaid, in
full or in part, voluntarily or as a
result of defaults, casualties to the
related vehicles, death of an obligor
or other reasons. The servicer or the
seller may be required to repurchase
one or more receivables from the trust
if they breach specified
representations or covenants relating
to the receivables described in
"Description of the Transfer and
Servicing Agreements-- Sale and
Assignment of Receivables." The
servicer also will have the right to
purchase all remaining receivables
from the trust pursuant to a clean-up
call described in "Description of the
Notes-- Optional Redemption" in the
prospectus. Each such prepayment,
repurchase or purchase will shorten
the average life of the notes.
Prepayment rates may be influenced by
a variety of factors and cannot be
predicted with any assurance. You will
bear any reinvestment risks resulting
from a faster rate of prepayment or
repurchase of receivables. Any time
your principal is repaid to you at a
time when you did not expect to
receive it, you may not be able to
reinvest your funds at the same or a
higher rate of return than the
interest rate on your notes.
Variations in Regional
Economic Conditions
May Cause Payment
Reductions or Delays............... As of the initial cutoff date,
dealers located in California, North
Carolina, Texas, Virginia and all
other states, respectively, originated
28.42%, 15.46%, 12.78%, 11.48% and
31.86% of the initial receivables by
aggregate principal balance. Adverse
economic conditions or other factors
particularly affecting these states
may affect the delinquency, loan loss
and repossession experience of the
receivables.
Unenforceability of the
Trust's Security Interests in
Financed Vehicles Because
Certificates of Title Will Not
Be Amended May Cause
Payment Reductions or
Delays............................. When dealers or Paragon first
originate receivables, Paragon's
security interests in the financed
vehicles are noted on the certificates
of title for the vehicles. A security
interest in a motor vehicle registered
in California, North Carolina, Texas
or Virginia, where approximately
68.14% of the initial receivables by
aggregate principal balance as of the
initial cutoff date have been
originated, may be perfected only by
causing a certificate of title to be
issued for the vehicle with the
security interest of the secured party
noted thereon.
Paragon will sell and assign
security interests in the financed
vehicles to the seller. The seller,
in turn, will sell and assign those
security interests to the trust. The
trust, in turn, will sell and assign
those security interests to the
indenture trustee for the benefit of
the noteholders and MBIA. In most
states, these assignments are
effective assignments of a security
interest, and the assignee succeeds
to the assignor's rights as secured
party. However, due to
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<PAGE>
the administrative burden and
expense, the certificates of title
for the financed vehicles will not
be marked, amended or reissued to
identify the seller, the trust or
the indenture trustee as the secured
party. In the absence of this
action, the indenture trustee may
not have a perfected security
interest in the financed vehicles
securing the receivables. California
law permits an assignee to succeed
to the assignor's rights without
recording the assignment on the
certificate of title. Under Texas
law, these assignments are an
effective conveyance of a security
interest, but the assignee's
security interest may not be
perfected unless the certificates of
title are amended to show the
assignee as the new lienholder and
notice of the assignment is given to
the related obligor. North Carolina
law permits, but does not require,
the notation of an assignment of
security interest on the certificate
of title. Virginia law is silent as
to whether a perfected security
interest in a motor vehicle that has
been assigned remains perfected
after assignment if no steps are
taken to cause a new certificate of
title to be issued showing the
assignee as lien holder. For a more
complete description of perfection
issues, see "Certain Legal Aspects
of the Receivables--Security
Interest in Vehicles" in the
prospectus.
Noteholders May Not
Declare Events of Default
Under the Indenture or
Decide the Consequences
of an Event of Default............. An event of default under the
indenture can generally occur only if
MBIA delivers to the indenture trustee
a notice of the occurrence of an event
of default, and noteholders will have
no independent right to declare an
event of default. The indenture
trustee or the noteholders can only
declare an event of default under the
indenture if MBIA has defaulted in its
obligations under the insurance policy
or is subject to an insolvency
proceeding. If there is an event of
default under the indenture and MBIA
is not in default under the insurance
policy or subject to an insolvency
proceeding, MBIA will have the right
to cause the liquidation of the trust
property. This liquidation will result
in the redemption of the notes.
Following an event of default, the
indenture trustee and the owner
trustee will continue to submit claims
under the insurance policy to enable
the trust to make interest payments
and, to the extent set forth in the
"Policy Payment Amount" definition
under "The Insurance Policy" below,
principal payments on your notes each
month. However, following an event of
default, MBIA may elect to pay all or
any portion of the outstanding notes,
plus accrued interest.
Voting Rights of
Noteholders May Be
Exercised by the Insurer............ So long as MBIA is not in default
under the insurance policy or subject
to an insolvency proceeding, it will
have the right to exercise all rights,
including voting rights, that the
noteholders are entitled to exercise
under the sale and servicing
agreement, the indenture and the trust
agreement, without any consent of
noteholders. However, MBIA cannot
exercise its rights to amend the sale
and servicing agreement, the indenture
or the trust agreement without the
consent of each noteholder in any
manner that would:
S-12
<PAGE>
o reduce the amount of, or
delay the timing of,
collections of payments
of monthly principal and
interest on the receivables or
distributions required to
be made on any note;
o adversely affect, in any
material respect, the interests
of the noteholders; or
o alter the rights of noteholders
to consent to such amendment.
If MBIA is in default under the
insurance policy or is subject to an
take any action under the sale and
servicing agreement, the indenture or
the trust agreement to terminate the
servicer, or to control or direct the
actions of the trust, the seller, the
servicer, the indenture trustee or the
owner trustee under the sale and
servicing agreement, the indenture or
the trust agreement. Furthermore,
MBIA's consent will not be required
with respect to any action (or waiver
of a right to take action) to be taken
by the trust, the seller, the
servicer, the indenture trustee, the
owner trustee or the noteholders,
except that MBIA's consent is required
to amend the sale and servicing
agreement, the indenture and the trust
agreement if the amendment would have
a material adverse effect on MBIA.
Paragon's Dependence
on External Financing
Facilities May Cause a
Servicer Termination Event.......... Paragon's ability to continue to
originate, acquire and service its
portfolio is dependent on continued
access to short-and long-term sources
of funding. Paragon's principal source
of funding is a warehouse lending
facility provided by ContiTrade
Services, L.L.C. ("CTS"). CTS's
commitment under the warehouse
facility expires on September 12,
1999, and Paragon is currently
negotiating the terms of a replacement
warehouse facility with another
lender. Although Paragon expects to be
able to refinance the warehouse
facility, if Paragon is unable to do
so or is otherwise unable to obtain
sufficient sources of funding,
Paragon's ability to perform its
obligations under the sale and
servicing agreement and the insurance
agreement could be impaired and could
trigger MBIA's rights to replace
Paragon as servicer without any
consent of the noteholders.
S-13
<PAGE>
THE TRUST
General
The trust is a Delaware business trust formed under the Trust
Agreement for the transactions described in this prospectus supplement.
After its formation, the trust will not engage in any activity other than
acquiring, holding and managing the receivables and the other assets of the
trust and proceeds therefrom and issuing the notes and certificates and
making payments thereon.
The trust's principal offices are in Delaware, in care of
Wilmington Trust Company, as owner trustee. The trust has no directors,
officers or employees and is not involved in any legal proceedings.
Capitalization of the Trust
The following table illustrates the capitalization of the trust as
of the closing date, as if the issuance and sale of the notes and the
certificates had taken place on such date:
5.95% Asset Backed Notes....................... $100,000,000.00
Asset Backed Certificates...................... $ 2,564,102.56
---------------
Total.......................................... $102,564,102.56
===============
An audited balance sheet of the trust as of March 18, 1999 is
attached as Appendix A to this prospectus supplement.
The Owner Trustee
Wilmington Trust Company is the owner trustee under the Trust
Agreement. Wilmington Trust Company is a Delaware banking corporation and
its principal offices where information can be obtained relating to the
trust are located at 1100 North Market Street, Wilmington, Delaware
19890-0001. The seller and its affiliates may maintain normal commercial
banking relations with the owner trustee and its affiliates.
S-14
<PAGE>
THE RECEIVABLES POOL
Paragon Acceptance Corporation ("Paragon") purchased or originated
the receivables in the ordinary course of its business. The pool of
receivables will consist of receivables purchased by the trust as of the
closing date ("initial receivables") and any receivables ("additional
receivables") purchased during the trust's funding period. Paragon has
selected receivables from its portfolio of receivables for inclusion in the
pool of receivables using several criteria, some of which are set forth in
the prospectus under "The Receivables Pool," as of February 28, 1999 (the
"Initial Cutoff Date") in the case of the initial receivables, or as of the
cutoff date designated for any sale of additional receivables (each, a
"Subsequent Cutoff Date"), in the case of additional receivables.
Eligibility criteria include that each receivable: (a) has no
payment 10% or more of which was more than 29 days past due; (b) has an
annual percentage interest rate ("APR") of not less than 6.83% and not more
than 17%; (c) provides for level monthly payments that fully amortize the
amount financed over an original term to scheduled maturity of at least 18
months and not more than 72 months (provided payments are made on the
applicable due dates and except that the final payment may differ); (d) has
an outstanding principal balance of not less than $5,000 and not more than
$85,000; and (e) has a remaining term to scheduled maturity of at least 14
months and not more than 72 months.
In addition, the seller will represent and warrant, among other
things, that, after giving effect to each transfer of additional
receivables, the receivables in the trust: (a) will have a weighted average
APR of not less than 10.60%; (b) will have no receivable with an APR less
than 6.75%; (c) will have a weighted average remaining term to maturity of
not more than 64 months; (d) based on the billing addresses of the
applicable dealers, no more than 10% of the receivables by principal
balance will be located in any one state other than California, North
Carolina, Virginia and Texas; (e) will have at least 65% of the receivables
by principal balance secured by cars and sports utility vehicles with a
manufacturer's suggested retail price when new of $20,000 or more; (f) will
have no more than 12% of the receivables by principal balance as
Pre-Computed Receivables; (g) will have no more than 45% of the receivables
by principal balance with an original term to scheduled maturity of more
than 60 months but less than or equal to 72 months; and (h) will have no
receivable with a principal balance in excess of $85,000.
The initial receivables were originated on or before February 28,
1999. The composition of the pool of receivables as of the closing date
will not deviate from the composition of the pool of receivables as of the
Initial Cutoff Date. The seller did not and will not utilize any selection
procedures it believed would be adverse to the noteholders or MBIA in
selecting the receivables.
The tables on the following pages set forth information regarding
the composition and characteristics of the Receivables Pool as of the
Initial Cutoff Date.
<PAGE>
Composition of the Receivables
as of the Initial Cutoff Date
Aggregate Principal Balance.......................................$76,548,946.54
Number of Receivables......................................................4,105
Average Amount Financed...............................................$19,433.78
Range of Amounts Financed....................................$6,50 to $88,651.35
Average Remaining Principal Balance...................................$18,647.73
Range of Remaining Principal Balances....................$5,036.78 to $83,864.55
Weighted Average APR......................................................10.63%
Range of APRs....................................................6.83% to 17.00%
Weighted Average Original Term to Scheduled Maturity (1)...............64 months
Range of Original Terms to Scheduled Maturity....................18 to 72 months
Weighted Average Remaining Term to Scheduled Maturity (1)..............61 months
Range of Remaining Terms to Scheduled Maturity...................14 to 72 months
New Vehicles (Percentage of Aggregate Principal Balance)....................6.6%
Used Vehicles (Percentage of Aggregate Principal Balance)....... ..........93.4%
(1) Rounded to the nearest month.
S-15
<PAGE>
Distribution of the Receivables by APR
as of the Initial Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
APR Range Balance Balance(1) Receivables Receivables(1)
--------- ------- ----------- ----------- --------------
6.75 to 6.99% $ 8,358,577.59 10.92% 442 10.77%
7.00 to 7.99% 3,356,963.31 4.39 162 3.95
8.00 to 8.99% 8,981,340.01 11.73 452 11.01
9.00 to 9.99% 11,149,870.76 14.57 578 14.08
10.00 to 10.99% 14,009,374.00 18.30 729 17.76
11.00 to 11.99% 11,299,562.94 14.76 604 14.71
12.00 to 12.99% 9,693,004.12 12.66 549 13.37
13.00 to 13.99% 5,632,158.36 7.36 316 7.70
14.00 to 14.99% 2,462,664.94 3.22 157 3.82
15.00 to 15.99% 965,153.02 1.26 68 1.66
16.00 to 16.99% 370,783.49 0.48 27 0.66
17.00 to 17.99% 269,494.00 0.35 21 0.51
----------- ---- -- ----
TOTAL $76,548,946.54 100.00% 4,105 100.00%
============== ======= ===== =======
(1) Percentages may not add to 100.00% because of rounding.
S-16
<PAGE>
Distribution of Receivables by Principal Place of Business of Dealer
as of the Initial Cutoff Date
Percentage
by Aggregate Percentage
Aggregate Principal Number of by Number of
State Principal Balance Balance (1) Receivables Receivables(1)
- ----- ----------------- ----------- ----------- --------------
California $21,751,691.88 28.42% 1,189 28.96%
North Carolina 11,832,424.55 15.46 587 14.30
Texas 9,786,107.21 12.78 528 12.86
Virginia 8,787,367.31 11.48 463 11.28
Florida 6,030,206.91 7.88 311 7.58
New Mexico 3,476,959.56 4.54 215 5.24
Oklahoma 3,333,453.40 4.35 195 4.75
Georgia 3,262,839.58 4.26 140 3.41
Maryland 2,627,641.81 3.43 150 3.65
Arizona 1,562,286.64 2.04 86 2.10
Colorado 1,283,399.97 1.68 67 1.63
Pennsylvania(2) 795,274.57 1.04 53 1.29
Kentucky 555,240.19 0.73 35 0.85
Delaware 541,870.54 0.71 31 0.76
South Carolina 267,608.72 0.35 16 0.39
Indiana 179,316.85 0.23 10 0.24
Oregon 167,274.35 0.22 10 0.24
Connecticut 98,265.82 0.13 5 0.12
Missouri 82,989.23 0.11 6 0.15
Tennessee 52,421.99 0.07 4 0.10
Kansas 34,808.52 0.05 1 0.02
Massachusetts 19,005.86 0.02 1 0.02
New Jersey 10,406.93 0.01 1 0.02
Nevada 10,084.15 0.01 1 0.02
--------- ---- - ----
TOTAL $76,548,946.54 100.00% 4,105 100.00%
============== ======= ===== =======
(1) Percentages may not add to 100.00% because of rounding.
(2) The inclusion of receivables originated in Pennsylvania in the
pool of receivables is subject to receipt of a sales finance
company license for the trust. If that license cannot be obtained
by the closing date, the seller intends to sell Pennsylvania
receivables to the trust on a Subsequent Transfer Date once it
receives the license.
S-17
<PAGE>
Distribution by Original Term to Scheduled Maturity of the Receivables
as of the Initial Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
Range of Original Terms Balance Balance(1) Receivables Receivables(1)
- ----------------------- ------- ------------ ----------- --------------
18 to 23 months $ 19,837.88 0.03% 1 0.02%
24 to 47 months 1,441,089.76 1.88 130 3.17
48 to 53 months 3,606,557.33 4.71 289 7.04
54 to 59 months 609,299.46 0.80 42 1.02
60 to 65 months 39,023,317.46 50.98 2,276 55.44
66 to 71 months 1,802,193.96 2.35 91 2.22
72 months 30,046,650.69 39.25 1,276 31.08
------------- ----- ----- -----
TOTAL $76,548,946.54 100.00% 4,105 100.00%
============== ======= ===== =======
(1) Percentages may not add to 100.00% because of rounding.
Distribution by Remaining Term to Scheduled Maturity of the Receivables
as of the Initial Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Range of Principal Principal Number of by Number of
Remaining Terms Balance Balance (1) Receivables Receivables(1)
- --------------- ------- ------------ ----------- -------------
12 to 47 months $ 5,668,213.59 7.40% 466 11.35 %
48 to 53 months 5,140,060.50 6.71 343 8.36
54 to 59 months 25,775,965.85 33.67 1,501 36.57
60 to 65 months 10,057,317.85 13.14 525 12.79
66 to 71 months 25,160,733.76 32.87 1,072 26.11
72 months 4,746,654.99 6.20 198 4.82
------------ ---- --- ----
TOTAL $ 76,548,946.54 100.00% 4,105 100.00%
=============== ======= ===== =======
(1) Percentages may not add to 100.00% because of rounding.
S-18
<PAGE>
Distribution of Receivables by Amount Financed
as of the Initial Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
Amount Financed Balance Balance(1) Receivables Receivables(1)
- --------------- ------- ------- ----------- --------------
$5,000.00 to $9,999.99 $ 2,639,687.70 3.45% 322 7.84%
$10,000.00 to $14,999.99 11,720,066.39 15.31 993 24.19
$15,000.00 to $19,999.99 19,235,989.28 25.13 1,149 27.99
$20,000.00 to $24,999.99 17,619,072.61 23.02 819 19.95
$25,000.00 to $29,999.99 10,958,462.44 14.32 421 10.26
$30,000.00 to $34,999.99 6,426,506.38 8.40 207 5.04
$35,000.00 to $39,999.99 3,574,059.28 4.67 100 2.44
$40,000.00 to $44,999.99 1,831,231.66 2.39 45 1.10
$45,000.00 to $49,999.99 949,476.45 1.24 21 0.51
$50,000.00 to $54,999.99 545,259.86 0.71 11 0.27
$55,000.00 to $59,999.99 432,741.28 0.57 8 0.19
$60,000.00 to $89,999.99 616,393.21 0.81 9 0.22
------------- ---- - ----
TOTAL $76,548,946.54 100.00% 4,105 100.00%
============== ======= ===== =======
(1) Percentages may not add to 100.00% because of rounding.
Distribution of Receivables by Current Principal Balance
as of the Initial Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Current Principal Principal Number of by Number of
Principal Balance Balance Balance(1) Receivables Receivables(1)
- ----------------- ------- ------- ----------- -----------
$5,000.00 to $9,999.99 $ 3,680,086.56 4.81% 434 10.57%
$10,000.00 to $14,999.99 13,323,669.81 17.41 1,070 26.07
$15,000.00 to $19,999.99 19,255,800.67 25.15 1,102 26.85
$20,000.00 to $24,999.99 17,612,812.45 23.01 790 19.24
$25,000.00 to $29,999.99 10,120,486.80 13.22 371 9.04
$30,000.00 to $34,999.99 6,024,297.81 7.87 186 4.53
$35,000.00 to $39,999.99 2,679,674.62 3.50 72 1.75
$40,000.00 to $44,999.99 1,473,191.99 1.92 35 0.85
$45,000.00 to $49,999.99 1,226,424.51 1.60 26 0.63
$50,000.00 to $84,999.99 1,152,501.32 1.51 19 0.46
------------ ---- -- ----
TOTAL $76,548,946.54 100.00% 4,105 100.00%
============== ======= ===== =======
(1) Percentages may not add to 100.00% because of rounding.
S-19
<PAGE>
Delinquencies and Loss Experience
The following tables describe Paragon's delinquency and loss
experience for the periods indicated. There is no assurance that the
delinquency and credit loss experience with respect to Paragon's
automobile, light duty truck and sports utility vehicle installment
contracts in the future or that the experience of the receivables owned by
the trust will be similar to that set forth below.
Paragon began acquiring contracts in August of 1996.
Delinquencies, repossessions and net losses have increased steadily since
that time due to seasoning of the pool of contracts. Fluctuation in
delinquencies, repossession and losses generally follow trends in the
overall economic environment and may be affected by such factors as
increased competition for obligors, the supply and demand for automobiles,
light duty trucks and sports utility vehicles, rising consumer debt burden
per household and increases in personal bankruptcies. The credit
enhancement for the trust, including the insurance policy provided by the
insurer, has been designed to protect the noteholders against increases in
delinquencies and losses.
[CAPTION]
<TABLE>
Historical Delinquency Experience
12/31/96 6/30/97 12/31/97 6/30/98 12/31/98
-------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Principal No. of contracts 486 2,090 4,576 8,667 11,765
Balance at Period End(1) Amount ($) 7,889,627 33,882,836 75,755,941 145,663,968 197,674,655
------------------------------------- ---------------- ---------------- --------------- --------------
Delinquencies No. of contracts 2 14 66 132 159
30 - 59 days Pay Off Balance ($) 21,084 283,003 1,031,132 2,213,174 2,735,707
% of Principal 0.27% 0.84% 1.36% 1.52% 1.38%
60 - 89 days No. of contracts 0 3 10 22 37
Pay Off Balance ($) 0 34,773 160,904 405,439 609,314
% of Principal 0.00% 0.10% 0.21% 0.28% 0.31%
90 days or more No. of contracts 0 0 1 4 18
Pay Off Balance ($) 0 0 14,185 92,083 303,265
% of Principal 0.00% 0.00% 0.02% 0.06% 0.15%
------------------------------------- ---------------- ---------------- --------------- --------------
Total Delinquencies No. of contracts 2 17 77 158 214
Pay Off Balance ($) 21,084 317,776 1,206,221 2,710,696 3,648,285
% of Principal 0.27% 0.94% 1.59% 1.86% 1.85%
Amount in No. of vehicles 0 6 7 24 30
Repossession Pay Off Balance ($) 0 105,815 112,910 434,530 489,986
Inventory % of Principal 0.00% 0.31% 0.15% 0.30% 0.25%
------------------------------------- ---------------- ---------------- --------------- --------------
Total Delinquencies No. of contracts & 2 23 84 182 244
and Amount in vehicles 21,084 423,591 1,319,131 3,145,226 4,138,272
Repossession Pay Off Balance ($) 0.27% 1.25% 1.74% 2.16% 2.09%
% of Principal
------------------------------------- ---------------- ---------------- --------------- --------------
</TABLE>
(1) Aggregate Principal Balance equals the net finance receivables for
all contracts serviced, excluding repossessed vehicles. The
amounts are on a basis consistent with Paragon's financial
statement presentation of Contracts Held for Sale, and include
such items as unamortized dealer participation and deferred
initial direct costs, reserve for losses and unearned finance
charges on precomputed contracts.
S-20
<PAGE>
Receivable Portfolio
Historical Net Loss Experience
[CAPTION]
<TABLE>
As of
-----------------------------
12 Months
Ended
12/31/96 6/30/97 12/31/97 6/30/98 12/31/98 12/31/98
-------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Average Aggregate Principal Balance(1) $2,847,061 $20,319,777 $54,292,574 $108,919,408 $173,558,972 $140,898,822
----------- ------------ ------------ ------------- ------------- -------------
Gross Charge-Offs(2) $0 $46,233 $331,696 $809,235 $1,483,538 $2,292,773
Recoveries(3) $0 $985 $182 $107,783 $322,422 $430,205
----------- ------------ ------------ ------------- ------------- -------------
Net Losses $0 $45,248 $331,514 $701,452 $1,161,117 $1,862,569
----------- ------------ ------------ ------------- ------------- -------------
Net Losses as a Percentage of
Average Aggregate Principal Balance (4) 0.00% 0.22% 0.61% 0.64% 0.67% 1.32%
----------- ------------ ------------ ------------- ------------- -------------
</TABLE>
- ------------------------
(1) Six-month averages, except for the twelve months ended December 31,
1998. Aggregate Principal Balance equals the net finance receivables
for all contracts serviced, excluding repossessed vehicles. The amounts
are on a basis consistent with Paragon's financial statement
presentation of Contracts Held for Sale, and include such items as
unamortized dealer participation and deferred initial direct costs,
reserve for losses and unearned finance charges on precomputed
contracts.
(2) Gross Charge-Offs are defined as principal balance at time of
charge-off less net sale proceeds.
(3) Recoveries are post charge-off amounts that are collected and applied
toward the obligors' deficiency balance.
(4) Percentages are not annualized, except for the twelve months
ended December 31, 1998.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being
written to store and process data using two digits rather than four to
define the applicable year. Any computer programs used by Paragon that have
date sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. Paragon's critical
computer applications software is not maintained in-house. Rather, Paragon
operates under service agreements with outside vendors that provide Paragon
(and many other institutions) access to the applications that are
maintained by the vendors and run on the vendors' mainframe computers.
These critical applications have been certified as year 2000 compliant by
the applicable vendors. Paragon has also assessed the potential impact of
year 2000 noncompliance on the part of other external relationships and,
subject to Paragon's ongoing review of vendors' year 2000 compliance,
Paragon is not aware at this time of any year 2000 issues that would have a
material adverse effect on Paragon's financial position, cash flows or
results of operations. As a result, subject to Paragon's ongoing compliance
efforts, the costs and uncertainties relating to timely resolution of year
2000 issues applicable to Paragon's business and operations are not
reasonably expected by the seller to have a material adverse effect on
Paragon's financial position, cash flows or results of operations. The
preceding two sentences are forward-looking statements and the actual costs
could differ materially from the costs currently anticipated by Paragon.
THE SELLER, THE SERVICER AND PARAGON
The seller is a wholly-owned subsidiary of Paragon. Information
regarding the seller is set forth under "The Seller" in the prospectus and
additional information about Paragon and the servicer is set forth under
"Paragon and the Servicer" in the prospectus. Paragon was incorporated in
S-21
<PAGE>
the State of Delaware in November 1994 and began purchasing contracts in
August 1996. Paragon was initially capitalized with approximately
$8,400,000 in preferred and common stock held by an investment fund managed
Triumph Capital Group, Inc. and Paragon's senior management. Triumph is
a private equity firm that makes privately-negotiated, minority equity and
equity- related investments in middle market companies that require capital
for growth. Since 1990, Triumph has sponsored private equity funds with
over $1 billion in committed capital. In April 1998, Paragon issued
approximately $14,000,000 in additional preferred and common stock to three
institutional investors not affiliated with Triumph.
Other funding sources currently available to Paragon include a
warehouse lending facility provided by CTS and a $4,000,000 subordinated
lending facility also provided by CTS. CTS holds a warrant to purchase up
to approximately 5.9% of the common stock of Paragon. Paragon is currently
negotiating the terms of a warehouse facility to replace CTS. CTS's
commitment under the existing facility expires on September 12, 1999.
WEIGHTED AVERAGE LIFE OF THE NOTES
Information regarding certain maturity and prepayment
considerations with respect to the notes is set forth under "Weighted
Average Life of Securities" in the prospectus. As the rate of payment of
principal of the notes depends primarily on the rate of payment (including
prepayments) of the principal balance of the receivables, final payment of
the notes could occur significantly earlier than the final scheduled
payment date. It is expected that final payment of the notes will occur on
or prior to the applicable final scheduled payment date. Under the
insurance policy, the insurer will irrevocably and unconditionally
guarantee payment of principal on the notes on each payment date to the
extent set forth in the "Policy Payment Amount" definition under "The
Insurance Policy" below, as well as the ultimate payment of principal on
the final scheduled payment date.
DESCRIPTION OF THE NOTES
General
The indenture trustee will issue the notes pursuant to the
Indenture between the indenture trustee and the trust (the "Indenture"), a
form of which has been filed as an exhibit to the registration statement. A
copy of the Indenture will be filed with the Commission following the
issuance of the notes. The following summary, together with the related
description in the prospectus, describes the material terms of the notes
and the Indenture but it does not purport to be complete and is subject to,
and is qualified by reference to, all the provisions of the notes and the
Indenture. The following summary supplements the description of the general
terms and provisions of the notes and the related Indenture found in the
prospectus.
Payments of Interest
The notes will bear interest at a rate of 5.95% per annum.
The notes constitute Fixed Rate Securities, as that term is
defined under "Certain Information Regarding the Securities--Fixed Rate
Securities" in the prospectus. Interest on the principal balance of the
notes is payable to the noteholders monthly on each payment date,
commencing April 15, 1999.
The insurer will irrevocably and unconditionally guarantee timely
payment of interest due on the notes on each payment date under the
insurance policy. See "Description of the Transfer and Servicing
Agreements--Distributions" and "--Reserve Account" in this prospectus
supplement.
Payment dates will occur on the 15th of each month or, if such day
is not a Business Day, the next succeeding Business Day, commencing April
15, 1999. A "Business Day" is any day other than a Saturday, Sunday or any
other day on which banks in St. Louis, Missouri, Los Angeles, California,
New York, New York, Minneapolis, Minnesota, or the principal place of
business of any successor servicer or successor indenture trustee are
authorized or obligated by law or order to be closed. Interest on the notes
will be calculated on the basis of a 360- day year consisting of twelve
30-day months.
<PAGE>
Payments of Principal
The principal of the notes will be payable to the noteholders on
each payment date, to the extent of funds available therefor, in an amount
generally equal to the Class A Principal Payment Amount. The insurer will
irrevocably and unconditionally guarantee payment of principal on the notes
on each payment date to the extent set forth in the "Policy Payment Amount"
definition under "The Insurance Policy" below, as well as the ultimate payment
of principal on the final scheduled payment date, under the insurance policy.
S-22
<PAGE>
Optional Redemption
The trust will redeem in whole, but not in part, the remaining
notes outstanding if the servicer exercises its option to purchase the
receivables. The servicer may purchase the receivables when the aggregate
outstanding principal balance has declined to 10% or less of the total
initial principal balance of the receivables (as measured at the Cutoff
Date, for the initial receivables, and the related Subsequent Cutoff Date,
for additional receivables), as described in the prospectus under
"Description of the Transfer and Servicing Agreements--Termination." The
redemption price will equal the unpaid principal amount of the remaining
outstanding notes plus accrued and unpaid interest thereon.
Mandatory Redemption
On the payment date on or after the last day of the funding
period, any funds remaining in the pre-funding account (after giving effect
to the purchase of additional receivables on that date) will be applied to
redeem the notes then outstanding.
Rights of MBIA as Controlling Party
So long as no Insurer Default has occurred and is continuing, the
insurer will have the right to exercise many of the rights, including
voting rights, that the noteholders would otherwise be entitled to exercise
under the Sale and Servicing Agreement, the Indenture and the Trust
Agreement. These rights include the right to remove the Servicer or waive
any Servicer Termination Event, to declare an Event of Default or control
remedies in the case of an Event of Default under the Indenture, to approve
supplemental indentures and other modifications to the Indenture, the Sale
and Servicing Agreement and the Trust Agreement, to approve any merger or
consolidation with respect to the trust, to approve the appointment or
removal of an indenture trustee and to exercise voting rights, all without
the consent of the noteholders. However, the insurer cannot exercise its
rights to amend the Sale and Servicing Agreement, the Indenture or the
Trust Agreement without the consent of each noteholder in any manner that
would reduce the amount of, or delay the timing of, collections of payments
of monthly principal and interest on the receivables or distributions
required to be made on any note, adversely affect in any material respect
the interests of the noteholders or alter the rights of noteholders to
consent to any such amendment.
