<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER ____, 1998
REGISTRATION NO. ___-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------------
STUDENT LOAN FUNDING LLC
Delaware 31-1599686
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
(Exact name of registrant as specified in its charter)
ONE WEST FOURTH STREET, SUITE 210
CINCINNATI, OHIO 45202
(513) 352-0570
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
<TABLE>
<CAPTION>
<S> <C> <C>
THOMAS L. CONLAN, JR. COPIES TO: AND TO:
PRESIDENT PATRICIA MANN SMITSON PAUL F. SEFCOVIC
ONE WEST FOURTH STREET, SUITE 210 THOMPSON HINE & FLORY LLP SQUIRE, SANDERS & DEMPSEY L.L.P.
CINCINNATI, OHIO 45202 312 WALNUT STREET, SUITE 1400 41 SOUTH HIGH STREET, SUITE 1300
(513) 352-4300 CINCINNATI, OHIO 45202 COLUMBUS, OHIO 43215
(513) 763-4340 (TELECOPY) (513) 352-6700 (614) 365-2700
(Name, address, including zip code and (513) 241-4771 (TELECOPY) (614) 365-2499 (TELECOPY)
telephone number, including area code,
of agent for service)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE
TO THE PUBLIC: FROM TIME TO TIME AFTER THE EFFECTIVE
DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Student Loan
Asset-Backed Notes $1,000,000 100% $1,000,000 $295.00
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(1) Estimated solely for calculating the registration fee.
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</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the SEC, acting pursuant to said Section 8(a), may
determine.
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<PAGE> 2
The information in this prospectus supplement and the attached prospectus is not
complete and may be changed. The issuer may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus supplement and the attached prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED __________ ___, 1998
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
STUDENT LOAN FUNDING LLC
$____________ STUDENT LOAN ASSET-BACKED NOTES
<S> <C> <C> <C> <C> <C>
CONSIDER CAREFULLY THE RISK THE ISSUER WILL SERIES 1998A-3 SERIES 1998A-4 SERIES 1998B-3 TOTAL
FACTORS BEGINNING ON PAGE 1 IN ISSUE -- SENIOR T-BILL SENIOR T-BILL SUBORDINATE
THE PROSPECTUS AND PAGE S-7 OF RATE NOTES RATE NOTES T-BILL RATE NOTES(1)
THIS PROSPECTUS SUPPLEMENT.
Principal Amount $_________ $__________ $__________ $_________
The Notes will represent limited Series Interest Rate T-Bill Rate T-Bill Rate T-Bill Rate
obligations of the issuer payable plus [ ]%2 plus [ ]%2 plus [ ]%2
solely from the student loans and
other assets in the trust estate Interest Paid Quarterly Quarterly Quarterly
do not represent obligations of
the issuer to pay from any other First Interest Payment [_____] [_____] [_____]
sources. The Notes do not Date
represent obligations of any of
the issuer's affiliates. The Notes First Scheduled [_____] [_____] [_____]
are not insured or guaranteed by Principal
any person. Except as noted in Distribution Date
this document, the underlying
accounts and student loans are Legal Final Maturity ____ __, __ ____ __, __ ____ __, __
not insured or guaranteed by any
person or governmental agency. Price to Public _________% _________% _________% $_________
This prospectus supplement may Underwriting _________% _________% _________% $_________
be used to offer and sell the Discount
Notes only if accompanied by the
prospectus. Proceeds to Issuer _________% _________% _________% $_________
</TABLE>
- ---------------------------
(1) The Series 1998B-3 Notes are subordinated to the Series 1998A-3 Notes and
the Series 1998A-4 Notes. Subordination of the Series 1998B-3 Notes provides
credit enhancement for the Series 1998A-3 Notes and the Series 1998A-4 Notes.
(2) Initially, ___% with respect to the Series 1998A-3 Notes, ___% with respect
to the Series 1998A-4 Notes, and ___% with respect to the Series 1998B-3 Notes.
Following the initial interest accrual period, subject to a cap of the lesser of
[18%] and the net loan rate.
TRUST ASSETS:
The trust estate will consist of student loans with an aggregate principal
balance as of ________, ___ of $______, proceeds thereof, moneys and investment
securities on deposit in certain of the funds and accounts under the indenture,
including a reserve fund, and the issuer's and the eligible lender trustee's
rights under certain contracts. [The principal amount of the Notes exceeds the
sum of (i) the principal amount of the student loans and accrued interest
thereon as of ________, __ and (ii) the initial reserve fund deposit and the
amounts in the other funds and accounts under the indenture by approximately
$----------.]
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED
OR DISAPPROVED OF THESE NOTES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SALOMON SMITH BARNEY
NATIONSBANC MONTGOMERY SECURITIES LLC
FIFTH THIRD/THE OHIO COMPANY
_______________, 1998
<PAGE> 3
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The issuer provides information to 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
your Notes and (b) this prospectus supplement, which describes the specific
terms of your Notes.
If there is a conflict between this prospectus supplement and
the accompanying prospectus, you should rely on the information in this
prospectus supplement.
This prospectus supplement and the accompanying prospectus
include cross-references to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
[The issuer has filed preliminary information regarding your
trust estate and your Notes with the SEC. The information contained in this
document supersedes all of that preliminary information, which was prepared by
the underwriters for prospective investors.]
------------------------
Until __________, all dealers that effect transactions in the
Notes, whether or not participating in this offering, may be required to deliver
a prospectus and prospectus supplement. This requirement is in addition to the
dealers' obligation to deliver a prospectus and prospectus supplement when
acting as underwriters with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
PAGE
----
SUMMARY OF TERMS...........................................S-1
Offered Securities......................................S-1
The Issuer..............................................S-1
Security for the Notes; Trust Estate....................S-1
Interest................................................S-2
Principal...............................................S-3
Subordination...........................................S-4
Servicers...............................................S-4
Priority of Payments....................................S-4
Reserve Fund............................................S-5
Redemption..............................................S-6
Federal Income Tax Consequences.........................S-6
ERISA Considerations....................................S-6
Registration, Clearing and Settlement...................S-6
Rating..................................................S-6
RISK FACTORS...............................................S-7
THE ISSUER.................................................S-7
Year 2000...............................................S-7
USE OF PROCEEDS............................................S-9
THE FINANCED STUDENT LOANS.................................S-9
Incentive Programs.....................................S-14
MATURITY AND PREPAYMENT
CONSIDERATIONS.........................................S-15
THE SERVICERS.............................................S-16
[AFSA Data Corporation]................................S-17
PAGE
----
[Great Lakes Higher Education Servicing
Corporation]........................................S-17
[UNIPAC Service Corporation]...........................S-18
THE GUARANTEE AGENCIES....................................S-18
[Great Lakes Higher Education Guaranty
Corporation]........................................S-18
[Pennsylvania Higher Education Assistance
Agency].............................................S-20
DESCRIPTION OF THE NOTES..................................S-22
Interest...............................................S-22
Principal..............................................S-24
Subordination of the Series 1998B-3 Notes..............S-26
Collection Fund........................................S-26
Reserve Fund...........................................S-29
REDEMPTION................................................S-30
Auction of the Financed Student Loans..................S-30
Optional Redemption....................................S-30
THE INDENTURE.............................................S-31
Indenture Trustee......................................S-31
Eligible Lender Trustee................................S-31
Reports to Noteholders.................................S-31
Student Loan Portfolio Fund............................S-31
UNDERWRITING..............................................S-32
LEGAL MATTERS.............................................S-33
RATING....................................................S-33
ii
<PAGE> 4
SUMMARY OF TERMS
* THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING OF THE
NOTES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING PROSPECTUS.
* THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOWS AND
OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED BY THE FULL
DESCRIPTION OF THESE CALCULATIONS, CASH FLOWS AND OTHER INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
* YOU CAN FIND A DEFINITION OF CAPITALIZED TERMS USED IN THIS SUMMARY AND NOT
OTHERWISE DEFINED HEREIN UNDER THE CAPTION "GLOSSARY OF PRINCIPAL
DEFINITIONS" BEGINNING ON PAGE A-1 OF THE ACCOMPANYING PROSPECTUS.
OFFERED SECURITIES
The notes are limited obligations of the issuer secured by and payable solely
from the assets of the trust estate established for the notes under the
indenture of trust. The Series 1998B-3 Notes are subordinated to the Series
1998A-3 Notes and the Series 1998A-4 Notes. See "Subordination" in this Summary
of Terms and "Description of the Notes -- Subordination of the Series 1998B-3
Notes" in this prospectus supplement.
Issuance of the notes is scheduled for _________, 19__.
THE ISSUER
The issuer is a Delaware limited liability company. Student Loan Funding
Resources, Inc., an Ohio corporation, owns a 99% membership interest in the
issuer. SLF Enterprises, Inc., an Ohio corporation wholly owned by Student Loan
Funding Resources, Inc., owns a 1% membership interest in the issuer. Student
Loan Funding Resources, Inc. acts as administrator for the issuer's business
activities.
SECURITY FOR THE NOTES; TRUST ESTATE
A trust estate has been established as security for the notes. The primary
assets of the trust estate consist of student loans with an aggregate principal
balance of $_________ as of ________, 19__. The student loans consist of certain
education loans to students and parents of students enrolled in accredited
institutions of higher education. See "Description of the FFEL Program" in the
prospectus.
The issuer and each eligible lender trustee will pledge the student loans to the
indenture trustee to secure the notes pursuant to an indenture of trust among
the issuer, one or more eligible lender trustees, and the indenture trustee. The
notes are secured by and payable solely from the trust estate established under
the indenture.
The indenture trustee is [Star Bank, National Association], a national banking
association. The initial eligible lender trustee is [Star Bank, National
Association], a national banking association. One or more additional eligible
lender trustees may be added or substituted for the initial eligible lender
trustee from time to time. See "The Indenture -- Indenture Trustee" and "--
Eligible Lender Trustee" in this prospectus supplement.
The trust estate also consists of:
* moneys and investment securities on deposit in
certain of the funds and accounts established
under the indenture;
* rights of the issuer and the eligible lender
trustees under the servicing agreements, the
S-1
<PAGE> 5
purchase agreements and the guarantee
agreements that relate to student loans; and
* the right of the issuer and the eligible lender
trustees under certain other related contracts.
All of the student loans in the trust estate are FFELP Loans. [Great Lakes
Higher Education Guaranty Corporation and Pennsylvania Higher Education
Assistance Agency] are the guarantee agencies that each guarantee more than 10%
of the initial student loans. Of the initial student loans, approximately ___%
are guaranteed as to the payment of 100% of principal and interest by a
guarantee agency, and the balance are guaranteed as to [98]%. Reimbursement of a
guarantee agency by the Secretary of Education ranges from 78% to 100%. For a
description of the guarantee agencies and guarantee agreements, see "The
Guarantee Agencies" in this prospectus supplement and "Description of the
Guarantee Agencies" in the prospectus.
The issuer may substitute additional student loans for those comprising the
initial pool of student loans under certain circumstances, including the
substitution of student loans with similar characteristics, the loss of the
guarantee with respect to a student loan that is guaranteed or the consolidation
of student loans made to the same borrower. See "The Financed Student Loans" in
this prospectus supplement.
INTEREST
The issuer pays interest on the notes quarterly on the 25th day of February,
May, August and November. When the 25th is not a business day, interest is
payable on the next business day. Because the Series 1998B-3 Notes are
subordinated to the Series 1998A-3 Notes and the Series 1998A-4 Notes, payments
of interest on the Series 1998B-3 Notes may be deferred or otherwise affected in
certain circumstances. For so long as any Series 1998A-3 Notes or Series 1998A-4
Notes remain outstanding, any such deferral in the payment of interest on the
Series 1998B-3 Notes will not constitute an event of default under the indenture
unless the deferral exists on the maturity date for the Series 1998B-3 Notes.
See "Priority of Payments" in this Summary of Terms and "Description of the
Notes -- Collection Fund" in this Prospectus Supplement.
Series 1998A-3 Notes. The Series 1998A-3 Notes bear interest through __________
at ____% per annum. Thereafter, the interest rate will be adjusted weekly to
equal the lesser of the daily weighted average of the T-Bill rates plus [__]%
per annum and [18%] per annum, but not in excess of the net loan rate for the
quarterly interest period.
Series 1998A-4 Notes. The Series 1998A-4 Notes bear interest through __________
at ____% per annum. Thereafter, the interest rate will be adjusted weekly to
equal the lesser of the daily weighted average of the T-Bill rates plus [__]%
per annum and [18%] per annum, but not in excess of the net loan rate for the
quarterly interest period.
Series 1998B-3 Notes. The Series 1998B-3 Notes bear interest through __________
at ____% per annum. Thereafter, the interest rate will be adjusted weekly to
equal the lesser of the daily weighted average of the T-Bill rates plus [__]%
per annum and [18%] per annum, but not in excess of the net loan rate for the
quarterly interest period.
The T-Bill rate is the weighted average per annum discount rate (expressed on a
bond equivalent basis) for direct obligations of the United States with a
maturity of thirteen weeks sold at the most recent auction for such obligations,
as reported by the U.S. Department of the Treasury. The T-Bill Rate will be
subject to a lock-in period of six business days. A lock-in period is a period
of days preceding any interest payment date when the interest rate for a series
of notes in effect on the first day of such period remains in effect for the
remainder of that quarterly interest period. See "Description of the Notes --
Determination of the T-Bill Rate" in the prospectus.
The net loan rate for a quarterly interest period is the annualized percentage
rate determined by multiplying:
* the ratio of :
* 365 (or 366 in the case of a leap year), to
S-2
<PAGE> 6
* the actual number of days in the quarterly
interest period,
by
* the ratio of:
* expected interest collections, special allowance payments and interest
subsidy payments on the student loans and investment earnings on amounts
held under the indenture for the related collection period minus program
operating expenses for the collection period, to
* the principal amount (including capitalized interest) of the student
loans on the first day of the collection period.
See "Description of the Notes -- Interest" in this
prospectus supplement.
A collection period is a period of three calendar months beginning on the day
after the end of the preceding collection period, except that the first
collection period begins on [__________, 19___] and ends on [__________, 19___].
If the interest rate for a series exceeds the net loan rate for a quarterly
interest period, the excess interest, together with interest thereon at the
applicable formula rate, will be paid quarterly only to the extent funds are
available after other required payments on the notes. This is called carryover
interest. Carryover interest will continue to be payable even after the
principal amount of the applicable series of notes has been reduced to zero
until no notes remain outstanding under the indenture and the balances in the
funds and accounts allocable to the notes under the indenture have been reduced
to zero. See "Description of the Notes -- Interest" in this prospectus
supplement.
You may obtain interest rates by telephoning [(513) 762-8870].
PRINCIPAL
No principal will be paid on the Series 1998B-3 Notes until the Series 1998A-3
Notes and the Series 1998A-4 Notes have been paid in full. Unless an event of
default has occurred, no principal will be paid on the Series 1998A-4 Notes
until the Series 1998A-3 Notes have been paid in full. If an event of default
has occurred, principal will be paid pro rata on the Series 1998A-3 Notes and
the Series 1998A-4 Notes.
Principal will be payable on the Series 1998A-3 Notes:
* on each quarterly payment date in an amount generally equal to the decline
in the principal amount (including capitalized interest) of the student
loans between the end of the second preceding collection period and the end
of the immediately preceding collection period, and
* to the extent necessary, on each quarterly payment date until the parity
percentage equals ____%.
Principal will be payable on the Series 1998A-4 Notes:
* on each quarterly payment date on and after the principal balance of the
Series 1998A-3 Notes has been reduced to zero in an amount generally equal
to the decline in the principal amount (including capitalized interest) of
the student loans between the end of the second preceding collection period
and the end of the immediately preceding collection period, and
* to the extent necessary, on each quarterly payment date until the parity
percentage equals ____%.
Principal will be payable on the Series 1998B-3 Notes:
* on each quarterly payment date on and after the principal balance of the
Series 1998A-3 Notes and the Series 1998A-4 Notes has been paid in full in
an amount generally equal to the decline in the principal amount (including
capitalized
S-3
<PAGE> 7
interest) of the student loans between the end of the second preceding
collection period and the end of the immediately preceding collection
period, and
* to the extent necessary, on each quarterly payment date until the parity
percentage equals ___%.
These payments of principal will be made to the extent available funds exist on
each quarterly payment date. If available funds are not enough to pay any of the
amounts other than parity percentage payments, any shortfall will be added to
the principal payable on the next quarterly payment date. Such shortfall will
not constitute an event of default under the indenture unless the shortfall
exists on the maturity date for that series of notes. See "Description of the
Notes -- Principal" in this prospectus supplement.