An "Insurer Default" means the occurrence and continuance of
either of the following events:
o the insurer has failed to make a payment required under
the insurance policy in accordance with its terms; or
o the insurer has become subject to an insolvency
proceeding under the New York insurance laws or other
similar insolvency events have occurred with respect to
the insurer.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary, together with the related description in
the prospectus, describes the material terms of the Sale and Servicing
Agreement between Paragon, individually and as servicer, the seller, the
trust and the indenture trustee and backup servicer (the "Sale and
Servicing Agreement") and the Trust Agreement between Paragon, the owner
trustee and the seller (the "Trust Agreement"), but it does not purport to
be complete and is subject to, and qualified by reference to, all the
provisions of the Sale and Servicing Agreement and the Trust Agreement.
Forms of the Sale and Servicing Agreement and the Trust Agreement have been
filed as exhibits to the registration statement. A copy of the Sale and
Servicing Agreement and the Trust Agreement will be filed with the
Commission following the issuance of the notes. The following summary
supplements the description of the general terms and provisions of the Sale
and Servicing Agreement and the Trust Agreement found in the prospectus.
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Sale and Assignment of Initial Receivables and Additional Receivables
Information with respect to the conveyance on the closing date of
the initial receivables from the seller to the trust under the Sale and
Servicing Agreement is set forth under "Description of the Transfer and
Servicing Agreements-Sale and Assignment of Receivables" in the prospectus.
In addition, during the funding period, under the Sale and Servicing
Agreement, the seller will be obligated to sell to the trust additional
receivables having an aggregate principal balance of approximately
$26,015,156.02. This amount equals the amount deposited in the trust's
pre-funding account on the closing date.
It is expected that additional receivables will be conveyed to the
trust periodically on dates specified by the seller (each, a "Subsequent
Transfer Date") occurring during the funding period. The "funding period"
is the period beginning on the closing date and ending on the earliest of:
(1) the date on which the amount in the pre- funding account (after giving
effect to any transfers from the pre-funding account in connection with the
transfer of additional receivables to the issuer) is less than $100,000;
(2) the date on which an Event of Default or a Servicer Termination Event
occurs; and (3) the close of business on May 15, 1999.
On each Subsequent Transfer Date, subject to the conditions
described below, the seller will sell and assign to the trust, without
recourse, the seller's entire interest in the additional receivables listed
by the seller on a schedule attached to an assignment relating to the
additional receivables. Upon the conveyance of additional receivables to
the trust on a Subsequent Transfer Date, (1) the receivables in the pool of
receivables will increase by the aggregate principal balance of the
additional receivables being conveyed and (2) an amount equal to 2% of the
aggregate principal balance of the additional receivables will be withdrawn
from the pre-funding account and deposited into the reserve account.
Any conveyance of additional receivables is subject to the
satisfaction, on or before the related Subsequent Transfer Date, of the
following conditions precedent, among others: (1) the seller has provided
the trustee, the indenture trustee, the insurer, Paragon and the Rating
Agencies with a notice of such conveyance not later than five business days
prior to the Subsequent Transfer Date; (2) the seller has delivered to the
trustee and the insurer (with a copy to the indenture trustee) a written
assignment conveying the additional receivables to the trust, including a
schedule identifying the additional receivables; (3) the seller has
deposited into the collection account all collections received in respect
of the additional receivables after the applicable Subsequent Cutoff Date
and on or before three business days prior to such Subsequent Transfer
Date; (4) each additional receivable satisfies the eligibility criteria
specified in the Sale and Servicing Agreement (see "The Receivables Pool");
(5) as of the related Subsequent Cutoff Date, the receivables, including
any additional receivables conveyed by the seller as of the Subsequent
Cutoff Date, satisfy the criteria described under "The Receivables Pool" in
this prospectus supplement and "The Receivables Pools" in the prospectus;
(6) the required deposit to the reserve account for the Subsequent Transfer
Date has been made; (7) the seller has delivered required opinions of
counsel to the trustee, the indenture trustee, the insurer and the Rating
Agencies with respect to the transfer of the additional receivables; (8)
each Rating Agency has notified the seller, the indenture trustee and the
insurer that the addition of such additional receivables will not result in
the withdrawal or downgrade of the then current ratings of the notes; and
(9) the seller has not selected the additional receivables in a manner that
it believes is adverse to the interests of the noteholders or the insurer.
Except for the criteria described in the preceding paragraph and
under "The Receivables Pool" above, there are no required characteristics
of the additional receivables. Therefore, following the transfer of
additional receivables to the trust, the aggregate characteristics of the
entire Receivables Pool may vary from those of the initial receivables. See
"Risk Factors Changes in Pool Characteristics as a Result of Pre-Funding"
and "The Receivables Pool."
Although Paragon will continue to service and administer the
receivables under the Sale and Servicing Agreement, Paragon will deliver
the original documents evidencing each receivable and the certificate of
title for the related financed vehicle to the indenture trustee as
custodian for the trust.
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Accounts
The servicer (or the indenture trustee on behalf of and at the
direction of the servicer) will establish and maintain the collection
account, the reserve account, the pre-funding account and the interest
reserve account in the name of the indenture trustee for the benefit of the
noteholders and the insurer. The indenture trustee will hold the amounts on
deposit from time to time in the reserve account, the pre-funding account
and the interest reserve account for the benefit of noteholders and the
insurer. The indenture trustee will invest funds on deposit in the reserve
account, the pre-funding account and the interest reserve account in
Eligible Investments selected by the seller that mature not later than the
next payment date. On or before each payment date, funds in the amount of
the Deficiency Claim Amount, if any, for that payment date will be
withdrawn from the reserve account and deposited into the collection
account.
Reserve Account. On each payment date, the indenture trustee will
withdraw from the reserve account and deposit into the collection account
funds in the amount of the Deficiency Claim Amount, if any. This withdrawal
may result from, among other things, receivables becoming Liquidated
Receivables or the failure by the servicer or the seller to make any
remittance required to be made under the Sale and Servicing Agreement. The
aggregate amount to be withdrawn from the reserve account on any payment
date will not exceed the amount available in the reserve account. The
indenture trustee will deposit any withdrawal from the reserve account into
the collection account on or before the payment date for which the
withdrawal is made.
The "Reserve Account Required Amount" generally means, as of any
payment date, the greater of (i) 2% of the outstanding principal amount of
the receivables as of the related Accounting Date and (ii) the lesser of
(a) 1% of the outstanding principal balance of the initial receivables and
the additional receivables as of their respective cutoff dates and (b) the
then outstanding principal balance of the notes. If a Reserve Event occurs
and has not been cured, then the Reserve Account Required Amount will be 6%
of outstanding principal amount of the receivables as of the related
Accounting Date. If a Trigger Event occurs and has not been cured, then the
Reserve Account Required Amount will be 100% of the outstanding principal
amount of the receivables as of the related Accounting Date. The Sale and
Servicing Agreement will contain various triggers causing a "reserve event"
or a "trigger event" to occur, including, among others, default,
delinquency and cumulative net loss ratios as well as events of default
specified in the insurance agreement that relate to financial covenants and
changes of control of Paragon.
The Reserve Account Required Amount may be reduced from time to
time with the consent of the insurer if each Rating Agency has delivered
prior written notice to the seller, the servicer, the indenture trustee and
the owner trustee that such reduction will not result in a reduction,
withdrawal or qualification of such Rating Agency's then current ratings of
the notes. The time necessary for the reserve account to reach and maintain
the Reserve Account Required Amount at any time after the closing date will
be affected by the delinquency, credit loss, repossession and prepayment
experience of the receivables and, therefore, cannot be accurately
predicted. Amounts on deposit in the reserve account will be released to
the certificateholder(s) on each payment date to the extent that the amount
on deposit in the reserve account, after giving effect to any withdrawals
therefrom on that payment date, exceeds the Reserve Account Required
Amount. Upon any distribution to the certificateholder(s) of amounts from
the reserve account, the noteholders will not have any rights in, or claims
to, those amounts.
"Accounting Date" means, with respect to a payment date
or Determination Date, the last day of the Collection Period
preceding that payment date or Determination Date.
"Deficiency Claim Amount" means, with respect to any
Determination Date, the positive difference of (1) the sum of the
amounts payable from the collection account as described in (1)
through (4) under "Description of the Transfer and Servicing
Agreements--Distributions" below, minus (2) the amount of
Available Funds (excluding the Policy Claim Amount) with respect
to such Determination Date. The Deficiency Claim Amount will be
withdrawn from the reserve account to the extent funds are on
deposit therein and deposited into the collection account on the
related payment date.
<PAGE>
"Liquidation Proceeds" with respect to a Liquidated
Receivable means all amounts realized with respect to such
receivable (other than amounts withdrawn from the reserve account
and drawings under the insurance policy) net of (1) reasonable
expenses incurred by the servicer in connection with the
collection of such receivable and the repossession and disposition
of the related financed vehicle and (2) amounts that
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are required to be refunded to the obligor on such receivable;
except that the Liquidation Proceeds with respect to any
receivable will in no event be less than zero.
If funds in the reserve account are reduced to zero, noteholders
must rely on insurer's guarantee of timely payment of interest and, to the
extent set forth in the "Policy Payment Amount" definition under "The
Insurance Policy" below, principal on the notes on each payment date under
the insurance policy.
Interest Reserve Account. The servicer (or the indenture trustee
on behalf of and at the direction of the servicer) will establish and
maintain the interest reserve account as a Trust Account in the name of the
indenture trustee for the benefit of the noteholders and the insurer. The
interest reserve account will be created with an initial deposit by the
seller of $260,000, funded from the proceeds of the sale of the notes. On
each payment date, the servicer will instruct the indenture trustee to
withdraw from the interest reserve account and deposit into the collection
account an amount equal to the Interest Reserve Requirement for such
payment date, if any. The "Interest Reserve Requirement," means, with
respect to the payment dates occurring in April and May of 1999, the
excess, if any, of (a) the payments to be made under clauses (1), (3) and
(5) under "Distribution -- Payments from the Collection Account" below,
over (b) the sum of (i) 30 days of interest (44 days of interest, in the
case of the April 1999 payment date) on the Noteholders' Percentage of the
outstanding principal balance of all receivables held by the trust as of
the close of business on the last day of the second preceding Collection
Period (or the closing date, in the case of the April 1999 payment date),
calculated at the interest rate on the notes, and (ii) any earnings on
amounts on deposit in the pre-funding account to be transferred to the
collection account on such payment date. If the interest reserve account is
overfunded on the payment date in April of 1999, the overfunding will be
released to the seller. Any funds remaining in the interest reserve account
after satisfaction of the Interest Reserve Requirement will be released to
the seller on the payment date in May 1999.
Servicing Compensation and Payment of Expenses
The servicing fee rate will be 1.0% per year of the aggregate
principal balance of receivables as of the open of business on the first
day of the related Collection Period. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment of Expenses" in
the prospectus. The servicer will also collect and retain any late fees,
non-sufficient funds or returned check fees, liquidation fees and other
administrative fees with respect to the receivables. Payments by or on
behalf of obligors will be allocated to scheduled payments and late fees
and other charges in accordance with the servicer's normal practices and
procedures. Fees and transition expenses of any successor servicer will be
limited to the extent set forth in the Sale and Servicing Agreement. See
"Description of the Transfer and Servicing Agreements--Servicing
Compensation and Payment of Expenses" in the prospectus and
"--Distributions" herein.
Distributions
Deposits to Collection Account. On or before each payment date,
the servicer will cause all collections and other amounts constituting the
Payment Amount to be deposited into the collection account.
"Available Funds" means, with respect to any
Determination Date, the sum of (1) the Collected Funds received by
the servicer during the related Collection Period, (2) all
Purchase Amounts deposited in the collection account since the
preceding Determination Date and on or before the related Deposit
Date, (3) the Policy Claim Amount, if any, received by the
indenture trustee from the insurer with respect to such Payment
Date, (4) all investment earnings on the Pre-Funded Amount, if
any, to be transferred to the collection account on such Payment
Date, (5) all income received from investments of funds in the
collection account and the reserve account during the related
Collection Period and (6) the Interest Reserve Requirement, if
any, to be transferred to the collection account for such
Collection Period.
<PAGE>
"Collected Funds" means, with respect to any
Determination Date, the amount of funds in the collection account
representing collections (including under insurance policies) on
the receivables received by the servicer during the related
Collection Period, including all Liquidation Proceeds collected
during the related Collection Period (but excluding any Purchase
Amounts) and all amounts paid by Dealers under Dealer Agreements
or Dealer Assignments with respect to the receivables during the
related Collection Period.
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"Liquidated Receivable" means, with respect to any
Collection Period, a receivable as to which the earliest of the
following events has occurred: (1) the related financed vehicle
has been repossessed and sold by the servicer, or (2) at least 10%
of any scheduled payment has become 120 or more days delinquent,
or (3) the servicer has determined in good faith that all amounts
it expects to recover with respect thereto have been received.
"Payment Amount" means, with respect to any payment date,
the sum of (1) the Available Funds as of the related Determination
Date, plus (2) the Deficiency Claim Amount, if any, with respect
to such payment date.
"Purchase Amount" means for any receivable, as of the
close of business on the last day of a Collection Period, the
amount of principal plus accrued interest thereon, for such
Receivable as of such day.
"Purchased Receivable" means a receivable purchased as of
the close of business on the last day of a Collection Period by
the servicer or repurchased by the seller pursuant to the Sale and
Servicing Agreement.
Payments from the Collection Account. On each payment date, the
servicer will instruct the indenture trustee or, if the collection account
is maintained with an institution other than indenture trustee, instruct
and cause such institution (based on the information contained in the
Servicer's Report delivered on the related Determination Date) to make, and
indenture trustee or such other institution will make, the payments from
the collection account, to the extent of the Payment Amount, in the
following order of priority:
(1) to the indenture trustee, the backup servicer, and
the owner trustee any accrued and unpaid fees and expenses, in
each case subject to a maximum amount of expenses except after an
event of default under the Indenture;
(2) to the servicer, any accrued and unpaid servicing
fees and other amounts relating to mistaken deposits, postings or
checks returned for insufficient funds to the extent the servicer
has not reimbursed itself for such amounts and to the extent the
servicer has not, in its discretion, chosen to subordinate its
fees under (9) below;
(3) to the noteholders, the Class A Interest Payment Amount;
(4) until the outstanding principal amount of the notes
has been reduced to zero, the Class A Principal Payment Amount to
the noteholders;
(5) to the insurer, any amounts owing and not previously
paid under the insurance agreement;
(6) to the reserve account, to the extent necessary so
that the balance on deposit therein will not be less than the
Reserve Account Required Amount;
(7) to the indenture trustee, the owner trustee, the
backup servicer and any successor servicer, any accrued and unpaid
fees and expenses not paid under (1) or (2) above;
(8) all remaining amounts, together with any funds in the
reserve account in excess of the Reserve Account Required Amount,
to the noteholders as an additional payment of principal, until
the excess of the aggregate principal balance of receivables as of
the related Accounting Date over the note balance (after giving
effect to all payments under (4) above) equals 4% of the aggregate
principal balance of receivables as of that Accounting Date;
(9) to the servicer, any accrued and unpaid servicing
fees and other amounts not paid at its discretion under (2) above;
and
(10) all remaining amounts, together with any funds in
the reserve account in excess of the Reserve Account Required
Amount, to the certificateholder(s).
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"Class A Interest Payment Amount" means, with respect to any
payment date, an amount equal to the sum of (1) for the first payment date
44 days of interest and for any payment date thereafter 30 days of
interest, in each case calculated on the basis of a 360-day year consisting
of twelve 30-day months, at 5.95% on the outstanding note balance as of the
close of business on the related Accounting Date, plus (2) the Class A
Interest Carryover Shortfall with respect to the preceding payment date,
plus 30 days of interest on the Class A Interest Carryover Shortfall, to
the extent permitted by law, at 5.95%.
"Class A Interest Carryover Shortfall" means, as of the close of
business on any payment date, an amount equal to (1) the Class A Interest
Payment Amount for that payment date minus (2) the amount of interest that
the holders actually received on that payment date.
"Class A Principal Payment Amount" with respect to any payment
date equals the sum of: (1) the Noteholders' Percentage of the sum of: (A)
the principal portion of all Collected Funds for the related Determination
Date (other than Collected Funds received with respect to Liquidated
Receivables following the respective dates such receivables became
Liquidated Receivables), (B) the principal balance of all receivables that
became Liquidated Receivables during the related Collection Period (other
than Purchased Receivables) as determined on the respective dates such
receivables became Liquidated Receivables, (C) the principal portion of the
Purchase Amount of all Receivables that became Purchased Receivables as of
the related Accounting Date, and (D) the aggregate amount of any
court-ordered reductions in amounts owing from obligors on the receivables
arising out of insolvency proceedings with respect to such obligors that
have been realized during the related Collection Period; plus (2) any Class
A Principal Carryover Shortfall with respect to the preceding payment date.
On the final scheduled payment date for the notes, the Class A Principal
Payment Amount will equal the outstanding principal balance of the notes.
"Class A Principal Carryover Shortfall" as of the close of
business on any payment date equals (1) the Class A Principal Payment
Amount, minus (2) the amount of principal that the holders actually
received on such payment date.
"Noteholders' Percentage" means (a) 100% until and including the
later of September 15, 1999 and the date when the aggregate principal
balance of receivables as of the related Accounting Date exceeds the
aggregate principal amount of the notes by 4% of the aggregate principal
balance of receivables as of that Accounting Date, (b) thereafter, if
September 15, 1999 was the later date in clause (a), zero until the
overcollateralization amount described in clause (a) equals 4%, and (c)
thereafter, 96%.
Servicer Termination Events
The Sale and Servicing Agreement contains the "Servicer
Termination Events" described on page 35 of the prospectus. A Servicer
Termination Event may also be triggered by the insurer if events of default
specified in the insurance agreement occur, including, among other things,
events of default relating to financial covenants and a change of control
of Paragon. If these Servicer Termination Events occur, the insurer may
replace Paragon as the servicer without any consent of the noteholders.
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
In all the states in which the receivables have been originated,
retail installment contracts such as the receivables evidence the credit
sale of automobiles, light duty trucks and sports utility vehicles by
dealers to obligors. The contracts also constitute personal property
security agreements and include grants of security interests in the
financed vehicles under the Uniform Commercial Code (the "UCC").
In most states, perfection of a security interest in a motor
vehicle is governed by the motor vehicle titling or registration laws of
the state in which the vehicle is located. In California, North Carolina,
Texas and Virginia, where more than 68% of the receivables have been
originated, a security interest in a motor vehicle may be perfected only by
causing a certificate of title to be issued for the vehicle with the
security interest of the secured party noted on the title. In those states,
Paragon's policies and procedures require dealers and vehicle owners to
take the steps necessary to cause certificates of title for financed
vehicles to be issued with the security interest of Paragon noted on the
title and to cause the certificates of title to be delivered to Paragon.
Under a Receivables Purchase Agreement between Paragon and the
seller (the "Receivables Purchase Agreement") and the Sale and Servicing
Agreement, Paragon will sell and assign to the seller, and the seller will
sell and assign to the trust, its security interests in the financed
vehicles securing the receivables. Under the Indenture, the issuer will
assign those security interests to the indenture trustee, for the benefit
of the noteholders and the insurer. However, because of the administrative
burden and expense, no steps will be taken to cause certificates of title
for the financed vehicles to be issued or amended to show the indenture
trustee as the new secured party on the certificates of title for the
financed vehicles. See "Description of the Transfer and Servicing
Agreements--Sale and Assignment of Receivables" in the prospectus.
In most states, assignments such as those under the Receivables
Purchase Agreement and the Sale and Servicing Agreement are effective
assignments of a security interest and the assignee succeeds to the
assignor's rights as secured party. California law permits an assignee to
succeed to the assignor's rights without recording the assignment on the
certificate of title. Under Texas law, such assignments are an effective
conveyance of a security interest, but the assignee's security interest may
not be perfected unless the certificates of title are amended to show the
assignee as the new lienholder and notice of such assignment is given to
the related obligor. North Carolina law permits, but does not require, the
notation of an assignment of security interest on the certificate of title.
Virginia law is silent as to whether a perfected security interest that has
been assigned remains perfected after assignment if no steps are taken to
cause a new certificate of title to be issued showing the assignee as lien
holder. With respect to Virginia, the trust will rely on an analogy to the
provisions of the UCC relating to security interests that are perfected by
the filing of a financing statement, which permit the assignor and assignee
of a perfected security interest to file a financing statement amendment to
reflect the assignment, but do not require such a filing as a condition to
the continued validity and perfection of the security interest.
Additional information regarding certain legal aspects of the
receivables is set forth under "Certain Legal Aspects of the Receivables"
in the prospectus.
<PAGE>
THE INSURANCE POLICY
The insurer, in consideration of the payment of the premium and
subject to the terms of the insurance policy, unconditionally and
irrevocably guarantees to any Owner (as defined below) that an amount equal
to each Policy Claim Amount will be received by the indenture trustee, or
its successors, as trustee for the Owners, on behalf of the Owners from the
insurer, for distribution by the indenture trustee to each Owner of each
Owner's proportionate share of the Policy Claim Amount. The insurer's
obligations under the insurance policy with respect to a particular Policy
Claim Amount will be discharged to the extent funds equal to the applicable
Policy Claim Amount are received by the indenture trustee, whether or not
such funds are properly applied by the indenture trustee. Payments of
Policy Claim Amounts will be made only at the time set forth in the
insurance policy. The insurance policy will not guarantee payment of any
amounts that become due on an accelerated basis as a result of (a) a
default by the trust, (b) the occurrence of an Event of Default under the
Indenture, or (c) any other cause. The insurer may elect, in its sole
discretion, to pay in whole or in part such principal due upon
acceleration. The insurer may elect, in its sole discretion, to pay all or
a portion of certain shortfalls of funds available to make distributions of
principal on the notes on a payment date, as described under "Description
of the Transfer and Servicing Agreements" in this prospectus supplement.
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The insurer will pay any Policy Claim Amount that is a Preference
Amount (as defined below) on the business day following receipt by the
fiscal agent of the insurer of (1) a certified copy of the order requiring
the return of a preference payment, (2) an opinion of counsel satisfactory
to the insurer that such order is final and not subject to appeal, (3) an
assignment in such form as is reasonably required by the insurer,
irrevocably assigning to the insurer all rights and claims of each Owner
relating to or arising under the notes against the debtor that made such
preference payment or otherwise with respect to such preference payment and
(4) appropriate instruments to effect the appointment of the insurer as
agent for such Owner in any legal proceeding related to such preference
payment, such instruments being in a form satisfactory to the insurer. If
these documents are received after 12:00 noon, New York City time, on such
business day, they will be deemed to be received on the next business day.
Such payments will be disbursed to the receiver or the trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has
returned principal or interest paid on such notes to such receiver or
trustee in bankruptcy, in which case such payment will be disbursed to such
Owner.
The insurer will pay any other amount payable under the insurance
policy no later than 12:00 noon, New York City time, on the later of the
related payment date or the second business day following receipt in New
York, New York on a business day by the fiscal agent, of a notice
specifying the Policy Claim Amount that will be due and owing on such
payment date. If this notice is received after 12:00 noon, New York City
time, on that business day, it will be deemed to be received on the next
business day. If any such notice received by the fiscal agent is not in
proper form or is otherwise insufficient for the purpose of making a claim
under the insurance policy it will be deemed not to have been received by
the fiscal agent, and the insurer or the fiscal agent, as the case may be,
will promptly so advise the indenture trustee and the indenture trustee may
submit an amended notice.
Policy Claim Amounts due under the insurance policy, unless
otherwise stated therein, will be disbursed by the fiscal agent to the
indenture trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Policy Claim Amount less, in respect
of Policy Claim Amounts including Preference Amounts, any amount held by
the indenture trustee for the payment of such Policy Claim Amount and
legally available therefor.
The fiscal agent is the agent of the insurer only and the fiscal
agent will in no event be liable to Owners for any acts of the fiscal agent
or any failure of the insurer to deposit or cause to be deposited
sufficient funds to make payments due under the insurance policy.
Subject to the terms of the Indenture, the insurer shall be
subrogated to the rights of each Owner to receive payments under the notes
to the extent of any payment by the insurer under the insurance policy.
As used herein, the following terms have the following meanings:
"Owner" means each noteholder who, on the applicable payment date,
is entitled under the terms of the related note to a distribution
thereunder.
"Policy Claim Amount" means, with respect to each payment date,
the sum of (i) the Policy Payment Amount for that payment date and (ii) the
Preference Amount for that payment date.
"Policy Payment Amount" means, as of any payment date, an amount, if
any, equal to the sum of:
(a) the amount, if any, by which (i) the amount set forth under
clause (3) under "Description of the Transfer and Servicing
Agreements -- Distributions" above exceeds (ii) the sum of (x)
Available Funds (excluding the Policy Claim Amount) and (y) the
amount on deposit in the reserve account on that payment date, in
each case after giving effect to payments under clauses (1) and
(2) under "Description of the Transfer and Servicing Agreements --
Distributions" above, plus
(b) on any payment date other than the final scheduled payment
date, the amount, if any, by which (i) the outstanding principal
amount of the notes as of that payment date (after giving effect
to all other
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amounts allocable and distributable to principal on the notes on
that payment date, including amounts withdrawn from the reserve
account) exceeds (ii) the sum of (x) the aggregate principal
balance of the receivables as of the related Accounting Date and
(y) the pre-funded amount, if any, as of the related Accounting
Date; plus
(c) on the final scheduled payment date, an amount equal to the
outstanding principal amount of the notes (after giving effect to
all other amounts allocable and distributable to principal on the
notes on that payment date, including amounts withdrawn from the
reserve account).
"Preference Amount" means any amount previously distributed to an
Owner in respect of the notes that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy with respect
to Paragon, the seller or the trust pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance
with a final nonappealable order of a court having competent jurisdiction.
The insurance policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving
effect to the conflict of law principles thereof. THE INSURANCE POLICY IS
NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN
ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The insurance policy is not cancelable for any reason. The premium
on the insurance policy is not refundable for any reason including payment,
or provision being made for payment, prior to the final scheduled payment
date of the notes.
DESCRIPTION OF THE INSURER
The insurer, MBIA Insurance Corporation 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
the 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 September 30, 1998 and
for the nine month periods ended September 30, 1998 and September 30, 1997
included in the Quarterly Report on Form 10-Q of MBIA Inc. for the period
ended September 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
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<PAGE>
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.
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"):
SAP
December 31, September 30,
1997 1998
(Audited) (Unaudited)
---------------------------------
(in millions)
----------------
Admitted Assets.......... $5,256 $6,318
Liabilities.............. $3,496 $4,114
Capital and Surplus...... $1,760 $2,204
GAAP
December 31, September 30,
1997 1998
(Audited) (Unaudited)
---------------------------------
(in millions)
----------------
Assets............... $5,988 $7,439
Liabilities.......... $2,624 $3,268
Shareholders'
Equity............... $3,364 $4,171
Copies of the financial statements of the insurer incorporated by
reference 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 "Description of the Insurer." Additionally, the insurer makes no
representation regarding the notes or the advisability of investing in the
notes.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE
SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Moody's Investors Service, Inc. rates the financial strength of the
insurer "Aaa". Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., rates the financial strength of the insurer
"AAA". Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the financial strength 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 of 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
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<PAGE>
any of the above ratings will have an adverse effect on the market price of
the notes. The insurer does not guarantee the market price of the notes nor
does it guarantee that the ratings on the notes will not be revised or
withdrawn.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax
consequences of the purchase, ownership and disposition of the notes and
such summary represents the opinion of Federal Tax Counsel subject to the
qualifications set forth herein. An opinion of Federal Tax Counsel,
however, is not binding on the Internal Revenue Service or the courts. No
ruling on any of the issues discussed below will be sought from the
Internal Revenue Service. The following summary is intended as a discussion
of the possible effects of certain federal income tax consequences to
holders, but does not purport to furnish information in the level of detail
or with the attention to a holder's specific tax circumstances that would
be provided by a holder's own tax advisor. For example, it does not discuss
the tax consequences of the purchase, ownership and disposition of the
notes by noteholders that are subject to special treatment under the
federal income tax laws (including banks and thrifts, insurance companies,
regulated investment companies, dealers in securities, foreign investors,
trusts and estates and pass-through entities, the equity holders of which
are any of the foregoing). In addition, the discussion regarding the notes
is limited to the federal income tax consequences of the initial
noteholders and not a purchaser in the secondary market. Moreover, there
are no cases or Internal Revenue Service rulings on similar transactions
involving both debt and equity interests issued by a trust with terms
similar to those of the Notes. As a result, the Internal Revenue Service
may disagree with all or a part of the discussion below. We suggest that
prospective investors 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.
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.
Scope of the Tax Opinions
In the opinion of Federal Tax Counsel, the trust will not be
classified as an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. Further, with respect to the
notes, Federal Tax Counsel is of the opinion that the notes will be
characterized as debt for federal income tax purposes.
In addition, Federal Tax Counsel has prepared or reviewed the
statements under the heading "Summary of Terms--Material Federal Income Tax
Consequences" as they relate to federal income tax matters and under the
heading "Material Federal Income Tax Consequences" herein and in the
prospectus and is of the opinion that such statements are a fair and
accurate discussion of all material federal income tax consequences of the
purchase, ownership and disposition of the notes. Such statements are
intended as a discussion of the possible effects of the classification of
the trust on investors and of related tax matters affecting investors
generally, but do not purport to furnish information in the level of detail
or with the attention to the investor's specific tax circumstances that
would be provided by an investor's own tax adviser. Accordingly, we suggest
that investors consult their own tax advisers with regard to the tax
consequences of investing in the notes.
Tax Classification of the Trust
Federal Tax Counsel is of the opinion that the trust will not be
classified as an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. A copy of such opinion of
Federal Tax Counsel will be filed with the Commission as an exhibit to a
Form 8-K prior to the confirmation of sales of any notes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on Federal Tax Counsel's conclusion
that the nature of the income of the trust will exempt it from the rule
that certain publicly traded partnerships are taxable as corporations.
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<PAGE>
If the trust were 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, reduced by its interest expense on the notes provided the
notes are respected as debt for federal income tax purposes (see discussion
in the following paragraph). Any such corporate income tax could materially
reduce cash available to make payments on the notes.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The seller will agree, and
the noteholders will agree by their purchase of Notes, to treat the notes
as debt for federal, state and local income and franchise tax purposes. In
the opinion of Federal Tax Counsel, the Notes will be characterized as debt
for federal income tax purposes. A copy of such opinion of Federal Tax
Counsel will be filed with the Commission with a Form 8-K following the
issuance of the notes. The discussion below assumes this characterization
of the notes is correct.
The discussion below assumes that all payments on the notes are
denominated in U.S. dollars, and that the notes are not Strip Notes.
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 principal
amount of the notes over their issue price) does not exceed a de minimis
amount (i.e., 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.
Interest Income on the Notes. Based on the above assumptions,
except as discussed in the following paragraph, the notes 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 method of tax accounting. Under the OID
regulations, a holder of a note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are
made on the note. A purchaser who buys a note for more or less than its
principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
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 and the holder's adjusted tax basis
in the note. 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, OID 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 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. Capital losses may be used by a
corporate taxpayer only to offset capital gains, and by an individual
taxpayer only to the extent of capital gains plus $3,000 of other income.
Foreign Holders. Interest payments made (or accrued) to a
noteholder who is a nonresident alien, foreign corporation or other
non-United States person (a "foreign person") generally will be considered
"portfolio interest", and generally will not be subject to United States
federal income tax and withholding tax, if the interest is not effectively
connected with the conduct of a trade or business within the United States
by the foreign person and the foreign person (i) is not actually or
constructively a "10 percent shareholder" of the trust or the seller or a
"controlled foreign corporation" with respect to which the trust or the
seller is a "related person" within the meaning of the Code and (ii)
provides the indenture trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes with an appropriate statement
(on Internal Revenue Service Form W-8 or a similar form), signed under
penalties of perjury, certifying that the beneficial owner of the note is a
foreign person and providing the foreign person's name and address. If a
note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however,
the signed statement must be accompanied by a Form W-8 or substitute form
provided by the foreign person that owns the note. If such interest is not
portfolio interest, then it will be subject to United States federal
withholding tax at a rate of 30
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<PAGE>
percent, unless that rate is reduced or eliminated pursuant to an
applicable tax treaty and the foreign person provides the trustee or other
payor of the interest with a copy of Internal Revenue Service Form 1001, or
if the interest is effectively connected with the conduct of a U.S. trade
or business and the foreign person provides a copy of Internal Revenue
Service Form 4224.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a note by a foreign person will be exempt from
United States federal income and withholding tax, provided that (i) such
gain is not effectively connected with the conduct of a trade or business
in the United States by the foreign person and (ii) in the case of an
individual foreign person, the foreign person is not present in the United
States for 183 days or more in the taxable year.
On October 6, 1997, final Treasury regulations (the "Withholding
Tax Regulations") were issued that modify certain of the filing
requirements with which foreign persons must comply in order to be entitled
to an exemption from U.S. withholding tax or a reduction to the applicable
U.S. withholding tax rate. Those persons currently required to file Form
W-8 generally will continue to be required to file that form. However, the
requirement that foreign persons submit Form W-8 is extended to most
foreign persons who wish to seek an exemption from withholding tax on the
basis that income from the Notes is effectively connected with the conduct
of a U.S. trade or business (in lieu of Form 4224) and to foreign persons
wishing to rely on a tax treaty to reduce the withholding tax rate (in lieu
of Form 1001). Under the Withholding Tax Regulations, a foreign person
would generally be required to submit Form W-8BEN in lieu of Form 1001 or
to submit Form W-8ECI in lieu of Form 4224, although alternative
documentation may be applicable in certain situations. The Withholding Tax
Regulations are effective for payments of interest due after December 31,
1999, but Forms 4224 and 1001 filed prior to that date will continue to be
effective until the earlier of December 31, 2000 or the current expiration
date of those forms. We suggest that prospective investors consult their
tax advisors with respect to the effect of the Withholding Tax Regulations.
Backup Withholding. Each holder of a note (other than an exempt
holder such as a corporation, tax exempt organization, qualified pension
and profit sharing trust, individual retirement account or nonresident
alien who provides certification as to status as a nonresident) will be
required to provide, under penalties of perjury, a certificate containing
the holder's name, address, correct federal taxpayer identification number
and a statement that the holder is not subject to backup withholding.
Should a nonexempt noteholder fail to provide the required certification,
the trust will be required to withhold 31 percent of the amount otherwise
payable to the holder, and remit the withheld amount to the Internal
Revenue Service as a credit against the holder's federal income tax
liability. We suggest that noteholders consult with their tax advisors as
to their eligibility for exemption from backup withholding and the
procedure for obtaining the exemption, and the potential impact of the
Withholding Tax Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Federal Tax Counsel, the Internal Revenue Service successfully
asserted that 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 taxable as a corporation with the adverse
consequences described above (and the taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on notes
recharacterized as equity). Alternatively, and most likely in the view of
Federal Tax Counsel, the Trust might be treated as a publicly traded
partnership that would not be taxable as a corporation because it would
meet certain qualifying income tests. Nonetheless, treatment of the notes
as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to foreign
holders generally would be subject to U.S. tax and U.S. 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. Furthermore, such a characterization could subject holders to
state and local taxation in jurisdictions in which they are not currently
subject to tax.
Information Reporting and Withholding. The trust will be required
to report annually to the IRS, and to each noteholder of record, the amount
of interest paid on the Notes (and the amount of interest withheld for
Federal income taxes, if any) for each calendar year, except as to exempt
noteholders (generally, noteholders
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that are corporations, tax-exempt organizations, qualified pension and
profit-sharing trusts and individual retirement accounts). For nonresident
aliens who provide certification as to their status as nonresidents,
interest paid will be reported on Form 1042-S. However, withholding will
not apply as long as the certification is valid. Generally, certification
must be renewed every three calendar years. Accordingly, each noteholder
(other than exempt noteholders who are not subject to the reporting
requirements) will be required to provide, under penalties of perjury, a
certificate containing the noteholder's name, address, correct Federal
taxpayer identification number and a statement that the noteholder is not
subject to backup withholding. If a nonexempt noteholder fails to provide
the required certification or recertify its foreign status, the trust will
be required to withhold 31% for U.S. residents or 30% for nonresident
aliens of the amount otherwise payable to the noteholder, and remit the
withheld amount to the IRS as a credit against the noteholder's Federal
income tax liability.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences" above, we suggest that potential
purchasers consider the state income tax consequences of the acquisition,
ownership and disposition of the notes. State income tax law may vary
substantially from state to state, and this discussion does not purport to
describe any aspect of the income tax laws of any state. Therefore, We
suggest that potential purchasers consult their own tax advisors with
respect to the various tax consequences of an investment in the notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a
pension, profit sharing, or other employee benefit plan, as well as
individual retirement accounts and certain types of Keogh Plans subject to
those provisions, and entities deemed to hold plan assets of such plans
(each, a "Benefit Plan"), from engaging in certain transactions involving
"plan assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the Benefit Plan. A
violation of these "prohibited transaction" rules may generate excise tax
and other penalties and liabilities under ERISA and the Code for such
persons. ERISA also imposes certain duties on persons who are fiduciaries
of Benefit Plans subject to ERISA. Under ERISA, any person who exercises
any authority or control respecting the management or disposition of the
assets of a Benefit Plan is considered to be a fiduciary of such Benefit
Plan (subject to certain exceptions not here relevant).
Certain transactions involving the Issuer might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to
a Benefit Plan that purchased Notes if assets of the Issuer were deemed to
be assets of the Benefit Plan. Under a regulation issued by the United
States Department of Labor (the "Plan Assets Regulation"), the assets of
the Issuer would be treated as plan assets of a Benefit Plan for the
purposes of ERISA and the Code only if the Benefit Plan acquired an equity
interest in the Issuer and none of the exceptions contained in the Plan
Assets Regulation was 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. Although there is little guidance on the
subject and although the Issuer has not obtained an opinion of counsel
under state law, the Issuer believes that, at the time of their issuance,
the notes should be treated as indebtedness without substantial equity
features for the purposes of the Plan Assets Regulation. The debt status of
the notes could be affected subsequent to their issuance by certain changes
in the financial condition of the Issuer.
Without regard to whether notes are treated as an equity interest
under the Plan Assets Regulation, the acquisition or holding of notes by or
on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Issuer, Paragon, the Servicer, the Backup
Servicer, the Indenture Trustee or the Owner Trustee is or becomes a party
in interest or a disqualified person with respect to such Benefit Plan.
Certain exemptions from the prohibited transaction rules could be
applicable to the purchase and holding of notes by a Benefit Plan
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depending on the type and circumstances of the plan fiduciary making the
decision to acquire such notes. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts;
PTCE 95-60, regarding certain transactions entered into by insurance
company general accounts; PTCE 96-23, regarding certain transactions
effected by "in-house asset managers"; PTCE 91-38 regarding certain
transactions entered into by bank collective investment funds; and PTCE
84-14, regarding certain transactions effected by "qualified professional
asset managers." Each purchaser and each transferee of a note shall be
deemed to represent and warrant that its purchase and holding of the notes
is covered by a PTCE, all of the conditions of which are and will be
satisfied upon its acquisition of, and throughout the term it holds, the
notes.
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.
We suggest that a Benefit Plan fiduciary considering the purchase
of notes consult its tax and/or legal advisors regarding whether the assets
of the Issuer would be considered plan assets, the possibility of exemptive
relief from the prohibited transaction rules and other issues and their
potential consequences.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement, dated March 24, 1999, the seller has agreed to cause the trust
to sell to Credit Suisse First Boston Corporation, the underwriter, all of
the notes. The underwriting agreement provides that the underwriter is
obligated to purchase all of the notes if any are purchased.
The underwriter proposes to offer the notes initially at the price
on the cover page of this prospectus supplement, and to selling group
members at that price less a discount of 0.300% of the principal on each
note. The underwriter and selling group members may allow a discount of
0.125% of the principal of each note on sales to other broker/dealers.
After the initial public offering, the public offering price and discount
to broker/dealers may change.
The seller estimates that its out of pocket expenses for this
offering will be approximately $200,000.
The notes are a new issue of securities with no established
trading market. The underwriter intends to make a secondary market for the
notes. However, it is not obligated to do so and may discontinue making a
secondary market for the notes at any times without notice. No assurance
can be given as to how liquid the trading market for the notes will be.
The seller and Paragon have agreed to indemnify the underwriter
against certain liabilities under the Securities Act, or contribute to
payments which the underwriter may be required to make in respect thereof.
In the ordinary course of their respective businesses, the
underwriter and its affiliates have engaged and may in the future engage in
investment banking or commercial banking transactions with the seller and
its affiliates. A portion of the proceeds of the offering will be used to
repay the underwriter for its short-term repayment of warehouse financing
provided by CTS to Paragon.
The underwriter may engage in stabilizing transactions, syndicate
covering transactions and penalty bids in accordance with Rule 104 under
the Exchange Act. Stabilizing transactions permit bids to purchase the
underlying security 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 underwriter 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 to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause
the price of the notes to be higher than it would otherwise be in the
absence of such transactions. The underwriter is not required to engage in
these activities and may end any of these activities at any time.
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LEGAL OPINIONS
In addition to the legal opinions described in the prospectus,
certain legal matters relating to the notes and certain federal income tax
and other matters will be passed upon for the trust by Mayer, Brown &
Platt. Certain legal matters will be passed upon for the underwriter by
Dewey Ballantine LLP. Mayer, Brown & Platt may from time to time render
legal services to the seller, the servicer and its affiliates.
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, have been incorporated herein
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting
and auditing.
The balance sheet of Paragon Auto Receivables Owner Trust 1999-A
as of March 18, 1999, appearing elsewhere herein, has been included herein
in reliance upon the report of KPMG LLP, independent certified public
accountants and upon the authority of said firm as experts in accounting
and auditing.
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INDEX OF DEFINED TERMS
Page
Accounting Date ........................................................S-25
additional receivables....................................................S-15
APR ........................................................S-15
Available Funds ........................................................S-26
Benefit Plan ........................................................S-36
Business Day ........................................................S-22
Class A Interest Carryover Shortfall......................................S-28
Class A Interest Payment Amount...........................................S-27
Class A Principal Carryover Shortfall.....................................S-28
Class A Principal Payment Amount..........................................S-28
CMAC ........................................................S-31
Collected Funds ........................................................S-26
CTS ........................................................S-13
Defaulted Receivable......................................................S-27
Deficiency Claim Amount...................................................S-25
Foreign person ........................................................S-34
funding period ........................................................S-24
Indenture ........................................................S-22
Initial Cutoff Date.......................................................S-15
initial receivables.......................................................S-15
Insurer Default ........................................................S-24
IRS ........................................................S-33
Liquidated Receivable.....................................................S-27
Liquidation Proceeds......................................................S-25
Noteholders' Percentage...................................................S-28
OID ........................................................S-34
OID regulations ........................................................S-34
Owner ........................................................S-30
Paragon ........................................................S-15
Payment Amount ........................................................S-27
Plan Assets Regulation....................................................S-36
Policy Claim Amount.......................................................S-30
Policy Payment Amount.....................................................S-30
Portfolio interest........................................................S-34
Preference Amount ........................................................S-31
PTCE ........................................................S-37
Purchase Amount ........................................................S-27
Purchased Receivable......................................................S-27
Qualified stated interest.................................................S-34
Rating Agencies .........................................................S-9
Receivables Purchase Agreement............................................S-29
Reserve Account Required Amount...........................................S-25
Sale and Servicing Agreement..............................................S-23
Subsequent Cutoff Date....................................................S-15
Subsequent Transfer Date..................................................S-24
Trust Agreement ........................................................S-23
UCC ........................................................S-29
Withholding Tax Regulations...............................................S-35
S-39
<PAGE>
APPENDIX A TO PROSPECTUS SUPPLEMENT
Independent Auditors' Report
----------------------------
Board of Directors
Paragon Auto Receivables Corporation:
We have audited the accompanying balance sheet of Paragon Auto Receivables
Owner Trust 1999-A as of March 18, 1999. This balance sheet is the
responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit of a balance sheet includes examining, on a
test basis, evidence supporting the amounts and disclosures in that balance
sheet. An audit of a balance sheet also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall balance sheet presentation. We believe that our
audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Paragon Auto Receivables Owner
Trust 1999-A as of March 18, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
March 23, 1999
Costa Mesa, California
A-1
<PAGE>
PARAGON AUTO RECEIVABLES OWNER TRUST 1999-A
BALANCE SHEET
March 18, 1999
Assets
------
Cash...................................................................$1,000
Total Assets...........................................................$1,000
======
Trust Principal
Beneficial Interest in Trust...........................................$1,000
Trust Principal........................................................$1,000
======
See accompanying notes to balance sheet.
A-2
<PAGE>
PARAGON AUTO RECEIVABLES OWNER TRUST 1999-A
Notes to Balance Sheet
(1) Organization and Nature of Operations
-------------------------------------
Paragon Auto Receivables Owner Trust 1999-A (the "Trust"), was
formed in the State of Delaware on March 15, 1999. The Trust has been
inactive since that date.
The Trust was organized to engage exclusively in the following
business and financial activities: to acquire motor vehicle retail
installment contracts from Paragon Auto Receivables Corporation and any of
its affiliates; to issue and sell notes and certificates collateralized by
its assets; and to engage in any lawful act or activity and to exercise any
powers which are incidental and necessary or convenient to the foregoing.
(2) Capital Contribution
--------------------
Paragon Auto Receivables Corporation purchased a 100% beneficial
ownership interest in the Trust for $1,000 on March 18, 1999.
A-3
PROSPECTUS
PARAGON AUTO RECEIVABLES TRUSTS
Asset Backed Notes
Asset Backed Certificates
Paragon Auto Receivables Corporation
Seller
Paragon Acceptance Corporation
Servicer
The Asset Backed Notes (the "Notes") and the Asset Backed
Certificates (the "Certificates" and, together with the Notes, 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, which may include one or more
classes of Notes or one or more classes of Certificates (or both), will be
issued by a trust to be formed on or before the issuance date for that
series (each, a "Trust"). Each Trust will be formed pursuant to either a
Trust Agreement (as amended and supplemented from time to time, a "Trust
Agreement") to be entered into between Paragon Auto Receivables
Corporation, a Delaware corporation, as seller (the "Seller"), Paragon
Acceptance Corporation ("Paragon" or, in its capacity as servicer, the
"Servicer"), and the trustee specified in the related Prospectus Supplement
(the "Trustee") or a Pooling and Servicing Agreement to be entered into
between the Trustee, the Seller and the Servicer. If a series of Securities
includes Notes, these Notes will be issued and secured pursuant to an
Indenture (as amended and supplemented from time to time, an "Indenture")
between the Trust and the indenture trustee specified in the related
Prospectus Supplement (the "Indenture Trustee") and will represent
indebtedness of the related Trust. The Certificates of a series will
represent fractional undivided interests in the related Trust. Capitalized
terms used in this Prospectus are defined on the pages indicated in the
"Index of Terms" on page 49 of this Prospectus. The property of each Trust
will include a pool of motor vehicle retail installment contracts (the
"Receivables") secured by new or used automobiles, light duty trucks and
sports utility vehicles (the "Financed Vehicles"), all moneys due or
received thereunder or with respect thereto after the applicable Cutoff
Date set forth in the related Prospectus Supplement, security interests in
the Financed Vehicles, any proceeds from claims on insurance policies with
respect to the Financed Vehicles, rights under dealer agreements, rights
with respect to deposit accounts in which collections are held or that
serve as credit enhancement, any other credit enhancements, and proceeds of
the foregoing, all as described herein and in the related Prospectus
Supplement. See "The Trusts."
(Continued on next page)
Prospective investors should consider the "Risk Factors" set forth
at page 3 herein, which discusses material risks involved
with an investment in the Securities.
ANY NOTES OF A SERIES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES OF A
SERIES REPRESENT BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND DO NOT
REPRESENT OBLIGATIONS OF OR INTERESTS IN PARAGON AUTO RECEIVABLES
CORPORATION, PARAGON ACCEPTANCE CORPORATION OR ANY OF THEIR AFFILIATES.
NONE OF THE NOTES, THE CERTIFICATES OR THE RECEIVABLES ARE GUARANTEED OR
INSURED BY, PARAGON AUTO RECEIVABLES CORPORATION, PARAGON ACCEPTANCE
CORPORATION OR ANY OF THEIR 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. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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 March 24, 1999.
<PAGE>
(Continued from previous page)
The related Prospectus Supplement will specify which class or
classes of Notes, if any, and which class or classes of Certificates, if
any, of the related series are being offered thereby. Each class of
Securities of any series, other than any Strip Notes and Strip
Certificates, will represent the right to receive a specified amount of
payments of principal and interest on the related Receivables, at the
rates, on the dates and in the manner described herein and in the related
Prospectus Supplement. See "Description of the Notes," "Description of the
Certificates" and "Description of the Securities" herein and in the related
Prospectus Supplement. If a series includes multiple classes of Securities,
the rights of one or more classes of Securities to receive payments may be
senior, equal to or subordinate to the rights of one or more of the other
classes of such series. Distributions on Certificates of a series may be
subordinated in priority to payments due on any related Notes or any other
Certificates to the extent described herein and in the related Prospectus
Supplement. See "Risk Factors--Risks Related to Subordination" herein and
in the related Prospectus Supplement.
A series may include one or more classes of Notes and/or
Certificates which differ as to the timing and priority of payment,
interest rate or amount of distributions in respect of principal or
interest or both. A series may include one or more classes of Notes or
Certificates entitled to distributions in respect of principal with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no distributions in
respect of principal. The rate of payment in respect of the principal of
any class of Notes and distributions in respect of the Certificate Balance
(as specified in the related Prospectus Supplement, the "Certificate
Balance") of any class of the Certificates will depend on the priority of
payment of such class and the rate and timing of payments (including
prepayments, defaults, 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. See "Weighted Average Life of the Securities."
AVAILABLE INFORMATION
The Seller, as originator of each Trust, has 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 (the "Securities Act"), with respect to the Notes and/or the
Certificates offered pursuant to this Prospectus. For further information,
reference is made to the Registration Statement, which may be inspected and
copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of 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
Commission maintains a public access site on the Internet through the World
Wide Web at which site reports, information statements and other
information, including all electronic filings, may be viewed. The Internet
address of such World Wide Web site is http://www.sec.gov.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Seller, as originator of any Trust,
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), after the date of this
Prospectus and prior to the termination of the offering of the Securities
shall be deemed to be incorporated by reference in this Prospectus or in
any related Prospectus Supplement. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus. See "Certain Information Regarding
the Securities--Reports to Securityholders."
The Seller will provide without charge to each person, including
any beneficial owner of Securities, to whom a copy of this Prospectus is
delivered, on the written or oral request of such person, a copy of any or
all of the documents incorporated herein or in any related Prospectus
Supplement by reference, except the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to the Seller, in care of
Paragon Acceptance Corporation, 200 South Hanley, Suite 800, Clayton,
Missouri 63105, Attention: General Counsel (Telephone: (314) 721-0012). The
Servicer will file with respect to each Trust such periodic reports as are
required by the Exchange Act.
<PAGE>
RISK FACTORS
The Limited Liquidity of the Securities May Make it Difficult to Resell Them
The Underwriters for an offering of Securities (as defined in the related
Prospectus Supplement,"Underwriters") may assist in resales of the Securities
but they are not required to do so. A secondary market for any Securities may
not develop. If a secondary market does develop, it might not continue or it
might not be sufficiently liquid to allow you to resell any of your
Securities. In addition, if the Securities are traded after their initial
issuance, they may trade at a discount from their initial offering price,
depending on prevailing interest rates, the market for similar securities,
the financial condition and prospects of the Trust and other factors beyond
the control of the Issuer, including general economic conditions.
Increases in Delinquencies and Losses on the Receivables May Cause Payment
Reductions or Delays
Paragon began purchasing motor vehicle retail installment contracts
in August 1996. Although Paragon has calculated and presented its net loss
experience with respect to its serviced portfolio in this Prospectus and
the related Prospectus Supplement, there can be no assurance that the
information presented will reflect actual experience with respect to the
Receivables. In addition, there can be no assurance that the future
delinquency or loss experience of a Trust with respect to the Receivables
will be better or worse than that set forth herein with respect to
Paragon's serviced portfolio. It is likely, however, that delinquencies and
losses will increase in the portfolio as the Receivables become more
seasoned. The credit enhancement for each Trust will be designed to protect
Securityholders against such increases in delinquencies and losses. If,
however, any such increase is greater than anticipated, delays in payments
of collections of the Receivables could occur or reductions in the amount
of payments to Securityholders could result. See "The Receivables" in the
related Prospectus Supplement.
Securityholders Bear Reinvestment Risk and Other Interest Rate Risks if
Receivables Are Prepaid
Reinvestment Risks from Prepayments. All the Receivables are
prepayable at any time without penalty (or with only a nominal penalty) to
the Obligor. For this purpose the term "prepayments" includes prepayments
in full, partial prepayments and liquidations due to default, receipts of
proceeds from claims on any repossession loss, physical damage, credit life
and accident and health insurance policies and purchases by dealers (the
"Dealers") under their respective dealer agreements (each, a "Dealer
Agreement") or dealer assignments (each, a "Dealer Assignment"). In
addition, the Seller and the Servicer may be required to repurchase
Receivables from the Trust if specified representations or covenants made
by them are breached. The Servicer also has the right to purchase all
remaining Receivables and other Trust property from a Trust pursuant to its
optional repurchase right. See "Description of the Transfer and Servicing
Agreements--Sale and Assignment of Receivables," "--Servicing Procedures"
and "--Termination." Each such prepayment, repurchase or purchase will
shorten the average life of the related Securities.
Prepayment rates of Receivables may be influenced by a variety of
economic, social and other factors, and cannot be predicted with any
assurance. For example, decreases in interest rates and the fact that the
Obligor may not sell or transfer the Financed Vehicle without the payment
in full of the related Receivable may affect the rate of prepayment. If
prepayments occur after a decline in interest rates, you may be required to
reinvest your funds at a return lower than the applicable interest rate on
a class of Notes (the "Interest Rate") or the applicable rate of interest
on a class of Certificates (the "Certificate Rate")). You will bear all
reinvestment risk resulting from a faster or slower rate of prepayment of
Receivables.
<PAGE>
Risks Associated with Securities Purchased at a Discount or Premium.
Holders of Securities should consider, in the case of any Securities
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Receivables will result in an actual yield (i.e.,
the effective interest rate) that is less than the anticipated yield. In
the case of any Securities purchased at a premium, Holders of Securities
should consider the risk that a faster than anticipated rate of principal
payments on the Receivables will result in an actual yield that is less
than the anticipated yield. See "--Reinvestment Risks from Prepayments."
Risks Associated with Yield Sensitivity of the Strip Securities. The
yield to maturity of any Strip Securities will be extremely sensitive to the
prepayment and default experience on the Receivables, which may fluctuate
-3-
<PAGE>
significantly from time to time. See "--Reinvestment Risks from
Prepayments." Holders of any Strip Securities entitled to principal
payments with disproportionately small, nominal or no interest payments
should consider the risk that a slower than anticipated rate of payments on
the Receivables will result in an actual yield that is less than the
anticipated yield. Holders of Strip Securities entitled to interest
payments with disproportionately small, nominal or no principal payments
should consider the risk that a faster than anticipated rate of payments on
the Receivables will result in an actual yield that is less than the
anticipated yields. Prospective investors in Strip Securities should fully
consider the risk that an extremely rapid rate of principal prepayments
could result in the failure of investors in the Strip Securities entitled
to disproportionately small, nominal or no principal payments to recoup
their initial investment.
Servicing Errors Due to Servicer's Failure to Segregate Receivable Files May
Cause Payment Reductions or Delays
The Seller will cause financing statements to be filed with the
appropriate governmental authorities to perfect the interest of the related
Trust in its purchase of Receivables from the Seller and to perfect the
interest of the Seller in its purchase of Receivables from the Paragon in
accordance with the UCC in effect in the relevant jurisdiction. If so
specified in the related Prospectus Supplement, the Servicer will hold the
Receivables, either directly or through subservicers, as custodian for the
applicable Trustee following the sale and assignment of the Receivables to
the related Trust. The Receivables will not be segregated, stamped or
otherwise marked to indicate that they have been sold to the related Trust.
If through inadvertence or otherwise (for example, if Paragon or the Seller
were to sell or grant a security interest in Receivables in violation of
the applicable Transfer and Servicing Agreements), another party purchases
(or takes a security interest in) the Receivables for new value in the
ordinary course of business and takes possession of the Receivables without
actual knowledge of the related Trust's interest, the purchaser (or secured
party) will acquire an interest in the Receivables superior to the interest
of the related Trust. Under such circumstances, there is a risk that the
Trust would not be able to realize some or all of the cash flow from such
Receivable. Although Paragon or the Seller would be liable to the Trust in
that event, if Paragon or the Seller became insolvent, holders of
Securities could suffer losses.
Unenforceability of the Trust's Security Interests in Financed Vehicles
Because Certificates of Title Will, Not Be Amended May Cause Payment
Reductions or Delays
In connection with the sale of Receivables by Paragon to the Seller
and by the Seller to a Trust, security interests in the Financed Vehicles
securing such Receivables will be assigned by Paragon to the Seller and by
the Seller to such Trust simultaneously with the sale of such Receivables
by Paragon to the Seller and by the Seller to such Trust. Due to
administrative burden and expense (i.e., fees payable to state motor
vehicle departments ranging up to approximately forty dollars per vehicle
and related paperwork), the certificates of title to the Financed Vehicles
will not be amended to reflect the assignments to the Seller or to the
Trust. In the absence of such amendments, the Seller and such Trust may not
have a perfected security interest in the Financed Vehicles securing the
Receivables in some states. The Seller will be obligated to repurchase any
Receivable sold to such Trust as to which the Seller has breached its
representation that Paragon has a perfected security interest in the
Financed Vehicle securing such Receivable as of the date such Receivable is
transferred to such Trust, if such breach shall materially and adversely
affect the interest of such Trust in such Receivable and if a breach of
such representation shall not have been cured by the last day of the month
(or, if the Seller elects, earlier) following the month in which the Seller
discovers or receives notice of such breach. 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, which could result in delays in payments on the related Notes (if
any) and Certificates and possible reductions in the amount of those
payments. Paragon will be obligated, pursuant to the applicable Purchase
Agreement, to repurchase from the Seller any Receivable sold by it
thereunder that the Seller has repurchased as a result of such a breach.
The Seller will assign its rights under each Purchase Agreement to the
related Trust. The Seller believes that it is customary for certificates of
title or ownership to not be endorsed or amended in connection with asset
securitizations of the type contemplated hereby.
<PAGE>
Non-Priority of the Trust's Security Interests in Financed Vehicles May Cause
Payment Reductions or Delays
To the extent the security interest in the Financed Vehicles is
perfected, such Trust will have a prior claim over subsequent purchasers of
such Financed Vehicles and holders of subsequently perfected security
interests.
-4-
<PAGE>
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. Loss of priority could result in delays in
payments on the related Notes (if any) and Certificates and possible
reductions in the amount of those payments. Neither the Seller nor the
Servicer will have an obligation to repurchase a Receivable as to which any
of the aforementioned 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.
See "Certain Legal Aspects of the Receivables--Security Interest in
Vehicles."