The parity percentage basically is determined by dividing:
* the principal amount (including capitalized interest) of the student loans
plus accrued interest, interest subsidies and special allowance payments,
and all amounts in the collection fund and the reserve fund, by
* the principal balance of the notes plus accrued and unpaid interest and
expenses.
The final payment of principal and interest will be made no later than
__________on the Series 1998A-3 Notes, no later than __________ on the Series
1998A-4 Notes, and no later than __________on the Series 1998B-3 Notes. The
actual maturity of each series is expected to occur sooner as a result of a
variety of factors. See "Maturity and Prepayment Considerations" in the
prospectus and this prospectus supplement.
SUBORDINATION
The Series 1998B-3 Notes are subordinated to the Series 1998A-3 Notes and the
Series 1998A-4 Notes. The Series 1998B-3 Notes will not receive any payments of
principal until the Series 1998A-3 Notes and the Series 1998A-4 Notes have been
paid in full. In addition, if certain specified conditions exist, payment of
interest on the Series 1998B-3 Notes may be deferred or otherwise affected. For
so long as any Series 1998A-3 Notes or Series 1998A-4 Notes remain outstanding,
any such deferral will not constitute an event of default under the indenture
unless the deferral exists on the maturity date for the Series 1998B-3 Notes.
See "Priority of Payments" in this Summary of Terms and "Description of the
Notes -- Collection Fund" in this Prospectus Supplement.
SERVICERS
To facilitate servicing of the student loans, the issuer has entered or will
enter into servicing agreements with various approved servicers. Each servicer
of student loans will forward all collections on the student loans to the
indenture trustee for deposit in the collection fund established under the
indenture. [AFSA Data Corporation, Great Lakes Higher Education Servicing
Corporation and UNIPAC Service Corporation] each service more than 10% of the
initial student loans. See "The Servicers" in this prospectus supplement.
PRIORITY OF PAYMENTS
Collections on the student loans, investment earnings and other available funds
will be allocated first to pay expenses before being applied to pay the notes.
Except as described below, any available funds after the payment of expenses
will be applied on each quarterly payment date generally in the following
priority:
* First, to pay interest on the Series 1998A-3 Notes and the Series 1998A-4
Notes, ratably;
* Second, to pay interest on the Series 1998B-3 Notes;
* Third, to pay principal on the Series 1998A-3 Notes in an amount equal to
the reduction in the balance of the student loans and any shortfall from
previous principal distributions on the
S-4
<PAGE> 8
Series 1998A-3 Notes until the principal balance thereof has been reduced
to zero;
* Fourth, after the principal balance of the Series 1998A-3 Notes has been
reduced to zero, to pay principal on the Series 1998A-4 Notes in an amount
equal to the reduction in the balance of the student loans and any
shortfall from previous principal distributions on the Series 1998A-4 Notes
until the principal balance thereof has been reduced to zero;
* Fifth, after the principal balance of the Series 1998A-3 Notes and the
Series 1998A-4 Notes has been reduced to zero, to pay principal on the
Series 1998B-3 Notes in an amount equal to the reduction in the balance of
the student loans and any shortfall from previous principal distributions
on the Series 1998B-3 Notes;
* Sixth, to the reserve fund the amount, if any, necessary to attain the
specified reserve fund balance;
* Seventh, if the parity percentage is not at least ___%, to pay principal,
first to the Series 1998A-3 Notes until the principal balance thereof has
been reduced to zero, then to the Series 1998A-4 Notes until the principal
balance thereof has been reduced to zero, and thereafter to the Series
1998B-3 Notes, until the parity percentage equals ___%;
* Eighth, to pay carryover interest, first to the Series 1998A-3 Notes until
payment in full thereof, then to the Series 1998A-4 Notes until payment in
full thereof, and thereafter to the Series 1998B-3 Notes; and
* Ninth, any remainder to the excess surplus account established under the
indenture. The issuer may withdraw amounts from the excess surplus account
at any time upon written request to the indenture trustee so long as after
such withdrawal the parity percentage will be at least ___%. Any amounts so
withdrawn will not thereafter be available to pay principal or interest on
the notes. See "The Indentures-- Funds and Accounts" in the prospectus.
The above payment order will be modified if, after following such payments,
either:
* the principal amount of the Series 1998A-3 Notes and the Series 1998A-4
Notes would exceed the sum of the principal amount of the student loans
(including capitalized interest) and amounts in the indenture funds and
accounts as of the end of the preceding collection period, or
* an event of default has occurred under the indenture but prior to the
acceleration of maturity of the notes.
For so long as either of the above conditions exist, the payment order will be
modified to provide that the Series 1998B-3 Notes will not receive any interest
payments pursuant to clause "Second" above. For so long as any Series 1998A-3
Notes or Series 1998A-4 Notes remain outstanding, any such deferral will not
constitute an event of default under the indenture unless the deferral exists on
the maturity date for the Series 1998B-3 Notes. Where an event of default has
occurred, principal on the Series 1998A-3 Notes and the Series 1998A-4 Notes
will be paid pro rata, without preference or priority of any kind. See
"Description of the Notes -- Collection Fund" in this prospectus supplement.
RESERVE FUND
The indenture trustee will make an initial deposit of $________ into a reserve
fund for the notes. This amount is this reserve fund's specified reserve fund
balance. To the extent necessary, the initial deposit will be supplemented
quarterly with all amounts remaining after making all required distributions on
such date until the specified reserve fund balance is attained. See "Description
of the Notes -- Reserve Fund" in this prospectus supplement and "Description of
the Notes -- Credit Enhancement" in the prospectus.
S-5
<PAGE> 9
REDEMPTION
AUCTION OF THE FINANCED STUDENT LOANS
On or after __________, 20__, the issuer will offer the student loans for sale.
If the issuer receives at least two bids (which may include the issuer or its
affiliates), the issuer will accept the higher bid if it will pay transaction
costs and all amounts due the noteholders, including carryover interest, after
application of funds on deposit in the reserve fund. If the bid proceeds are not
sufficient to pay transaction costs and the notes, the issuer will be required
to resolicit bids annually on such date for the then outstanding student loans
until a successful bid is accepted or until the notes have been paid in full.
The proceeds of any such sale will be used to redeem any outstanding notes at
par plus accrued interest on the next applicable quarterly payment date. The
issuer can give no assurance as to whether it will be successful in soliciting
acceptable bids to purchase the student loans on any such auction date. See
"Redemption -- Auction of the Financed Student Loans" in this prospectus
supplement.
OPTIONAL REDEMPTION
On or after ________, 20___, if the principal balance of the student loans
(including capitalized interest) is equal to ___% or less of the initial
principal amount of student loans in the trust estate, the issuer may elect to
purchase the student loans for a price equal to their principal amount, plus all
accrued interest thereon, but not less than an amount necessary to pay
transaction costs and all amounts due to the noteholders, including carryover
interest, after application of funds on deposit in the reserve fund for the
notes. The net proceeds of such purchase will be applied to redeem any
outstanding notes at par plus accrued interest on the next applicable quarterly
payment date. See "Redemption -- Optional Redemption" in this prospectus
supplement.
FEDERAL INCOME TAX CONSEQUENCES
The notes will evidence debt obligations under the Internal Revenue Code of
1986, as amended, and interest paid or accrued thereon will be taxable to
noteholders. The notes are [not] expected to be issued with original issue
discount. See "Federal Income Tax Consequences -- Original Issue Discount" in
the prospectus. By acceptance of your note, you will be deemed to have agreed to
treat your note as a debt instrument for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income. For
additional information concerning the application of federal income tax laws
with respect to the notes, see "Federal Income Tax Consequences" in the
prospectus.
ERISA CONSIDERATIONS
The notes are expected to be treated as debt obligations without significant
equity features for purposes of the regulations of the Department of Labor set
forth in 29 C.F.R. 2510.3-101. See "ERISA Considerations" in the prospectus.
REGISTRATION, CLEARING AND SETTLEMENT
Your notes will be held through DTC in the United States or through Cedel Bank,
societe anonyme or the Euroclear System in Europe. You will not receive a
definitive note representing your interest, except in certain limited
circumstances. See "Description of the Notes -- Book Entry Registration" in the
prospectus.
The notes will be offered in minimum denominations of [$50,000] and integral
multiples of [$1,000] in excess thereof.
RATING
It is a condition to the issuance and sale of the notes that they be rated by
the following rating agencies as follows:
Fitch Moody's S&P
Series 1998A-3 Notes AAA Aaa AAA
Series 1998A-4 Notes AAA Aaa AAA
Series 1998B-3 Notes A A2 A
See "Risk Factors -- Rating" in the prospectus.
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<PAGE> 10
RISK FACTORS
In addition to the Risk Factors set forth in the prospectus, you should note the
following:
[THE PRINCIPAL BALANCE
OF NOTES IS GREATER THAN
THE PRINCIPAL BALANCE OF
THE COLLATERAL.
The aggregate principal balance of the notes exceeds the sum of (i) the
aggregate balance of the student loans and accrued interest thereon as of
_____________, _____, the initial reserve fund deposit and the amounts in the
other funds and accounts under the indenture by approximately $__________.
Payment of principal and interest on the notes is dependent upon collections on
the student loans, particularly interest thereon. If the yield on the student
loans does not generally exceed the interest rate on the notes and program
operating expenses, insufficient funds may exist to repay the notes.]
SUBORDINATION OF THE SERIES
1998B-3 NOTES
The Series 1998B-3 Notes are subordinated to the Series 1998A-3 Notes and the
Series 1998A-4 Notes. The Series 1998B-3 Notes will not receive any payments of
principal until the Series 1998A-3 Notes and the Series 1998A-4 Notes have been
paid in full. In addition, if certain specified conditions exist, payment of
interest on the Series 1998B-3 Notes will only be made after distributions of
principal of and interest on the Series 1998A-3 Notes and the Series 1998A-4
Notes. See "Description of the Notes -- Collection Fund" herein and "Risk
Factors -- Subordination" in the Prospectus.
THE ISSUER
Student Loan Funding LLC (the "Issuer"), is a Delaware limited liability company
organized as a bankruptcy remote special purpose entity. The Issuer has the
following two members: (i) Student Loan Funding Resources, Inc. (99% ownership),
an Ohio corporation that also acts as administrator for the Issuer's business
activities (the "Administrator"), and (ii) SLF Enterprises, Inc. (1% ownership),
an Ohio corporation and wholly owned subsidiary of the Administrator. [As of
_______ __, 19__, the Issuer had $________ in assets and $_______ in outstanding
debt.] The Series 1998A-3 Notes, the Series 1998A-4 Notes (together, the "Series
1998A Notes") and the Series 1998B-3 Notes (together with the Series 1998A
Notes, the "Notes") are limited obligations of the Issuer and are payable solely
from the Trust Estate established under the Indenture. See "Security for the
Notes -- The Trust Estates" in the Prospectus.
YEAR 2000
The "Year 2000" issue refers to a wide variety of potential computer program and
electronic processing and functionality issues that may arise from the inability
to properly process date-sensitive information relating to the Year 2000, years
thereafter and to a lesser degree, the Year 1999. As a result of computer
programs and other electronic devices historically being programmed using two
digits rather than four to define the applicable year, time- sensitive software
may not properly recognize a year that begins with "20" instead of the familiar
"19", which could result in system failure or miscalculations.
The Issuer is wholly dependent upon the Administrator's information systems. The
Administrator is conducting a review of its own information systems and expects
to have completed all critical modifications to those systems by June 30, 1999,
allowing time in 1999 for any system refinements that may be needed. The
Administrator has also developed high level contingency plans for its
mission-critical applications and will refine these plans in 1999.
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<PAGE> 11
Nevertheless, it is not clear whether adequate contingency plans can be
developed for all possible problems. Costs of the Administrator's Year 2000
efforts are not expected to have a material adverse impact on operation of the
Program or the timely payment of the Notes. The Administrator expects to spend
approximately $300,000 in 1998 and 1999 on the project. However, if the
Administrator's actual costs or timing for its own Year 2000 remediation efforts
differ materially from its present estimates, or if there are unexpected
increases in the cost of the operation of the Program due to Year 2000 issues,
then the operation of the Program could be adversely affected, and this could
adversely affect the timing and amount of payments on the Notes.
The Administrator has made inquiries of the Indenture Trustee, the Eligible
Lender Trustee, each of the Servicers and each of the Guarantee Agencies that
guarantee more than 10% of the initial Financed Student Loans, and each of these
parties has confirmed to the Administrator that it is reviewing its own
information systems and is taking the necessary steps to make any necessary
modifications to those systems. However, there can be no assurance that the
computer systems of these entities or other companies on which the Issuer, the
Administrator, the Indenture Trustee, the Eligible Lender Trustee, any Servicer
or any Guarantee Agency relies will be compliant on a timely basis, or that a
failure to resolve Year 2000 issues by any such party or another party on which
such party relies, or a remediation or conversion that is incompatible with the
Administrator's, Indenture Trustee's, Eligible Lender Trustee's, any Guarantee
Agency's or any Servicer's computer systems, will not have a material adverse
effect on the Issuer, the Administrator, the Indenture Trustee, the Eligible
Lender Trustee, a Guarantee Agency or a Servicer. Also, to the extent any
additional Eligible Lender Trustee, Guarantee Agency or Servicer is added for
Financed Student Loans in the Trust Estate, or a replacement or successor to the
initial Indenture Trustee is necessary, the relative state of preparedness or
unpreparedness of such entities with regard to Year 2000 issues may have an
adverse impact on the Issuer or the Administrator and the timing and amount of
payments on the Notes. The Administrator will continue to monitor the progress
of the Indenture Trustee, the Eligible Lender Trustee, each of the Servicers and
each of the Guarantee Agencies in addressing their respective Year 2000 issues.
The Administrator has also made inquiries to the Department of Education, and
the Department of Education has confirmed to the Administrator that it is
reviewing its own information systems and is taking the necessary steps to make
any necessary modifications to those systems. The Department of Education has
undertaken a Year 2000 Compliance Project to address Year 2000 issues.
Information regarding the Department of Education's Year 2000 efforts can be
obtained at the Department of Education's site on the World Wide Web at
http://www.ed.gov. Officials at the Department of Education have made statements
to the public acknowledging that the Department of Education has been placed on
the Office of Management and Budget's "watch list" for not meeting certain
milestones toward Year 2000 compliance, but have further indicated that
compliance for the Department of Education's mission-critical systems relating
to the FFEL Program are on schedule for completion by the OMB's March 1999
deadline. Any failure by the Department of Education to resolve any Year 2000
issues or any adverse effect on the Department of Education caused by a party on
which the Department of Education relies as a result of Year 2000 issues may
have a material adverse effect on the FFEL Program and the timely receipt of
payments on Financed FFELP Loans, such as Interest Subsidy Payments and Special
Allowance Payments.
Even if the Issuer or the Administrator does not incur significant direct costs
in modifying its own information systems, there can be no assurance that the
failure or delay of the Indenture Trustee, any Eligible Lender Trustee, any
Servicer, any Guarantee Agency, the Department of Education or any other third
parties (including any party on which any of these parties rely or any auction
agent, calculation agent, exchange counterparty, market agent, broker-dealer,
provider of credit enhancement or remarketing agent under the Indenture or any
other indenture of the Issuer) in addressing Year 2000 issues or the costs
involved in such process will not have a material adverse impact on the timely
receipt and amount of collections on the Financed Student Loans. If the
collections were to be so affected, the timing and amounts of payments on the
Notes could be adversely affected.
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<PAGE> 12
USE OF PROCEEDS
Of the proceeds of the sale of the Notes, net of Underwriters' discount of
$____________, approximately $__________ will be used to Finance the initial
Financed Student Loans on the Closing Date, and the remainder will be
transferred to the Indenture Trustee for deposit to the credit of the following
Funds and Accounts in the following estimated amounts:
Reserve Fund $
[Capitalized Interest Account]
Expense Account
THE FINANCED STUDENT LOANS
This section sets forth tables and other information describing certain
characteristics, as of __________, of the Financed Student Loans expected to be
Financed on _______________ (the "Closing Date"). The Financed Student Loans
will include FFELP Loans that meet several criteria, including the following:
each Financed Student Loan (i) was or will be originated in the United States or
its territories or possessions under and in accordance with the FFEL Program to
or on behalf of a student who has graduated or is expected to graduate from an
accredited institution of higher education within the meaning of the Higher
Education Act, (ii) contains terms in accordance with those required by the FFEL
Program, the Guarantee Agreements and other applicable requirements, and (iii)
is not more than 90 days past due as of the date such Financed Student Loan is
Financed. As of _______________ (the "Cut-off Date"), $_________________
principal amount of the initial Financed Student Loans were delinquent for up to
59 days and none of the initial Financed Student Loans was delinquent for more
than 59 days. For this purpose, delinquency refers to the number of days for
which a payment is past due. All of the Financed Student Loans in the Trust
Estate are FFELP Loans.