Insolvency of Paragon or the Seller May Cause Payment Reductions or Delays
The Seller has taken steps in structuring the transactions described
herein and in the related Prospectus Supplement that are intended to ensure
that the voluntary or involuntary application for relief by Paragon under
the United States Bankruptcy Code (the "Bankruptcy Code") or similar
applicable state laws ("Insolvency Laws") will not result in consolidation
of the assets and liabilities of the Seller with those of Paragon. These
steps include the creation of the Seller as a separate, limited-purpose
subsidiary pursuant to a certificate of incorporation containing certain
limitations (including restrictions on the nature of the Seller's business
and a restriction on the Seller's ability to commence a voluntary case or
proceeding under any Insolvency Law without the prior unanimous affirmative
vote of all of its directors). However, there can be no assurance that the
activities of the Seller would not result in a court's concluding that the
assets and liabilities of the Seller should be consolidated with those of
Paragon in a proceeding under any Insolvency Law. See "The Seller." If a
court were to conclude that the assets and liabilities of the Seller should
be consolidated with those of Paragon in a proceeding under any Insolvency
Law, then any "true sale" to the Seller would be ineffective to remove the
Receivables and other assets from the bankruptcy estate of Paragon. See
"Risk of No 'True Sale'" below. Although there can be no assurance, the
Seller believes there is no material risk that the Trust would be
substantively consolidated with any other entity if that entity were to
become the subject of a proceeding under any Insolvency Law.
The Seller and Paragon each intend that the transfer of Receivables
by Paragon to the Seller will constitute a "true sale" of such Receivables.
The Seller will take steps in structuring its purchases of Receivables from
Paragon to increase the likelihood that such purchases will each be deemed
a "true sale". In particular, each such purchase will be without recourse
to Paragon for credit losses and at a purchase price believed by the
parties to represent the fair market value of the applicable Receivables.
If the transfer does, in fact, constitute such a "true sale," the
Receivables and the proceeds thereof would not be part of Paragon's
bankruptcy estate under Section 541 of the Bankruptcy Code should Paragon
become the subject of a bankruptcy case subsequent to the transfer of the
Receivables to the Seller. It is a condition of the offering that the
Seller shall have received an opinion of counsel to the effect that,
subject to certain facts, assumptions and qualifications, the transfer of
such Receivables by Paragon to the Seller pursuant to the related Purchase
Agreement would be characterized as a "true sale'" of such Receivables to
the Seller and such Receivables would not form part of Paragon's bankruptcy
estate pursuant to Section 541 of the Bankruptcy Code.
Notwithstanding the foregoing, if the Seller or Paragon were to
become a debtor in a bankruptcy case and a creditor or trustee in
bankruptcy of the Seller or Paragon or Paragon itself were to take the
position that the transfer of Receivables by the Seller to the Trust, or by
Paragon to the Seller, as the case may be, should instead be treated as a
pledge of the Receivables to secure a borrowing of the Seller or Paragon,
as the case may be, then delays in payments of collections of the
Receivables could occur or (should the court rule in favor of any such
trustee, debtor or creditor) reductions in the amount of such payments
could result. If the transfer of the Receivables by the Seller to the
Trust, or by Paragon to the Seller, is treated as a pledge instead of a
sale, a tax, government or other lien on the property of the Seller or
Paragon, as the case may be, arising before the transfer of the Receivables
to the Trust may have priority over the Trust's or the Seller's interest in
the Receivables.
<PAGE>
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993), cert. denied 114 S.Ct 554 (1993), the United States Court of Appeals
for the 10th Circuit suggested that even where a transfer of accounts from
a seller to a buyer constitutes a "true sale," the accounts would
nevertheless constitute property of the seller's bankruptcy estate in a
bankruptcy of the seller. If the Seller were to become subject to a
bankruptcy proceeding and a court were to follow the Octagon court's
reasoning, Securityholders might experience delays in payment or possibly
losses on their investment in the Securities. The Permanent Editorial Board
of the UCC has issued
-5-
<PAGE>
an official commentary (PEB Commentary No. 14) which characterizes the
Octagon court's interpretation of Article 9 of the UCC as erroneous. Such
commentary states that nothing in Article 9 is intended to prevent the
transfer of ownership of accounts or chattel paper. However, such
commentary is not legally binding on any court.
Limitations on Realization Upon Financed Vehicles Because of Insolvency of
Obligors May Cause Payment Reductions or Delays
Numerous statutory provisions, including Insolvency Laws, may
interfere with or affect the ability of a secured party to realize upon
collateral or to enforce a deficiency judgment against an obligor. For
example, in a Chapter 13 proceeding under the Bankruptcy Code, a court may
prevent a creditor from repossessing a vehicle, and, as part of the
obligor's rehabilitation plan, reduce the amount of the secured
indebtedness to the market value of the vehicle at the time of bankruptcy
(as determined by the court), leaving the creditor as a general unsecured
creditor for the remainder of the indebtedness. A bankruptcy court may also
reduce the monthly payments due under a contract or change the rate of
interest and time of repayment of the indebtedness. To the extent that any
credit enhancement for such Trust were insufficient to cover all such
losses, such actions could result in an inability of holders of the Notes
(if any) and Certificates issued by such Trust to recover payment in full
of their respective principal amounts and interest thereon or could result
in delays in such payments.
Limitations on Enforceability of the Receivables Because of Consumer
Protection Laws May Cause Payment Reductions or Delays
Federal and state consumer protection laws regulate the creation and
enforcement of consumer contracts and loans such as the Receivables.
Specific statutory liabilities are imposed upon creditors who fail to
comply with these regulatory provisions. In some cases, this liability
could affect an assignee's ability to enforce a Receivable. Application of
such laws could also render a Receivable unenforceable, cause the Trust to
be unable to collect any balance remaining due on the Receivable or result
in liability to the Trust. If an Obligor had a claim against any Trust for
violation of these laws prior to the Cutoff Date, the Seller will be
obligated to repurchase the related Receivable unless the breach is cured.
If the Seller fails to repurchase such Receivable, payments to
Securityholders could be reduced or delayed. See "Certain Legal Aspects of
the Receivables--Consumer Protection Laws."
Payments Will Be Made Only from the Limited Assets of the Applicable Trust
No Trust will have, or be permitted or expected to 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, a Revolving Account, a Reserve Account and any other credit
enhancement. The Notes 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 Paragon, the Seller, the Servicer, any Trustee,
any Indenture Trustee or any other person or entity. Consequently, holders
of the Securities of any series must rely for repayment upon payments on
the related Receivables and, if and to the extent available, amounts on
deposit in the Pre-Funding Account (if any), the Revolving Account (if
any), the Reserve Account (if any) and any other credit enhancement, in
each case to the extent provided in the related Prospectus Supplement.
Amounts to be deposited in any such Reserve Account with respect to any
Trust will be limited in amount and the amount required to be on deposit in
such Reserve Account will be reduced as the Pool Balance is reduced. In
addition, funds in any such Reserve Account will be available on each
Payment Date to cover shortfalls in distributions of interest and principal
on the related Securities. If any such Reserve Account is depleted, the
related Trust will depend solely on current payments on its Receivables and
other credit enhancement (if any) to make payments on the related
Securities. If losses occur which are not covered by the Reserve Account
(if any) or any other credit enhancement or which exceed the amount covered
by such credit enhancement, holders of Securities may be unable to receive
payment in full of principal and interest on their respective Securities.
<PAGE>
If so directed by the holders of the requisite percentage of
outstanding Notes of a series issued with respect to a Trust that issues
Notes, following an acceleration of the Notes upon an Event of Default, the
applicable Indenture Trustee may sell the related Receivables in certain
limited circumstances as specified in the related Indenture. See
"Description of the Notes--The Indenture--Events of Default; Rights upon
Event of Default."
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<PAGE>
However, there is no assurance that the market value of such Receivables
will at any time be equal to or greater than the aggregate principal amount
of such outstanding Notes and the aggregate Certificate Balance of all
outstanding Certificates. Therefore, upon an Event of Default with respect
to the Notes of any series, there can be no assurance that sufficient funds
will be available to repay the related registered holders of each class of
Notes ("Noteholders") and registered holders of Certificates
("Certificateholders" and together with any Noteholders, the
"Securityholders") in full. In addition, the amount of principal required
to be paid to Noteholders of such series under the related Indenture will
generally be limited to amounts available to be deposited in the Collection
Account. Therefore, the failure to pay principal on a class of Notes
generally will not result in the occurrence of an Event of Default until
the Final Scheduled Payment Date (as defined in the related Prospectus
Supplement, the "Final Scheduled Payment Date") for such class of Notes.
Recourse to Paragon, the Seller, the Servicer and their Affiliates for
Payments Will Be Strictly Limited
Paragon, the Seller and their affiliates are generally not obligated
to make any payments to Securityholders in respect of any Securities.
However, the Seller will make representations and warranties with respect
to the characteristics of the Receivables. In certain circumstances, the
Seller may be required to repurchase Receivables with respect to which the
representations and warranties have been breached. If the Seller fails to
repurchase such Receivables, payments to Securityholders may be reduced or
delayed. See "Description of the Transfer and Servicing Agreements--Sale
and Assignment of Receivables."
In addition, in certain circumstances, the Servicer may be required
to purchase Receivables. If the Servicer fails to purchase such
Receivables, payments to Securityholders may be reduced or delayed. See
"Description of the Transfer and Servicing Agreements--Servicing
Procedures." If Paragon were to stop acting as the Servicer, delays in
processing payments on the Receivables and information in respect of the
Receivables could occur and result in delays in payments to the
Securityholders.
Extension or Deferral of Payments on Receivables May Increase Weighted Average
Life of Securities
In certain circumstances, the Servicer may permit the extension or
modification of Receivables on a case-by-case basis. Any such extensions or
modifications may increase the weighted average life of the related
Securities. Any reinvestment risks resulting from faster or slower payment
resulting from extensions, modifications or amendments of payments on
Receivables held by the Trust will be borne entirely by the
Securityholders. The Servicer will not be permitted to grant any such
extension or modification if as a result the final scheduled payment on a
Receivable would fall after the related Final Scheduled Payment Date,
unless the Servicer repurchases the affected Receivable. See "Risk
Factors--Risk of Prepayment and Possible Adverse Effect on Yield" and
"Weighted Average Life of the Securities."
Termination of the Servicer May Cause Payment Reductions or Delays
With respect to a series of Securities that includes Notes, in the
event a Servicer Termination Event occurs, the Indenture Trustee or the
Noteholders with respect to such series, as described under "Description of
the Transfer and Servicing Agreements--Rights upon Servicer Termination
Event" may remove the Servicer without the consent of the Trustee or any of
the Certificateholders with respect to such series. The Trustee or the
Certificateholders with respect to such series will not have the ability to
remove the Servicer if a Servicer Termination Event occurs. In addition,
the Noteholders of such series will have the ability, with certain
specified exceptions, to waive Servicer Termination Events by the Servicer,
including Servicer Termination Events that could materially adversely
affect the Certificateholders of such series. See "Description of the
Transfer and Servicing Agreements -- Waiver of Past Defaults." The Servicer
believes that its credit loss and delinquency experience reflect in part
its trained staff and collection procedures. There can be no assurance that
collections with respect to the Receivables will not be adversely affected
by any change in Servicer. Any credit enhancement provider for a series of
Securities may have the right to remove the Servicer or waive Servicer
Termination Events without the consent of the Indenture Trustee, the
Trustee or the Securityholders.
<PAGE>
Security Owners Will Only Be Able to Exercise Their Rights Indirectly
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
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in the related Prospectus Supplement (Cede, or such other nominee, "DTC's
Nominee"), and will not be registered in the names of the beneficial owners
of the Securities ("Security Owners") of such series or their nominees
unless Definitive Securities are issued. As a result, unless and until
Definitive Securities for such series are issued, such Security Owners will
not be recognized by the 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, such Security Owners will only be
able to exercise the rights of Securityholders indirectly through DTC,
Cedel or Euroclear and their participating organizations. See "Certain
Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities."
Ratings of the Securities Do Not Address Suitability of Investment
It is a condition to the issuance of each class of Securities offered
hereby that they are rated by at least one nationally recognized
statistical rating agency (the "Rating Agency") in one of its generic
rating categories which signifies investment grade. A rating is not a
recommendation to purchase, hold or sell Securities, inasmuch as such
rating does not comment as to market price or suitability for a particular
investor. The ratings of the Securities address the likelihood of the
timely payment of interest on and the ultimate payment of principal of the
Securities pursuant to their terms. There can be no assurance that a rating
will remain 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.
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THE TRUSTS
With respect to each series of Securities, the Seller will establish
a separate Trust pursuant to the respective Trust Agreement or Pooling and
Servicing Agreement, as applicable, for the transactions described herein
and in the related Prospectus Supplement. The property of each Trust will
include a pool (a "Receivables Pool") of Receivables pursuant to which
purchasers (each, an "Obligor") of Financed Vehicles are obligated. The
property of each Trust will also include all payments due or received with
respect to Receivables after the Cutoff Date (as such term is defined in
the related Prospectus Supplement, a "Cutoff Date"). Pursuant to each
Dealer Agreement, the applicable Dealer is obligated to purchase from
Paragon any Receivables sold or originated thereunder which do not meet
certain representations made by that Dealer, and, to the extent set forth
in the related Prospectus Supplement, any uncollectible Receivables covered
by recourse plans ("Dealer Recourse"). The Receivables of each Receivables
Pool will be serviced by the Servicer. See "The Servicer." Receivables that
are to be included in any Receivables Pool will be transferred pursuant to
a Purchase Agreement (the "Purchase Agreement") by Paragon to the Seller
for purposes of transfer to the applicable Trust. In addition, to the
extent described in any Prospectus Supplement, the related Receivables Pool
may include Receivables acquired by Paragon through acquisitions.
On or before the applicable Closing Date, the Seller will sell the
Initial Receivables of the applicable Receivables Pool to the Trust. To the
extent so provided in the related Prospectus Supplement, Subsequent
Receivables will be conveyed to the Trust as frequently as daily during a
Funding Period. Any Subsequent Receivables so conveyed will also be assets
of the applicable Trust and will be subject to the prior rights of the
related Indenture Trustee and the Noteholders, if any, therein. The
property of each Trust will also include (i) all of the right, title and
interest of Paragon and the Seller in and to (i) the security interests of
Paragon and the Seller in the related Financed Vehicles and any other
interest of Paragon and the Seller in the related Financed Vehicles,
including the certificates of title with respect to such Financed Vehicles,
(ii) certain insurance policies and any proceeds from such insurance
policies relating to the Receivables, the Obligors or the related Financed
Vehicles, including rebates or refunds of premiums, (iii) the rights of
Paragon and the Seller against Dealers with respect to the Receivables,
(iv) the rights of the Seller under the related Purchase Agreement, (v) all
funds on deposit from time to time in the trust accounts established and
maintained pursuant to the related Transfer and Servicing Agreement,
including all income thereon and proceeds thereof, and (vi) all proceeds
and investments of any of the foregoing, provided that, with respect to any
series of Notes, the relevant rights and benefits with respect to such
property will be assigned by the Seller and the Trustee to the related
Indenture Trustee for the benefit of the related Securityholders. To the
extent specified in the related Prospectus Supplement, a Pre-Funding
Account, a Revolving 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 Trustee or an Indenture Trustee for the benefit of holders of the
related Securities.
If so specified in the related Prospectus Supplement, a Trust may
acquire Initial Receivables pursuant to warehouse financing arrangements
entered into prior to the sale by that Trust of any Notes offered hereby.
"Warehouse financing" generally refers to interim financing of Receivables
during the period from the purchase or funding of the Receivables by
Paragon until the securitization of the Receivables. In some cases, to the
extent specified in the related Prospectus Supplement, a Trust that issues
Notes will acquire Receivables prior to the issuance of the Notes and/or
Certificates ultimately to be issued by that Trust. The interim financing
for such acquisitions will be provided by the issuance by the Trust of
notes or certificates which were privately placed. Such notes or
certificates will be refinanced by the sale of the Notes and/or
Certificates. It will be a condition to the issuance of any Securities
which refinance other securities issued by any such Trust that such
warehouse financing be repaid to the extent provided in the related
Prospectus Supplement, and any related security interests released, at or
prior to the time of such issuance.
<PAGE>
The Servicer will service the Receivables held by each Trust and will
receive fees for such services. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment of Expenses"
herein and "--Servicing Compensation and Payment of Expenses" in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, to facilitate the servicing of the Receivables each
Trustee will authorize the Servicer to retain physical possession of the
documents representing the Receivables held by each Trust and other
documents relating thereto as custodian for each such Trust. Due to
administrative burden and expense (i.e., fees payable to state motor
vehicle departments ranging up to approximately forty
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dollars per vehicle and related paperwork), the certificates of title to
the Financed Vehicles will not be amended to reflect the sale and
assignment of the security interest in the Financed Vehicles to the Seller
or each Trust. In the absence of such amendments, the Seller and such Trust
may not have a perfected security interest in the Financed Vehicles in all
states. See "Certain Legal Aspects of the Receivables" and "Description of
the Transfer and Servicing Agreements--Sale and Assignment of Receivables."
Notes and Certificates of a given Series will be issued by the same
Trust and payable from the same Trust property. If the protection provided
to any Noteholders of a given series by the subordination of the related
Certificates and by the Reserve Account (if any) or other credit
enhancement for such series, or the protection provided to
Certificateholders by any such Reserve Account or other credit enhancement
is insufficient, such Noteholders or Certificateholders, as the case may
be, would have to look principally to the Obligors on the related
Receivables, the proceeds from the repossession and sale of Financed
Vehicles which secure defaulted Receivables and the proceeds from any
recourse against Dealers with respect to such Receivables. In such event,
certain factors, such as the applicable Trust's not having perfected
security interests in the Financed Vehicles in all states, may affect the
Servicer's ability to repossess and sell the collateral securing the
Receivables, and thus may reduce the proceeds to be distributed to the
holders of the Securities of such series. See "Description of the Transfer
and Servicing Agreements--Distributions", "--Credit and Cash Flow
Enhancement" and "Certain Legal Aspects of the Receivables."
If so specified in the related Prospectus Supplement, a Trust may
make an election to be treated as a "financial asset securitization
investment trust" or "FASIT." The applicable Transfer and Servicing
Agreement for such a Trust may contain any such terms and provide for the
issuance of Notes or Certificates on such terms and conditions as are
permitted to a FASIT and described in the related Prospectus Supplement.
See "Federal Income Tax Consequences--FASIT Legislation."
The principal offices of the applicable Trust (if any) and the
related Trustee will be specified in the related Prospectus Supplement.
The Trustee
The Trustee for each Trust will be specified in the related
Prospectus Supplement. The Trustee's liability in connection with the
issuance and sale of the related Securities is limited solely to the
express obligations of such Trustee set forth in the related Trust
Agreement and the applicable Transfer and Servicing Agreement. The Trustee
under each Trust Agreement will perform administrative functions under such
Trust Agreement, including making distributions from the Collection
Account. A Trustee may resign at any time, in which event the Servicer, or
its successor, will be obligated to appoint a successor trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible
to continue as Trustee under the related Trust Agreement or Pooling and
Servicing Agreement, as applicable, or if the Trustee becomes insolvent. In
such circumstances, the Servicer will be obligated to appoint a successor
trustee. Any resignation or removal of a Trustee and appointment of a
successor trustee will not become effective until acceptance of the
appointment by the successor trustee.
<PAGE>
THE RECEIVABLES POOLS
General
The Receivables in each Receivables Pool will be motor vehicle retail
installment sales contracts secured by new or used motor vehicles entered
into between Obligors and automotive dealers and may include motor vehicle
promissory notes and security agreements executed by an Obligor in favor of
a motor vehicle lender ("Direct Loans"). The Receivables to be held by each
Trust will be selected from the Receivables portfolio of Paragon for
inclusion in a Receivables Pool by several criteria, including that each
Receivable (i) is secured by a new or used vehicle, (ii) was originated in
the United States, (iii) is a Precomputed Receivable or a Simple Interest
Receivable and (iv) as of the Cutoff Date (a) had an outstanding principal
balance of at least the amount set forth in the related Prospectus
Supplement, (b) had a scheduled maturity not later than the date set forth
in the related Prospectus Supplement, (c) had an original term to maturity
of not more than the period set forth in the related Prospectus Supplement
and (d) had a contractual rate of interest ("APR") of not less than the
rate per annum set forth in the related Prospectus Supplement. No selection
criteria or procedures believed by the Seller to be adverse to the
Securityholders are to be used in selecting the Receivables.
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"Precomputed Receivables" 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") or are
monthly actuarial receivables ("Actuarial Receivables" and, together with
Rule of 78's Receivables, "Precomputed Receivables"). An Actuarial
Receivable provides for amortization of the amount financed over a series
of fixed level payment installments. Each monthly installment, including
the installment representing the final payment on the Receivable, consists
of an amount of finance charge equal to 1/12 of the APR of the account
multiplied by the unpaid amount financed, and a portion of the amount
financed equal to the remainder of the installment. A Rule of 78's
Receivable provides for the payment by the obligor of a specified total
amount of payments, payable in equal installments on each due date. The
total represents the amount financed and finance charge in an amount
calculated on the basis of the stated APR for the term of the receivable.
The rate at which interest is earned is calculated in accordance with the
'Rule of 78's.' The 'Rule of 78's' is a method of calculating the unearned
portion of the precomputed finance charge on Receivables payable in
substantially equal successive installments of approximately equal
intervals over 12 months. The unearned portion of the precomputed finance
charge to be refunded if a Receivable is prepaid is equal to that portion
of the finance charge which the sum of the number of months the obligations
are outstanding after the date of prepayment (counting 1 month as 1, 2
months as 3 (1 + 2), etc., up to 78) bears to 78.
"Simple Interest Receivables" provide for the amortization of the
amount financed under the Receivable over a series of fixed level monthly
payments (except that the last payment may be different). However, unlike
the monthly payments under an Actuarial Receivable, each monthly payment
consists of an installment of interest that is calculated on the basis of
the outstanding principal balance of the receivable multiplied by the
stated APR and further multiplied by the period elapsed (as a fraction of a
calendar year) since the last payment of interest was made. As payments are
received under a Simple Interest Receivable, they are applied first to
interest accrued to the date of payment, and the balance is applied to
reduce the unpaid principal balance. Accordingly, if an obligor 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 an
obligor 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 obligor 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 and unpaid accrued interest. If a receivable is prepaid,
the Obligor is required to pay interest only to the date of prepayment.
Information with respect to each Receivables Pool will be set forth
in the related Prospectus Supplement, including, to the extent appropriate,
the composition, the distribution by APR and by the geographic location,
the portion of such Receivables Pool consisting of Precomputed Receivables
and of Simple Interest Receivables and the portion of such Receivables Pool
secured by new vehicles and by used vehicles.
Underwriting
Paragon positions itself in the dealership market as prime quality
financing source and offers distinct vehicle financing programs to its
dealers. These offerings vary based upon (a) credit quality of the
customer, (b) the percentage of wholesale value of the vehicle that Paragon
is willing to advance and (c) pricing (i.e., annual percentage rate and
dealer participation paid). Paragon strives to provide professional service
to its dealers, including by (i) providing dealers with written credit
guidelines, (ii) making consistent credit decisions and (iii) providing
credit decisions seven days a week, with credit approvals for most eligible
applicants within 30 minutes of receipt of the application. Paragon's
competitors include money center and regional commercial banks, as well as
other captive and independent finance companies.
<PAGE>
A signed Dealer Agreement is a prerequisite for Paragon's purchase of
contracts from a dealer and provides representations and warranties with
respect to each contract sold to Paragon. Dealer relationships are
developed and maintained by Paragon's experienced sales representatives.
Sales representatives typically target dealers with whom they have had past
relationships. Dealers must also have a concentration of "high line"
vehicles (that is, luxury and near-luxury automobiles and certain select
sports utility vehicles).
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Credit underwriting is centralized at Paragon's service center in St.
Louis, Missouri. Dealers typically remit applications to the service center
via facsimile. Credit analysts underwrite each application using Paragon's
written underwriting guidelines and application processing software, known
as Automated Credit Applications Processing System ("ACAPS"). ACAPS
electronically obtains credit bureau reports on each applicant and provides
interpretation of the reports.
Paragon's guidelines are geared toward "prime" credits and,
therefore, analysts employ credit scoring in their credit decision. The
credit scoring system utilized by Paragon is a "launch scorecard" purchased
from Experian's Strategic Solutions Division, which calculates a credit
score based upon a statistical algorithm derived from the performance of
over 1,000,000 motor vehicle retail installment contracts. Other important
factors in Paragon's credit decisions include previous credit experience,
total debt payment obligations to income ratios, employment stability and
residence stability. Once an applicant is approved and Paragon receives the
contract documentation from the dealer, documentation specialists verify
that (a) the contract and all related documents are completed properly and
all signatures are in order and (b) the contract conforms to the credit
decision, including the name of the customer, the specific vehicle, the
additional equipment and the amount of the advance, prior to purchasing the
contract from the dealer.
Subsequent Receivables
Subsequent Receivables may be originated at a later date using credit
criteria different from those which were applied to any Initial Receivables
and may be of a different credit quality. Periodic information regarding
the Subsequent Receivables will be included under Item 5 in a Current
Report filed on Form 8-K with the Commission pursuant to the Exchange Act
with respect to each Trust to which Subsequent Receivables have been
transferred.
Servicing and Collections
Paragon handles all servicing and collection functions from its
centralized service center in St. Louis, Missouri. Paragon sends monthly
statements to each customer to provide an active reminder of the due date
and amount of each payment. The statements direct payments to the lockbox
maintained with NationsBank, N.A. in St. Louis. For a description of the
lockbox arrangements, see "The Transaction Documents--Collections."
For delinquent payments, Paragon organizes the collection workload
based upon the seriousness of the delinquency. Therefore, more senior
customer service representatives work the accounts that are more than 30
days delinquent and the less seasoned customer service representatives work
the earlier delinquency stages. Collection activities begin through
telephone contact with delinquent customers once a contract becomes 10 days
delinquent (or, in the case of first payment defaults, one day delinquent).
Frequent telephone contact is typically maintained until either (a) the
delinquent payment is made by the customer, (b) the customer breaks several
promises to make such payment or (c) the customer misses a second payment
(i.e., is more than 30 days delinquent). The decision to repossess a
vehicle is typically addressed by the collections manager prior to the 45th
day of delinquency. Paragon believes that addressing the decision to
repossess a vehicle early in the delinquency will lead to lower net losses
over the life of the portfolio. Paragon's loss recognition policy is
generally to charge off a contract upon the earliest to occur of: (i)
repossession and sale of the vehicle; (ii) a good faith determination by
collections management that no further proceeds are expected to be received
on such contract; or (iii) such contract becomes 120 days delinquent.
Information Technology and Systems
Paragon's information technology needs are met with a system
consisting of two mainframe computers (which are provided by vendors) and
personal computer local area networks linking the mainframes with the St.
Louis service center and Paragon's headquarters in Mission Viejo. The
mainframe computers house Paragon's credit application processing system,
ACAPS, and Paragon's loan accounting and collections systems, Shaw IL 2000
and CS 2000. The mainframe which runs ACAPS is provided by CBC Companies,
Inc. and is located in Columbus, Ohio. Communication between Columbus and
St. Louis is conducted over a dedicated, leased telephone line. The
mainframe that runs Paragon's loan accounting and collections programs is
provided by CSC Logic, Inc./MSA d/b/a Loan Servicing Enterprise (LSE)
("CSC"). These programs reside on CSC's mainframe
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computer in Dallas, Texas, with which the service center communicates
through a dedicated, leased telephone line.
Delinquency and Loss Experience
Certain information concerning the experience of Paragon pertaining
to delinquency and loss experience with respect to Receivables will be set
forth in the related Prospectus Supplement. There can be no assurance that
the delinquency and net loss experience on any Receivables Pool will be
comparable to prior experience or to such information.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the Notes, if any, and the Certificates
of any series will generally be influenced by the rate at which the
principal balances of the related Receivables are paid, which payment may
be in the form of scheduled amortization or prepayments. See "Description
of the Transfer and Servicing Agreements--Accounts." All of the Receivables
are repayable at any time without penalty (or with only a nominal penalty)
to the Obligor. The rate of prepayment of automotive receivables is
influenced by a variety of economic, social and other factors, including
decreases in the general level of prevailing interest rates, the desire of
the Obligor to purchase a new vehicle and the fact that an Obligor
generally may not sell or transfer the Financed Vehicle securing a
Receivable unless such Receivable is paid in full. In addition, under
certain circumstances, the Seller will be obligated to repurchase
Receivables from a given Trust pursuant to the related Transfer and
Servicing Agreement as a result of breaches of representations and
warranties and the Servicer will be obligated to purchase Receivables from
such Trust pursuant to such Transfer and Servicing Agreement as a result of
breaches of certain covenants. Holders of Securities should consider, in
the case of Securities purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Receivables could result in
an actual yield that is less than the anticipated yield and, in the case of
Securities purchased at a premium, the risk that a faster than anticipated
rate of principal payments on the Receivables could result in an actual
yield that is less than the anticipated yield. See "Description of the
Transfer and Servicing Agreements--Sale and Assignment of Receivables" and
"--Servicing Procedures." See also "Description of the Transfer and
Servicing Agreements--Termination" regarding the option of the Seller and
Servicer to purchase the Receivables from a given Trust and "--Insolvency
Event" regarding the sale of the Receivables owned by a Trust that is not a
grantor trust if an Insolvency Event with respect to the Seller occurs.
No prediction can be made as to the rate of prepayment on the
Receivables. The Servicer is not aware of any publicly available industry
statistics for the entire industry on an aggregate basis that set forth
principal prepayment experience for Receivables similar to the Receivables
over an extended period of time.
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the Notes, if any, or the
Certificates of a given series on each Payment Date, since such amount will
depend, in part, on the amount of principal collected on the related
Receivables Pool during the applicable Collection Period. Any reinvestment
risks resulting from a faster or slower incidence of prepayment of
Receivables will be borne entirely by the Noteholders, if any, and the
Certificateholders of a given series. The related Prospectus Supplement may
set forth certain additional information with respect to the maturity and
prepayment considerations applicable to the particular Receivables Pool and
the related series of Securities.
<PAGE>
Consistent with its customary servicing practices and procedures, the
Servicer or its designee may, in its discretion and on a case-by-case
basis, arrange with Obligors to extend or modify the terms of the related
Receivables. Extensions and modifications are generally only granted in
cases of short-term financial hardship, such as unexpected medical
expenses, unexpected car repair expenses or a temporary leave of absence
from employment, and are generally limited to one extension of no more than
three months duration per year per Obligor. Any extensions or modifications
of Receivables may increase the weighted average life of the related
Securities. Unless the Servicer repurchases the affected Receivable, the
Servicer will not be permitted voluntarily to grant any extension or
modification if as a result the final scheduled payment on a Receivable
would fall after the related Final Scheduled Payment Date or modify a
Receivable in a Trust to be treated as a grantor trust if such modification
would result in a deemed exchange of such Receivable under Section 1001 of
the Code.
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POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each class of Notes will be a seven-digit
decimal which the Servicer will compute prior to each distribution with
respect to such class of Notes expressing the remaining outstanding
principal balance of such class of Notes, as of the applicable Payment Date
(after giving effect to payments to be made on such Payment Date), as a
fraction of the initial outstanding principal balance of such class of
Notes. The "Certificate Pool Factor" for each class of Certificates will be
a seven-digit decimal which the Servicer will compute prior to each
distribution with respect to such class of Certificates expressing the
remaining Certificate Balance of such class of Certificates, as of the
applicable Payment Date (after giving effect to distributions to be made on
such Payment Date), as a fraction of the initial Certificate Balance of
such class of Certificates. Each Note Pool Factor and each Certificate Pool
Factor will initially be 1.0000000 and thereafter will decline to reflect
reductions in the outstanding principal balance of the applicable class of
Notes, or the reduction of the Certificate Balance of the applicable class
of Certificates, as the case may be. A Noteholder's portion of the
aggregate outstanding principal balance of the related class of Notes is
the product of (i) the original denomination of such Noteholder's Note and
(ii) the applicable Note Pool Factor. A Certificateholder's portion of the
aggregate outstanding Certificate Balance for the related class of
Certificates is the product of (i) the original denomination of such
Certificateholder's Certificate and (ii) the applicable Certificate Pool
Factor.
The Noteholders, if any, and the Certificateholders will receive
reports on or about each Payment Date concerning payments received on the
Receivables, the Pool Balance (as such term is defined in the related
Prospectus Supplement, the "Pool Balance"), each Certificate Pool Factor or
Note Pool Factor, as applicable, and various other items of information,
including amounts allocated or distributed for such Payment Date. In
addition, 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--Reports to Securityholders."
USE OF PROCEEDS
The net proceeds from the sale of the Securities of a given series
will be applied by the Seller or the applicable Trust (i) to the purchase
of the Receivables and/or repayment of any related Warehouse Financing,
(ii) to make the initial required deposit (if any) into any Reserve Account
or other account established in connection with a given series, (iii) to
make the deposit of the amount (the "Pre-Funded Amount") to be deposited
into the Pre-Funding Account (as such term is defined in the related
Prospectus Supplement, the "Pre-Funding Account") or the Revolving Account
(as such term is defined in the related Prospectus Supplement, the
"Revolving Account") on the related Closing Date, if any, and (iv) such
other uses as may be set forth in the related Prospectus Supplement. The
portion of the net proceeds paid to the Seller will be used to purchase the
Receivables from Paragon.
<PAGE>
THE SELLER
The Seller is a wholly-owned subsidiary of Paragon. The Seller was
incorporated in the State of Delaware on November 20, 1997. The principal
executive offices of the Seller are located at 27405 Puerta Real, Suite
200, Mission Viejo, California 92691 and its telephone number is (949)
348-8700.
The Seller has taken steps in structuring the transactions described
herein and in the Prospectus Supplement that are intended to ensure that
the voluntary or involuntary application for relief by Paragon under any
Insolvency Laws will not result in consolidation of the assets and
liabilities of the Seller with those of Paragon. These steps include the
creation of the Seller as a separate, limited-purpose subsidiary pursuant
to a certificate of incorporation and bylaws containing certain limitations
(including restrictions on the nature of the Seller's business and a
restriction on the Seller's ability to commence a voluntary case or
proceeding under any Insolvency Law without the prior unanimous affirmative
vote of all of its directors). However, there can be no assurance that the
activities of the Seller would not result in a court's concluding that the
assets and liabilities of the Seller should be consolidated with those of
Paragon in a proceeding under any Insolvency Law. See "Risk Factors--Risk
of Substantive Consolidation."
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<PAGE>
The Seller will warrant to the Trust in the applicable Transfer and
Servicing Agreement that the sale of the Receivables by the Seller to the
Trustee on behalf of the Trust is a valid sale of such Receivables. In
addition, the Seller, the Trustee and the Trust will treat the conveyance
by the Seller of the Receivables as a sale of the Receivables by the Seller
to the Trustee on behalf of the Trust and the Seller will take or cause to
be taken all actions that are required to perfect the Trustee's ownership
in such Receivables. If the Seller were to become a debtor in a bankruptcy
case and a creditor or trustee in bankruptcy of the Seller or the Seller
itself were to take the position that the sale of Receivables by the Seller
to the Trust should instead be treated as a pledge of the Receivables to
secure a borrowing of the Seller, then delays in payments of collections of
the Receivables could occur or (should the court rule in favor of any such
trustee, debtor or creditor) reductions in the amount of such payments
could result. If the transfer of the Receivables by the Seller to the
Trustee on behalf of the Trust is treated as a pledge instead of a sale, a
tax or government lien on the property of the Seller arising before the
transfer of the Receivables to the Trustee on behalf of the Trust may have
priority over such Trustee's interest in the Receivables. If the conveyance
by the Seller of the Receivables is treated as a sale, the Receivables
would not be part of the Seller's bankruptcy estate and would not be
available to the Seller's creditors.
PARAGON AND THE SERVICER
Paragon Acceptance Corporation, a Delaware corporation, is a
specialized consumer finance company engaged in the acquisition and
servicing of "prime" quality automobile, light duty truck and sports
utility vehicle retail installment sale contracts secured by recent model,
"high line" vehicles (that is, luxury and near-luxury automobiles and
certain select sports utility vehicles). Paragon purchases and services
motor vehicle retail installment contracts through its dealer service
center in St. Louis, Missouri. The headquarters and principal executive
offices of Paragon are located at 27405 Puerta Real, Suite 200, Mission
Viejo, California 92691.
DESCRIPTION OF THE NOTES
General
With respect to each Trust that issues Notes, one or more classes of
Notes of the related series will be 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. The following summary,
together with the related summary in the Prospectus Supplement for a
particular Trust, describes all of the material terms and provisions of the
Indenture and Notes, but it does not purport to be complete and is subject
to, and is qualified by reference to, all the provisions of the applicable
Notes and Indenture.
<PAGE>
Each class of Notes will initially be represented by one or more
Notes, in each case registered in the name of a nominee of DTC (together
with any successor depository selected by the Trust, the "Depository")
except as set forth below. See "Certain Information Regarding the
Securities--Definitive Securities." Notes will be available for purchase in
denominations specified in the related Prospectus Supplement or, if not so
specified, in denominations of $1,000 and integral multiples thereof. Notes
may be issued in book-entry form or as Definitive Notes and if not
otherwise specified in the related Prospectus Supplement, will be issued in
book-entry form only. As to Notes issued in book-entry form, the Seller has
been informed by DTC that DTC's nominee will be Cede, unless another
nominee is specified in the related Prospectus Supplement. Accordingly,
such nominee is expected to be the holder of record of the Notes of each
such class. Unless and until Definitive Notes are issued in replacement for
book-entry Notes under the limited circumstances described herein or in the
related Prospectus Supplement, no beneficial owner of Notes (each, a "Note
Owner") will be entitled to receive a physical certificate representing a
Note. See "Certain Information Regarding the Securities--Definitive
Securities." As to the Notes issued in book-entry form, all references
herein and in the related Prospectus Supplement to actions by Noteholders
refer to actions taken by DTC upon instructions from its participating
organizations (the "Participants") and all references herein and in the
related Prospectus Supplement to distributions, notices, reports and
statements to Noteholders refer to distributions, notices, reports and
statements to DTC or its nominee, as the registered holder of the Notes,
for distribution to Noteholders in accordance with DTC's procedures with
respect thereto. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Definitive Securities."
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<PAGE>
Principal and Interest on the Notes
The timing and priority of payment, seniority, Interest Rate and
amount of or method of determining payments of principal and interest on
each class of Notes of a given series 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 other class or classes of Notes of such
series, as described in the related Prospectus Supplement. The dates for
payments of interest and principal on the Notes of such series may be
different from the Payment Dates for the Certificates of such series. To
the extent specified in the related Prospectus Supplement, payments of
interest on the Notes other than certain Strip Notes, if any, of such
series will be made prior to payments of principal thereon. To the extent
provided in the related Prospectus Supplement, a series may include one or
more classes of Notes ("Strip Notes") entitled to (i) principal payments
with disproportionate, nominal or no interest payments 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 of a given series or the method for determining such Interest Rate.
See also "Certain Information Regarding the Securities--Fixed Rate
Securities" and "--Floating Rate Securities." One or more classes of Notes
of a series may be redeemable in whole or in part under the circumstances
specified in the related Prospectus Supplement, including at the end of the
Funding Period (if any) or as a result of the exercise by the Seller or
Servicer of its option to purchase the related Receivables Pool.
To the extent specified in the related Prospectus Supplement,
payments to Noteholders of all classes within a series in respect of
interest will have the same priority. Under certain circumstances, the
amount available for such payments could be less than the amount of
interest payable on the Notes on any of the dates specified for payments in
the related Prospectus Supplement (each, a "Payment Date", which may be the
same date as each applicable Payment Date as specified in the related
Prospectus Supplement), in which case each class of Noteholders will
receive its ratable share (based upon the aggregate amount of interest due
to such class of Noteholders) of the aggregate amount available to be
distributed in respect of interest on the Notes of such series. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement."
In the case of a series of Notes which includes two or more classes
of Notes, the sequential order and priority of payment in respect of
principal and interest, 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. Payments in respect of
principal and interest of any class of Notes will be made on a pro rata
basis among all the Noteholders of such class.
To the extent specified in the related Prospectus Supplement, the
principal amount of Notes outstanding at any time may be reduced to reflect
losses in the Receivables experienced prior to such time.
Following are examples of various types of Notes which may be issued
by a Trust. The Prospectus Supplement accompanying this Prospectus will
describe in more detail any of the below-listed types of Notes actually
issued by a particular Trust.
Fixed Payment Notes. To the extent specified in any Prospectus
Supplement, one or more classes of Notes of a given series may have fixed
principal payment schedules. Noteholders of such Notes would be entitled to
receive as payments of principal on any given Payment Date the applicable
amounts set forth on such schedule with respect to such Notes, in the
manner and to the extent set forth in the related Prospectus Supplement.
<PAGE>
Short Term Asset Backed Notes. To the extent specified in any
Prospectus Supplement, one or more classes of Notes of a given series may
be entitled to receive principal payments prior to the receipt of principal
payments by other classes of Securities issued by the applicable Trust. If
so provided in the related Prospectus Supplement, such class or classes of
Notes will have a final scheduled maturity date of less than 397 days from
the initial trade date related thereto and such class or classes will have
received a short-term rating by a Rating Agency that is in one of the two
highest short-term rating categories. The failure to pay such a class of
Notes on or prior to the related Final Scheduled Payment Date would
constitute an event of default under the related Indenture. In general,
such class or classes of Notes will otherwise be similar to Notes which are
described in this Prospectus.
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<PAGE>
Planned Amortization Class. To the extent specified in any Prospectus
Supplement, one or more classes of Notes of a given series may be
structured as a planned amortization class ("PAC"). A PAC will be retired
according to a predetermined amortization schedule set forth in the related
Prospectus Supplement and structured to be substantially independent of the
prepayment rate on the Receivables. The timing of distributions in respect
of the other classes of Securities in the related series in some instances
may be slowed down or accelerated so that the PAC scheduled amortization
may be met as provided in the related Prospectus Supplement. The planned
amortization for a PAC set forth in the related Prospectus Supplement
generally will require scheduled sinking fund payments for the PAC on each
Payment Date. Payments to the other classes of Securities in the related
series will be allocated as otherwise set forth in the related Prospectus
Supplement only after the scheduled sinking fund payments or scheduled
amortization payments to the PAC have been made.
Targeted Amortization Class. To the extent specified in any
Prospectus Supplement, one or more classes of Notes of a given series may
be structured as a targeted amortization class ("TAC"). Any TAC will be
similar to a PAC, with support classes providing protection against
prepayment risks to the TAC. However, a TAC will differ from a PAC in that
it generally may not receive as much protection against prepayments on the
Receivables as a PAC. In particular, a TAC will generally provide no
protection against the risk of prepayments occurring more slowly than the
rate of prepayment assumed for structuring purposes and generally will not
be structured to permit expected cash flows from non-TAC classes of
Securities to be diverted to the TAC.
Companion Class. To the extent specified in any Prospectus
Supplement, one or more classes of Notes of a given series may be designed
to receive principal payments on a Payment Date only if principal payments
have been made on a specified planned amortization class of Notes or
targeted amortization class of Notes, and to receive any excess payments
over the amount required to reduce the principal amount of the planned
amortization class or targeted amortization class to the planned or
targeted balance for such Payment Date.
The Indenture
Modification of Indenture. With respect to each Trust that has issued
Notes pursuant to an Indenture, the Trust and the Indenture Trustee may,
with the consent of the holders of a majority of the outstanding Notes of
the related series, execute a supplemental indenture to add provisions to,
change in any manner or eliminate any provisions of, the related Indenture,
or modify (except as provided below) in any manner the rights of the
related Noteholders. Any credit enhancement provider for a series of
Securities may have the right to approve supplemental indentures and other
modifications to the Indenture.
With respect to the Notes of a given series, without the consent of
the holder of each outstanding Note affected thereby, no supplemental
indenture will: (i) change the due date of any installment of principal of
or interest on any such Note or reduce the principal amount thereof, the
Interest Rate specified thereon or the redemption price with respect
thereto or change any place of payment where, or the coin or currency in
which, any such Note or any interest thereon is payable; (ii) impair the
right to institute suit for the enforcement of certain provisions of the
related Indenture regarding payment; (iii) reduce the percentage of the
aggregate amount of the outstanding Notes of such series, 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 related Indenture or of certain defaults
thereunder and their consequences as provided for in such Indenture; (iv)
modify or alter the provisions of the related Indenture regarding the
voting of Notes held by the applicable Trust, any other obligor on such
Notes, the Seller or an affiliate of any of them; (v) reduce the percentage
of the aggregate outstanding amount of such Notes, the consent of the
holders of which is required to direct the related Indenture Trustee to
sell or liquidate the Receivables; (vi) decrease the percentage of the
aggregate principal amount of such Notes required to amend the sections of
the related Indenture which specify the applicable percentage of aggregate
principal amount of the Notes of such series necessary to amend such
Indenture or certain other related agreements; or (vii) permit the creation
of any lien ranking prior to or on a parity with the lien of the related
Indenture with respect to any of the collateral for such Notes or, except
as otherwise permitted or contemplated in such Indenture, terminate the
lien of such Indenture on any such collateral or deprive the holder of any
such Note of the security afforded by the lien of such Indenture.
<PAGE>
The Trust and the applicable Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of the Noteholders
of the related series, for the purpose of, among other things, adding any
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provisions to or changing in any manner or eliminating any of the
provisions of the related Indenture or of modifying in any manner the
rights of such Noteholders; provided that such action will not adversely
affect in any material respect the interest of any such Noteholder, unless
the Rating Agency then rating the Notes shall have notified the Seller, the
Servicer and the Indenture Trustee in writing that such action will not
result in a reduction or withdrawal of the rating of the affected Notes of
such series.
Events Of Default; Rights Upon Event of Default. With respect to the
Notes of a given series, "Events of Default" under the related Indenture
will consist of: (i) any failure to pay interest on the Notes as and when
the same becomes due and payable, which failure continues unremedied for
five days; (ii) any failure to make any required payment of principal on
the Notes; (iii) a default in the observance or performance in any material
respect of any covenant or agreement of the applicable Trust made in the
related Indenture, or any representation or warranty made by the applicable
Trust in the related Indenture or in any certificate delivered pursuant
thereto or in connection therewith having been incorrect as of the time
made, and the continuation of any such default or the failure to cure such
breach of a representation or warranty for a period of 30 days after there
shall have been given to such Trust by the applicable Indenture Trustee, or
to such Trust and such Indenture Trustee by the holders of at least 25% of
the aggregate outstanding principal balance of the Notes, a written notice
in accordance with the related Indenture; (iv) certain events of
bankruptcy, insolvency, receivership or liquidation with respect to the
Seller or the applicable Trust; and (v) failure to pay the unpaid principal
balance of any class of Notes on the respective Final Scheduled Payment
Date for such class. However, the amount of principal required to be paid
to Noteholders of such series under the related Indenture will generally be
limited to amounts available to be deposited in the applicable collection
account. Therefore, the failure to pay principal on a class of Notes
generally will not result in the occurrence of an Event of Default until
the Final Scheduled Payment Date for such class of Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any series, the related Indenture Trustee or holders of a
majority in principal amount of such Notes then outstanding may declare the
principal of such Notes to be immediately due and payable. Such declaration
may, under certain circumstances, be rescinded by the holders of a
percentage of the principal amount of Notes then outstanding specified in
the related Prospectus Supplement and, if not so specified, may be
rescinded by the holder of a majority in principal amount of such Notes
then outstanding.
If the Notes of any series are 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 applicable Trust maintain possession of such Receivables and continue
to apply collections on such Receivables as if there had been no
declaration of acceleration. Such Indenture Trustee is prohibited from
selling the related Receivables following an Event of Default, other than a
default in the payment of any principal of or a default for five days or
more in the payment of any interest on any Note of such series, unless (i)
the holders of all such outstanding Notes and the holders of all
outstanding certificates 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 and all outstanding Certificates on the
date of such sale, or (iii) such Indenture Trustee determines that the
proceeds of Receivables would not be sufficient on an ongoing basis to make
all payments on such Notes as such payments would have become due if such
obligations had not been declared due and payable, and such Indenture
Trustee obtains the consent of the holders of 66-2/3% of the aggregate
outstanding amount of such Notes and the holders of 100% of the aggregate
outstanding amount of the Certificates.
<PAGE>
If an Event of Default occurs and is continuing with respect to a
series of Notes, such Indenture Trustee will be under no obligation to
exercise any of the rights or powers under such Indenture at the request or
direction of any of the holders of such Notes, if such Indenture Trustee
believes it will not be adequately indemnified against the costs, expenses
and liabilities which might be incurred by it in complying with such
request or direction. Subject to the provisions for indemnification and
certain limitations contained in the related Indenture, the holders of a
majority in principal amount of the outstanding Notes of a given series
will have the right to direct the time, method and place of conducting any
proceeding or any remedy available to the applicable Indenture Trustee, and
the holders of a majority in principal amount of such Notes then
outstanding 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 such Indenture that cannot be
modified without the waiver or consent of all the holders of such
outstanding Notes.
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<PAGE>
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 applicable 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 to such Indenture Trustee to institute such proceeding in
its own name as Indenture Trustee, (iii) such holder or holders have
offered such Indenture Trustee satisfactory indemnity, (iv) such Indenture
Trustee has for 60 days failed to institute such proceeding, and (v) no
direction inconsistent with such written request has been given to such
Indenture Trustee during such 60-day period by the holders of a majority in
principal amount of such outstanding Notes.
A credit enhancement provider for a series of Securities may have the
right to declare, and control remedies in the event of, an Event of Default
to the exclusion of the Trustee, Indenture Trustee or the Securityholders
of such series.
With respect to any Trust, neither the related Indenture Trustee nor
the related Trustee in its individual capacity, nor any holder of a
Certificate representing an ownership interest in such Trust nor any of
their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an
express agreement to the contrary, be personally liable for the payment of
the principal of or interest on the related Notes or for the agreements of
such Trust contained in the applicable Indenture.
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 or any state, (ii) such entity expressly assumes
such Trust's obligation to make due and punctual payments upon the Notes of
the related series and the performance or observance of every agreement and
covenant of such Trust under the Indenture, (iii) no Event of Default shall
have occurred and be continuing immediately after such merger or
consolidation, (iv) such Trust has been advised that the rating of the
Notes or the Certificates of such series then in effect would not be
reduced or withdrawn by the Rating Agency as a result of such merger or
consolidation, (v) such Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Trust or to any related Noteholder or Certificateholder,
and (vi) any action necessary to maintain the lien and security interest
under the Indenture has been taken. Any credit enhancement provider for a
series of Securities may have the right to approve any such merger or
consolidation.
Each Trust will not, among other things, (i) except as expressly
permitted by the applicable Indenture, the applicable Transfer and
Servicing Agreements or certain related documents with respect to such
Trust (collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of such Trust, (ii) claim any credit
on or make any deduction from the principal and interest payable in respect
of the Notes of the related series (other than amounts withheld under the
Code or applicable state law) or assert any claim against any present or
former holder of such Notes because of the payment of taxes levied or
assessed upon such Trust, (iii) 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 such Notes under such
Indenture except as may be expressly permitted thereby, (iv) permit any
lien, charge, excise, claim, security interest, mortgage or other
encumbrance (other than certain liens that arise by operation of law) to be
created on or extend to or otherwise arise upon or burden the assets of
such Trust or any part thereof, or any interest therein or the proceeds
thereof, or (v) permit the lien of the related Indenture not to constitute
a valid first priority (other than certain liens that arise by operation of
law) security interest in the assets of such Trust.
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.
<PAGE>
Satisfaction and Discharge of Indenture. An 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 such Indenture
Trustee of funds sufficient for the payment in full of all such Notes and
any amounts owing to a credit enhancement provider, if applicable.
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The Indenture Trustee
The Indenture Trustee for a series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any series may
resign at any time, in which event the issuer with respect to each series
of Securities (the "Issuer") will be obligated to appoint a successor
trustee for such series. The Issuer may also remove any such Indenture
Trustee if such Indenture Trustee ceases to be eligible to continue as such
under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, the Issuer will be obligated to appoint a successor
trustee for the applicable series of Notes. Any resignation or removal of
the Indenture Trustee and appointment of a successor trustee for any series
of Notes does not become effective until acceptance of the appointment by
the successor trustee for such series. Any credit enhancement provider for
a series of Securities may have the right to approve the Issuer's
appointment or removal of the Indenture Trustee.
DESCRIPTION OF THE CERTIFICATES
General
With respect to each Trust, one or more classes of Certificates of
the related series will be issued pursuant to the terms of a Trust
Agreement or a Pooling and Servicing Agreement, a form of each of which has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The following summary, together with the related
summary in the Prospectus Supplement for a particular Trust, describes all
of the material terms and provisions of Certificates and the Trust
Agreement or the Pooling and Servicing Agreement, as applicable, but it
does not purport to be complete and is subject to, and is qualified by
reference to, all the provisions of the Certificates and the Trust
Agreement or Pooling and Servicing Agreement, as applicable.
Except for the Certificates, if any, of a given series purchased by
the Seller, each class of Certificates will initially be represented by one
or more Certificates registered in the name of the Depository, except as
set forth below. See "Certain Information Regarding the Securities --
Definitive Securities." Except for the Certificates, if any, of a given
series purchased by the Seller, the Certificates will be available for
purchase in minimum denominations specified in the related Prospectus
Supplement, or if not so specified, in denominations of $1,000 and integral
multiples of $1,000 in excess thereof. Certificates may be issued in
book-entry form or as Definitive Certificates and if not otherwise
specified in the related Prospectus Supplement will be available in
book-entry form only. As to the Certificates issued in book-entry form, the
Seller has been informed by DTC that DTC's nominee will be Cede, unless
another nominee is specified in the related Prospectus Supplement.
Accordingly, such nominee is expected to be the holder of record of the
Certificates of any series that are not purchased by the Seller. Unless and
until Definitive Certificates are issued in replacement for book-entry
Certificates under the limited circumstances described herein or in the
related Prospectus Supplement, no beneficial owner of Certificates (each a
"Certificate Owner") (other than the Seller) will be entitled to receive a
physical certificate representing a Certificate. See "Certain Information
Regarding the Securities -- Definitive Securities." As to Certificates
issued in book-entry form, all references herein and in the related
Prospectus Supplement to actions by Certificateholders refer to actions
taken by DTC upon instructions from the Participants and all references
herein and in the related Prospectus Supplement to distributions, notices,
reports and statements to Certificateholders refer to distributions,
notices, reports and statements to DTC or its nominee, as the case may be,
as the registered holder of the Certificates, for distribution to
Certificateholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities -- Book-Entry
Registration" and "-- Definitive Securities." Any Certificates of such
series owned by the Seller or its affiliates will be entitled to equal and
proportionate benefits under the applicable Trust Agreement, except that
such Certificates will be deemed not to be outstanding for the purpose of
determining whether the requisite percentage of Certificateholders have
given any request, demand, authorization, direction, notice, consent or
other action under the Related Documents (other than the commencement by
the related Trust of a voluntary proceeding in bankruptcy as described
under "Description of the Transfer and Servicing Agreements--Insolvency
Event").
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Distributions of Principal and Interest
The timing and priority of distributions, seniority, allocations of
losses, Certificate Rate and amount of or method of determining
distributions with respect to principal and interest of each class of
Certificates will be described in the related Prospectus Supplement.
Distributions of interest on such Certificates other than certain Strip
Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Payment Date") and will be made prior to distributions
with respect to principal of such Certificates. To the extent provided in
the related Prospectus Supplement, a series may include one or more classes
of Certificates ("Strip Certificates," and, together with Strip Notes,
"Strip Securities") 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. Each class of Certificates may have a different
Certificate Rate, which may be a fixed, variable or adjustable Certificate
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 Certificate Rate for each class of Certificates of a given
series or the method for determining such Certificate Rate. See also
"Certain Information Regarding the Securities--Fixed Rate Securities" and
"--Floating Rate Securities." If a series of Securities includes classes of
Notes, such Notes and Certificates will be issued by the same Trust and
payable from the same Trust property, to the extent specified in the
related Prospectus Supplement, distributions in respect of the Certificates
of such series will be subordinate to payments in respect of the Notes of
such series to the extent provided in the related Prospectus Supplement.
Distributions in respect of interest on and principal of any class of
Certificates will be made on a pro rata basis among all 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 interest and 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.
To the extent specified in the related Prospectus Supplement, the
principal amount of Certificates outstanding at any time may be reduced to
reflect losses on the Receivables experienced prior to such time.
CERTAIN INFORMATION REGARDING THE SECURITIES
Fixed Rate Securities
Each class of Securities (other than certain classes of Strip Notes
or Strip Certificates) may bear interest at a fixed rate per annum ("Fixed
Rate Securities") or at a variable or adjustable rate per annum ("Floating
Rate Securities"), as more fully described below and in the related
Prospectus Supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Certificate Rate, as
the case may be, specified in the related Prospectus Supplement. Interest
on each class of Fixed Rate Securities will be computed on the basis of a
360-day year of twelve 30-day months or on such other day count basis as is
specified in the applicable Prospectus Supplement. See "Description of the
Notes--Principal and Interest on the Notes" and "Description of the
Certificates-- Distributions of Principal and Interest."
Floating Rate Securities
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as such term is defined in the related
Prospectus Supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to an
interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in
the related Prospectus Supplement. The "Spread" is the number of basis
points (one basis point equals one-hundredth of a percentage point) that
may be specified in the applicable Prospectus Supplement as being
applicable to such class, and the "Spread Multiplier" is the percentage
that may be specified in the applicable Prospectus Supplement as being
applicable to such class.
<PAGE>
The applicable Prospectus Supplement will designate a Base Rate
for a given Floating Rate Security based on the London interbank offered rate
("LIBOR"), commercial paper rates, Federal funds rates, U.S. Government
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treasury securities rates, negotiable certificates of deposit rates or
another rate as set forth in such Prospectus Supplement.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following
(in each case expressed as a rate per annum): (i) a maximum limitation, or
ceiling, on the rate at which interest may accrue during any interest
period and (ii) a minimum limitation, or floor, on the rate at which
interest may accrue during any interest period. In addition to any maximum
interest rate that may be applicable to any class of Floating Rate
Securities, the interest rate applicable to any class of Floating Rate
Securities will in no event be higher than the maximum rate permitted by
applicable law, as the same may be modified by United States law of general
application.
Each Trust with respect to which a class of Floating Rate Securities
will be issued will appoint, and enter into agreements with, a calculation
agent (each, a "Calculation Agent") to calculate interest rates on each
such class of Floating Rate Securities issued with respect thereto. The
applicable Prospectus Supplement will set forth the identity of the
Calculation Agent for each such class of Floating Rate Securities of a
given series, which may be either the Trustee or Indenture Trustee with
respect to such series. All determinations of interest by the Calculation
Agent shall, in the absence of manifest error, be conclusive for all
purposes and binding on the holders of Floating Rate Securities of a given
class. All percentages resulting from any calculation of the rate of
interest on a Floating Rate Security will be rounded, if necessary, in the
manner specified in the related Prospectus Supplement or, if not so
specified to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward.
Book-Entry Registration
With respect to each class of Securities of a given series issued in
book-entry form, Securityholders may hold their Securities through DTC (in
the United States) or Cedel or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems. DTC's Nominee will hold the global
Securities. Cedel and Euroclear will hold omnibus positions on behalf of
the Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's names on
the books of their respective depositories (collectively, the
"Depositaries") which in turn will hold such positions in customers'
securities accounts in the Depositaries' 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 New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, 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 holds securities for its Participants ("DTC
Participants") and facilitates the clearance and settlement among DTC
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic book-entry changes in DTC
Participants' accounts, thereby eliminating the need for physical movement
of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to the DTC system is also available to
others such as securities brokers and dealers, banks, and trust companies
that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and DTC Participants are on file with the
Securities and Exchange Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in the ordinary way in accordance with their applicable rules and
operating procedures.
<PAGE>
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its Depositary to take action to effect final
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settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and
Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Cedel Participant or Euroclear Participant on such business day.
Cash received in Cedel or Euroclear as a result of sales of securities by
or through a Cedel Participant or a Euroclear Participant to a 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.
Purchases of Securities under the DTC system must be made by or
through DTC Participants, which will receive a credit for the Securities on
DTC's records. The ownership interest of each actual Security Owner is in
turn to be recorded on the DTC Participants' and Indirect Participants'
records. Security Owners will not receive written confirmation from DTC of
their purchase, but Security Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC Participant or Indirect
Participant through which the Security Owner entered into the transaction.