Each Financed Student Loan is required to be guaranteed as to principal and
interest by a Guarantee Agency and reinsured by the Department of Education to
the extent provided under the Higher Education Act and eligible for Special
Allowance Payments and, with respect to each Financed Student Loan that is a
subsidized Stafford Loan, Interest Subsidy Payments paid by the Department of
Education. See "Description of the FFEL Program" in the Prospectus.
Additional Student Loans that may be Financed by the Issuer after the Closing
Date include (i) Consolidation Loans Financed by the Issuer on or before
_________, 19___ with Consolidation Loan prepayments on deposit in the
Collection Account that consolidate one or more of the Financed Student Loans in
the Trust Estate, provided that in no event shall the aggregate amount of
Financed Student Loans in the Trust Estate that are Consolidation Loans exceed
$__________; (ii) Serial Loans that are serial (i.e., made to the same borrower
under the same loan program and guaranteed by the same Guarantee Agency) to an
existing Financed Student Loan owned by the Issuer; and (iii) certain Financed
Student Loans that may be substituted for other Financed Student Loans in the
Trust Estate meeting certain specified characteristics. See "The Indenture --
Student Loan Portfolio Fund" and "Description of the Notes -- Collection Fund"
herein.
Although characteristics of additional Financed Student Loans are expected to
have characteristics similar to the initial Financed Student Loans, because
additional Financed Student Loans may be Financed after the Closing Date as
described above, the aggregate characteristics of the entire pool of Financed
Student Loans, including the composition of the Financed Student Loans and of
the borrowers thereof, the distribution by interest rate and the
S-9
<PAGE> 13
distribution by principal balance described in the following tables, will vary
from those of the initial Financed Student Loans as described herein. See "The
Financed Student Loan Pool" in the Prospectus.
Each of the Financed Student Loans provides for the amortization of the
outstanding principal balance of such Financed Student Loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of such
Financed Student Loan multiplied by the applicable interest rate and further
multiplied by the period elapsed (as a fraction of a calendar year) since the
preceding payment of interest was made. As payments are received in respect of
such Financed Student Loan, the amount received is applied first to outstanding
late fees, if collected, then to interest accrued to the date of payment and the
balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a regular installment before its scheduled due date, the portion
of the payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a
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, subject to any applicable Deferment
Periods or Forbearance Periods, the borrower pays a regular 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 of such Financed Student Loan.
Set forth below in the following tables is a description of certain additional
characteristics of the initial Financed Student Loans as of the Cut-off Date.
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
Aggregate Outstanding Principal Balance.................................... $
Aggregate Outstanding Accrued Interest.....................................
Number of Borrowers........................................................
Average Outstanding Principal Balance Per Borrower.........................
Number of Loans............................................................
Average Outstanding Principal Balance Per Loan.............................
Weighted Average Annual Borrower Interest Rate.............................
Weighted Average Remaining Term (months) (does not include the months
remaining for the in-school, Grace, Deferment or Forbearance periods)......
Weighted Average Remaining Term (months) (including the months
remaining for the in-school, Grace, Deferment or Forbearance periods)...
S-10
<PAGE> 14
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY LOAN TYPE
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Loan Type Loans Balance Balance
- --------- ------------ ------------- -----------
<S> <C> <C> <C>
Stafford-Subsidized..................................................
Stafford-Unsubsidized................................................
Consolidation........................................................
PLUS.................................................................
SLS..................................................................
Total.......................................................
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY GUARANTEE LEVEL
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guarantee Level Loans Balance Balance
- --------------- ------------ ------------- -----------
<S> <C> <C> <C>
FFELP Loan Guaranteed 100%...........................................
FFELP Loan Guaranteed 98%............................................
Total............................................................
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY GUARANTEE AGENCY
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guarantee Agency Loans Balance Balance
- ---------------- ------------ ------------- -----------
______________________...............................................
______________________...............................................
<S> <C> <C> <C>
Other Guarantee Agencies.............................................
Total............................................................
</TABLE>
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<PAGE> 15
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY BORROWER INTEREST RATE
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Interest Rate (1) Loans Balance Balance
- ----------------- ------------ ------------- -----------
<S> <C> <C> <C>
Less than 7.50%..............................................................
7.50% to 7.99% ..............................................................
8.00% to 8.49%...............................................................
8.50% to 8.99%...............................................................
9.00% to 9.49%...............................................................
9.50% or greater.............................................................
Total....................................................................
</TABLE>
(1) Determined using the interest rates applicable to the initial Financed
Student Loans as of the Cut-off Date. However, because certain of the initial
Financed Student Loans bear interest at variable rates per annum, the existing
interest rates are not indicative of future interest rates on the Financed
Student Loans. See "Description of the FFEL Program" in the Prospectus.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY RANGE OF OUTSTANDING
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Principal Balance Loans Balance Balance
- ----------------- ------------ ------------- -----------
<S> <C> <C> <C>
Less than $1,000.............................................................
$1,000-$1,999................................................................
$2,000-$2,999................................................................
$3,000-$3,999................................................................
$4,000-$4,999................................................................
$5,000-$5,999................................................................
$6,000-$6,999................................................................
$7,000-$7,999................................................................
$8,000-$8,999................................................................
$9,000-$9,999................................................................
$10,000-$10,999..............................................................
$11,000-$11,999..............................................................
$12,000-$12,999..............................................................
$13,000-$13,999..............................................................
$14,000-$14,999..............................................................
$15,000 or greater...........................................................
Total....................................................................
</TABLE>
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<PAGE> 16
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY BORROWER PAYMENT STATUS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Borrower Payment Status Loans Balance Balance
- ----------------------- ------------ ------------- ----------
<S> <C> <C> <C>
In School....................................................................
Grace........................................................................
Repayment....................................................................
Deferment....................................................................
Forbearance..................................................................
Total....................................................................
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY REMAINING TERM TO
SCHEDULED MATURITY AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Remaining Months Outstanding Outstanding
Until Scheduled Number of Principal Principal
Maturity Loans Balance Balance
- -------- ------------ ------------- ----------
<S> <C> <C> <C>
1 to 12
13 to 24
25 to 36
37 to 48
49 to 60
61 to 72
73 to 84
85 to 96
97 to 108
109 to 120
121 to 180
181 to 240
241 to 300
Over 300
Total....................................................................
</TABLE>
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<PAGE> 17
GEOGRAPHIC DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Location (1) Loans Balance Balance
- ------------ ------------ ------------- ----------
<S> <C> <C> <C>
Ohio
- -----------
- -----------
Others(2)
Total....................................................................
</TABLE>
(1) Based on the current permanent billing addresses of the borrowers of the
initial Financed Student Loans shown on the Servicer's records.
(2) Consist of locations that include [___] other states, U.S. territories,
possessions and commonwealths, foreign countries, overseas military
establishments, and unknown locations, none of the aggregate principal balance
of the Financed Student Loans relating to which exceeds ___% of the Initial
Pool Balance.
To the extent that states with a large concentration of Financed Student Loans
experience adverse economic or other conditions to a greater degree than other
areas of the country, the ability of such borrowers to repay their Financed
Student Loans may be impacted to a larger extent than if such borrowers were
dispersed more geographically.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY SCHOOL TYPES
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
School Type Loans Balance Balance
- ----------- ------------ ------------- ----------
<S> <C> <C> <C>
4 Year Public
4 Year Private
2 Year Public
2 Year Private
Proprietary/Vocational
Other/Unknown
Total....................................................................
</TABLE>
INCENTIVE PROGRAMS
The Issuer currently makes available and may hereafter make available certain
incentive programs to borrowers, including the Jump Start(sm) Program (the "Jump
Start Program"). The Jump Start Program generally applies to all Stafford Loans
and Unsubsidized Stafford Loans originated on or after January 1, 1997 made to
borrowers who are residents of, or who attend eligible post-secondary
educational institutions, in the State of Ohio. Under the Jump Start Program,
the applicable interest on such Jump Start Loan is reduced by 1.25% per annum,
effective upon the commencement of repayment status and continuing for 48 months
as long as payments on such Jump Start Loan remain current, after which time
such reduced interest rate becomes permanent. Jump Start Loans are also eligible
for the EasyPay Program (the "EasyPay Program"). The EasyPay Program entitles
eligible student borrowers who
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<PAGE> 18
authorize automatic payment of student loans from a checking or a savings
account to an interest rate on such student loans that is 0.25% less than the
rate that would otherwise apply to such student loans. Although less than [ ]%
of the initial Financed Student Loans are Jump Start Loans, additional Jump
Start Loans may be Financed after the Closing Date.
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the Notes and the yield on the Notes will be
affected by (i) prepayments of the Financed Student Loans that may occur as
described below, (ii) the sale by the Issuer of Financed Student Loans, (iii)
Parity Percentage Payments and (iv) deferrals or delays in payments on the
Financed Student Loans resulting from defaults, Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods or as a result of
refinancing through Consolidation Loans.
All the Financed Student Loans are prepayable in whole or in part by the
borrowers at any time without penalty (including by means of Consolidation
Loans) and may be prepaid as a result of a borrower default, death, disability
or bankruptcy, a closing of or false certification by the borrower's school,
subsequent liquidation or collection of Guarantee Payments with respect thereto
and as a result of Financed Student Loans being repurchased by the respective
Sellers as a result of a breach of a representation and warranty. The rate of
such prepayments cannot be predicted and may be influenced by a variety of
economic, social and other factors, including those described below. In general,
the rate of prepayments may tend to increase to the extent that alternative
financing becomes available at prevailing interest rates which fall
significantly below the interest rates applicable to the Financed Student Loans.
However, because many of the Financed Student Loans bear interest at a rate that
either actually or effectively is floating, it is impossible to determine
whether changes in prevailing interest rates will be similar to or vary from
changes in the interest rates on the Financed Student Loans. To the extent
borrowers of Financed Student Loans elect to borrow Consolidation Loans, such
Financed Student Loans will be prepaid. See "Description of the FFEL Program --
Loan Terms -- Consolidation Loans" in the Prospectus. See also "Redemption"
herein regarding the Issuer's option to purchase the Financed Student Loans
remaining in the Trust Estate on or after ____________, 20___, and the auction
by the Issuer of any Financed Student Loans remaining in the Trust Estate on or
after _______________, 20___.
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods. The rate of payment of
principal of the Notes and the yield on the Notes may also be affected by the
rate of defaults resulting in losses on Financed Student Loans, by the severity
of those losses and by the timing of those losses, which may affect the ability
of the Guarantee Agencies to make Guarantee Payments with respect to Financed
Student Loans.
The rate of prepayment on the Financed Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Financed Student Loans will be borne entirely by the Noteholders. Such
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time Noteholders
receive payments from the Trust Estate than such interest rates and such spreads
would otherwise have been had such prepayments not been made or had such
prepayments been made at a different time.
THE FOLLOWING INFORMATION IS GIVEN SOLELY TO ILLUSTRATE THE EFFECT OF
PREPAYMENTS ON THE FINANCED STUDENT LOANS ON THE WEIGHTED AVERAGE LIFE OF THE
NOTES UNDER THE ASSUMPTIONS STATED BELOW AND IS NOT A PREDICTION OF THE
PREPAYMENT RATE THAT MIGHT ACTUALLY BE EXPERIENCED BY THE FINANCED STUDENT LOANS
IN THE TRUST ESTATE.
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<PAGE> 19
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes will be primarily
a function of the rate at which payments are made on the Financed Student Loans
in the Trust Estate. Payments on such Financed Student Loans may be in the form
of scheduled amortization of principal or prepayments (including, without
limitation, Guarantee Payments). For this purpose, the term "prepayments"
includes prepayments in full or in part (including pursuant to Consolidation
Loans), as a result of (i) borrower default, death, disability or bankruptcy,
(ii) a closing of or a false certification by the borrower's school and (iii)
subsequent liquidation of Guarantee Payments with respect thereto and as a
result of Financed Student Loans being repurchased by the respective Seller as a
result of a breach of a representation and warranty. All of the Financed Student
Loans are prepayable at any time without penalty by the borrower. See "Risk
Factors" in the Prospectus.
The Constant Prepayment Rate prepayment model ("CPR") represents an assumed
constant rate of prepayment of Financed Student Loans in the Trust Estate
outstanding as of the beginning of each quarter expressed as a per annum
percentage. There can be no assurance that such Financed Student Loans will
experience prepayments at a constant prepayment rate or otherwise in the manner
assumed by the prepayment model.
The weighted average lives in the following table were determined assuming that
(i) scheduled payments of principal on the Financed Student Loans are received
in a timely manner and prepayments are made at the percentages of the prepayment
model set forth in the table; (ii) the initial principal balance of the Financed
Student Loans is $________ and such Financed Student Loans have the
characteristics described under the caption "The Financed Student Loans" herein;
(iii) payments are made on the Notes on the 25th day of each quarter commencing
_____________; (iv) the Financed Student Loans in the Trust Estate are auctioned
on _______________; and (v) the Notes are issued on the Closing Date. No
representation is made that these assumptions will be correct, including the
assumption that the Financed Student Loans in the Trust Estate will not
experience delinquencies or unanticipated losses.
In making an investment decision with respect to the Notes, investors should
consider a variety of possible prepayment scenarios, including the limited
scenarios described in the table below.
WEIGHTED AVERAGE LIFE OF THE NOTES AT THE RESPECTIVE CPRS SET FORTH BELOW:
<TABLE>
<CAPTION>
Weighted Average Life (years)
0% CPR 3% CPR 5% CPR 7% CPR 9% CPR 15% CPR
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Series 1998A-3 Notes........................
Series 1998A-4 Notes........................
Series 1998B-3 Notes........................
</TABLE>
THE SERVICERS
[AFSA Data Corporation, Great Lakes Higher Education Servicing Corporation and
UNIPAC Service Corporation] each service more than 10% of the initial Financed
Student Loans (each, a "Servicer"). The Financed Student Loans may be serviced
by other Servicers as may be approved by the Issuer from time to time (subject
to the approval of the Rating Agencies). Pursuant to a Servicing Agreement, each
Servicer has agreed to service, and perform all other related tasks with respect
to, the Financed Student Loans in compliance with applicable standards and
procedures. See "Servicing" in the Prospectus.
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<PAGE> 20
Information relating to the particular Servicers set forth in this Prospectus
Supplement, which is particularly within each Servicer's knowledge, has been
requested of and has been provided by the respective Servicers, and such
information and information included in the reports referred to herein have not
been verified or independently confirmed by the Issuer, the Underwriters or
their counsel, and comprises all information in respect of each Servicer that
the Issuer obtained after a reasonable request and inquiry. No Servicer is
affiliated with the Issuer, the Administrator or any Underwriter.
AFSA DATA CORPORATION
AFSA Data Corporation ("AFSA") acts as a loan servicing agent for the Issuer and
certain affiliates of the Issuer. AFSA is a for-profit corporation and a
wholly-owned subsidiary of Fleet Holding Corporation, a subsidiary of Fleet
National Bank, which in turn is a wholly-owned subsidiary of Fleet Financial
Group of Boston, Massachusetts, a diversified financial services company. As of
[__________], AFSA provided loan servicing for approximately [$_____] billion in
FFELP guaranteed student and parental loans, approximately [$_____] billion in
Perkins Loans, Health Professionals Student Loans, and institutional loans, and
[$_____] billion in Federal Direct Student Loans under contract with the
Department of Education. AFSA has its principal offices in Long Beach,
California, and a Regional Processing Center in Utica, NY, which services the
guaranteed student loan and parental loan programs, and a Regional Processing
Center in Lombard, Illinois, which services campus based programs. AFSA's
principal office is located at [2277 E. 220th Street, Long Beach California,
90810-1690]. Telephone [(313) 513-2700].
GREAT LAKES HIGHER EDUCATION SERVICING CORPORATION
General Information
Great Lakes Higher Education Corporation ("Great Lakes") was incorporated in
1967 to provide a guaranteed Student Loan program in accordance with the Act.
Great Lakes is a private, non-stock, nonprofit corporation organized under
Chapter 181, Wisconsin Statutes and is headquartered in Madison, Wisconsin.