Transfers of ownership interests in the Securities are to be accomplished
by entries made on the books of DTC Participants acting on behalf of
Security Owners. Security Owners will not receive certificates representing
their ownership interest in Securities, except in the event that use of the
book-entry system for the Securities is discontinued. Except to the extent
Seller holds Certificates with respect to any series of Securities, it is
anticipated that the only "Securityholder", "Noteholder" and
"Certificateholder" will be DTC's Nominee. Note Owners will not be
recognized by each Indenture Trustee as Noteholders, as such term is used
in each Indenture, and Note Owners will be permitted to exercise the rights
of Noteholders only indirectly through DTC and DTC Participants. Similarly,
Certificate Owners will not be recognized by each Trustee as
Certificateholders as such term is used in each Trust Agreement or Pooling
and Servicing Agreement, and Certificate Owners will be permitted to
exercise the rights of Certificateholders only indirectly through DTC and
DTC Participants.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC are registered in the name of DTC's Nominee. The
deposit of Securities with DTC and their registration in the name of DTC's
Nominee effects no change in beneficial ownership. DTC has no knowledge of
the actual Security Owners of the Securities; DTC's records reflect only
the identity of the DTC Participants to whose accounts such Securities are
credited, which may or may not be the Security Owners. The DTC Participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect Participants, and by DTC
Participants and Indirect Participants to Security Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither DTC nor DTC's Nominee will consent or vote with respect to
Securities. Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date, which assigns DTC's
Nominees's consenting or voting rights to those DTC Participants to whose
accounts the Securities are credited on the record date (identified in a
listing attached thereto).
Principal and interest payments on the Securities will be made to
DTC. DTC's practice is to credit Participants' accounts on the applicable
Payment Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment
on such Payment Date. Payments by DTC Participants to Security Owners will
be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name" and will be the responsibility of such DTC
Participant and not of DTC, the related Indenture Trustee or the related
Trustee, as applicable or the Seller, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal and interest to DTC is the responsibility of the applicable
Trustee, disbursement of such payments to DTC Participants shall be the
responsibility of DTC, and disbursement of such payments to Security Owners
shall be the responsibility of DTC Participants and Indirect Participants.
Under a book-entry format, Securityholders may experience some delay in
their receipt of payments, since such
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payments will be forwarded by the applicable Trustee to DTC's Nominee. DTC
will forward such payments to DTC Participants which thereafter will
forward them to Indirect Participants or Security Owners.
Because DTC can only act on behalf of DTC Participants, who in turn
act on behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions with respect to
such Securities, may be limited due to the lack of a physical certificate
for such Securities.
DTC has advised the Seller that it will take any action permitted to
be taken by a Noteholder under the related Indenture or a Certificateholder
under the related Trust Agreement or Pooling and Servicing Agreement only
at the direction of one or more DTC Participants to whose accounts with DTC
the applicable Notes or Certificates are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Seller believes to be
reliable, but the Seller takes no responsibility for the accuracy thereof.
Cedel Bank, societe anonyme ("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 32 currencies,
including United States dollars. Cedel provides to its Cedel Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedel interfaces with domestic markets in several countries. As
a professional depository, Cedel is subject to regulation by the Luxembourg
Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers
and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the underwriters of any series of
Securities. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Cedel Participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to
clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk
from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in any of 32 currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in 25
countries generally similar to the arrangements for cross-market transfers
with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the
"Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, Societe Cooperative, 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 Board establishes policy for the Euroclear
System. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial
intermediaries and may include the underwriters of any series of
Securities. Indirect access to the Euroclear System is also available to
other firms that 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 the Euroclear System
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments
with respect to securities in the Euroclear System. All securities in the
Euroclear System are held on
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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 Securities held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions
will be subject to tax reporting in accordance with relevant United States
tax laws and regulations. See "Material Federal Income Tax Consequences."
Cedel or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Securityholder under a related Agreement
on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time. Under such circumstances, in the event that a
successor securities depository for DTC is not obtained, Definitive
Securities are required to be printed and delivered. The Seller may decide
to discontinue use of the system of book-entry transfers through DTC (or a
successor securities depository). In that event, Definitive Securities will
be delivered to Securityholders. See "--Definitive Securities."
NONE OF THE TRUST, THE SELLER, PARAGON, THE SERVICER, ANY
SUBSERVICER, ANY APPLICABLE TRUSTEE NOR ANY OF THE UNDERWRITERS WILL HAVE
ANY RESPONSIBILITY OR OBLIGATION TO ANY DTC 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 SECURITY OWNER IN
RESPECT OF THE PRINCIPAL BALANCE OF, OR INTEREST ON, THE SECURITIES, (3)
THE DELIVERY BY ANY DTC PARTICIPANT, CEDEL PARTICIPANT, OR EUROCLEAR
PARTICIPANT OF ANY NOTICE TO ANY SECURITY OWNER WHICH IS REQUIRED OR
PERMITTED UNDER THE TERMS OF THE APPLICABLE AGREEMENTS TO BE GIVEN TO
SECURITYHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC OR DTC'S NOMINEE AS
THE SECURITYHOLDER.
Definitive Securities
With respect to any series of Notes and any series of Certificates
issued in book-entry form, such Notes or Certificates will be issued in
fully registered, certificated form ("Definitive Notes" and "Definitive
Certificates", respectively, and collectively referred to herein as
"Definitive Securities") to Noteholders or Certificateholders or their
respective nominees, rather than to DTC or its nominee, if the related
Prospectus Supplement so provides with respect to the initial issuance of
any such Securities thereunder and, if the related Prospectus Supplement
does not so provide, only if (i) Seller advises the related Trustee that
DTC is no longer willing or able to discharge properly its responsibilities
as depository with respect to such Securities and such Trustee is unable to
locate a qualified successor, (ii) the Seller at its option, advises the
related Trustee that it elects to terminate the book-entry system through
DTC, or (iii) after the occurrence of an Event of Default or a Servicer
Termination Event with respect to such Securities, holders representing at
least a majority of the outstanding principal amount of the Notes or the
Certificates, as the case may be, of such series advise the applicable
Trustee and DTC through its Participants in writing that the continuation
of a book-entry system through DTC (or a successor thereto) with respect to
such Notes or Certificates is no longer in the best interest of the holders
of such Securities.
Upon the occurrence of any event described in the immediately
preceding paragraph, the applicable Trustee will be required to notify all
applicable Security Owners of a given series through Participants of the
availability of Definitive Securities. Upon surrender by DTC of the
definitive certificates representing the corresponding Securities and
receipt of instructions for re-registration, the applicable Trustee will
reissue such Securities as Definitive Securities to such Securityholders.
Distributions of principal of, and interest on, Definitive Securities
will be made by the applicable Trustee in accordance with the procedures
set forth in the related Indenture or the related Trust Agreement or
Pooling
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and Servicing Agreement, as applicable, directly to holders of Definitive
Securities in whose names the Definitive Securities were registered at the
close of business on the applicable record date specified for such
Securities in the related Prospectus Supplement. Such distributions will be
made by check mailed to the address of such holder as it appears on the
register maintained by the applicable Trustee. The final payment on any
such Definitive Security, however, will be made only upon presentation and
surrender of such Definitive Security at the office or agency specified in
the notice of final distribution to the applicable Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the applicable Trustee or of a registrar named in a notice
delivered to holders of Definitive Securities. No service charge will be
imposed for any registration of transfer or exchange, but the applicable
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
List of Securityholders
Three or more holders of Notes of a given series or one or more
holders of such Notes evidencing not less than 25% of the aggregate
outstanding principal balance of such Notes may, by written request to the
related Indenture Trustee, obtain access to the list of all Noteholders of
such series maintained by such Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
related Indenture or under such Notes. Unless Definitive Notes have been
issued, the only "Noteholder" appearing on the list maintained by the
related Indenture Trustee will be Cede, as nominee for DTC. In such
circumstances, any Note Owner wishing to communicate with other Note Owners
will not be able to identify those Note Owners through the Indenture
Trustee and instead will have to attempt to identify them through DTC and
its Participants or such other means as such Note Owner may find available.
Three or more holder of Notes of a given series or one or more
holders of such Certificates evidencing not less than 25% of the
Certificate Balance of such Certificates may, by written request to the
related Trustee, obtain access to the list of all Certificateholders of
such series maintained by such Trustee for the purpose of communicating
with other Certificateholders with respect to their rights under the
related Trust Agreement or Pooling and Servicing Agreement or under such
Certificates. Unless Definitive Certificates have been issued, the only
"Certificateholder" appearing on the list maintained by the related Trustee
will be Cede, as nominee for DTC. In such circumstances, any Certificate
Owner wishing to communicate with other Certificate Owners will not be able
to identify those Certificate Owners through the Trustee and instead will
have to attempt to identify them through DTC and its Participants or such
other means as such Certificate Owner may find available.
Reports to Securityholders
With respect to each series of Securities, on or prior to each
Payment Date, the Servicer will prepare and provide to the related Trustee
a statement to be delivered to the related Securityholders. With respect to
each series of Securities, each such statement to be delivered to
Noteholders will include (to the extent applicable) the following
information (and any other information so specified in the related
Prospectus Supplement) as to the Notes of such series with respect to such
Payment Date or the period since the previous Payment Date, as applicable,
and each such statement to be delivered to Certificateholders will include
(to the extent applicable) the following information (and any other
information so specified in the related Prospectus Supplement) as to the
Certificates of such series 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 of such series;
(ii) the amount of the distribution allocable to principal of
each class of Securities of such series;
(iii) the amount of the distribution allocable to draws from
the Reserve Account (if any), any Yield Supplement Account or
payments in respect of any other credit or cash flow enhancement
arrangement;
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(iv) the balance of any Yield Supplement Account or the
Reserve Account (if any) on such date, after giving effect to changes
therein on such date;
(v) the amount of fees paid by the Trust with respect to such
Collection Period;
(vi) the aggregate outstanding principal balance and the Note
Pool Factor for each class of such Notes, and the Certificate Balance
and the Certificate Pool Factor for each class of such Certificates,
each after giving effect to all payments reported under clause (ii)
above on such date;
(vii) the Noteholders' Interest Carryover Shortfall, the
Noteholders' Principal Carryover Shortfall, the Certificateholders'
Interest Carryover Shortfall and the Certificateholders' Principal
Carryover Shortfall (each as defined in the related Prospectus
Supplement), if any, in each case as applicable to each class of
Securities, and the change in such amounts from the preceding
statement;
(viii) the Interest Rate or Certificate Rate for the next
period for any class of Notes or Certificates of such series with
variable or adjustable rates;
(ix) for each such date during the Funding Period (if any),
the remaining Pre-Funded Amount;
(x) for the first such date that is on or immediately
following the end of the Funding Period (if any), the amount of any
remaining Pre-Funded Amount that has not been used to fund the
purchase of Subsequent Receivables and is being passed through as
payments of principal on the Securities of such series;
(xi) to the extent provided in the related Prospectus
Supplement, the amount of advances made by the Servicer, if any, on
such date; and
(xii) such other information as may be specified in the
related Prospectus Supplement.
Within the prescribed period of time for tax reporting purposes
after the end of each calendar year during the term of each Trust, the
applicable Trustee will mail to each person who at any time during such
calendar year has been a Securityholder with respect to such Trust and received
any payment thereon a statement containing certain information for the purposes
of such Securityholder's preparation of federal income tax returns. See
"Material Federal Income Tax Consequences."
Funding Period or Revolving Period
If specified in the related Prospectus Supplement, during a Funding
Period and/or Revolving Period, the Pre- Funding Account and/or Revolving
Account will be maintained as a trust account in the name of the applicable
Trustee. The Pre-Funded Amount will initially equal the amount specified in
the related Prospectus Supplement, which may be up to 100% of the aggregate
principal amount of the series of Securities offered thereunder. During the
Funding Period, the Pre-Funded Amount will be reduced by the amount thereof
used to purchase Subsequent Receivables in accordance with the applicable
Transfer and Servicing Agreement and the amounts thereof deposited in the
Reserve Account in connection with the purchase of such Subsequent
Receivables.
Prior to being used to purchase Subsequent Receivables or paid to the
Noteholders and Certificateholders, the Pre-Funded Amount and amounts on
deposit in the Revolving Account will be invested from time to time in
Permitted Investments. See "Description of the Transfer and Servicing
Agreements--Accounts."
If the initial Pre-Funded Amount exceeds 25% of the aggregate
proceeds from the sale of Securities, the actual investments of the
Pre-Funding Amount as of the end of each month will be provided in Current
Reports on Form 8-K to be filed by the Seller with respect to the
applicable Trust.
<PAGE>
If specified in the related Prospectus Supplement for a Trust that
issues Notes, during a Revolving Period, the applicable Trustee will
deposit in the related Revolving Account the principal collections on the
related Receivables as described above. In addition, on each Payment Date
during the Revolving Period, the applicable Trustee will deposit in the
related Revolving Account any other amount described in the related
Prospectus
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Supplement. Funds on deposit in a Revolving Account will be withdrawn from
time to time during the related Revolving Period for delivery to the Seller
in exchange for the transfer and assignment of Subsequent Receivables to
the related Trust in the manner specified in the related Prospectus
Supplement. In addition, on the Payment Date following the end of the
related Revolving Period, the applicable Trustee will transfer the amount,
if any, on deposit in the related Revolving Account at the close of
business on the last day of such Revolving Period, less any investment
earnings on deposit therein, to the related Collection Account for
distribution to the related Securityholders on such Payment Date. In
addition, on each Payment Date during the related Revolving Period, the
applicable Trustee will transfer to the related Collection Account for
distribution to the related Securityholders on such Payment Date the
amount, if any, by which the amount on deposit in the related Revolving
Account at the close of business on the last day of the preceding calendar
month, less any investment earnings on deposit therein, exceeds the maximum
permitted Revolving Account balance specified in the related Prospectus
Supplement.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the material terms of each Sale and
Servicing Agreement between the Seller, the Servicer and the Trust (as
amended and supplemented from time to time, the "Sale and Servicing
Agreement") or Pooling and Servicing Agreement between the Seller, the
Servicer and the Trustee (as amended and supplemented from time to time,
the "Pooling and Servicing Agreement" and, together with the Sale and
Servicing Agreement, each a "Transfer and Servicing Agreement") pursuant to
which a Trust will purchase Receivables from the Seller and the Servicer
will agree to service such Receivables and each Trust Agreement (in the
case of a grantor trust, the Pooling and Servicing Agreement) pursuant to
which a Trust will be created and Certificates will be issued and pursuant
to which the Trustee will undertake certain administrative duties with
respect to a Trust that issues Notes. Forms of each type of the Transfer
and Servicing Agreements and the Trust Agreement have been filed as
exhibits to the Registration Statement of which this Prospectus forms a
part. This summary does not purport to be complete and is subject to, and
qualified by reference to, all the provisions of the Transfer and Servicing
Agreements and the Trust Agreement.
Sale and Assignment of Receivables
Prior to or at the time of issuance of the Securities of a given
Trust, pursuant to a related Purchase Agreement, Paragon will sell and
assign to the Seller, without recourse, its entire interest in the Initial
Receivables, of the related Receivables Pool, including its security
interests in the related Financed Vehicles. The Seller will, if so
specified in the related Prospectus Supplement, transfer and assign to the
applicable Trustee, without recourse, pursuant to a Transfer and Servicing
Agreement, its entire interest in the Initial Receivables, if any, of the
related Receivables Pool, including its security interests in the related
Financed Vehicles. The Trustee will not independently verify the existence
and qualification of any Receivables. The Trustee will, concurrently with
such sale and assignment, execute, authenticate, and deliver the related
Notes and/or Certificates to the Seller in exchange for the Receivables.
Each such Receivable will be identified in a schedule delivered pursuant to
such Transfer and Servicing Agreement (a "Schedule of Receivables"). The
net proceeds received by the Seller from the sale of the Certificates and
the Notes of a given series will be applied to the purchase of the related
Receivables from Paragon and, to the extent specified in the related
Prospectus Supplement, to the repayment of any Warehouse Financing or
deposit of the Pre-Funded Amount into the Pre- Funding Account and to make
any required initial deposit in any Reserve Account. The related Prospectus
Supplement for a given Trust will specify whether, and the terms,
conditions and manner under which, Subsequent Receivables will be sold by
the Seller to the applicable Trust from time to time during any Funding
Period on each date specified as a transfer date in the related Prospectus
Supplement (each, a "Subsequent Transfer Date").
The purchase price for the Receivables purchased by the Trust from
the Seller and by the Seller from Paragon may be more or less than the
aggregate principal balance thereof. If any Receivables are purchased for a
purchase price less than their respective principal balances, a portion of
the collections or proceeds in respect of principal from such Receivables
may be deemed collections or proceeds in respect of interest on such
Receivables for the purposes of allocating distributions on the Securities.
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If so specified in the related Prospectus Supplement, a Trust may
acquire Initial Receivables pursuant to Warehouse Financing arrangements
entered into prior to the issuance by that Trust of any Securities offered
hereby. It will be a condition to the issuance of Securities by any such
Trust that any Warehouse Financing with respect to the Pool Receivables be
repaid in full, and any related security interests released, at or prior to
the time of such issuance.
In each Purchase Agreement, Paragon will represent and warrant to the
Seller and in each Transfer and Servicing Agreement, the Seller will
represent and warrant to the applicable Trust, among other things: (i) as
of the Closing Date, the information provided in the schedule to the Sale
and Servicing Agreement with respect to the Receivables is correct in all
material respects; (ii) as of the Cutoff Date or the applicable Subsequent
Cutoff Date, if any, the Receivables are free and clear of all liens or
claims existing or that have been filed for work, labor, storage or
materials that are liens prior to the security interest in the Financed
Vehicle granted by the Receivables and no right of setoff, counterclaim or
rescission has been asserted or threatened with respect to the Receivables;
(iii) at the date of issuance of the Securities, each of the Receivables is
secured by (or will be when all necessary steps have been taken to result
in) a first priority perfected security interest in the Financed Vehicle in
favor of Paragon; (iv) none of the Receivables contravenes in any material
respects any requirements of applicable federal, state and local laws,
including consumer credit, truth in lending, equal credit opportunity and
disclosure laws; and (v) any other representations and warranties that may
be described in the related Prospectus Supplement.
As of the last day of the month (or if the Seller elects, earlier)
following the month in which the Seller discovers or receives notice of a
breach of any representation or warranty of the Seller that materially and
adversely affects the interests of the related Trust in any Receivable, the
Seller, unless the breach is cured, will repurchase such Receivable from
such Trust at a price equal to the amount of principal plus accrued
interest calculated in accordance with the Servicer's customary practices
for such Receivable, after giving effect to the receipt of any moneys
collected (from whatever source) on such Receivable, if any (the "Purchase
Amount"). The repurchase obligation constitutes the sole remedy available
to the Certificateholders or the Trustee and any Noteholders or Indenture
Trustee in respect of such Trust for any such uncured breach.
Unless otherwise specified in the related Prospectus Supplement, to
assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Seller and each Trust will designate the Servicer
or Paragon as custodian to maintain possession, as such Trust's agent, of
the related motor vehicle retail installment sales contract or promissory
note and security agreement and any other documents relating to the
Receivables. The Receivables will not be segregated, stamped or otherwise
marked to indicate that they have been sold to the related Trust. The
accounting records and computer systems of Paragon, the Servicer and the
Seller will reflect the sales and assignments of the related Receivables to
the Seller or a Trust, as applicable, and Uniform Commercial Code ("UCC")
financing statements reflecting such sales and assignments will be filed.
If through inadvertence or otherwise, another party purchases (or takes a
security interest in) the Receivables for new value in the ordinary course
of business and takes possession of the Receivables without actual
knowledge of the related Trust's interest, the purchaser (or secured party)
will acquire an interest in the Receivables superior to the interest of the
related Trust. See "Certain Legal Aspects of the Receivables--Security
Interest 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 and into which amounts
released from any Pre-Funding Account, Revolving Account, Reserve Account
or other credit enhancement for payment to such Noteholders and
Certificateholders will be deposited and from which all distributions to
such Noteholders and Certificateholders will be made (the "Collection
Account"). 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 in the name of the related Trustee on behalf of the
related Certificateholders.
If so provided in the related Prospectus Supplement, the Servicer
will establish an additional account (the "Payahead Account"), into which,
to the extent required by the applicable Transfer and Servicing Agreement,
early payments by or on behalf of Obligors on Precomputed Receivables which
do not constitute scheduled
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payments, full prepayments, nor certain partial prepayments that result in
a reduction of the Obligor's periodic payment below the scheduled payment
as of the applicable Cutoff Date ("Payaheads") will be deposited until such
time as the payment falls due. Until such time as payments are transferred
from the Payahead Account to the Collection Account, they will not
constitute collected interest or collected principal and will not be
available for distribution to the applicable Noteholders or
Certificateholders. For each Trust that issues Notes, the Payahead Account
will initially be maintained with and in the name of the applicable
Indenture Trustee. With respect to each Trust that does not issue Notes,
the Servicer will establish and maintain with the related Trustee the
Payahead Account in the name of such Trustee. So long as Paragon is the
Servicer and provided that (i) there exists no Servicer Termination Event
and (ii) each other condition to holding Payaheads as may be required by
the applicable Transfer and Servicing Agreement is satisfied, Payaheads may
be retained by the Servicer until the applicable Payment Date.
Any other accounts to be established with respect to a Trust,
including any Pre-Funding Account, Revolving Account, Yield Supplement
Account (as such term is defined in the related Prospectus Supplement, the
"Yield Supplement Account") or Reserve Account, will be described in the
related Prospectus Supplement.
For any series of Securities, funds in the Collection Account and any
Pre-Funding Account, Revolving Account, Reserve Account and other accounts
identified as such in the related Prospectus Supplement (collectively, the
"Trust Accounts") will be invested as provided in the related Transfer and
Servicing Agreement in Permitted Investments.
"Permitted Investments" will be any Eligible Investments, except that
money market funds will not be Permitted Investments in the case of a
Pre-Funding Account unless the Indenture Trustee receives an opinion of
counsel to the effect that making such investments will not require the
related Trust to register as an investment company under the Investment
Company Act of 1940, as amended. "Eligible Investments" consist of (a)
direct interest-bearing obligations of, and interest-bearing obligations
guaranteed as to timely payment of principal and interest by, the United
States or any agency or instrumentality of the United States the
obligations of which are backed by the full faith and credit of the United
States; (b) demand or time deposits in, certificates of deposit of, demand
notes of, or bankers' acceptances issued by any depository institution or
trust company organized under the laws of the United States or any State
and subject to supervision and examination by federal and/or state banking
authorities (including, if applicable, the related Indenture Trustee or any
agent of the related Indenture Trustee acting in their respective
commercial capacities); provided, however, that the short-term unsecured
debt obligations of such depository institution or trust company at the
time of such investment, or contractual commitment providing for such
investment, are rated in one of the two highest short-term rating
categories by the Rating Agency; (c) repurchase obligations pursuant to a
written agreement (i) with respect to any obligation described in clause(a)
above, where the related Indenture Trustee has taken actual or constructive
delivery of such obligation in accordance with the applicable Indenture,
and (ii) entered into with a depository institution or trust company
organized under the laws of the United States or any State thereof, the
deposits of which are insured by the Federal Deposit Insurance Corporation
and the short-term unsecured debt obligations of which are rated in one of
the two highest short-term rating categories by the Rating Agency
(including, if applicable, the related Indenture Trustee, or any agent of
the related Indenture Trustee acting in its commercial capacity); (d)
securities bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any State whose
long-term unsecured debt obligations are rated in one of the two highest
long-term rating categories by the Rating Agency at the time of such
investment or contractual commitment providing for such investment; (e)
commercial paper that (i) is payable in United States dollars and (ii) is
rated in one of the two highest short-term rating categories by the Rating
Agency; (f) money market mutual funds that are rated in the highest credit
rating category by at least one nationally recognized statistical rating
organization; or (g) any other demand or time deposit, obligation, security
or investment as may be acceptable to the Rating Agency, as evidenced by
the prior written consent of the Rating Agency, and the credit enhancement
provider for a series of Securities, if applicable.
Permitted Investments generally are limited to obligations or
securities that mature on or before the date of the next distribution for
such series. However, to the extent permitted by the Rating Agency, and any
credit enhancement provider, if applicable, funds in any Reserve Account
may be invested in securities that will not mature prior to the date of the
next distribution with respect to such Certificates or Notes and will not
be sold to meet any shortfalls. Thus, the amount of cash in any Reserve
Account at any time may be less than the balance of the Reserve Account. If
the amount required to be withdrawn from any Reserve Account to cover
shortfalls
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in collections on the related Receivables (as provided in the related
Prospectus Supplement) exceeds the amount of cash in the Reserve Account,
unless additional credit enhancement is provided for a series of
Securities, a temporary shortfall in the amounts distributed to the related
Noteholders or Certificateholders could result, which could, in turn,
increase the average life of the Notes or the Certificates of such series.
To the extent specified in the related Prospectus Supplement, investment
earnings on funds deposited in the Trust Accounts, net of losses and
investment expenses (collectively, "Investment Earnings"), will be either
retained in the applicable Trust Account or distributed to the Servicer and
not be treated as collections on the Receivables or otherwise be available
for Noteholders or Certificateholders.
The Trust Accounts will be maintained as Eligible Accounts. "Eligible
Account" means either (i) a segregated trust account that is maintained
with the corporate trust department of a depository institution, or (ii) a
segregated direct deposit account maintained with a depository institution
or trust company organized under the laws of the United States of America,
any of the States thereof or the District of Columbia having a certificate
of deposit, short-term deposit or commercial paper rating in one of the two
highest categories from the Rating Agency (or, if not rated by the Rating
Agency, from another nationally recognized statistical rating
organization).
Servicing Procedures
The Servicer will make reasonable efforts to collect all payments due
with respect to the Receivables held by any Trust and will, consistent with
the related Transfer and Servicing Agreement, follow such collection
procedures as it follows with respect to comparable motor vehicle retail
installment sales contracts and promissory note and security agreements it
services for itself or others. Consistent with its customary procedures,
the Servicer may, in its discretion, arrange with the Obligor on a
Receivable to extend, modify or amend the payment schedule, but no such
arrangement will, for purposes of any Transfer and Servicing Agreement,
modify any Receivable if such amendment or modification would extend the
final payment date of any Receivable beyond the Final Scheduled Payment
Date. Some of such arrangements may result in the Servicer purchasing the
Receivable for the Purchase Amount. See "Risk Factors--Risk of Prepayment
and Possible Adverse Effect on Yield." The Servicer may sell the Financed
Vehicle securing the respective Receivable at public or private sale, or
take any other action permitted by applicable law. See "Certain Legal
Aspects of the Receivables."
Pursuant to the applicable Transfer and Servicing Agreement, Paragon,
as Servicer, has the right to delegate any or all of its responsibilities
and obligations as Servicer to any of its affiliates and to delegate
specific duties to third-party service providers who are in the business of
performing such duties. Notwithstanding any delegation of its
responsibilities and obligations to any other entity, the Servicer will
continue to be liable for all its servicing obligations under the
applicable Transfer and Servicing Agreement as if the Servicer alone were
servicing the Receivables.
Collections
With respect to each Trust, the Servicer will generally deposit all
payments on the related Receivables received from Obligors and all proceeds
of the related Receivables collected during each collection period
specified in the related Prospectus Supplement (each, a "Collection
Period") into the related Collection Account not later than two business
days after receipt of available funds. However, if so provided in the
related Prospectus Supplement, so long as Paragon is the Servicer and
provided that (i) there exists no Servicer Termination Event and (ii) each
other condition to making monthly deposits as may be required by the
related Transfer and Servicing Agreement is satisfied, the Servicer may
retain such amounts until the Business Day (as defined in the related
Prospectus Supplement, a "Business Day") prior to the applicable Payment
Date. The Servicer or the Seller, as the case may be, will remit the
aggregate Purchase Amount of any Receivables to be purchased from a Trust
to the related Collection Account on the Business Day prior to the
applicable Determination Date. Pending deposit into the Collection Account,
collections may be employed by the Servicer at its own risk and for its own
benefit and will not be segregated from its own funds. 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 so provided in the related Prospectus Supplement, to the
extent the collections on a Precomputed Receivable for a Collection Period
are less than the scheduled payment, the amount of Payaheads made on such
Precomputed Receivable not
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previously applied (the "Payahead Balance"), if any, with respect to such
Precomputed Receivable shall be applied by the Servicer to the extent of
the shortfall.
Servicing Compensation and Payment of Expenses
On each Payment Date, the Servicer will be entitled to receive the
Servicing Fee for the related Collection Period in an amount generally
equal to a specified percentage per annum (as set forth in the related
Prospectus Supplement, the "Servicing Fee Rate") of the Pool Balance as of
the first day of such Collection Period (the "Servicing Fee"). To the
extent provided in the related Prospectus Supplement, the Servicer's right
to receive all or a portion of the Servicing Fee on one or more Payment
Dates may be subordinated to the rights of Securityholders to receive
principal and interest for the related Collection Period. In addition, to
the extent provided in the related Prospectus Supplement, on one or more
Payment Dates all or a portion of such Servicing Fee may be deposited in
the Reserve Account until the Reserve Account Required Amount or such other
amount specified in the related Prospectus Supplement is on deposit in the
Reserve Account. If it is acceptable to the Rating Agency without a
reduction in the rating of any of the Securities, the Servicing Fee in
respect of a Collection Period (together with any portion of a Servicing
Fee that remains unpaid from prior Payment Dates) at the option of the
Servicer may be paid at or as soon as possible after the beginning of such
Collection Period out of the first collections of interest received on the
Receivables for such Collection Period.
The Servicer will also collect and retain all administrative fees,
expenses and charges paid by or on behalf of Obligors, including any late
fees, non-sufficient funds fees and liquidation fees collected on the
Receivables during such Collection Period and reimbursement of any personal
property taxes assessed on repossessed Financed Vehicles paid by the
Servicer ("Supplemental Servicing Fees") and will be entitled to
reimbursement from such Trust for certain liabilities. Payments by or on
behalf of Obligors will be allocated to scheduled payments and late fees
and other charges in accordance with the Servicer's customary practices and
procedures. In addition, the Servicer or the Seller will be entitled to
receive such fees and other amounts specified in the related Prospectus
Supplement. See "Description of the Transfer and Servicing
Agreements--Servicing Compensation and Payment of Expenses" and
"--Distributions" in the related Prospectus Supplement.