Great Lakes is currently organized as a support corporation under Internal
Revenue Code Section 509(a)(3) and supports two Wisconsin nonstock, nonprofit
corporations which qualify as tax-exempt organizations within the meaning of
Internal Revenue Code Section 501(c)(3), Great Lakes Higher Education Guaranty
Corporation ("GLHEGC") and Great Lakes Higher Education Servicing Corporation
("GLHESC"). Great Lakes retains control over GLHEGC and GLHESC through its
rights as the sole member of each corporation. It will also continue to provide
certain support functions for GLHEGC and GLHESC such as information systems,
facilities management and accounting services. Great Lakes provides a full range
of guaranty agency and repayment servicing functions for student loans. Great
Lakes has established operating centers in Columbus, Ohio and St. Paul,
Minnesota, customer service facilities in East Lansing, Michigan and San Juan,
Puerto Rico, and systems development locations in Eau Claire and Milwaukee,
Wisconsin and Oakbrook, Illinois. Great Lakes employs approximately [_____]
people and also currently utilizes approximately [_____] independent contractors
on a fully dedicated basis.
Servicer Information
As of [__________], GLHESC serviced [_____] student and parental accounts with
an outstanding balance of [$_________] for [_____] lenders nationwide. Less than
[___%] of the portfolio serviced by GLHESC is made up of loans to students at
for-profit trade schools. As of [__________], [___%] of the portfolio serviced
by GLHESC was in repayment status, [___%] was in grace status and the remaining
[___%] was in interim status.
S-17
<PAGE> 21
Great Lakes will provide a copy of its most recent audited financial statements
upon receipt of a written request directed to [2401 International Lane, Madison,
Wisconsin 53704, Attention: Vice President for Finance].
UNIPAC SERVICE CORPORATION
A Nebraska corporation headquartered near Denver, Colorado, UNIPAC Service
Corporation ("UNIPAC") began its education loan servicing operations on January
1, 1978. UNIPAC is owned [80.5%] by Union Bank and Trust Company of Lincoln,
Nebraska. UNIPAC provides complete student loan administration to lending
institutions and secondary markets nationwide. UNIPAC currently has
approximately [_____] employees in Aurora, Colorado, [_____] employees in its
Lincoln, Nebraska office and [_____] employees in its St. Paul, Minnesota
office. As of [__________], UNIPAC's servicing volume in its Colorado office was
approximately [$__________] for its full-service and secondary market clients,
and approximately [$__________] for its remote servicing clients. UNIPAC is
located as [3015 South Parker Road, Suite 400, Aurora, Colorado 80014].
Telephone: [(303) 696-3699].
THE GUARANTEE AGENCIES
[Great Lakes Higher Education Guaranty Corporation and Pennsylvania Higher
Education Assistance Agency] each guarantee more than 10% of the initial
Financed FFELP Loans. Information relating to these particular Guarantee
Agencies is set forth below. The remaining [___%] of the initial Financed FFELP
Loans are guaranteed by one of the following Guarantee Agencies:
(a) [United Student Aid Funds, Inc., a private nonprofit corporation
organized under the General Corporation Law of the State of Delaware,
whose principal office is located at 30 South Meridian Street,
Indianapolis, Indiana 46204-3503. Telephone: (800) 428-9250];
(b) [Florida Department of Education, Office of Student Financial
Assistance, whose principal office is located at 325 West Gaines
Street, 255 Collins Building, Tallahassee, Florida 32339-0400.
Telephone: (850) 488- 4095];
(c) [Northwest Education Loan Association, a Washington nonprofit
corporation, whose principal office is located at 500 Colman Building,
811 First Avenue, Seattle, Washington 98104. Telephone: (800) 732-
1077];
(d) [Education Credit Management Corporation, whose principal office is
located at 101 East Fifth Street, Suite 2400, St. Paul, Minnesota
55101. Telephone: (888) 221-ECMC]; and
(e) [_____________________, whose principal office is located at
________________. Telephone: (___) ___- ____.]
Information relating to the particular Guarantee Agencies set forth in this
Prospectus Supplement, which is particularly within each Guarantee Agency's
knowledge, has been requested of and has been provided by the respective
Guarantee Agencies, and such information and information included in the reports
referred to herein have not been verified or independently confirmed by the
Issuer, the Underwriters or their counsel, and comprises all information in
respect of each Guarantee Agency that the Issuer obtained after a reasonable
request and inquiry. No Guarantee Agency is affiliated with the Issuer, the
Administrator or any Underwriter.
GREAT LAKES HIGHER EDUCATION GUARANTY CORPORATION
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<PAGE> 22
Great Lakes Higher Education Guaranty Corporation ("GLHEGC") is the designated
guarantor for the State of Wisconsin, State of Minnesota, State of Ohio, Puerto
Rico and the Virgin Islands. (As of December 31, 1997, GLHEGC assumed the
designated guarantor responsibility for the State of Minnesota from its
Northstar affiliate and merged Northstar's guaranty agency operations with
GLHEGC's own guaranty agency operations under the Higher Education Act).
Guaranty Volume. For the federal fiscal year ending on [__________], GLHEGC
ranked as the [_____] largest student loan guarantor in the country and its
Northstar affiliate ranked [_____] making Great Lakes' combined total [_____] in
the country. GLHEGC guaranteed a total of [$__________] in Stafford, PLUS and
SLS loans in the federal fiscal year [_____-_____], [$__________] in the federal
fiscal year [_____-_____], [$__________] in federal fiscal year [_____-_____],
[$__________] in federal fiscal year [_____-_____], [$__________] in federal
fiscal year [_____-_____], [$__________] in federal fiscal year [_____-_____],
[$__________] in federal fiscal year [_____- _____], [$__________] in federal
fiscal year [_____-_____] and [$__________] in federal fiscal year [_____-_____]
(including Northstar).
Reserve Ratio. Following are GLHEGC's reserve fund levels as calculated in
accordance with 34 CFR 5682.410(a)(10) for the last [____] fiscal years ending
September 30.
<TABLE>
<CAPTION>
Federal Guaranty Federal Guaranty
Fiscal Reserve Total Loans Reserve
Year Fund Balance Outstanding* Fund Level
---- ------------ ------------ ----------
<S> <C> <C> <C>
[-----] [$----------] [$----------] [-----%]
[-----] [$----------] [$----------] [-----%]
[-----] [$----------] [$----------] [-----%]
[-----] [$----------] [$----------] [-----%]
[-----] [$----------] [$----------] [-----%]
</TABLE>
* Does not include loans transferred from Higher Education Assistance
Foundation, Ohio Student Aid Commission or Puerto Rico guaranty agencies.
Recovery Rate. The recovery rate is a key performance indicator in evaluating
the effectiveness of a student loan guarantor's collection efforts after the
loans have defaulted. The rate is determined by dividing the amount recovered by
the cumulative amount of default claims paid by the guarantee agency. Following
are GLHEGC's recovery rates as of the end of each of the last [_____] fiscal
years for which data is available, the national averages for each year and
GLHEGC's recovery rate ranking among all student loan guarantors.
S-19
<PAGE> 23
<TABLE>
<CAPTION>
Fiscal Great Lakes' National Average Great Lakes'
Year Recovery Rate Recovery Rate Ranking
---- ------------- ------------- -------
<S> <C> <C> <C>
[-----] [-----%] [-----%] [---]
[-----] [-----%] [-----%] [---]
[-----] [-----%] [-----%] [---]
[-----] [-----%] [-----%] [---]
[-----] [-----%] [-----%] [---]
[-----] [-----%] [-----%] [---]
[-----] [-----%] [-----%] [---]
</TABLE>
Proprietary Loans. Default rates for proprietary loans have been much higher
than default rates for loans made to borrowers attending two-year and four-year
schools. GLHEGC's original principal amount of student loans guaranteed and
outstanding (in whole or in part) and percentage of proprietary, two-year and
four-year guaranteed loans as of [__________] are set forth below.
Loans
-----
School Type (millions) Percentage
- ----------- ----------
Two-year [$____] [_____%]
Four-year [_____] [_____%]
Proprietary [_____] [_____%]
Consolidation [_____] [_____%]
[$_____] 100.0%
Claims Rate. [For the past [_____] fiscal years, GLHEGC's claims rate has not
exceeded [_____%] and, as a result, the highest allowable reinsurance has been
paid on all GLHEGC's claims.] GLHEGC's claims rate for fiscal year [_____] was
lower than its [_____] claims rate. The actual claims rates are as follows:
Fiscal Year Claims Rate
----------- -----------
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY
Pennsylvania Higher Education Assistance Agency ("PHEAA") is the designated
student loan guarantor for West Virginia, Delaware and the Commonwealth of
Pennsylvania. PHEAA guarantees Stafford, PLUS and other federally reinsured
student loans made to borrowers.
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<PAGE> 24
Guaranty Volume. PHEAA is one of the largest student loan guarantors in the
country. PHEAA guaranteed a total of [$__________] of Stafford and SLS loans in
the federal fiscal year [____-____], [$__________] in the federal fiscal year
[____-____], [$__________] in the federal fiscal year [____-____], [$__________]
in the federal fiscal year [____-____] and [$__________] in the federal fiscal
year [____-____].
Reserve Ratio. A student loan guarantor's reserve ratio is determined by
dividing its fund balance by the total amount of loans outstanding. PHEAA's
reserve ratio for the last five federal fiscal years ending September 30 is as
follows:
<TABLE>
<CAPTION>
Fiscal Fund Total Loans Reserve
Year Balance Outstanding Ratio
<S> <C> <C> <C>
[-----] [$----------] [$----------] [-----%]
[-----] [----------] [----------] [-----%]
[-----] [----------] [----------] [-----%]
[-----] [----------] [----------] [-----%]
[-----] [----------] [----------] [-----%]
</TABLE>
Recovery Rate. The recovery rate is a key performance indicator in evaluating
the effectiveness of a student loan guarantor's collection efforts after the
loans have defaulted. The rate is determined by dividing the amount recovered by
the cumulative amount of default claims paid by the student loan guarantor.
PHEAA's recovery rates as of the end of each of the following [_____] fiscal
years ending September 30, the national averages for each such year and PHEAA's
ranking by recovery rate among all student loan guarantors are as follows:
<TABLE>
<CAPTION>
Fiscal PHEAA's National Average PHEAA's
Year Recovery Rate Recovery Rate Ranking
<S> <C> <C> <C>
[-----] [-----%] [-----%] [-----]
[-----] [-----%] [-----%] [-----]
[-----] [-----%] [-----%] [-----]
[-----] [-----%] [-----%] [-----]
[-----] [-----%] [-----%] [-----]
</TABLE>
Proprietary Loans. Default rates for student loans made to students attending
proprietary schools have been much higher than those for students attending
two-year and four-year schools. PHEAA's approximate amount and percentage of
student loans guaranteed per type of school by PHEAA as of [__________] is set
forth below.
Loans Percentage of
Type of School Outstanding Loans Outstanding
Two-year [$__________] [_____%]
Four-year [__________] [_____%]
Proprietary [__________] [_____%]
[$__________] 100.0%
Claims Rate. [For the past [_____] fiscal years ending September 30, PHEAA's
claims rate has not exceeded [_____%] and as a result, the highest allowable
reinsurance has been paid on all PHEAA's claims.] The actual claims rates are as
follows:
S-21
<PAGE> 25
Fiscal Year Claims Rate
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
[-----] [-----%]
Unless otherwise indicated, all of the above information was provided by PHEAA.
PHEAA will provide a copy of its most recent audited financial statements upon
receipt of a written request directed to [__________], [1200 North 7th Street,
Harrisburg, Pennsylvania 17102].
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the terms of the Indenture. The following
summary describes certain terms of the Notes. Other terms of the Notes are set
forth in the Prospectus. See "Description of the Notes" in the Prospectus. The
summary does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Notes.
The Notes will be available for purchase in denominations of $50,000 and
integral multiples of $1,000 in excess thereof in book-entry form only. The
Notes will initially be represented by one or more Notes registered in the name
of the nominee of DTC (together with any successor depository selected by the
Issuer, the "Depository"). Unless and until Definitive Notes are issued under
the limited circumstances described under "Description of the Notes --
Definitive Notes" in the Prospectus, no Noteholder will be entitled to receive a
physical certificate representing a Note. All references herein to actions by
Noteholders refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein 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 "Description of the Notes --
Book-Entry Registration" in the Prospectus.
INTEREST
Interest will accrue during each Interest Accrual Period on the principal
balance of each Series of Notes at a rate per annum equal to the related Series
Interest Rate calculated below and will be payable quarterly on the 25th day of
each February, May, August and November, or if such day is not a Business Day,
on the next succeeding Business Day (each, a "Distribution Date") to the
Noteholders as of the Record Date. The Record Date for the Notes is the second
Business Day preceding a Distribution Date. Interest accrued as of any
Distribution Date but not paid on such Distribution Date will be payable on the
succeeding Distribution Date, together with interest thereon at the applicable
Series Interest Rate. Interest will be paid pro rata to the holders of each such
Series of Notes Outstanding.
An Interest Accrual Period for the Notes with respect to any Distribution Date
begins on the preceding Distribution Date and ends on the day preceding such
Distribution Date, except the first Interest Accrual Period will begin on the
Closing Date.
The Series Interest Rate for each Series of Notes for each Interest Accrual
Period will equal the Formula Rate, subject to a cap of the Net Loan Rate for
such Interest Accrual Period. The Formula Rate for each Interest Accrual Period
for the Series 1998A-3 Notes will equal the daily weighted average of the T-Bill
Rates within such Interest Accrual
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<PAGE> 26
Period plus [ ]%, but in no event greater than [18.0]% per annum. The Formula
Rate for each Interest Accrual Period for the Series 1998A-4 Notes will equal
the daily weighted average of the T-Bill Rates within such Interest Accrual
Period plus [ ]%, but in no event greater than [18.0]% per annum. The Formula
Rate for each Interest Accrual Period for the Series 1998B-3 Notes will equal
the daily weighted average of the T-Bill Rates within such Interest Accrual
Period plus [ ]%, but in no event greater than [18.0]% per annum. See
"Description of the Notes -- Determination of the T-Bill Rate" in the
Prospectus. Interest on each Series of Notes will be calculated on the basis of
the actual number of days elapsed in each Interest Accrual Period divided by 365
(or 366 in the case of a leap year). The weighted average calculations described
above will be based on the actual number of days in such Interest Accrual
Period.
The Series Interest Rate for each Series of Notes and the Net Loan Rate will be
determined by the Calculation Agent, which initially is Salomon Smith Barney
Inc. The Series Interest Rate for each Series of Notes will be adjusted weekly
on the calendar day following each auction of 91-day Treasury Bills (an
"Interest Determination Date"), except that (i) the Series Interest Rate in
effect from the first day of each Interest Accrual Period, including the initial
Interest Accrual Period, through the day of the first 91-day Treasury Bill
auction on or after the first day of each Interest Accrual Period will be based
on the results of the most recent 91-day Treasury Bill auction prior to such day
and (ii) the Series Interest Rates will be subject to a Lock-In Period of six
Business Days preceding each Distribution Date. See "Description of the Notes --
Determination of the T-Bill Rate" in the Prospectus.
Information concerning the current 91-day Treasury Bill rate and the "accrued
interest factor" will be available by telephoning the Indenture Trustee at
[(513) 762-8870] between the hours of 9 a.m. and 5 p.m. Eastern time on any day
on which the Cincinnati Corporate Trust Office of the Indenture Trustee is open
for business and will also be available through Dow Jones Telerate Service of
Bloomberg L.P.
The Net Loan Rate for any Interest Accrual Period is equal to the annualized
percentage rate determined by multiplying (a) the ratio of 365 (or 366 in the
case of a leap year) to the actual number of days in such Interest Accrual
Period, and (b) the ratio of (i) Expected Interest Collections for the related
Collection Period less Program Operating Expenses with respect to such
Collection Period, to (ii) the Pool Balance as of the first day of such
Collection Period.
"Expected Interest Collections" means, with respect to any Collection Period,
the sum of (i) the amount of interest accrued, net of amounts required to be
paid to the Department of Education or to be repaid to Guarantee Agencies with
respect to the Financed Student Loans in the Trust Estate for such Collection
Period (whether or not such interest is actually paid), (ii) all Interest
Subsidy Payments and Special Allowance Payments pursuant to claims submitted for
such Collection Period (whether or not actually received), net of amounts
required to be paid to the Department of Education, with respect to Financed
FFELP Loans in the Trust Estate, to the extent not included in (i) above, and
(iii) Investment Earnings on the amounts on deposit allocable to the Trust
Estate with respect to such Collection Period prior to the related Distribution
Date.
If interest at the Formula Rate for any Series of Notes for any Interest Accrual
Period exceeds interest at the Net Loan Rate, the excess interest, together with
interest thereon at the applicable Formula Rate ("Carryover Interest") will be
paid on the subsequent Distribution Dates only to the extent funds are available
after other required payments on the Notes. See "-- Collection Fund" herein.
Carryover Interest will continue to be so payable notwithstanding that the
principal amount of the applicable Series of Notes has been reduced to zero
until (i) no Notes remain outstanding and (ii) the balances in the Funds and
Accounts have been reduced to zero. The ratings of the Notes do not address the
likelihood of payment of Carryover Interest. Any reference herein to "interest"
excludes Carryover Interest.
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<PAGE> 27
PRINCIPAL
NO PRINCIPAL WILL BE PAID ON THE SERIES 1998B-3 NOTES UNTIL THE SERIES 1998A
NOTES HAVE BEEN PAID IN FULL. UNLESS AN EVENT OF DEFAULT HAS OCCURRED, NO
PRINCIPAL WILL BE PAID ON THE SERIES 1998A-4 NOTES UNTIL THE SERIES 1998A-3
NOTES HAVE BEEN PAID IN FULL. FOLLOWING THE OCCURRENCE OF AN EVENT OF DEFAULT,
PRINCIPAL PAYMENTS ON THE SERIES 1998A NOTES WILL BE MADE PRO RATA, WITHOUT
PREFERENCE OR PRIORITY.
Principal payments on the Series 1998A Notes will be made quarterly on each
Distribution Date in an amount generally equal to the Series 1998A Noteholders'
Principal Distribution Amount for such Distribution Date until the principal
balance of the Series 1998A Notes has been reduced to zero. After the Series
1998A Notes have been paid in full, principal payments on the Series 1998B-3
Notes will be made quarterly on each Distribution Date in an amount generally
equal to the Series 1998B-3 Noteholders' Principal Distribution Amount for such
Distribution Date until the principal balance of the Series 1998B-3 Notes has
been reduced to zero. In addition, Parity Percentage Payments will be payable on
each Distribution Date (to the Series of Notes then receiving principal
payments) until the Parity Percentage equals ___%.
The final payment of principal and interest will be made no later than
__________ on the Series 1998A-3 Notes, __________ on the Series 1998A-4 Notes,
and __________ on the Series 1998B-3 Notes (each a "Legal Final Maturity"). The
actual maturity of one or more Series of Notes is expected to occur sooner as a
result of a variety of factors. See "Maturity and Prepayment Considerations" in
the Prospectus and this Prospectus Supplement.
If Available Funds are insufficient to pay the Series 1998A Principal
Distribution Amount or the Series 1998B-3 Principal Distribution Amount on a
Distribution Date, such shortfall will be added to the principal payable to such
Noteholders on subsequent Distribution Dates, as applicable, AND (EXCEPT WITH
RESPECT TO THE LEGAL FINAL MATURITY OF A SERIES OF NOTES) SUCH SHORTFALL WILL
NOT CONSTITUTE AN EVENT OF DEFAULT. Additionally, on the Legal Final Maturity
for a Series of Notes and on any date the Notes are to be redeemed in whole,
amounts in the Reserve Fund will be available to reduce the principal balance of
such Series of Notes to zero. See "-- Reserve Fund" herein.
All principal payments of Notes of any Series will be made pro rata within that
Series. In connection with each principal payment of Notes of any Series, the
Indenture Trustee shall compute the Principal Factor for that Series. The
"Principal Factor" shall be a number, carried to a seven-digit decimal,
indicating the principal balance of each Note of a Series as of a Distribution
Date (after giving effect to any payments made on that date) as a fraction of
the original principal amount of such Note. The Principal Factor for each Series
of Notes shall be initially 1.0000000 and will thereafter decline to reflect the
reduction in the principal balance of the Notes of that Series after any payment
of principal. The principal balance of any Note can be determined by multiplying
the original principal amount of such Note by the Principal Factor applicable to
that Series of Notes.
The "Series 1998A Noteholders' Interest Distribution Amount" means, with respect
to any Distribution Date, the sum of (i) the amount of interest accrued at the
respective Series Interest Rates for the related Interest Accrual Period on the
aggregate outstanding principal balances of both Series of Series 1998A Notes on
the immediately preceding Distribution Date after giving effect to all principal
distributions to holders of Series 1998A Notes on such preceding Distribution
Date (or, in the case of the first Distribution Date, on the Closing Date) and
(ii) the Series 1998A Interest Shortfall for such Distribution Date; provided
that the Series 1998A Noteholders' Interest Distribution Amount will not include
any Carryover Interest on the Series 1998A Notes.
The "Series 1998A Interest Shortfall" means, with respect to any Distribution
Date, the excess of (i) the Series 1998A Noteholders' Interest Distribution
Amount on the preceding Distribution Date over (ii) the amount of interest
actually
S-24
<PAGE> 28
distributed to the Series 1998A Noteholders on such preceding Distribution Date,
plus interest on the amount of such excess interest due to the Series 1998A
Noteholders, to the extent permitted by law, at the weighted average interest
rate borne by the Series 1998A-3 Notes and the Series 1998A-4 Notes from such
preceding Distribution Date to the current Distribution Date.
The "Series 1998A Noteholders' Principal Distribution Amount" means, with
respect to any Distribution Date, the Series 1998A Principal Distribution Amount
for such Distribution Date plus the Series 1998A Principal Shortfall as of the
close of the preceding Distribution Date; provided that the Series 1998A
Noteholders' Principal Distribution Amount will not exceed the outstanding
principal balance of the Series 1998A Notes. In addition, (i) on the Legal Final
Maturity of the Series 1998A-3 Notes, the principal required to be distributed
to the Series 1998A-3 Noteholders will include the amount required to reduce the
outstanding principal balance of the Series 1998A-3 Notes to zero, and (ii) on
the Legal Final Maturity of the Series 1998A-4 Notes, the principal required to
be distributed to the Series 1998A-4 Noteholders will include the amount
required to reduce the outstanding principal balance on the Series 1998A-4 Notes
to zero.
The "Series 1998A Principal Distribution Amount" is equal to the decline in the
Pool Balance between the end of the second Collection Period preceding a
Distribution Date and the end of the immediately preceding Collection Period.
The "Series 1998A Principal Shortfall" means, as of the close of any
Distribution Date, the excess of (i) the Series 1998A Principal Distribution
Amount on such Distribution Date over (ii) the amount of principal actually
distributed to the Series 1998A Noteholders on such Distribution Date.
The "Series 1998B-3 Noteholders' Interest Distribution Amount" means, with
respect to any Distribution Date, the sum of (i) the amount of interest accrued
at the related Series Interest Rate for the related Interest Accrual Period on
the aggregate outstanding principal balance of the Series 1998B-3 Notes on the
immediately preceding Distribution Date after giving effect to all principal
distributions to holders of Series 1998B-3 Notes on such preceding Distribution
Date (or, in the case of the first Distribution Date, on the Closing Date) and
(ii) the Series 1998B-3 Interest Shortfall for such Distribution Date; provided
that the Series 1998B-3 Noteholders' Interest Distribution Amount will not
include any Carryover Interest on the Series 1998B-3 Notes.
The "Series 1998B-3 Interest Shortfall" means, with respect to any Distribution
Date, the excess of (i) the Series 1998B-3 Noteholders' Interest Distribution
Amount on the preceding Distribution Date over (ii) the amount of interest
actually distributed to the Series 1998B-3 Noteholders on such preceding
Distribution Date, plus interest on the amount of such excess interest due to
the Series 1998B-3 Noteholders, to the extent permitted by law, at the related
Series Interest Rate from such preceding Distribution Date to the current
Distribution Date.
The "Series 1998B-3 Noteholders' Principal Distribution Amount" means, with
respect to any Distribution Date, the Series 1998B-3 Principal Distribution
Amount for such Distribution Date plus the Series 1998B-3 Principal Shortfall as
of the close of the preceding Distribution Date; provided that the Series
1998B-3 Noteholders' Principal Distribution Amount will not exceed the
outstanding principal balance of the Series 1998B-3 Notes. In addition, on the
Legal Final Maturity of the Series 1998B-3 Notes, the principal required to be
distributed to the Series 1998B-3 Noteholders will include the amount required
to reduce the outstanding principal balance on the Series 1998B-3 Notes to zero.
The "Series 1998B-3 Principal Distribution Amount" is equal to the decline in
the Pool Balance between the end of the second Collection Period preceding a
Distribution Date and the end of the immediately preceding Collection
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<PAGE> 29
Period (reduced with respect to the first Distribution Date on which principal
is to be paid on the Series 1998B-3 Notes by the Series 1998A Noteholders'
Principal Distribution Amount on such Distribution Date).
The "Series 1998B-3 Principal Shortfall" means, as of the close of any
Distribution Date, the excess of (i) the Series 1998B-3 Principal Distribution
Amount on such Distribution Date over (ii) the amount of principal actually
distributed to the Series 1998B-3 Noteholders on such Distribution Date.
The "Parity Percentage" is the fraction expressed as a percentage, the numerator
of which is the sum of (i) the Pool Balance plus accrued interest thereon due
from borrowers, accrued interest which is expected to be capitalized, and
accrued Interest Subsidy Payments and Special Allowance Payments, if any, as of
the end of the preceding Collection Period, and (ii) all amounts on deposit
(including any accrued interest thereon) in the Collection Fund and the Reserve
Fund, and the denominator of which is the sum of (a) the Outstanding principal
amount of the Notes, and accrued and unpaid interest thereon and (b) accrued and
unpaid Program Operating Expenses.
A "Collection Period" means each period of three calendar months from and
including the date next following the end of the preceding Collection Period,
except that the first Collection Period begins on the Closing Date and ends on
the last day of the second month preceding the month in which the first
Distribution Date occurs.
The "Pool Balance" as of the end of a Collection Period is equal to the
aggregate principal balance of the Financed Student Loans (including accrued
interest thereon capitalized through such date) as of the end of the Collection
Period, after giving effect to the following, without duplication: (i) all
payments in respect of principal received by the Indenture Trustee during such
Collection Period from or on behalf of borrowers and Guarantee Agencies and,
with respect to certain payments on certain Financed FFELP Loans, the Secretary
and (ii) the principal portion of all Purchase Amounts received by the Indenture
Trustee for such Collection Period.
SUBORDINATION OF THE SERIES 1998B-3 NOTES
The rights of the Noteholders of the Series 1998B-3 Notes to receive principal
and interest payments will be subordinated to such rights of the Noteholders of
the Series 1998A Notes to the extent described herein. This subordination is
intended to enhance the likelihood of regular receipt of principal and interest
by the Noteholders of the Series 1998A Notes. See "-- Collection Fund" herein.
COLLECTION FUND
In connection with the issuance of the Notes, the following Accounts will be
established in the Collection Fund: a "Collection Account", a "Note Payment
Account", a "Capitalized Interest Account", an "Expense Account" and an "Excess
Surplus Account".
Collection Account. The Issuer will, and will cause each Seller and Servicer to,
transfer all Available Funds received by it to the Indenture Trustee, promptly
or otherwise in accordance with the applicable Purchase Agreement or Servicing
Agreement, as the case may be, and the Indenture Trustee will, upon receipt of
any Available Funds with respect to the Financed Student Loans held in the
Student Loan Portfolio Fund, immediately deposit and credit such Available Funds
to the Collection Account.
On or before ________, 19___, amounts on deposit in the Collection Account
constituting Consolidation Loan prepayments may be applied for the Financing of
Consolidation Loans by the Issuer that consolidate one or more of the Financed
Student Loans in the Trust Estate, provided that in no event shall the aggregate
amount of Financed
S-26
<PAGE> 30
Student Loans in the Trust Estate that are Consolidation Loans exceed
$_________. The moneys to be so applied will be an amount equal to the full
remaining unpaid principal and accrued and unpaid interest and late charges on
all Financed Student Loans selected by the student borrower for consolidation.
Moneys will be paid to the Sellers of Financed Student Loans or the holders of
Student Loans selected for consolidation upon receipt by the Indenture Trustee
of certain documentation from the Issuer as provided in the Indenture. The
Issuer may only purchase Financed Student Loans serviced by Servicers and
guaranteed by Guarantee Agencies that have been approved by each Rating Agency
at the time of purchase.
Expenses relating to the Notes may be paid from time to time from Available
Funds in the Collection Account by transfers to the Expense Account for payment
thereof. See "-- Expense Account" herein.
On each Distribution Date, the Indenture Trustee will transfer from the
Collection Account the following amounts in the following priority, subject to
Available Funds for the immediately preceding Collection Period:
(i) to the Expense Account, to the extent required to increase
the balance of such Account to the Program Expense
Requirement calculated as of such Distribution Date;
(ii) to the Note Payment Account, an amount up to the Series
1998A Noteholders' Interest Distribution Amount for payment
on such Distribution Date to the Series 1998A Noteholders,
ratably, without preference or priority of any kind;
(iii) to the Note Payment Account, an amount up to the Series
1998B-3 Noteholders' Interest Distribution Amount for
payment on such Distribution Date to the Series 1998B-3
Noteholders;
(iv) to the Note Payment Account, an amount up to the Series
1998A Noteholders' Principal Distribution Amount for payment
on such Distribution Date first to the Series 1998A-3
Noteholders until the principal balance thereof has been
reduced to zero, and thereafter to the Series 1998A-4
Noteholders until the principal balance thereof has been
reduced to zero;
(v) on each Distribution Date on and after the Series 1998A
Notes have been paid in full, to the Note Payment Account,
an amount up to the Series 1998B-3 Noteholders' Principal
Distribution Amount for payment on such Distribution Date to
the Series 1998B-3 Noteholders;
(vi) to the Reserve Fund, the amount, if any, required to
increase the balance thereof to the Specified Reserve Fund
Balance as described under the caption "-- Reserve Fund"
herein;
(vii) to the Note Payment Account, an amount up to Parity
Percentage Payments to the extent then required on such
Distribution Date, for payment on such Distribution Date
first to the Series 1998A-3 Noteholders until the principal
balance thereof has been reduced to zero, then to the Series
1998A-4 Noteholders until the principal balance thereof has
been reduced to zero, and thereafter to the Series 1998B-3
Noteholders;
(viii) to the Note Payment Account, an amount up to any Carryover
Interest, for payment on such Distribution Date first to the
Series 1998A-3 Noteholders, and upon payment of all
Carryover Interest due to the Series 1998A-3 Noteholders,
then to the Series 1998A-4 Noteholders, and upon payment of
all Carryover Interest due to the Series 1998A-4
Noteholders, to the Series 1998B-3 Noteholders; and
S-27
<PAGE> 31
(ix) any remainder to the Excess Surplus Account.
Notwithstanding the foregoing, if on any Distribution Date following all
distributions to be made on such Distribution Date, either:
(a) the Outstanding principal amount of the Series 1998A Notes would
exceed the sum of the Pool Balance at the end of the immediately
preceding Collection Period plus the aggregate balance on deposit
in the Funds and Accounts under the Indenture on such
Distribution Date following such distributions, or
(b) an Event of Default under the Indenture has occurred (but prior
to the acceleration of the maturity of the Notes),
then, until the applicable conditions described in clauses (a) and (b) no longer
exist, the Series 1998B-3 Noteholders' Interest Distribution Amount will not be
paid to the Series 1998B-3 Noteholders pursuant to clause (iii) above. For so
long as any Series 1998A Notes remain Outstanding, such deferral in the payment
of the Series 1998B-3 Noteholders' Interest Distribution Amount (except with
respect to the Legal Final Maturity of the Series 1998B-3 Notes) will not
constitute an Event of Default under the Indenture. In addition, as long as the
applicable conditions described in clause (b) continue to exist, the Series
1998A Noteholders' Principal Distribution Amount will be paid pro rata to the
Series 1998A Noteholders, without preference or priority of any kind. See "The
Indentures -- Event of Default" in the Prospectus.
Note Payment Account. On each Distribution Date, following the transfers to the
Note Payment Account described above, the Indenture Trustee will distribute to
the Noteholders as of the related Record Date the amounts transferred to the
Note Payment Account, together with any amounts transferred from the Reserve
Fund, the Capitalized Interest Account and any Advances, as described under the
caption "-- Collection Account" herein.