The Servicing Fee and Supplemental Servicing Fee will compensate the
Servicer for performing the functions of a third party servicer of motor
vehicle receivables as an agent for its beneficial owner, including
collecting and posting all payments, responding to inquiries of Obligors on
the Receivables, investigating delinquencies, sending billing information
to Obligors, paying costs of collections and disposition of defaults and
policing the collateral. The Servicing Fee also will compensate the
Servicer for administering the particular Receivables Pool, accounting for
collections and furnishing monthly and annual statements to the related
Trustee and Indenture Trustee with respect to distributions and generating
federal income tax information for such Trust and for the related
Noteholders and Certificateholders. The Servicing Fee also will reimburse
the Servicer for certain taxes, the fees of the related Trustee and
Indenture Trustee, if any, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering
the applicable Receivables Pool.
Distributions
With respect to each series of Securities, beginning on the 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 such Securities entitled thereto will be
made by the applicable Trustee to the Noteholders and the
Certificateholders of such series. The timing, calculation, allocation,
order, source, priorities of and requirements for all payments to each
class of Noteholders and all distributions to each class of
Certificateholders of such series will be set forth in the related
Prospectus Supplement.
With respect to each Trust, on each Payment Date, collections on the
related Receivables will be distributed from the Collection Account to the
Noteholders, if any, and to Certificateholders to the extent provided in
the related Prospectus Supplement. Credit enhancement, such as a Reserve
Account or a surety bond or insurance policy guaranteeing payment of
interest and/or principal, will be available to cover any shortfalls in the
amount available for distribution on such date to the extent (a) specified
in the related Prospectus Supplement and (b) that such credit enhancement
is actually available for such purpose from time to time. As more fully
described in the related Prospectus Supplement, distributions in respect of
principal of a class of Securities of a given series will be subordinate to
distributions in respect of interest on such class, and distributions in
respect of one or more
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classes of Certificates of such series may be subordinate to payments in
respect of Notes, if any, of such series or other classes of Certificates
of such series.
Credit and Cash Flow Enhancement
The amounts and types of credit and cash flow enhancement
arrangements and the provider thereof, if applicable, with respect to each
class of Securities of a given series, if any, will be set forth in the
related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, credit and cash flow enhancement may be in the form
of subordination of one or more classes of Securities or all or a portion
of the Servicing Fee, Supplemental Servicing Fee or certain other amounts
payable to the Servicer or the Seller pursuant to the applicable Transfer
and Servicing Agreement, Reserve Accounts, over-collateralization, letters
of credit, credit or liquidity facilities, surety bonds, guaranteed
investment contracts, guaranteed rate agreements, swaps or other interest
rate protection agreements, repurchase obligations, yield supplement
agreements, other agreements with respect to third party payments or cash
deposits or any combination of two or more of the foregoing. If specified
in the related Prospectus Supplement, credit or cash flow enhancement for a
class of Securities may cover one or more other classes of Securities of
the same series, and credit or cash flow enhancement for a series of
Securities may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit
enhancement for the benefit of any class or series of Securities is
intended to enhance the likelihood of receipt by the Securityholders of
such class or series 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 or series of
Securities will not provide protection against all risks of loss and will
not guarantee repayment of the entire principal balance and interest
thereon except to the extent so specified in the related Prospectus
Supplement. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement,
Securityholders of any class or series will bear their allocable share of
deficiencies, as described in the related Prospectus Supplement. In
addition, if a form of credit enhancement covers more than one series of
Securities, Securityholders of any such series will be subject to the risk
that such credit enhancement will be exhausted by the claims of
Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Transfer and Servicing Agreement, the Seller will
establish for a series or class of Securities an account, as specified in
the related Prospectus Supplement (the "Reserve Account"), which will be
maintained with the related Trustee or Indenture Trustee, as applicable.
The Reserve Account will be funded by an initial deposit on the Closing
Date in the amount (if any) set forth in the related Prospectus Supplement
and, if the related series has a Funding Period, will also be funded on
each Subsequent Transfer Date to the extent described in the related
Prospectus Supplement. To the extent described in the related Prospectus
Supplement, the amount (if any) on deposit in the Reserve Account will be
increased on each Payment Date thereafter up to the Reserve Account
Required Amount (as defined in the related Prospectus Supplement) by the
deposit therein of the amount of collections on the related Receivables
remaining on each such Payment Date after the payment of all other required
payments and distributions on such date. The related Prospectus Supplement
will describe the circumstances and manner under which distributions may be
made out of the Reserve Account, either to holders of the Securities
covered thereby or to the Seller.
The Seller may at any time, without consent of the Securityholders,
sell, transfer, convey or assign in any manner its rights to and interests
in distributions from the Reserve Account provided that (i) the Rating
Agency confirms in writing that such action will not result in a reduction
or withdrawal of the rating of any class of Securities, (ii) the Seller
provides to the applicable trustee and any Indenture Trustee an opinion of
counsel from independent counsel that such action will not cause the
related Trust to be classified as an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes and
(iii) such transferee or assignee agrees in writing to take positions for
federal income tax purposes consistent with the federal income tax
positions agreed to be taken by the Seller.
Yield Supplement Account; Yield Supplement Agreement. If so provided
in the related Prospectus Supplement, pursuant to the related Transfer and
Servicing Agreement, Paragon, the Seller or another person will enter into
a Yield Supplement Agreement (as such term is defined in the related
Prospectus Supplement, the "Yield Supplement Agreement") pursuant to which
Paragon, the Seller or such other person will establish for a
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series a Yield Supplement Account which will be maintained with the same
entity at which the related Collection Account is maintained and, if so
specified in the related Prospectus Supplement, will be created with an
initial deposit by the Seller. Each Yield Supplement Account will be
designed solely to hold funds to be applied by the Indenture Trustee or
applicable Trustee to provide payments to Securityholders in respect of
Receivables the APR of which is less than the Required Rate (as such term
is defined in the related Prospectus Supplement, the "Required Rate").
On each Payment Date, the obligor under the Yield Supplement
Agreement will pay to the Trust an amount equal to the Yield Supplement
Amount (as such term is defined in the related Prospectus Supplement, the
"Yield Supplement Amount") in respect of the Receivables for such Payment
Date. If so specified in the Prospectus Supplement, in the event that such
obligor defaults on its obligation to make payments under the Yield
Supplement Agreement, the related Prospectus Supplement will describe the
manner and circumstances in which amounts on deposit on any Payment Date in
the Yield Supplement Account in excess of the Required Yield Supplement
Amount (as such term is defined in the related Prospectus Supplement, the
"Required Yield Supplement Amount") will be released, and to whom such
amounts will be distributed. Monies on deposit in the Yield Supplement
Account may be invested in Permitted Investments under the circumstances
and in the manner described in the related Transfer and Servicing
Agreement. If so specified in the related Prospectus Supplement, investment
earnings on investment of funds in a Yield Supplement Account will be
deposited into such Yield Supplement Account. The related Prospectus
Supplement, will describe the manner in which any monies remaining on
deposit in a Yield Supplement Account upon the termination of the related
Trust pursuant to its terms will be released and to whom such amounts will
be distributed.
If a Yield Supplement Account is established with respect to any
Trust as to which a Pre-Funding Account has been established, the Seller
and the related Indenture Trustee or applicable Trustee, will enter into a
Yield Supplement Agreement pursuant to which, on each Subsequent Transfer
Date, the Seller will deposit into the Yield Supplement Account the
Additional Yield Supplement Amount (as such term is defined in the related
Prospectus Supplement, the "Additional Yield Supplement Amount") in respect
of the related Subsequent Receivables. Each Yield Supplement Agreement will
affect only Receivables having an APR less than the related Required Rate.
Statements to Trustees and Trust
Prior to each Payment Date with respect to each series of Securities,
the Servicer will provide to the applicable Indenture Trustee, if any, and
the applicable Trustee as of the close of business on the last day of the
preceding Collection Period a statement setting forth substantially the
same information as is required to be provided in the periodic reports
provided to Securityholders of such series described under "Certain
Information Regarding the Securities -- Reports to Securityholders."
Evidence as to Compliance
Each Transfer and Servicing Agreement will provide that the Servicer
will furnish to the related Trust and Indenture Trustee or Trustee, as
applicable, on or before April 30 of each year, beginning in the calendar
year following the establishment of the related Trust, a statement of a
firm of independent certified public accountants (or other evidence
satisfactory to the Rating Agency) as to compliance by the Servicer during
the preceding twelve months ended December 31 (or, in the case of the first
such certificate, from the applicable Closing Date) with certain standards
relating to the servicing of the applicable Receivables, the Servicer's
accounting records and computer files with respect thereto and certain
other matters.
Each Transfer and Servicing Agreement will also provide for delivery
to the related Trust and Indenture Trustee or Trustee, as applicable,
substantially simultaneously with the delivery of such accountants'
statement referred to above, of a certificate signed by an officer of the
Servicer stating that the Servicer has fulfilled its obligations under the
applicable Transfer and Servicing Agreement, throughout the preceding
twelve months (or, in the case of the first such certificate, from the
Closing Date) or, if there has been a default in the fulfillment of any
such obligation, describing each such default. The Servicer has agreed to
give each Indenture Trustee and each Trustee notice of certain Servicer
Termination Events under the related Transfer and Servicing Agreement.
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Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Trustee
at the appropriate address set forth in the Prospectus Supplement.
Certain Matters Regarding the Servicer
Each Transfer and Servicing Agreement will provide that the Servicer
may not resign from its obligations and duties as Servicer thereunder,
except upon determination that the Servicer's performance of such duties is
no longer permissible under applicable law. No such resignation will become
effective until the related Indenture Trustee or Trustee, as applicable, or
a successor or back-up servicer, has assumed the Servicer's servicing
obligations and duties under such Transfer and Servicing Agreement.
Each Transfer and Servicing Agreement will further provide that
neither the Servicer nor any of its directors, officers, employees and
agents will be under any liability to the related Trust or the related
Noteholders or Certificateholders for taking any action or for refraining
from taking any action pursuant to such Transfer and Servicing Agreement or
for errors in judgment; except 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 in the
performance of the Servicer's duties thereunder or by reason of reckless
disregard of its obligations and duties thereunder. In addition, each
Transfer and Servicing Agreement 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 such Transfer
and Servicing Agreement and that, in its opinion, may cause it to incur any
expense or liability.
Under the circumstances specified in each Transfer and Servicing
Agreement, any entity into which the Servicer may be merged or
consolidated, or any entity resulting from any merger or consolidation to
which the Servicer is a party, or any entity succeeding to the business of
the Servicer or, with respect to its obligations as Servicer, any
corporation 50% or more of the voting stock of which is owned, directly or
indirectly, by Paragon, which corporation or other entity in each of the
foregoing cases assumes the obligations of the Servicer, will be the
successor of the Servicer under such Transfer and Servicing Agreement.
Servicer Termination Events
"Servicer Termination Events" under each Transfer and Servicing
Agreement will include: (i) the Servicer's failure to make deposits into
the Collection Account or to deliver to the applicable Trustee any proceeds
or payments payable to the Noteholders or Certificateholders required to be
so deposited or delivered in accordance with the Transfer and Servicing
Agreement, which failure continues unremedied for a period of two Business
Days (one Business Day with respect to payment of Purchase Amounts) after
receipt of notice by the Servicer from the applicable Trustee or discovery
of such failure by a responsible officer of the Servicer; (ii) the
Servicer's failure to deliver the required servicer's certificate to the
applicable Trustee by the Determination Date (as defined in the related
Prospectus Supplement, the "Determination Date") (or within two Business
Days thereafter, if such failure by the Servicer is due to circumstances
outside the Servicer's control), or failure on the part of the Servicer to
observe certain other of its covenants and agreements set forth in the
Transfer and Servicing Agreement with respect to mergers; (iii) the
Servicer's failure or failures to satisfy certain other covenants or
agreements set forth in the Transfer and Servicing Agreement, which failure
or failures, individually or in the aggregate, materially and adversely
affect the rights of Noteholders and remains uncured for a period of 30
days after notice thereof; (iv) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings with
respect to the Servicer indicating its insolvency, reorganization pursuant
to bankruptcy proceedings, or inability to pay its obligations, the
commencement of an involuntary case under the federal bankruptcy law, as
now or hereinafter in effect, or another present or future federal or state
bankruptcy, insolvency or similar law and such case is not dismissed within
60 days; or (v) the breach of certain of the Servicer's representations or
warranties, which breach has a material adverse effect on the Trust or the
holders of Notes or Certificates and, with respect to representations
capable of cure, is not cured within 30 days after notice thereof.
<PAGE>
Rights Upon Servicer Termination Events
In the case of any Trust that has issued Notes, as long as a Servicer
Termination Event under a Sale and Servicing Agreement remains unremedied,
the related Trustee or the related Indenture Trustee or holders of Notes of
the related series evidencing greater than 50% of the principal amount of
such Notes then outstanding may
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terminate all the rights and obligations of the Servicer under such Sale
and Servicing Agreement, whereupon the Backup Servicer (if specified in the
related Prospectus Supplement, the "Backup Servicer") 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 Termination Event under the related Pooling and Servicing
Agreement remains unremedied, the related Trustee or holders of
Certificates of the related series evidencing greater than 50% of the
principal amount of such Certificates then outstanding may terminate all
the rights and obligations of the Servicer under such Pooling and Servicing
Agreement, whereupon such Trustee or a successor servicer appointed by such
Trustee will succeed to all the responsibilities, duties and liabilities of
the Servicer under such Pooling and Servicing Agreement and will be
entitled to similar compensation arrangements. If, however, a conservator,
receiver or similar official has been appointed for the Servicer, and no
Servicer Termination Event other than such appointment has occurred, such
official may have the power to prevent such Indenture Trustee, such
Noteholders, such Trustee or such Certificateholders from effecting a
transfer of servicing. Any credit enhancement provider for a series of
Securities may have the right to terminate the Servicer and to exercise
other remedies if a Servicer Termination Event occurs without the consent
of the Trustee, the Indenture Trustee or the Securityholders.
Waiver of Past Servicer Termination Events
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 Balance, in the case of any Servicer Termination Event which
does not adversely affect the related Indenture Trustee or such
Noteholders) may, on behalf of all such Noteholders and Certificateholders,
waive any Servicer Termination Event by the Servicer in the performance of
its obligations under the related Sale and Servicing Agreement and its
consequences, except a Servicer Termination Event in making any required
deposits to or payments from any of the Trust 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
Servicer Termination Event by the Servicer in the performance of its
obligations under the related Transfer and Servicing Agreement, except a
Servicer Termination Event in making any required deposits to or payments
from the related Trust Accounts in accordance with such Transfer and
Servicing Agreement. No such waiver will impair such Noteholders' or
Certificateholders' rights with respect to subsequent defaults. Any credit
enhancement provider for a series of Securities may have the right to waive
Servicer Termination Events without the consent of the Trustee, the
Indenture Trustee or the Securityholders.
<PAGE>
Amendment
Each of the Transfer and Servicing Agreements may be amended by the
parties thereto, without the consent of any of the Noteholders, to cure any
ambiguity, to correct or supplement any provision therein or for the
purpose of adding any provision to or changing in any manner or eliminating
any provision thereof or modifying in any manner the rights of the
Noteholders; provided, however, that such action must not, as evidenced by
an opinion of counsel, adversely affect in any material respect the
interests of the Noteholders. The parties thereto may also amend a Transfer
and Servicing Agreement with the consent of holders of notes of such series
evidencing at least a majority of the principal amount of then outstanding
Notes to add, change or eliminate any provisions of such Transfer and
Servicing Agreement or to modify the rights of the Noteholders; provided,
however, that the Rating Agency has notified the parties thereto in writing
prior to the execution thereof that such action will not result in a
reduction of the then current rating of any class of then outstanding
Notes; and provided, further, 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 payments required to be made on
any Note, or the interest rate on any Note; (ii) amend any provisions
summarized under "The Notes--Priority of Distribution Amounts" in the
related Prospectus Supplement in such a manner as to affect the priority of
payment of interest or principal to Noteholders; or (iii) reduce the
percentage of the aggregate principal amount of the Notes required to
consent to any such amendment or any waiver thereunder, without the consent
of the holders of all Notes outstanding. Any credit enhancement provider
for a series of Securities may have the right to approve amendments to the
Transfer and Servicing Agreements.
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Additionally, each of the Transfer and Servicing Agreements may be
amended by the parties thereto at the direction of the Seller or Servicer
without the consent of any of the Securityholders to add, modify or
eliminate such provisions as may be necessary or advisable in order to
enable all or a portion of a Trust to qualify as, and to permit an election
to be made to cause all or a portion of a Trust to be treated as, a
"financial asset securitization investment trust" as described in the
provisions of the "Small Business Job Protection Act of 1996," H.R. 3448,
and in connection with any such election, to modify or eliminate existing
provisions of a Transfer and Servicing Agreement relating to the intended
federal income tax treatment of the Securities and the related Trust in the
absence of the election. See "Federal Income Tax Consequences--FASIT
Legislation." It is a condition to any such amendment that the Rating
Agency will have notified the Seller, the Servicer and the applicable
Trustee in writing that the amendment will not result in a reduction or
withdrawal of the rating of any outstanding Securities with respect to
which it is a Rating Agency.
Additionally, each of the Transfer and Servicing Agreements may be
amended by the parties thereto at the direction of the Seller or Servicer
without the consent of any of the Securityholders (i) to add, modify or
eliminate such provisions as may be necessary or advisable in order to
enable (a) the transfer to the Trust of all or any portion of the
Receivables to be derecognized under generally accepted accounting
principles ("GAAP") by the Seller to the applicable Trust, (b) the
applicable Trust to avoid becoming a member of the Seller's consolidated
group under GAAP, or (c) the Seller or any of its affiliates to otherwise
comply with or obtain more favorable treatment under any law or regulation
or any accounting rule or principle; and (ii) in connection with any such
addition, modification or elimination, without limiting the generality of
the foregoing clause (i), to cause the Receivables to be transferred by the
Seller first to a bankruptcy remote affiliate and from such affiliate to a
Trust; provided, however, that it is a condition to any such amendment that
(i) the Seller delivers an officer's certificate to the related Trustee to
the effect that such amendment meets the requirements set forth in this
paragraph and (ii) such amendment will not result in a withdrawal or
reduction of the rating of any outstanding series of Securities under the
related Trust.
Insolvency
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 Trust without the unanimous prior approval of all
Certificateholders (including the Seller) of such Trust and the delivery to
such Trustee by each such Certificateholder (including the Seller) of a
certificate certifying that such Certificateholder reasonably believes that
such Trust is insolvent.
Non-Recourse Sale and Assignment
The Notes 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 Paragon, the Seller, the Servicer, any Trustee,
any Indenture Trustee or, except to the extent provided in the related
Prospectus Supplement, any other person or entity.
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
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
Seller, the related Trustee and the related Indenture Trustee, if any,
pursuant to the Transfer and Servicing Agreements will terminate upon the
earlier 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,
the Certificateholders of the related series and any credit enhancement
provider of all amounts required to be paid to them pursuant to the
Transfer and Servicing Agreements and (iii) the occurrence of either event
described below.
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In order to avoid excessive administrative expense, the Servicer will
be permitted at its option to purchase from each Trust, as of any Payment
Date, if the then outstanding Pool Balance with respect to the Receivables
held by such Trust is equal to or less than the percentage of the Initial
Pool Balance set forth in the related Prospectus Supplement (as defined in
the related Prospectus Supplement, the "Initial Pool Balance"), all
remaining related Receivables and other Trust property at a price equal to
the aggregate of the Purchase Amounts thereof as of the end of the
preceding Collection Period, provided that such price is sufficient to
redeem each Security issued by such Trust at a redemption price equal to
its outstanding principal amount plus accrued and unpaid interest at the
applicable Interest Rate thereon.
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.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
Rights in the Receivables
The Receivables are "chattel paper" as defined in the UCC. Pursuant
to the UCC, a sale of chattel paper is treated in a manner similar to a
transaction creating a security interest in chattel paper. The Seller will
cause appropriate financing statements to be filed with the appropriate
governmental authorities to perfect the interest of the related Trust in
its purchase of Receivables from the Seller and in the appropriate
jurisdictions to perfect the interest of the Seller in its purchase of
Receivables from Paragon.
Pursuant to the applicable Transfer and Servicing Agreement, Paragon
will (unless otherwise specified in the related Prospectus Supplement) hold
the Receivables as custodian for the applicable Trustee following the sale
and assignment of the Receivables to the related Trust. The Seller will
take such action as is required to perfect the rights of the applicable
Trustee in the Receivables. The Receivables will not be segregated, stamped
or otherwise marked to indicate that they have been sold to the related
Trust. If through inadvertence or otherwise, another party purchases (or
takes a security interest in) the Receivables for new value in the ordinary
course of business and takes possession of the Receivables without
knowledge of the related Trust's security interest, the purchaser (or
secured party) will acquire an interest in the Receivables superior to the
interest of the related Trust. Any such purchaser/secured party would not
be deemed to have such knowledge merely because there are UCC filings of
record and would not learn of the sale of the Receivables from a review of
the Receivables since they would not be marked to show the sale of such
Receivables to the Trust.
Under the applicable Transfer and Servicing Agreement, the Servicer
will be obligated from time to time to take such actions as are necessary
to protect and perfect the related Trust's (and the Indenture Trustee's, if
applicable) interest in the Receivables and their proceeds.
<PAGE>
Security Interest in Vehicles
Each motor vehicle retail installment sales contract or promissory
note and security agreement evidencing a Receivable grants a security
interest in the Financed Vehicle under the applicable UCC. Perfection of
security interests in automobiles, light duty trucks and sports utility
vehicles is generally governed by the motor vehicle registration laws of
the state in which the vehicle is located. In California and most other
states in which the Receivables are originated, a security interest in
automobiles and light duty trucks is perfected by notation (or compliance
with the requirements to effect such notation) of the secured party's lien
on the vehicles' certificate of title within the time permitted by
applicable law. Paragon takes all actions necessary under the laws of the
state in which the financed vehicle is located to perfect its security
interest in the financed vehicle securing a retail installment sales
contract purchased by it from a Dealer or Direct Loan made by Paragon,
including, where applicable, having a notation of its lien recorded on such
vehicle's certificate of title. Because the Servicer continues to service
the contracts and receivables, the Obligors on the contracts and
receivables will not be notified of the sales from Paragon to the Seller or
from the Seller to the Trust, and no action will be taken to
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record the transfer of the security interest from Paragon to the Seller or
from the Seller to the Trust by amendment of the certificates of title for
the Financed Vehicles or otherwise.
Pursuant to each Purchase Agreement, Paragon will assign to the
Seller its interests in the Financed Vehicles securing the Receivables
assigned by Paragon to the Seller and, with respect to each Trust, pursuant
to the related Transfer and Servicing Agreement, the Seller will assign its
interests in the Financed Vehicles securing the related Receivables to such
Trust. However, because of the administrative burden and expense, none of
Paragon, the Seller, the Servicer or the related Trustee will amend any
certificate of title to identify either the Seller or such Trust as the new
secured party on such certificate of title relating to a Financed Vehicle.
Also, unless otherwise provided in the Prospectus Supplement, Paragon will
continue to hold any certificates of title relating to the Financed
Vehicles in its possession as custodian for the Seller and such Trust
pursuant to the related Transfer and Servicing Agreement. See "Description
of the Transfer and Servicing Agreements--Sale and Assignment of
Receivables."
In California and most other states, an assignment such as that under
each Transfer and Servicing Agreement is an effective conveyance of a
security interest without amendment of any lien noted on a vehicle's
certificate of title, and the assignee succeeds thereby to the assignor's
rights as secured party. However, by not identifying the related Trust as
the secured party on the certificate of title, the security interest of
such Trust in the vehicle could be defeated through fraud or negligence
and, in most states including California, any person without notice of the
assignment is protected in dealing with the lienholder of record as the
holder of the security interest. In California and most other states, in
the absence of fraud or forgery by the vehicle owner or Paragon or
administrative error by state or local agencies, the notation of the lien
of the Paragon on the certificates of title will be sufficient to protect
the related 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 the Seller failed
to obtain and assign to the related Trust a perfected security interest,
the security interest of such Trust would be subordinate to, among others,
subsequent purchasers of the Financed Vehicles and holders of perfected
security interests. Such a failure, however, would constitute a breach of
the warranties of the Seller under the related Transfer and Servicing
Agreement and would create an obligation of the Seller to repurchase the
related Receivable unless the breach is cured. Pursuant to each Transfer
and Servicing Agreement the Seller will assign such rights to the related
Trust. See "Description of the Transfer and Servicing Agreements--Sale and
Assignment of Receivables" and "Risk Factors--Risk of Unenforceable
Security Interest in Financed Vehicles."
Under the laws of California and most other states, the perfected
security interest in a vehicle would continue for four months after the
vehicle is moved to a state other than the state in which it is initially
registered and thereafter until the owner thereof re-registers the vehicle
in the new state but in any event not beyond the surrender of the
certificate of title. A majority of states, including California, generally
require surrender of a certificate of title to re-register a vehicle.
Accordingly, a secured party must surrender possession if it holds the
certificate of title to the vehicle or, in the case of a vehicle registered
in a state providing for the notation of a lien on the certificate of title
but not possession by the secured party, the secured party noted on the
certificate of title would receive notice of surrender if the security
interest is noted on the certificate of title. Thus, the secured party
noted on the certificate of title would have the opportunity to re-perfect
its security interest in the 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 motor vehicle receivables, Paragon takes any necessary 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 vehicle, Paragon generally must surrender possession of the
certificate of title or if noted as lienholder on the certificate of title
will receive notice as a result of its lien noted thereon and accordingly
will have an opportunity to require satisfaction of the related Receivable
before release of the lien. Under each Transfer and Servicing Agreement,
the Servicer is obligated to take appropriate steps, at the Servicer's
expense, to maintain perfection of security interests in the Financed
Vehicles and is obligated to purchase the related Receivable if it fails to
do so.
Under the laws of California and most other states, liens for repairs
performed on, or storage of, a motor vehicle and liens for unpaid taxes
take priority over even a perfected security interest in a financed
vehicle. The Code also grants priority to certain federal tax liens over
the lien of a secured party. The laws of certain states, including
California, and federal law permit the confiscation of vehicles by
governmental authorities under certain circumstances if used in unlawful
activities, which may result in the loss of a secured party's perfected
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security interest in the confiscated vehicle. Under each Transfer and
Servicing Agreement, the Seller will represent to the related Trust that,
as of the date the related Receivable is sold to such Trust, each security
interest in a Financed Vehicle is or will be prior to all other present
liens (other than tax liens and other liens that arise by operation of law)
upon and security interests in such Financed Vehicle. However, liens for
repairs, storage or taxes could arise, or the confiscation of a Financed
Vehicle could occur, at any time during the term of a Receivable. No notice
will be given to the Trustee, any Indenture Trustee, any Noteholders or the
Certificateholders in respect of a given Trust if such a lien arises or
confiscation occurs.
Repossession
In the event of default by vehicle purchasers, the holder of the
motor vehicle retail installment sales contract or Direct Loan has all the
remedies of a secured party under the UCC, except where specifically
limited by other state laws or federal consumer protection laws. Among the
UCC remedies, the secured party has the right to perform self-help
repossession unless such act would constitute a breach of the peace.
Self-help is the method employed by the Servicer in most cases and is
accomplished simply by retaking possession of the financed vehicle. 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
he may cure the default prior to repossession. Generally, the right to cure
may be exercised on a limited number of occasions in any one-year period.
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 vehicle must then be
repossessed in accordance with that order.
Notice of Sale; Redemption Rights
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 most 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 repossession,
holding, and preparing the collateral for disposition, arranging for its
sale, and, in some jurisdictions, reasonable attorney's fees (the
"repossession costs"). In some states, including California, the obligor
also has right to reinstate the contract by paying the secured party
delinquent installments plus the repossession costs.
Deficiency Judgments and Excess Proceeds
The proceeds of resale of the vehicles generally will be applied
first to the expenses of resale and repossession and then to the
satisfaction of the indebtedness. While some states, including California,
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. However, the deficiency judgment would be a personal
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. In addition, if any aspects of the repossession or
sale do not comply with applicable law, any otherwise existing right to a
deficiency judgement may be prohibited or limited. 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 vehicle and payment of all expenses
and all indebtedness, there is a surplus of funds. In that case, the UCC
requires the creditor to remit the surplus to any holder of a lien with
respect to the vehicle or if no such lienholder exists or there are
remaining funds, to remit the surplus to the former owner of the vehicle.
<PAGE>
Soldiers' and Sailors Civil Relief Act
The Soldiers' and Sailors Civil Relief Act of 1940 (the "Relief Act")
imposes certain limitations upon the actions of creditors with respect to
persons serving in the Armed Forces of the United States, and, to a more
limited extent, their dependents and guarantors and sureties of debt
incurred by such persons. An obligation incurred by a person prior to
entering military service cannot bear interest at a rate in excess of 6%
during the person's term of military service, unless the obligee petitions
a court which determines that the person's military service does not impair
his or her ability to pay interest at a higher rate. Further, a secured
party may not
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repossess during a person's military service a motor vehicle subject to an
installment sales contract or a promissory note entered into prior to the
person's entering military service, for a loan default which occurred prior
to or during such service, without court action. The Relief Act imposes
penalties for knowingly repossessing property in contravention of its
provisions. Additionally, dependents of military personnel are entitled to
the protection of the Relief Act, upon application to a court, if such
court determines the obligation of such dependent has been materially
impaired by reason of military service. To the extent an obligation is
unenforceable against the person in military service or a dependent, any
guarantor or surety of such obligation will not be liable for performance.
Consumer Protection Laws
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers
involved in consumer finance. These laws include, but are not limited to,
the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal
Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Fair Debt Collection Procedures Act, the Magnuson-Moss
Warranty Act, the Federal Reserve Board's Regulations B, Z and AA, the
Relief Act, state adoptions of the National Consumer Act and of the Uniform
Consumer Credit Code and state motor vehicle retail installment sales acts,
retail installment sales acts and other similar laws. In addition to
Federal law, state consumer protection statutes regulate, among other
things, the terms and conditions of the motor vehicle retail installment
sales contracts and promissory notes and security agreements pursuant to
which purchasers finance the acquisition of motor vehicles. These laws
place finance charge ceilings and other restrictions on consumer
transactions and require contract disclosures in addition to those required
under federal law. These requirements impose specific statutory liabilities
upon creditors who fail to comply. In some cases, this liability could
affect the ability of an assignee, such as the applicable Trustee, to
enforce consumer finance contracts such as the Receivables. The "Credit
Practices" Rule of the Federal Trade Commission imposes additional
restrictions on contract provisions and credit practices.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule"), the provisions of which are generally
duplicated by the Uniform Consumer Credit Code, other statutes or the
common law, has the effect of subjecting a seller in a consumer credit
transaction (and certain related creditors and their assignees) 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, each Trust, as holder of the related Receivables,
will be subject to any claims or defenses that the purchaser of the
applicable Financed Vehicle may assert against the seller of the Financed
Vehicle. Such claims are limited to a maximum liability equal to the
amounts paid by the Obligor on the Receivable. If an Obligor were
successful in asserting any such claim or defense, such claim or defense
would constitute a breach of the Seller's warranties under the related
Transfer and Servicing Agreement and would create an obligation of the
Seller to repurchase the Receivable unless the breach is cured. See
"Description of the Transfer and Servicing Agreements--Sale and Assignment
of Receivables."
Under the motor vehicle dealer licensing laws of most states,
including California, sellers of motor vehicles are required to be licensed
to sell such vehicles at retail sale. In addition, with respect to used
motor vehicles , the FTC's Rule on Sale of Used Vehicles requires all
sellers of used motor vehicles to prepare, complete and display a "Buyer's
Guide" which explains the warranty coverage for such vehicles. Federal
Odometer Regulations promulgated under the Motor Vehicle Information and
Cost Savings Act require that all sellers of 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 either a
Buyer's Guide or odometer disclosure statement was not properly provided to
the purchaser of a Financed Vehicle, such purchaser may be able to assert a
claim against the seller of such vehicle. Although Paragon is not a seller
of motor vehicles and is not subject to these laws, a violation thereof may
form the basis for a claim or defense against Paragon, the Seller or the
applicable Trustee as holder of the Receivables.
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Courts have applied general equitable principles to secured parties
pursuing repossession and 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, consumers 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 borrowers.
Under each Transfer and Servicing Agreement, the Seller will warrant
to the related Trust that each Receivable complies with all requirements of
law in all material respects. Accordingly, if an Obligor has a claim
against a Trust for violation of any law and such claim materially and
adversely affects such Trust's interest in a Receivable, such violation
would constitute a breach of the warranties of the Seller under such
Transfer and Servicing Agreement and would create an obligation of the
Seller to repurchase the Receivable unless the breach is cured. See
"Description of the Transfer and Servicing Agreements -- Sale and
Assignment of Receivables."
Certain Matters Relating to Insolvency
Seller has taken steps in structuring the transactions described
herein and in the related Prospectus Supplement that are intended to ensure
that the voluntary or involuntary application for relief by Paragon under
the Bankruptcy Code or Insolvency Laws will not result in consolidation of
the assets and liabilities of the Seller with those of Paragon. These steps
include the creation of the Seller as a separate, limited-purpose
subsidiary pursuant to a certificate of incorporation containing certain
limitations (including restrictions on the nature of the Seller's business
and a restriction on the Seller's ability to commence a voluntary case or
proceeding under any Insolvency Law without the prior unanimous affirmative
vote of all of its directors). However, there can be no assurance that the
activities of the Seller would not result in a court's concluding that the
assets and liabilities of the Seller should be consolidated with those of
Paragon in a proceeding under any Insolvency Law. If a court were to
conclude that the assets and liabilities of the Seller should be
consolidated with those of Paragon in a proceeding under any Insolvency
Law, then any "true sale" to the Seller would be ineffective to remove the
Receivables and other assets from the bankruptcy estate of Paragon.
Although there can be no assurance, the Seller believes there is no
material risk that the Trust would be substantively consolidated with any
other entity if that entity were to become the subject of a proceeding
under any Insolvency Law.
The Seller and Paragon each intend that the transfer of Receivables
by Paragon to the Seller will constitute a "true sale" of such Receivables.
The Seller will take steps in structuring its purchases of Receivables from
Paragon to increase the likelihood that such purchases will each be deemed
a "true sale". In particular, each such purchase will be without recourse
to Paragon for credit losses and at a purchase price believed by the
parties to represent the fair market value of the applicable Receivables.
If the transfer does, in fact, constitute such a "true sale," the
Receivables and the proceeds thereof would not be part Paragon's bankruptcy
estate under Section 541 of the Bankruptcy Code should Paragon become the
subject of a bankruptcy case subsequent to the transfer of the Receivables
to the Seller. It is a condition of the offering that the Seller shall have
received an opinion of counsel to the effect that, subject to certain
facts, assumptions and qualifications, the transfer of such Receivables by
Paragon to the Seller pursuant to the related Purchase Agreement would be
characterized as a "true sale'" of such Receivables to the Seller and such
Receivables would not form part of Paragon's bankruptcy estate pursuant to
Section 541 of the Bankruptcy Code.
Notwithstanding the foregoing, if the Seller or Paragon were to
become a debtor in a bankruptcy case and a creditor or trustee in
bankruptcy of the Seller or Paragon or Paragon itself were to take the
position that the transfer of Receivables by the Seller to the Trust, or by
Paragon to the Seller, as the case may be, should instead be treated as a
pledge of the Receivables to secure a borrowing of the Seller or Paragon,
as the case may be, then delays in payments of collections of the
Receivables could occur or (should the court rule in favor of any such
trustee, debtor or creditor) reductions in the amount of such payments
could result. If the transfer of the Receivables by the Seller to the
Trust, or by Paragon to the Seller, is treated as a pledge instead of a
sale, a tax, government or other lien on the property of the Seller or
Paragon, as the case may be, arising before the transfer of the Receivables
to the Trust may have priority over the Trust's or the Seller's interest in
the Receivables.
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In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993), cert. denied 114 S.Ct 554 (1993), the United States Court of Appeals
for the 10th Circuit suggested that even where a transfer of accounts from
a seller to a buyer constitutes a "true sale," the accounts would
nevertheless constitute property of the seller's bankruptcy estate in a
bankruptcy of the seller. If the Seller were to become subject to a
bankruptcy proceeding and a court were to follow the Octagon court's
reasoning, Securityholders might experience delays in payment or possibly
losses on their investment in the Securities. The Permanent Editorial Board
of the UCC has issued an official commentary (PEB Commentary No. 14) which
characterizes the Octagon court's interpretation of Article 9 of the UCC as
erroneous. Such commentary states that nothing in Article 9 is intended to
prevent the transfer of ownership of accounts or chattel paper. However,
such commentary is not legally binding on any court.
Other Limitations
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a secured
party to realize upon collateral or to enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a
court may prevent a creditor from repossessing a vehicle, and, as part of
the rehabilitation plan, reduce the amount of the secured indebtedness to
the market value of the vehicle at the time of bankruptcy (as determined by
the court), leaving the creditor as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the
monthly payments due under a contract or change the rate of interest and
time of repayment of the indebtedness.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Set forth in the related Prospectus Supplement is a summary of
material federal income tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. The summary is intended as a
discussion of the possible effects of certain federal income tax
consequences to holders generally, but does not purport to furnish
information in the level of detail or with the attention to a holder's
specific tax circumstances that would be provided by a holder's own tax
advisor. For example, it does not discuss the tax consequences of the
purchase, ownership and disposition of the Notes and Certificates by
Noteholders or Certificateholders that are subject to special treatment
under the federal income tax laws (including banks and thrifts, insurance
companies, regulated investment companies, dealers in securities, foreign
investors, trusts and estates and pass-through entities, the equity holders
of which are any of the foregoing). In addition, any discussion regarding
the Notes is limited to the federal income tax consequences of the initial
Noteholders and not a purchaser in the secondary market. Moreover, there
are no cases or Internal Revenue Service ("IRS") rulings on similar
transactions involving both debt and equity interests issued by a trust
with terms similar to those of the Notes and the Certificates. As a result,
the IRS may disagree with all or a part of the discussion in the Prospectus
Supplement. We suggest that prospective investors 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 summary is based upon current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury regulations promulgated
thereunder and judicial or ruling authority, all of which are subject to
change, which change may be retroactive. Each Trust will be provided with
an opinion of Federal Tax Counsel, regarding certain federal income tax
matters. An opinion of Federal Tax Counsel, however, is not binding on the
IRS or the courts. No ruling on any of the issues discussed in the related
Prospectus Supplement will be sought from the IRS. For purposes of the
summary, references to the Trust, the Notes, the Certificates and related
terms, parties and documents shall be deemed to refer, unless otherwise
specified therein, to each Trust and the Notes, Certificates and related
terms, parties and documents applicable to such Trust.
<PAGE>
The summary of material federal tax consequences to the
Certificateholders, and, if applicable, to the Noteholders, is set forth in
the related Prospectus Supplement. The federal income tax consequences to
Certificateholders will vary depending on whether the Trust is intended to
be treated as a partnership under the Code or as a grantor trust. The
Prospectus Supplement for each series of Certificates will specify whether
a partnership election will be made or the Trust will be treated as a
grantor trust. In addition, to the extent set forth
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in the related Prospectus Supplement, the tax consequences to
Securityholders may vary depending upon whether the related Prospectus
Supplement provides for a Revolving Period for Trusts that issue Notes.
Tax Opinions
The following is a brief summary of the tax opinions being rendered
by Mayer, Brown & Platt, special federal tax counsel for the Seller
("Federal Tax Counsel"). Unless the Prospectus Supplement specifies that
the Trust will be treated as a grantor trust, Federal Tax Counsel is of the
opinion that the applicable Trust will not be classified as an association
(or publicly traded partnership) taxable as a corporation for federal
income tax purposes. Further, with respect to the Notes, Federal Tax
Counsel is of the opinion that the Notes will be characterized as debt for
federal income tax purposes. If the Prospectus Supplement specifies that
the related Trust will be treated as a grantor trust, Federal Tax Counsel
is of the opinion that such Trust will not be classified as an association
(or publicly traded partnership) taxable as a corporation and that such
Trust will be classified as a grantor trust under Subpart E, Part I of
Subchapter J of the Code for federal income tax purposes.
In addition, Federal Tax Counsel will render its opinion that it has
prepared or reviewed the statements herein and in the related Prospectus
Supplement under the heading "Summary of Terms--Material Federal Income Tax
Consequences" as they relate to federal income tax matters and under the
heading "Material Federal Income Tax Consequences," and is of the opinion
that such statements are a fair and accurate discussion of all material
federal income tax consequences of the purchase, ownership and disposition
of the Securities. Any such opinions will be filed either as an exhibit to
the registration statement of which this Prospectus forms a part or will be
filed as an exhibit to a Form 8-K filed prior to the confirmation of sales
of any series of Securities. Such statements are intended as a discussion
of the possible effects of the classification of the Trust as a partnership
or a grantor trust, as the case may be, for federal income tax purposes on
investors and of related tax matters affecting investors generally, but do
not purport to furnish information in the level of detail or with the
attention to the investor's specific tax circumstances that would be
provided by an investor's own tax adviser. Accordingly, we suggest that
investors consult their own tax advisers with regard to the tax
consequences to it of investing in the Notes and/or Certificates.
FASIT Legislation
In August, 1996, the United States Congress passed and President
Clinton signed into law the "Small Business Job Protection Act of 1996,"
H.R. 3448 (the "Act"). The Act, which was effective September 1, 1997,
created a new type of entity for federal income tax purposes called a
"financial asset securitization investment trust" or "FASIT." The Act
enables certain arrangements similar to a Trust to elect to be treated as a
FASIT. Under the FASIT provisions of the Act, a FASIT generally would avoid
federal income taxation and could issue securities substantially similar to
the Certificates and Notes, and those securities would be treated as debt
for federal income tax purposes. If so specified in the related Prospectus
Supplement, a Trust may make an election to be treated as a FASIT. The
applicable Transfer and Servicing Agreement for such a Trust may contain
any such terms and provide for the issuance of Notes or Certificates on
such terms and conditions as are permitted to a FASIT and described in the
related Prospectus Supplement. However, any Trust electing to be treated as
a FASIT will be limited by the applicable Transfer and Servicing Agreement
in its ability to add or remove assets to substantially the same extent as
a "real estate mortgage investment conduit" under the Code and the
regulations thereunder. In addition, upon satisfying certain conditions set
forth in the applicable Transfer and Servicing Agreement for such a Trust,
the Seller and Servicer will be permitted to amend the Transfer and
Servicing Agreements in order to enable all or a portion of a Trust to
qualify as a FASIT and to permit a FASIT election to be made with respect
thereto, and to make such modifications to a Transfer and Servicing
Agreement as may be permitted by reason of the making of such an election.
See "Description of the Transfer and Servicing Agreements--Amendment."
However, there can be no assurance that the Seller will or will not cause
any permissible FASIT election to be made with respect to a Trust or amend
a Transfer and Servicing Agreement in connection with any election. In
addition, if such an election is made, it may cause a holder to recognize
gain (but not loss) with respect to any Notes or Certificates held by it,
even though Federal Tax Counsel will deliver its opinion that a Note will
be treated as debt for federal income tax purposes without regard to the
election and the Note or Certificate would be treated as debt following the
election. Additionally, any such election and any related amendments to a
Transfer and Servicing Agreement may have other tax and non-tax
consequences to Securityholders. Accordingly, we suggest that
Securityholders consult their tax advisors with regard to the effects of
any such election and any permitted related amendments on them in their
particular circumstances.
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<PAGE>
STATE TAX CONSEQUENCES
The above discussion does not address the tax treatment of any tax
partnership, grantor trust, Notes, Certificates, Noteholders or
Certificateholders under any state tax laws. We suggest that prospective
investors consult with their own tax advisors regarding the state tax
treatment of any tax partnership or grantor trust as well as any state tax
consequences to them of purchasing, holding and disposing of Notes or
Certificates.
* * *
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE AND IN THE
RELATED PROSPECTUS SUPPLEMENT MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. WE SUGGEST
THAT PROSPECTIVE PURCHASERS CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
NOTES AND CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL,
STATE OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan subject to ERISA, as well as
individual retirement accounts, certain types of Keogh Plans and other
plans subject to Section 4975 of the Code (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.
A fiduciary of a Benefit Plan considering the purchase of Securities
of any series should carefully review with its legal and other advisors
whether the assets of the related Trust would be considered plan assets,
whether the purchase or holding of the Securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Code,
and should refer to the discussion under "ERISA Considerations" in the
related Prospectus Supplement regarding any restrictions on the purchase or
holding of the Securities offered thereby.
Certain employee benefit plans, such as 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 the fiduciary and prohibited
transaction provisions under ERISA or the Code discussed herein, but
governmental plans may be subject to comparable restrictions under
applicable state law.
Trusts That Issue Notes
The following discussion applies only to Trusts that issue Notes.
Certain transactions involving a Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit
Plan that purchased Notes or Certificates if assets of the Trust were
deemed to be assets of the Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Asset Regulation"), the assets
of a Trust would be treated as plan assets of a Benefit Plan for the
purposes of ERISA and the Code only if the Benefit Plan acquired an "equity
interest" in the Trust and none of the exceptions contained in the Plan
Asset Regulation was applicable. An equity interest is defined under the
Plan Asset 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 likely treatment of the Notes as debt
under ERISA will be described in the related Prospectus Supplement.
Regardless of whether the Notes are treated as an equity interest for
purposes of the Plan Asset Regulation, the acquisition or holding of such
Notes with plan assets of a Benefit Plan could be considered to give rise
to a prohibited transaction if the Seller, the Servicer or the applicable
Issuer, Trustee or Indenture Trustee is or becomes a party in interest
under ERISA or a disqualified person under the Code with respect to such
Benefit
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<PAGE>
Plan. In such case, certain exemptions from the prohibited transactions
rules may be available, depending upon the type and circumstances of the
Benefit Plan fiduciary making the decision to purchase the Notes with
assets of the Benefit Plan. Included among these exemptions are Prohibited
Transaction Exemption ("PTE") 84-14, applicable to certain transactions
effected by a qualified professional asset manager; PTE 90-1, applicable to
certain transactions entered into by an insurance company separate account;
PTE 91-38, applicable to certain transactions entered into by a bank
collective investment trust; PTE 95-60, applicable to certain transactions
entered into by an insurance company general account; and PTE 96-23,
applicable to certain transactions entered into by an in-house asset
manager. Purchasers acquiring Notes of any series with the assets of a
Benefit Plan shall be deemed to represent and warrant that such purchase
and holding will not give rise to a nonexempt prohibited transaction.
Because the Certificates issued by a Trust that also issues Notes
will most likely be treated as equity interests under the Plan Asset
Regulation, such Certificates may not be acquired with the assets of any
Benefit Plan. Purchasers of the Certificates issued by a Trust that also
issues Notes shall be deemed to represent and warrant that they are not
purchasing the Certificates with the assets of a Benefit Plan.
Trusts That Do Not Issue Notes
The following discussion applies only to nonsubordinated Certificates
(referred to herein as "Senior Certificates") issued by a Trust that does
not issue Notes.
The related Prospectus Supplement will indicate whether the lead
underwriter named therein has been granted by the U.S. Department of Labor,
an exemption (the "Exemption") from certain of the prohibited transaction
rules of ERISA with respect to the initial purchase, the holding and the
subsequent resale by Benefit Plans of certificates representing interests
in asset-backed pass-through trusts that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of
the Exemption. The receivables covered by the Exemption include motor
vehicle installment sales contracts such as the Receivables.
Among the conditions which must be satisfied for the Exemption to
apply to the Senior Certificates are the following:
(1) the acquisition of the Senior Certificates by a Benefit
Plan is on terms (including the price for the Senior Certificates)
that are at least as favorable to the Benefit Plan as they would be
in an arm's length transaction with an unrelated party;
(2) the rights and interests evidenced by the Senior
Certificates acquired by the Benefit Plan are not subordinated to the
rights and interests evidenced by other certificates of the Trust;
(3) the Senior Certificates acquired by the Benefit Plan have
received a rating at the time of such acquisition that is in one of
the three highest generic rating categories from either Standard &
Poor's Ratings Services, Moody's Investors Service, Inc., Duff &
Phelps Credit Rating Co. or Fitch Investors Service, L.P.;
(4) the Trustee is not an affiliate of any other member of
the Restricted Group (as defined below);
(5) the sum of all payments made to the underwriters in
connection with the distribution of the Senior Certificates
represents not more than reasonable compensation for underwriting the
Senior Certificates; the sum of all payments made to and retained by
the Seller pursuant to the sale of the Receivables to the Trust
represents not more than the fair market value of such Receivables;
and the sum of all payments made to and retained by the Servicer
represents not more than reasonable compensation for the Servicer's
services under the Sale and Servicing Agreement and reimbursement of
the Servicer's reasonable expenses in connection therewith; and
(6) the Benefit Plan investing in the Senior Certificates is
an "accredited investor" as defined in Rule 501(a)(1) of Regulation D
of the Commission under the Securities Act.
Additional conditions must be satisfied for a Trust with a
Pre-Funding Account to be covered by the Exemption.
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Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest or prohibited transactions only if, among
other requirements, (i) in the case of the acquisition of Senior
Certificates in connection with the initial issuance, at least fifty (50)
percent of the Senior Certificates are acquired by persons independent of
the Restricted Group, (ii) the Benefit Plan's investment in Senior
Certificates does not exceed twenty-five (25) percent of all of the Senior
Certificates outstanding at the time of the acquisition, and (iii)
immediately after the acquisition, no more than twenty-five (25) percent of
the assets of the Benefit Plan are invested in certificates representing an
interest in one or more trusts containing assets sold or serviced by the
same entity. The Exemption does not apply to Benefit Plans sponsored by the
Seller, any underwriter, the Trustee, the Servicer, any Obligor with
respect to Receivables included in the Trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Trust, or any affiliate of such parties (the "Restricted Group").
The related Prospectus Supplement will indicate whether the Seller
believes that all conditions of the Exemption other than those within the
control of the investors have been met with respect to the Senior
Certificates, and whether the Senior Certificates may be acquired by
Benefit Plans.
Because any Certificates issued by a Trust that are subordinate to
any other class of Securities (the "Subordinate Certificates") will not be
eligible for the relief afforded by the Exemption, such Subordinate
Certificates may not be acquired with the assets of a Benefit Plan. Each
purchaser of a Subordinate Certificate shall be deemed to represent and
warrant that it is not acquiring or holding the Subordinate Certificate
with the assets of a Benefit Plan.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement
with respect to the Notes, if any, of a given series and an underwriting
agreement with respect to the Certificates of such series (collectively,
the "Underwriting Agreements"), the Seller will agree to cause the related
Trust to sell to the underwriters named therein and in the related
Prospectus Supplement, and each of such underwriters will severally agree
to purchase, the principal amount of each class of Notes and Certificates,
as the case may be, of the related series set forth therein and in the
related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given
series of Securities, the several underwriters will agree, subject to the
terms and conditions set forth therein, to purchase all the Notes and
Certificates, as the case may be, described therein which are offered
hereby and by the related Prospectus Supplement if any of such Notes and
Certificates, as the case may be, are purchased.
In the initial distribution of the Securities, the Securities will
either be offered at prices set forth in the applicable Prospectus
Supplement or, if specified in the applicable Prospectus Supplement,
offered at varying prices in negotiated transactions. After the initial
public offering of such Securities, those public offering prices may
change.
Each Underwriting Agreement will provide that the Seller will
indemnify the underwriters against certain civil liabilities, including
liabilities under the Securities Act, or contribute to payments the several
underwriters may be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Permitted Investments acquired from such underwriters or from
the Seller.
Pursuant to each Underwriting Agreement with respect to a given
series of Securities, the closing of the sale of any class of Securities
subject to such Underwriting Agreement will be conditioned on the closing
of the sale of all other such classes of Securities of that series.
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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LEGAL OPINIONS
Certain legal matters relating to the Securities of any series will
be passed upon for the related Trust, the Seller and the Servicer by Nancy
C. Ferguson, Esq., General Counsel of the Servicer, and by Mayer, Brown &
Platt, Chicago, Illinois. Certain legal matters will be passed upon for the
Underwriters by its counsel set forth in the related Prospectus Supplement.
Mayer, Brown & Platt may from time to time render legal services to the
Seller, the Servicer and their affiliates.
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INDEX OF TERMS
ACAPS ..............................................................12
Actuarial Receivables.......................................................11
Additional Yield Supplement Amount..........................................34
APR ..............................................................10
Backup Servicer.............................................................35
Bankruptcy Code..............................................................5
Base Rate ..............................................................21
Benefit Plan ..............................................................45
Bill ..............................................................44
Business Day ..............................................................31
Buyer's Guide ..............................................................41
Calculation Agent...........................................................22
Cede ...............................................................7
Cedel ..............................................................24
Cedel Participants..........................................................24
Certificate Balance..........................................................2
Certificate Owner...........................................................20
Certificate Pool Factor.....................................................14
Certificate Rate.............................................................3
Certificateholders...........................................................7
Certificates ...............................................................1
Closing Date ..............................................................28
Code ..............................................................43
Collection Account..........................................................29
Collection Period...........................................................31
Commission ...............................................................2
Cooperative ..............................................................24
CSC ..............................................................12
Cutoff Date ...............................................................9
Dealer Agreement.............................................................3
Dealer Assignment............................................................3
Dealer Recourse..............................................................9
Dealers ...............................................................3
Definitive Certificates.....................................................25
Definitive Notes............................................................25
Definitive Securities.......................................................25
Depositaries ..............................................................22
Depository ..............................................................15
Determination Date..........................................................35
Direct Loans ..............................................................10
Distribution Date...........................................................21
DTC .............................................................A-1
DTC Participants............................................................22
DTC's Nominee ...............................................................8
Eligible Account............................................................31
Eligible Investments........................................................30
Euroclear ..............................................................24
Euroclear Operator..........................................................24
Euroclear Participants......................................................24
Events of Default...........................................................18
Exchange Act ...............................................................2
Exemption ..............................................................46
FASIT ..............................................................10
Financed Vehicles............................................................1
Fixed Rate Securities.......................................................21
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Floating Rate Securities....................................................21
FTC Rule ..............................................................41
GAAP ..............................................................37
Global Securities..........................................................A-1
Indenture ............................................................. 15
Indenture Trustee............................................................1
Indirect Participants.......................................................22
Initial Pool Balance........................................................38
Insolvency Laws............................................................ 42
Interest Rate ...............................................................3
Interest Reset Period.......................................................21
Investment Earnings.........................................................30
IRS ..............................................................43
Issuer ..............................................................20
LIBOR ..............................................................21
Note Pool Factor............................................................14
Noteholders ...............................................................7
Notes ...............................................................1
Obligor ...............................................................9
PAC ..............................................................17
Paragon ...............................................................1
Participants ..............................................................15
Payahead Account............................................................29
Payahead Balance............................................................31
Payaheads ..............................................................29
Payment Date ..............................................................16
Permitted Investments.......................................................30
Plan Assets Regulation......................................................45
Pool Balance ..............................................................14
Pooling and Servicing Agreement.............................................28
Pre-Funded Amount...........................................................14
Pre-Funding Account.........................................................14
Precomputed Receivables.....................................................11
Prepayments ...............................................................3
Prospectus Supplement........................................................1
Purchase Agreement...........................................................9
Purchase Amount.............................................................29
Rating Agency ............................................................., 8
Receivables ...............................................................1
Receivables Pool.............................................................9
Registration Statement.......................................................2
Related Documents...........................................................19
Relief Act ..............................................................40
Required Rate ..............................................................34
Required Yield Supplement Amount............................................34
Reserve Account.............................................................33
Restricted Group............................................................47
Revolving Account...........................................................14
Rule of 78's Receivables....................................................11
Sale and Servicing Agreement................................................28
Schedule of Receivables.....................................................28
Securities ...............................................................1
Securities Act...............................................................2
Security Owners..............................................................8
Securityholders..............................................................7
Seller ...............................................................1
Senior Certificates.........................................................46
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Series .............................................................A-1
Servicer ...............................................................1
Servicer Termination Events.................................................35
Servicing Fee ..............................................................32
Servicing Fee Rate..........................................................32
Simple Interest Receivable..................................................11
Spread ..............................................................21
Spread Multiplier...........................................................21
Strip Certificates..........................................................21
Strip Notes ..............................................................16
Strip Securities............................................................21
Subsequent Transfer Date....................................................28
Supplemental Servicing Fees.................................................32
TAC ..............................................................17
Terms and Conditions........................................................24
Transfer and Servicing Agreement............................................28
Trust ...............................................................1
Trust Accounts..............................................................30
Trust Agreement..............................................................1
Trustee ...............................................................1
U.S. Person .............................................................A-3
UCC ..............................................................29
Underwriters ...............................................................3
Underwriting Agreements.....................................................47
Warehouse Financing.........................................................28
Withholding Tax Regulations................................................A-3
Yield Supplement Account....................................................30
Yield Supplement Agreement..................................................33
Yield Supplement Amount.....................................................34
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Paragon
Auto Receivables Trust Asset Backed Notes and Asset Backed Certificates
(the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company ("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 Securities will be effected on a
delivery-against-payment basis through the respective Depositaries 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 Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to U.S. corporate debt
obligations. 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
security 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 ensure that settlement can be made on the
desired value date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to U.S.
corporate debt obligations 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 Euroclear
Participant,
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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 Depositary, 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. Payment
will then be made by the respective Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has
been completed, the Global Securities will be credited to the 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 Global Securities credit will appear the next day (European time) and
the cash debit will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding
day when settlement occurred in New York). If settlement is not completed
on the intended value date (i.e., the trade fails), the Cedel or Euroclear
cash debit will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing
lines of credit, as they would for any settlement occurring within Cedel or
Euroclear. Under this approach, they may take on credit exposure to Cedel
or Euroclear until the Global Securities are credited to their accounts one
day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not
to pre-position funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Cedel Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities
were credited to their accounts. However, interest on the Global Securities
would accrue from the value date. Therefore, in many cases the investment
income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each Cedel Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available
to the DTC seller on the settlement date. Thus, to the DTC Participant a
cross-market transaction will settle no differently than a trade between
two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in
which Global Securities are to be transferred by the respective clearing
system, through the respective Depositary, 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 Depositary, 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 coupon payment date to and
excluding the settlement date. The payment will then be reflected in the
account of the Cedel Participant or Euroclear Participant the following
day, and receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would be back-valued to the value date
(which would be the preceding day, when settlement occurred in New York).
Should the Cedel Participant or Euroclear Participant have a line of credit
with its respective clearing system and elect to be in debit in
anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft charges incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would instead be valued as
of the actual settlement date. Finally, day traders that use Cedel or
Euroclear and that purchase Global Securities from DTC Participants for
delivery to Cedel Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
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(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;
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(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would
give the Global Securities sufficient time to be reflected in their
Cedel or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale
to the Cedel Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
Subject to the discussion below concerning final withholding tax
regulations, a beneficial owner of Global Securities holding securities
through Cedel or Euroclear (or through DTC if the holder has an address
outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue
discount) on registered debt issued by U.S. Persons, unless (i) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between such beneficial owner and the U.S. entity required
to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
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 Security Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing
Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed
by the Security Owner 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 (Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Security Owner of a
Global Security or in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the 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 (unless the IRS provides
otherwise by Treasury regulations) organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate or, for
taxable years beginning before January 1, 1997, a trust the income of which
is includible in gross income for United States tax purposes, regardless of
its source or, (iv) for taxable years beginning after December 31, 1996, a
trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust. This summary does not
deal with all aspects of U.S. Federal income tax withholding that may be
relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisers for specific tax advice concerning their
holding and disposing of the Global Securities.
<PAGE>
On October 6, 1997, final Treasury regulations (the "Withholding Tax
Regulations") were issued that modify certain of the filing requirements
with which non-U.S. persons must comply in order to be entitled to an
exemption from U.S. withholding tax or a reduction to the applicable U.S.
withholding tax rate. Those persons
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currently required to file Form W-8 generally will continue to be required
to file that form. However, the requirement that non-U.S. persons submit
Form W-8 is extended to most non-U.S. persons who wish to seek an exemption
from withholding tax on the basis that income from the Global Securities is
effectively connected with the conduct of a U.S. trade or business (in lieu
of Form 4224) and to non-U.S. persons wishing to rely on a tax treaty to
reduce the withholding tax rate (in lieu of Form 1001). The Withholding Tax
Regulations generally are effective for payments of interest due after
December 31, 1998, but Forms 4224 and 1001 filed prior to that date will
continue to be effective until the earlier of December 31, 1999 or the
current expiration date of those forms. Prospective investors are urged to
consult their tax advisors with respect to the effect of the Withholding
Tax Regulations.
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