Capitalized Interest Account. On the Closing Date, the Indenture Trustee will
deposit to the credit of the Capitalized Interest Account a portion of the
proceeds of the Notes. See "Use of Proceeds" herein. To provide for the payment
of interest on any Distribution Date or other date on which interest on any
Series of the Notes is due, the Indenture Trustee shall transfer from the
Capitalized Interest Account to the Note Payment Account, prior to any transfer
from the Reserve Fund, on each Distribution Date and any other date on which
interest is due on such Series, to the extent of moneys available in the
Capitalized Interest Account, an amount up to the amount needed to increase the
amount in the Note Payment Account to the amount of interest becoming due and
payable on such Distribution Date or other date on which interest on such
related Series is due. The Indenture Trustee shall continue to make such
transfers until the date on which all moneys in the Capitalized Interest Account
have been transferred from such Account; provided, that, after ____________, the
Indenture Trustee will also transfer from time to time any portion or all of the
balance of the Capitalized Interest Account to the balance of the Collection
Account as directed by the Issuer.
Expense Account. A portion of the proceeds from the offering of the Notes will
be deposited into the Expense Account. See "Use of Proceeds" herein. Funds will
also be deposited into the Expense Account, as described herein, from the
Collection Account and from the Reserve Fund. See "-- Collection Fund" and "--
Reserve Fund" herein. Funds in the Expense Account will be applied to pay
Program Operating Expenses and Costs of Issuance, as described in the Indenture.
In addition, expenses relating to the Notes may be paid from time to time from
Available Funds on deposit in the Collection Account by transfers to the Expense
Account for payment thereof.
Excess Surplus Account. On each Distribution Date, any Available Funds remaining
after all required distributions are made on such Distribution Date will be
deposited to the credit of the Excess Surplus Account. Amounts on
S-28
<PAGE> 32
deposit in the Excess Surplus Account may be withdrawn by the Issuer at any time
upon written request to the Indenture Trustee to be used for any lawful purpose;
provided that after such withdrawal the Parity Percentage is at least ___%. Any
Available Funds distributed to the Issuer from the Excess Surplus Account will
not thereafter be available to make payments on the Notes. Until withdrawal by
the Issuer, amounts on deposit in the Excess Surplus Account will be available
for transfer by the Indenture Trustee to the Reserve Fund if, and to the extent
that, a deficiency in the Reserve Fund remains after the transfers from the
Collection Account. The Issuer may also direct in writing that the Indenture
Trustee transfer amounts on deposit in the Excess Surplus Account to the
Collection Account or the Reserve Fund.
RESERVE FUND
In connection with the issuance of the Notes, the Indenture Trustee will
establish a Reserve Fund for the Notes. See "Description of the Notes -- Credit
Enhancement" in the Prospectus. On the Closing Date, the Indenture Trustee will
deposit $__________ in cash or Eligible Investments into the Reserve Fund which
is equal to its Specified Reserve Fund Balance.
The "Specified Reserve Fund Balance" on any Distribution Date for the Reserve
Fund is equal to the greater of ____% of the outstanding principal balance of
the Notes on such Distribution Date after giving effect to payments on such
Distribution Date, or $__________, but not in excess of the outstanding
principal balance of the Notes.
At any time the balance of the Reserve Fund is below its Specified Reserve Fund
Balance, the Indenture Trustee will restore the Reserve Fund to its Specified
Reserve Fund Balance by transfers on the next Distribution Date from among the
following Accounts in the following order of priority:
first, from the Collection Account after making all prior distributions
on such Distribution Date as described under "-- Collection Fund"
herein, and
second, from the Excess Surplus Account.
If the full amount required to restore the Reserve Fund to its Specified Reserve
Fund Balance is not available in the Collection Account or Excess Surplus
Account on the next succeeding Distribution Date, the Indenture Trustee will
continue to transfer funds in such order of priority from the Collection Account
as they become available and in accordance with the instructions for transfers
from such Account as described under the caption "-- Collection Fund" herein and
from the Excess Surplus Account until the deficiency in the Reserve Fund has
been eliminated. Also, if amounts were transferred from the Reserve Fund to
cover a Realized Loss on a Financed Student Loan, any subsequent payments of
principal received on or with respect to such Financed Student Loan will be
deposited into the Reserve Fund.
Any excess over the related Specified Reserve Fund Balance in the Reserve Fund
will be transferred to the Collection Account. After the transfer of any such
excess balance, the Reserve Fund will be used solely for the following purposes
in the following order of priority:
first, to make up any deficiency in the Expense Account immediately
following the transfer of moneys into such Account pursuant to
the Indenture;
second, to increase the amount in the Note Payment Account to the amount
required to pay interest on the Notes (other than Carryover
Interest or interest on the Series 1998B-3 Notes when the payment
of such
S-29
<PAGE> 33
interest is deferred as described under the caption "--
Collection Fund" herein) on any Distribution Date or on any other
date on which interest is due upon redemption or payment of the
Notes, by transfer and deposit by the Indenture Trustee to the
credit of the Note Payment Account on any such date; and
third, to provide for payment of the principal of any Series of Notes at
the Legal Final Maturity thereof or for the payment of the
principal of such Series being redeemed in whole as described
under the caption "Redemption" herein, by transfer and deposit by
the Indenture Trustee to the credit of the Note Payment Account
on the Legal Final Maturity of such Series or the date of any
such redemption, as the case may be.
The Reserve Fund is intended to enhance the likelihood of timely receipt by the
Noteholders of the full amount of interest due them on each Distribution Date
and principal due them on the Legal Final Maturity of the Notes or a date when
the Notes are to be redeemed in whole and to decrease the likelihood that the
Noteholders will experience losses. In certain circumstances, however, the
Reserve Fund could be depleted. If the amount required to be withdrawn from the
Reserve Fund to cover shortfalls in the amount of Available Funds exceeds the
amount of cash in the Reserve Fund, a temporary shortfall in the amount of
principal and interest distributed to the Noteholders could result. This
shortfall could, in turn, increase the average life of the Notes. Moreover,
amounts on deposit in a Reserve Fund other than amounts in excess of the related
Specified Reserve Fund Balance will not be available to cover any aggregate
unpaid Carryover Interest.
REDEMPTION
The Notes will be subject to redemption prior to maturity only as described
below.
AUCTION OF THE FINANCED STUDENT LOANS
On or after __________, 20__, the Issuer will offer the Financed Student Loans
in the Trust Estate for sale. The Issuer, its affiliates and unrelated third
parties may offer bids to purchase such Financed Student Loans on or prior to
such date. If at least two bids are received, the Issuer will accept the higher
bid if it will pay transaction costs and all amounts due the Noteholders
(including Carryover Interest) after application of funds on deposit in the
Reserve Fund. If at least two bids are not received or the bid proceeds are not
sufficient to pay transactions costs and the Notes, the Issuer will not
consummate the sale and will be required to resolicit bids annually on such date
for the then outstanding Financed Student Loans in the Trust Estate until a
successful bid is accepted or until the Notes have been paid in full. The net
proceeds of any such sale will be used to redeem any outstanding Notes at par
plus accrued interest on the next applicable Distribution Date. No assurance can
be given as to whether the Issuer will be successful in soliciting acceptable
bids to purchase the Financed Student Loans on any such auction date.
OPTIONAL REDEMPTION
To avoid excessive administrative expense, on or after ______________, 20___, if
the then outstanding Pool Balance is ____% or less of the Initial Pool Balance,
the Issuer may elect to purchase, or arrange for the purchase of, all remaining
Financed Student Loans in the Trust Estate as of the end of any Collection
Period immediately preceding a Distribution Date for a price equal to their
principal amount, plus all accrued interest thereon, as of the end of such
Collection Period but not less than an amount necessary to pay transaction costs
and all amounts due to the Noteholders (including Carryover Interest) after
application of funds on deposit in the Reserve Fund. The net proceeds of such
purchase will be applied to redeem any outstanding Notes at par plus accrued
interest on the next applicable Distribution Date.
S-30
<PAGE> 34
THE INDENTURE
The Notes will be issued pursuant to an Indenture of Trust, dated as of [_______
___, 19___], as supplemented from time to time (the "Indenture"), among the
Issuer, the Eligible Lender Trustee and the Indenture Trustee. On the Closing
Date, the Issuer and the Eligible Lender Trustee will pledge the Financed
Student Loans and other moneys received from the net proceeds of the Notes to
the Indenture Trustee under the Indenture.
INDENTURE TRUSTEE
[Star Bank, National Association], a national banking association organized
under the laws of the United States, is the Indenture Trustee for the Notes. The
Indenture Trustee's corporate trust office is located at [425 Walnut Street,
Cincinnati, Ohio 45202], and its telephone number is [(513) 762-8870]. The
Indenture Trustee is also acting as the initial Eligible Lender Trustee under
the Indenture and may serve from time to time as trustee under indentures or
eligible lender trust agreements with the Issuer or its affiliates relating to
other issues of their securities. In addition, the Issuer or its affiliates may
maintain other banking relationships with [Star Bank, National Association] and
its affiliates from time to time.
ELIGIBLE LENDER TRUSTEE
[Star Bank, National Association], a national banking association organized
under the laws of the United States, is the initial Eligible Lender Trustee for
the Issuer under the Eligible Lender Trust Agreement, dated as of [_______ ___,
19___], as amended, between the Issuer and the Eligible Lender Trustee. The
office of the Eligible Lender Trustee is located at [425 Walnut Street,
Cincinnati, Ohio 45202]. The Eligible Lender Trustee, on behalf of the Issuer,
will hold legal title to the Financed FFELP Loans in the Trust Estate. The
Eligible Lender Trustee on behalf of the Issuer has entered or will enter into a
Guarantee Agreement with each of the Guarantee Agencies with respect to each
Financed FFELP Loan. One or more additional Eligible Lender Trustees may be
added or substituted for the initial Eligible Lender Trustee from time to time
subject to certain conditions set forth in the Indenture. Each Eligible Lender
Trustee qualifies, or prior to taking title to the Financed FFELP Loans for
which additional qualifications are necessary, will qualify, as an eligible
lender and owner of Financed FFELP Loans for all purposes under the Higher
Education Act and the Guarantee Agreements with respect to such Financed FFELP
Loans. Failure of the Financed FFELP Loans to be owned by an eligible lender
would result in the loss of Guarantee Payments, Interest Subsidy Payments and
Special Allowance Payments with respect to Financed FFELP Loans. See
"Description of the FFEL Program," and "Risk Factors -- Offset by Guarantee
Agencies" in the Prospectus.
The Issuer or its affiliates may maintain other banking relationships with [Star
Bank, National Association] and its affiliates and any other Eligible Lender
Trustees and their affiliates from time to time.
REPORTS TO NOTEHOLDERS
On each Distribution Date, the Indenture Trustee will provide to the applicable
Noteholders of record as of the related Record Date a statement setting forth
substantially the information set forth under the caption "The Indentures --
Reports to Noteholders" in the Prospectus.
STUDENT LOAN PORTFOLIO FUND
In connection with the issuance of the Notes, the Indenture Trustee will
establish a "Student Loan Portfolio Fund". All Financed Student Loans
(including, without limitation, any Financed Student Loans transferred to the
Indenture
S-31
<PAGE> 35
Trustee for deposit under the Indenture by the trustee under any other indenture
of trust between the Issuer and such trustee) shall be included in the balances
of the Student Loan Portfolio Fund. Financed Student Loans may also be applied
(i) as provided in the applicable Purchase Agreements and Servicing Agreements
with respect to rejections and repurchases thereof, (ii) as provided for
defeasance of the Indenture, and (iii) as required to obtain the benefits of a
guarantee in case of default on such Financed Student Loan.
The Indenture Trustee shall permit the sale of Financed Student Loans selected
by the Issuer only (i) to avoid an Event of Default, (ii) in an exchange of
Financed Student Loans as described below, and (iii) in connection with a
mandatory auction or optional purchase of the Financed Student Loans in the
Trust Estate as described under the caption "Redemption" herein.
The Issuer may at any time and from time to time instruct the Indenture Trustee
to exchange Financed Student Loans for other Student Loans having an aggregate
principal amount no less than the aggregate principal amount of the Financed
Student Loans being exchanged, bearing the same or higher rates of interest,
being eligible, after exchange, for the same Special Allowance Payments, being
guaranteed by the same agency, and having the same status, whether interim,
grace or payout (provided, however, that as a result of such exchange the
average principal amount of all of the Financed Student Loans included in the
Trust Estate shall not be decreased, the average maturity of all such Financed
Student Loans shall not be increased and no Student Loan shall be Financed which
is not at the time authorized under the Indenture), provided, however, that the
Issuer certifies that such exchange will not materially adversely affect the
sufficiency of Available Funds to meet the obligations of the Issuer under the
Indenture.
Any sale, exchange or other disposition of Financed Student Loans described
above that are FFELP Loans will be only to or with one or more eligible lenders
under the Higher Education Act so long as the Higher Education Act requires the
owner or holder of FFELP Loans to be an eligible lender.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement dated
_________ ___, 19___ (the "Underwriting Agreement"), among the Issuer, Salomon
Smith Barney Inc., NationsBanc Montgomery Securities LLC and Fifth Third/The
Ohio Company (collectively, the "Underwriters"), the Issuer has agreed to sell
to the Underwriters, and each Underwriter has severally agreed to purchase from
the Issuer, the principal balance of each Series of Notes set forth below its
name on the following chart:
<TABLE>
<CAPTION>
SERIES OF NOTES Nations Banc Montgomery Fifth Third/
- --------------- Salomon Smith Barney Inc. Securities LLC The Ohio Company
<S> <C> <C> <C>
Series 1998A-3 Notes.................
Series 1998A-4 Notes.................
Series 1998B-3 Notes.................
------------------------- ----------------------- ------------------
Total.......................
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed, subject
to the terms and conditions set forth therein, to purchase all of the Notes
offered hereby, if any Notes are purchased. In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriter may be increased or
purchase commitments of all Underwriters may be terminated. The Issuer has been
advised by the Underwriters that the Underwriters propose initially to offer the
Notes to the public
S-32
<PAGE> 36
at the public offering price with respect to each Series set forth on the cover
page of this Prospectus Supplement. After the initial public offering, the
public offering price may be changed.
The Underwriting Agreement provides that the Issuer will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof. Such indemnification is limited to the Trust Estate.
The Notes are new issues of securities with no established trading market. The
Issuer has been advised by the Underwriters that the Underwriters intend to make
a market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for the Notes.
In the ordinary course of their business, the Underwriters and certain of their
affiliates have in the past, and may in the future, engage in commercial and
investment banking activities with the Issuer and its affiliates.
The Issuer may, from time to time, invest the funds in the Funds and Accounts in
Eligible Investments acquired from the Underwriters.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specific 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 Underwriters 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.
LEGAL MATTERS
Certain legal matters relating to the Issuer, the Notes and federal income tax
matters will be passed upon by Thompson Hine & Flory LLP. Certain legal matters
relating to the Notes will be passed upon for the Issuer by Calfee, Halter &
Griswold LLP. Certain legal matters will be passed upon for the Underwriters by
Squire, Sanders & Dempsey L.L.P. Each of these firms has performed legal
services for the Issuer in the past and it is expected that they will continue
to perform such services in the future.
RATING
It is a condition to the issuance and sale of each Series of Series 1998A Notes
that they each be rated "AAA" by [Standard & Poor's] and [Fitch] and "Aaa" by
[Moody's]. It is a condition to the issuance of the Series 1998B-3 Notes that
they be rated at least "A" by [Standard & Poor's] and [Fitch] and at least "A2"
by [Moody's]. A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The ratings of the Notes address the likelihood of the
ultimate payment of principal of and interest on the Notes pursuant to their
terms. The Rating Agencies do not evaluate, and the ratings on the Notes do not
address, the likelihood of prepayments on the Notes or the likelihood of payment
of the Carryover Interest.
S-33
<PAGE> 37
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR IN OTHER
INFORMATION TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION. THIS DOCUMENT DOES NOT CONSTITUTE AN
OFFER TO SELL ANY SECURITIES OTHER THAN THE NOTES NOR AN OFFER OF SUCH NOTES TO
ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THE PROSPECTUS AND PROSPECTUS SUPPLEMENT AT ANY TIME
DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS...............................S-1
RISK FACTORS...................................S-7
THE ISSUER.....................................S-7
USE OF PROCEEDS................................S-9
THE FINANCED STUDENT LOANS.....................S-9
MATURITY AND PREPAYMENT
CONSIDERATIONS..............................S-15
THE SERVICERS..................................S-16
THE GUARANTEE AGENCIES.........................S-18
DESCRIPTION OF THE NOTES.......................S-22
REDEMPTION.....................................S-30
THE INDENTURE..................................S-31
UNDERWRITING...................................S-32
LEGAL MATTERS..................................S-33
RATING.........................................S-33
PROSPECTUS
RISK FACTORS.....................................1
THE ISSUER......................................10
THE FINANCED STUDENT LOAN POOL..................13
MATURITY AND PREPAYMENT CONSIDERATIONS..........14
DESCRIPTION OF THE FFEL PROGRAM.................15
DESCRIPTION OF THE GUARANTEE AGENCIES...........29
THE PRIVATE LOAN PROGRAMS.......................32
SERVICING.......................................33
DESCRIPTION OF THE NOTES........................35
REDEMPTION......................................51
SECURITY FOR THE NOTES..........................51
THE INDENTURES..................................53
FEDERAL INCOME TAX CONSEQUENCES.................66
STATE TAX CONSIDERATIONS........................78
USE OF PROCEEDS.................................78
ERISA CONSIDERATIONS............................78
AVAILABLE INFORMATION...........................78
REPORTS TO NOTEHOLDERS..........................79
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE...................................79
CAUTIONARY STATEMENT CONCERNING
FORWARD- LOOKING STATEMENTS.................79
PLAN OF DISTRIBUTION............................80
RATING..........................................80
GLOSSARY OF PRINCIPAL DEFINITIONS..............A-1
GLOBAL CLEARANCE. SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES................B-1
$----------
STUDENT LOAN FUNDING LLC
STUDENT LOAN
ASSET-BACKED NOTES
SERIES 1998A-3
SENIOR T-BILL RATE NOTES
SERIES 1998A-4
SENIOR T-BILL RATE NOTES
SERIES 1998B-3
SUBORDINATE T-BILL RATE NOTES
--------------
PROSPECTUS
--------------
SALOMON SMITH BARNEY
NATIONSBANC MONTGOMERY
SECURITIES LLC
FIFTH THIRD/THE OHIO COMPANY
_______________, 1998
S-34
<PAGE> 38
PROSPECTUS
STUDENT LOAN FUNDING LLC
ISSUER
STUDENT LOAN ASSET-BACKED NOTES
<TABLE>
<S> <C>
- ----------------------------
CONSIDER CAREFULLY THE THE ISSUER:
RISK FACTORS BEGINNING
ON PAGE 1 IN THIS * may issue periodically student loan asset-backed notes in one or more series with one
PROSPECTUS. or more levels of payment priority that are secured by and payable only from a related
trust estate; and
The Notes will represent
limited obligations of the * will use the proceeds of the Notes to finance student loans that will be pledged as part
issuer payable solely from of the trust estate. A separate trust estate will be established for each issuance of Notes
the student loans and other under a separate trust indenture securing the Notes of that issue.
assets in the related trust
estate and do not represent EACH TRUST ESTATE:
obligations of the issuer to
pay from any other * will consist of:
sources. The Notes do not
represent obligations of * student loans;
any of the issuer's
affiliates. The Notes are * money and investments held under the related indenture; and
not insured or guaranteed
by any person. Except as * other property described on the cover page of the accompanying prospectus
noted in this document, the supplement.
underlying accounts and
student loans are not THE NOTES:
insured or guaranteed by
any person or * will be secured by and will be paid only from their related trust estate and not from
governmental agency. other trust estates or other assets of the Issuer;
This prospectus may be * will be rated in one of the four highest rating categories by at least one nationally
used to offer and sell any recognized rating organization;
series of Notes only if
accompanied by the * may have one or more forms of credit enhancement; and
prospectus supplement for
that series. * will be issued as part of a designated series that may include one or more levels of
payment priority.
THE NOTEHOLDERS:
* will receive interest and principal payments from collections on the student loans and
the other assets in the related trust estate; and
* are entitled to receive payments from collections on student loans and other assets held
under the related indenture and securing their series of Notes, but have no entitlement
to payments from student loans or other assets held under other indentures and securing other
series of Notes.
- ----------------------------
</TABLE>
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE NOTES OR DETERMINED
THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
______________, 1998
<PAGE> 39
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
The issuer provides information to you about the Notes in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular series
of Notes, including your series, and (b) the accompanying prospectus supplement,
which will describe the specific terms of your series of Notes, including:
* the timing of interest and principal payments;
* financial and other information about the student loans;
* information about credit enhancement for each series;
* the ratings for each series; and
* the method for selling the Notes.
IF THE TERMS OF A PARTICULAR SERIES OF NOTES VARY BETWEEN THIS PROSPECTUS
AND THE PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN THE
PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. The issuer has not authorized anyone to provide you with different
information. The Notes are not offered in any state where the offer is not
permitted.
The issuer has included cross-references in this prospectus and in the
accompanying prospectus supplement to captions in these materials where you can
find further related discussions. The following table of contents and the table
of contents included in the accompanying prospectus supplement provide the pages
on which these captions are located.
--------------------
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<PAGE> 40
TABLE OF CONTENTS
PAGE
----
RISK FACTORS................................................................1
THE ISSUER.................................................................10
The Administrator.....................................................11
THE FINANCED STUDENT LOAN POOL.............................................13
MATURITY AND PREPAYMENT
CONSIDERATIONS........................................................14
DESCRIPTION OF THE FFEL PROGRAM............................................15
Loan Terms............................................................16
Contracts with Guarantee Agencies.....................................24
Federal Special Allowance Payments....................................28
Federal Student Loan Insurance Fund...................................29
Direct Loans..........................................................29
DESCRIPTION OF THE GUARANTEE
AGENCIES..............................................................29
Federal Agreements....................................................31
Effect of Annual Claims Rate..........................................32
THE PRIVATE LOAN PROGRAMS..................................................32
SERVICING..................................................................33
Servicing Procedures..................................................34
Servicer Covenants....................................................34
Servicing Compensation................................................34
DESCRIPTION OF THE NOTES...................................................35
Payment of Available Funds............................................36
Interest..............................................................38
Principal.............................................................39
Determination of LIBOR................................................40
Determination of the T-Bill Rate......................................41
Auction Procedures....................................................42
Credit Enhancement....................................................44
Book-Entry Registration...............................................45
Definitive Notes......................................................49
List of Noteholders...................................................50
Reports to Noteholders................................................50
REDEMPTION.................................................................51
SECURITY FOR THE NOTES.....................................................51
The Trust Estates.....................................................51
Exchange Agreements...................................................52
THE INDENTURES.............................................................53
Indenture Trustee.....................................................53
Eligible Lender Trustee...............................................53
Funds and Accounts....................................................54
Advances..............................................................56
Investment............................................................56
Covenants of the Issuer...............................................57
Events of Default.....................................................58
Amendment and Supplemental
Indentures........................................................62
Defeasance............................................................64
Nonpresentment........................................................65
Removal of an Indenture Trustee;
Resignation; Successors..........................................66
FEDERAL INCOME TAX CONSEQUENCES............................................66
Characterization of the Notes as
Indebtedness......................................................67
Characterization of the Trust Estate..................................68
Original Issue Discount...............................................68
Variable Rate Notes...................................................72
Anti-Abuse Rule.......................................................74
Market Discount.......................................................74
Amortizable Premium...................................................75
Gain or Loss on Disposition...........................................76
Miscellaneous Tax Aspects.............................................77
STATE TAX CONSIDERATIONS...................................................78
USE OF PROCEEDS............................................................78
ERISA CONSIDERATIONS.......................................................78
AVAILABLE INFORMATION......................................................78
REPORTS TO NOTEHOLDERS.....................................................79
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE................................................79
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS............................................79
PLAN OF DISTRIBUTION.......................................................80
RATING.....................................................................80
GLOSSARY OF PRINCIPAL
DEFINITIONS..........................................................A-1
GLOBAL CLEARANCE. SETTLEMENT
AND TAX DOCUMENTATION
PROCEDURES...........................................................B-1
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<PAGE> 41
RISK FACTORS
You should consider the following risk factors in deciding whether to purchase
the Notes.
LIMITED ABILITY TO
RESELL YOUR NOTES The underwriters may assist in
resales of the Notes but they are not
required to do so. A secondary market for
any series of Notes 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
Notes.
LIMITED TRUST ASSETS A separate trust estate will be established
for your Notes under the related indenture.
Your trust estate will not have any
significant assets or sources of funds
except for the student loans and related
assets. Your Notes are limited obligations
of the issuer payable solely from your trust
estate. Your Notes, together with all
interest rate exchange agreements as may be
entered into from time to time, and
carryover interest, if any, are secured by
and payable solely from your trust estate,
and will not be insured or guaranteed by the
issuer, the administrator, the guarantee
agencies, the eligible lender trustee, any
of their affiliates, or the Department of
Education. You must rely for repayment upon
proceeds realized from the student loans,
credit enhancement (if any) and assets in
your trust estate. You will have no rights
to other trust estates established to secure
other Notes. See "Description of the Notes--
Payment of Available Funds", "The
Indentures-- Funds and Accounts" and
"Description of the Notes-- Credit
Enhancement" herein.
FAILURE BY LOAN HOLDERS
OR SERVICERS TO COMPLY
WITH STUDENT LOAN
ORIGINATION AND
SERVICING PROCEDURES The Higher Education Act requires
loan holders and servicers to follow
specified procedures to ensure that the
FFELP Loans are properly originated and
serviced. Failure to follow these procedures
may result in:
(i) LOSS OF REINSURANCE PAYMENTS,
INTEREST SUBSIDIES AND SPECIAL
ALLOWANCE PAYMENTS. The
Department of Education's
refusal to make reinsurance
payments to the guarantee
agencies or to make interest
subsidy payments and special
allowance payments to the
eligible lender trustee with
respect to the FFELP Loans; and
(ii) LOSS OF GUARANTEE PAYMENTS. The
guarantee agencies' inability
or refusal to make guarantee
payments with respect to FFELP
Loans.
In addition, any applicable private loan
program may have similar requirements. The
failure to follow any of those requirements
may result in the loss of any guarantee or
other similar benefits with respect to such
private loans.
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<PAGE> 42
The loss of any such payments may adversely
affect your indenture trustee's ability to
pay principal and interest on the Notes. See
"Description of the FFEL Program", "Private
Loan Programs" and "Servicing -- Servicing
Procedures" herein.
SUBORDINATION Where one or more series of Notes in an
issuance are subordinated to other series of
Notes in that issuance, principal payments
on the subordinated series generally will
not begin until the related senior series
are repaid. In addition, interest payments
on any payment date on a subordinated series
generally will be made only after each
related senior series has received its
interest entitlement on that payment date
and after each exchange payment to be made
under an interest rate exchange agreement on
a parity with such senior series is made,
and sometimes will be made only after each
related senior series has received its
principal entitlement on that payment date.
Consequently, a subordinated series will
bear losses on the student loans before such
losses being borne by the related senior
series. In addition, subordinated
noteholders may be limited in the legal
remedies that are available to them until
the related senior noteholders and any
interest rate exchange counterparties under
any exchange agreement on a parity with such
senior series are paid in full. See
"Security for the Notes-- The Trust Estates"
herein.
OFFSET BY GUARANTEE
AGENCIES OR THE
DEPARTMENT OF
EDUCATION COULD
REDUCE THE AMOUNT
OF AVAILABLE FUNDS The eligible lender trustee may use a
Department of Education lender
identification number that may also be used
for other student loans held by the eligible
lender trustee on behalf of the issuer, the
administrator or their affiliates under
other indentures. If it does, the billings
submitted to the Department of Education
will be consolidated with the billings for
payments for student loans under other
indentures, and payments on such billings
would be made by the Department of Education
or the guarantee agency to the eligible
lender trustee in lump sum form. These
payments would be allocated by the eligible
lender trustee among the various indentures
using the same lender identification number.
If the Department of Education or a
guarantee agency determines that the
eligible lender trustee owes a liability to
the Department of Education or the guarantee
agency on any FFELP Loan for which the
eligible lender trustee is legal
titleholder, the Department of Education or
the guarantee agency might seek to collect
that liability by offsetting against
payments due the eligible lender trustee
under your indenture. Such offsetting or
shortfall of payments due to the eligible
lender trustee with respect to your
indenture could adversely affect the amount
of available funds for any collection period
and your indenture trustee's ability to pay
interest and principal on your Notes.
Indentures of the issuer prior to September,
1998 do not contain provisions for
cross-indemnification with respect to such
payments and offsets. The indenture for your
Notes and other indentures of the issuer
going forward will contain such
cross-
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<PAGE> 43
indemnification provisions. Although these
indentures will include such provisions,
there can be no assurance that the amount of
funds available to your indenture trustee
with respect to such right of
indemnification may be adequate to
compensate you for any previous reductions
in the available funds for a collection
period. Also, the fact that prior indentures
did not contain such provisions could
adversely affect the amount of available
funds for any collection period to the
extent any shortfall or offset affects your
indenture and your indenture cannot be
adequately compensated.
See "Description of the FFEL Program" and
"Description of the Guarantee Agencies"
herein.
FINANCIAL HEALTH OF
GUARANTEE AGENCIES
COULD DECLINE The FFELP Loans are not secured by any
collateral of the borrower. Payments of
principal and interest are guaranteed by
guarantee agencies to the extent described
herein and in the related prospectus
supplement. Excessive borrower defaults
could impair a guarantee agency's ability to
meet its guarantee obligations. In addition,
future legislation or regulations may reduce
guarantee agency revenues by restricting the
amount of guarantee fees or reducing
Secretary of Education reimbursements. The
financial health of a guarantee agency could
affect the timing and amount of available
funds for any collection period and your
indenture trustee's ability to pay principal
of and interest on your Notes. Although a
holder of FFELP Loans could submit claims
for payment directly to the Department of
Education if the Department determines that
a guarantee agency is unable to meet its
insurance obligation, there is no assurance
that the Department of Education would make
such a determination or that it would pay
claims in a timely manner. The eligible
lender trustee may receive claim payments on
FFELP Loans directly from the Department of
Education under Section 432(o) of the Higher
Education Act if such a determination is
made. See "Description of the FFEL Program"
and "Description of the Guarantee Agencies"
herein.
The private loans are not secured by any
collateral of the borrower other than the
possibility of a co-signor. Payments of
principal and interest may be guaranteed by
a guarantor or by an escrow fund established
for the private loan program to the extent
described herein and in the related
prospectus supplement. Excessive borrower
defaults could impair a guarantor's ability
to meet its guarantee obligations or could
deplete any applicable escrow fund. The
financial health of these entities could
affect the timing and amount of available
funds for any collection period and your
indenture trustee's ability to pay principal
and interest on your Notes. See "Private
Loan Programs" herein.
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<PAGE> 44
FINANCIAL HEALTH OF
ANY EXCHANGE COUNTERPARTY
OR ANY PROVIDER OF AN
EXCHANGE COUNTERPARTY
GUARANTEE COULD REDUCE
THE AMOUNT OF AVAILABLE
FUNDS If an interest rate exchange agreement
relating to a series of your Notes is ever
executed, at such times that the exchange
rate being paid by an exchange counterparty
is greater than the exchange rate being paid
by the issuer, your indenture trustee's
ability to make principal and interest
payments on your Notes will be affected by
such exchange counterparty's ability or the
ability of any provider of an exchange
counterparty guarantee to meet its net
payment obligation to your indenture
trustee. See "Security for the Notes--
Exchange Agreements" herein.
POTENTIAL ADVERSE
CHANGES TO
FFEL PROGRAM The Higher Education Act and other
relevant federal or state laws may be
amended or modified in the future. In
particular, the level of guarantee payments
may be adjusted from time to time. The
issuer cannot predict whether any changes
will be adopted or, if so, what impact such
changes may have on the issuer, your trust
estate or your Notes.
INCREASED COMPETITION
FROM THE FEDERAL DIRECT
STUDENT LOAN PROGRAM The Federal Direct Student Loan Program has
been established under the Higher Education
Act. This program could result in reductions
in the volume of loans made under the FFEL
Program. If so, the issuer, the
administrator and the servicers may
experience increased costs due to reduced
economies of scale. These cost increases
could reduce the ability of the servicers to
satisfy their obligations to service the
student loans. This could also reduce
revenues received by the guarantee agencies
available to pay claims on defaulted FFELP
Loans. The competition currently existing in
the secondary market for loans made under
the FFEL Program could be reduced, resulting
in fewer potential buyers of the FFELP Loans
and lower prices available in the secondary
market for those loans.
The Department of Education has implemented
a direct consolidation loan program, which
may reduce the volume of loans made under
the FFEL Program and is expected to result
in prepayments of student loans. See
"Description of the FFEL Program herein."
REINVESTMENT RISK
AND PREPAYMENTS Student loans may be prepaid by
borrowers at any time without penalty. The
rate of prepayments may be influenced by
economic and other factors, such as interest
rates, the availability of other financing,
and the general job market. To the extent
borrowers elect to borrow money through
consolidation loans, the noteholders will
receive as a prepayment of principal the
aggregate principal amount of the loan.
4
<PAGE> 45
If loan prepayments result in a series of
Notes being prepaid before its expected
legal final maturity, you may not be able to
reinvest your funds at the same yield as the
yield on the Notes. The issuer cannot
predict the prepayment rate of any Notes,
and reinvestment risks resulting from a
faster or slower prepayment speed will be
borne entirely by you and the other holders
of the Notes. Generally, the effect of such
prepayments initially will be to increase
the rate of payment on senior Notes and,
therefore, increase the reinvestment risk
with respect to senior Notes. After the
senior Notes have been paid in full, the
amount of such prepayments will be applied
to the payment of the principal balance of
more subordinated Notes until they are paid
in full. Reinvestment risk resulting from
prepayments is expected to be borne first by
the holders of senior series of Notes, and
then by the holders of more subordinated
series of Notes. See "Maturity and
Prepayment Considerations" herein.
THE MATURITY OF YOUR
INVESTMENT IS UNCERTAIN Scheduled payments on the student loans and
the maturities of the student loans may be
extended without your consent, which may
lengthen the weighted average life of your
investment. Prepayments of principal on the
student loans, parity percentage payments
and other factors may shorten the life of
your investment. See "Maturity and
Prepayment Considerations" herein.
THE INTEREST RATE ON
THE NOTES IS SUBJECT
TO LIMITATIONS The interest rate for any series of LIBOR
rate Notes will be based generally on the
level of LIBOR. The interest rate for any
series of auction rate Notes will be based
generally on the outcome of an auction of
Notes. The interest rate for other series of
Notes may be based on the index, formula or
other method, such as the T-Bill rate. The
student loans, however, generally bear
interest at the T-Bill rate plus a stated
margin.
The foregoing interest rates generally will
be limited by the net loan rate for each
series. The net loan rate for a series is
determined by multiplying two ratios. The
first ratio is the ratio of 365 (or 366 in
the case of a leap year) to the actual
number of days in an interest period. The
second ratio is the ratio of expected
interest collections, special allowance
payments and interest subsidy payments on
the student loans in your trust estate and
investment earnings on amounts in your trust
estate for the related collection period
minus the program operating expenses
allocable to your Notes for the collection
period, to the principal amount (including
capitalized interest) of the student loans
in your trust estate on the first day of the
collection period. For a payment date on
which the net loan rate applies, the
difference between the amount of interest at
the rate described above and the amount of
interest at the net loan rate will be paid
on succeeding payment dates to the extent of
available funds and may never be paid. See
"Description of the Notes -- Interest"
herein.
PRINCIPAL BALANCE OF
NOTES MAY EXCEED
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<PAGE> 46
POOL BALANCE The principal amount of the Notes issued
under your Indenture may exceed the
principal balance of all assets purchased
with the proceeds of such issuance. If an
event of default occurs and the assets of
your trust estate are liquidated, the
student loans would have to be sold at a
premium for the subordinated noteholders and
possibly the senior noteholders to avoid a
loss. Neither the issuer nor the
administrator can predict the rate or timing
of accelerated payments of principal or when
the aggregate principal amount of the Notes
may be reduced to the aggregate principal
amount of the student loans.
INDENTURE TRUSTEE MAY
HAVE DIFFICULTY LIQUIDATING
FINANCED STUDENT LOANS Generally, during an event of default, your
indenture trustee is authorized with certain
noteholder consent to sell the related
student loans. However, your indenture
trustee may not find a purchaser for the
student loans. Also, the market value of the
student loans might not equal the principal
amount of Notes plus accrued interest. In
either event, the noteholders may suffer a
loss.
INSUFFICIENCY OF
FUNDS FOR PRINCIPAL
DISTRIBUTIONS IS NOT
AN EVENT OF DEFAULT The principal amount required to be paid on
the Notes on any payment date under your
indenture generally is limited to amounts
available for payment. Therefore, failure to
pay principal may not result in the
occurrence of an event of default until the
legal final maturity of the Notes.
BANKRUPTCY OF ISSUER
COULD RESULT IN
ACCELERATED
PREPAYMENT
ON YOUR NOTES The issuer is a limited purpose finance
subsidiary of Student Loan Funding
Resources, Inc. If the issuer becomes
bankrupt, the United States Bankruptcy Code
could materially limit or prevent the
enforcement of the issuer's obligations,
including, without limitation, its
obligations under the Notes. The issuer's
trustee in bankruptcy (or the issuer itself
as debtor-in-possession) may seek to
accelerate payment on the Notes and
liquidate the assets in your trust estate.
If principal on the Notes is declared due
and payable, you may lose the right to
future payments and face reinvestment risks
mentioned above.
PRE-FUNDING FUND
PAYMENTS MAY CREATE
REINVESTMENT RISKS If a pre-funding fund is established in
connection with the issuance of your Notes,
and if the amount of student loans purchased
by the issuer during the pre-funding period
is less than the pre-funded amount, the
issuer will distribute the difference as
additional principal payments. See "The
Indentures -- Funds and Accounts" herein.
6
<PAGE> 47
CHANGES IN INCENTIVE
AND REPAYMENT
TERMS RESULT IN
YIELD UNCERTAINTIES
FOR INVESTORS Under certain incentive programs, the issuer
and the sellers of the student loans to the
issuer may terminate or change the terms of
the incentives with respect to any or all of
a borrower's loans. The issuer cannot
predict which borrowers will qualify or
decide to participate in these programs. The
effect of these incentive programs may be to
reduce the yield on the student loans.
CONSUMER PROTECTION
LAWS MAY INCREASE
COSTS AND UNCERTAINTIES Consumer protection laws impose requirements
upon lenders and servicers. Some state laws
impose finance charge restrictions on
certain transactions and require contract
disclosures. These state laws are generally
preempted by the Higher Education Act for
FFELP Loans. However, the form of promissory
notes required by the Department of
Education for FFELP Loans provides that
holders of such promissory notes evidencing
certain loans made to borrowers attending
for-profit schools are subject to any claims
and legal defenses that the borrower may
have against the school. Private loan
programs would be subject to applicable
state laws regulating loans to consumers.
BOOK-ENTRY REGISTRATION
MAY LIMIT INVESTORS'
ABILITY TO PARTICIPATE
DIRECTLY AS A HOLDER The Notes may be represented by one or more
certificates registered in the name of Cede
& Co., the nominee for DTC, and will not be
registered in the names of the holders of
the Notes, if specified in the accompanying
prospectus supplement. If so, you will only
be able to exercise the rights of
noteholders indirectly through DTC and its
participating organizations. See
"Description of the Notes--Book-Entry
Registration" herein.
CREDIT RATINGS ADDRESS
ONLY A LIMITED SCOPE OF
INVESTOR CONCERNS A rating agency will rate each Note in one
of its four highest rating categories. A
rating is not a recommendation to buy or
sell Notes or a comment concerning
suitability for any investor. A rating only
addresses the likelihood of the ultimate
payment of principal and stated interest and
does not address the likelihood of
prepayments on the Notes or the likelihood
of the payment of carryover interest. A
rating may not remain in effect for the life
of the Notes. See "Rating" herein and
"Rating" in the accompanying Prospectus
Supplement.
Your indenture provides that the issuer and
your indenture trustee may undertake various
actions based upon receipt by your indenture
trustee of confirmation from each of the
rating agencies that the outstanding
respective ratings assigned by such rating
agencies to the outstanding Notes issued
under your indenture are not adversely
affected. Such actions include, but are not
limited to, the execution by
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<PAGE> 48
the issuer of interest rate exchange
agreements and the acquisition of certain
investments. To the extent such actions are
taken after issuance of the Notes, investors
in the Notes will be relying on the
evaluation by the rating agencies of such
actions and their impact on credit quality.
BANKRUPTCY OF STUDENT
LOAN FUNDING RESOURCES,
INC. COULD RESULT IN
REDUCTIONS OF PAYMENT
OR DELAYS IN PAYMENT The issuer has taken steps in structuring
the transactions contemplated hereby that
are intended to prevent any voluntary or
involuntary application for relief by
Student Loan Funding Resources, Inc., the
99% membership interest holder and
administrator of the business activities of
the issuer, under the United States
Bankruptcy Code or other insolvency laws, as
the case may be, from resulting in
consolidation of the assets and liabilities
of the issuer with those of Student Loan
Funding Resources, Inc. These steps include
the creation of the issuer as a separate,
special purpose subsidiary pursuant to a
limited liability company agreement
containing certain limitations, including
restrictions on the nature of the issuer's
business and a restriction on the issuer's
ability to commence a voluntary case or
proceeding under any insolvency law without
the unanimous affirmative vote of its
management committee. However, there can be
no assurance that the activities of the
issuer would not result in a court
concluding that the assets and the
liabilities of the issuer should be
consolidated with those of Student Loan
Funding Resources, Inc. in a proceeding
under any insolvency law. If a court were to
reach such a conclusion or if a filing were
made under any insolvency law by or against
the issuer, or if an attempt were made to
litigate any of the foregoing issues, then
delays in payments on the Notes could occur
or reductions in the amounts of such
payments could result. See "The Issuer"
herein.
PROBLEMS WITH THE
PURCHASE OF STUDENT
LOANS COULD RESULT
IN REDUCTIONS OR
DELAYS IN PAYMENT The issuer plans to acquire the initial pool
of student loans for each issue of Notes
from a variety of sources, including
purchases of student loans from one or more
affiliates of the issuer and from third
party sellers. If a pre-funding fund is
established for your Notes, the issuer may
also be able to acquire additional student
loans from affiliates and other third party
sellers after the closing date. The issuer
views these transfers of student loans from
its affiliates and third parties as a valid
sale. However, a court could treat this
transfer as a secured financing.
If any transfer of student loans is deemed
to be a secured financing, other persons may
have an interest in the loans superior to
the interest of the issuer or the eligible
lender trustee, as applicable. The issuer's
affiliates and other third parties selling
student loans to the issuer will represent
that the student loans are transferred to
the eligible lender trustee or the issuer,
as applicable, free and clear of all liens
and covenant that they will not sell,
pledge, assign, transfer or grant any lien
on any
8
<PAGE> 49
transferred student loan other than to the
eligible lender trustee or the issuer, as
applicable. Each servicer will have custody
of the promissory notes related to the
student loans. The student loans may not be
physically segregated at the servicer's or
other custodian's offices. If any interest
in the student loans were assigned to
another party, that party could acquire an
interest in the student loans superior to
the interest of the eligible lender trustee,
the issuer and your indenture trustee.
With respect to the acquisition of student
loans from an affiliate of the issuer, if
the transfer constitutes a valid sale, the
student loans would not be property of the
affiliate should the affiliate become
subject to any insolvency law after the
transfer. The selling affiliate will
represent and warrant to the issuer in the
related purchase agreement that the transfer
is a valid sale. In addition, the issuer and
the eligible lender trustee will treat the
transfer as a valid sale and will take all
actions that are required so that the
issuer, or the eligible lender trustee on
behalf of the issuer, will be treated as the
legal owner of the student loans.
Notwithstanding the foregoing, if the
selling affiliate were to become a debtor in
a bankruptcy case and a creditor or trustee
in bankruptcy of such debtor or such debtor
itself were to take the position that the
transfer should instead be treated as a
secured financing, then delays in payments
on the Notes could occur. If the court ruled
in favor of any such trustee, debtor or
creditor, reductions in the amount of
payments on the Notes could occur.
INABILITY OF SELLER TO
MEET ITS REPURCHASE
OBLIGATIONS MAY
ADVERSELY AFFECT
YOUR NOTES Under certain circumstances, the issuer has
the right, pursuant to the related purchase
agreement, to cause the seller to repurchase
any student loan in the event of a breach of
the representations, warranties or covenants
of the seller with respect to such student
loan. There can be no assurance, however,
that the seller will have the financial
resources to do so. The failure of the
seller to so repurchase a student loan would
constitute a breach of the related purchase
agreement but would not constitute an event
of default under your indenture.
PROBLEMS CAUSED BY
YEAR 2000 ISSUES COULD
RESULT IN REDUCTIONS OR
DELAYS IN PAYMENT The transition from the year 1999 to the
year 2000 and years after may disrupt the
ability of computerized and other electronic
systems to process information. As a result
of computer programs and other electronic
devices historically being programmed using
two digits rather than four to define the
applicable year, time- sensitive software
may not properly recognize a year that
begins with "20" instead of the familiar
"19", which could result in system failure
or miscalculations. If the issuer, Student
Loan Funding Resources, Inc., as the
administrator, the servicers, the guarantee
agencies, your indenture trustee or the
eligible lender trustees are unable to
modify their computer and electronic systems
and applications to resolve any year 2000
issues, or if any of these parties are
adversely affected by the
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<PAGE> 50
inability or failure of a third party on
which they rely to deal with year 2000
issues, the timely receipt of collections on
the student loans may be adversely affected.
The cost of operations of the issuer's
program for financing student loans could
also be adversely affected. In addition, to
the extent the Department of Education is
unable to resolve any year 2000 issues or is
adversely affected by a third party who was
unable to resolve any year 2000 issues, the
administration of the FFEL Program could be
adversely affected, including the timely
receipt of interest subsidy payments,
special allowance payments and other
payments from the Department of Education
with respect to FFELP Loans. If the receipt
of any of these collections or payments were
to be so affected as a result of year 2000
issues, or if the issuer's cost of
operations were to be so affected as a
result of year 2000 issues, the timing and
amounts of payments on your Notes could be
adversely affected. See "The Issuer -- Year
2000" in the accompanying Prospectus
Supplement.
THE ISSUER
Student Loan Funding LLC (the "Issuer") is a Delaware limited liability company
organized as a bankruptcy remote special purpose entity. The Issuer has the
following two members: (i) Student Loan Funding Resources, Inc. (99% ownership),
an Ohio corporation, and (ii) SLF Enterprises, Inc. (1% ownership), an Ohio
corporation and wholly owned subsidiary of Student Loan Funding Resources, Inc.
The Issuer is governed by a five-member Management Committee, which consists of
the following individuals: Christopher P. Chapman, Thomas L. Conlan, Jr., Mark
A. Ferrucci, Kim Lutthans and Brian A. Ross. Mr. Conlan, Mr. Chapman and Mr.
Ross are officers and employees of Student Loan Funding Resources, Inc. and Ms.
Lutthans and Mr. Ferrucci are independent members of the Management Committee.
The Issuer has no full-time employees. Student Loan Funding Resources, Inc. acts
as administrator for the Issuer's business activities (in such role, the
"Administrator"). Certain responsibilities of the Issuer under each Indenture
will be undertaken on behalf of the Issuer by the Administrator. See "-- The
Administrator" herein. The principal executive offices of the Issuer are located
at One West Fourth Street, Suite 210, Cincinnati, Ohio 45202. The telephone
number of such offices is (513) 352-0570.
On June 1, 1998, the Thomas L. Conlan Education Foundation (formerly known as
The Student Loan Funding Corporation), an Ohio nonprofit corporation (the
"Foundation"), in connection with an election under Section 150(d)(3) the
Internal Revenue Code of 1986, as amended (the "Code"), transferred to the
Administrator substantially all of the assets and liabilities of the Foundation
and the Administrator subsequently transferred substantially all of the
transferred assets and liabilities to the Issuer. As a result of these transfers
and assumptions, the Issuer became the sole obligor on approximately $1.9
billion of debt that was previously debt of the Foundation, which is all
non-recourse debt of the Issuer, and the Foundation and the Administrator have
no liability with respect thereto. Until June 1, 1998, the Foundation was a
tax-exempt charitable organization under Section 501(c)(3) of the Code and a
"qualified scholarship funding corporation" within the meaning of Section 150(d)
of the Code engaged in acting as a secondary market for student loans originated
under the Higher Education Act. On May 28, 1998, the Foundation made the tax
election pursuant to Section 150(d)(3) of the Code to terminate its status as a
qualified scholarship funding corporation while continuing to qualify as a
tax-exempt charitable organization under Section 501(c)(3) of the Code.
Under the Issuer's limited liability agency agreement, the Issuer will not
engage in any activity other than (i) acquiring, holding, selling and managing
student loans and other assets in the trust estates established by the Issuer
and proceeds therefrom, (ii) issuing one or more Series of Notes or other debt
obligations under one or more
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indentures of the Issuer, (iii) making payments on the Notes or other debt
obligations of the Issuer, and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish in connection with those
activities.
The Issuer has taken steps in structuring the transactions contemplated hereby
that are intended to prevent any voluntary or involuntary application for relief
by the Administrator under any Insolvency Law from resulting in consolidation of
the assets and liabilities of the Issuer with those of the Administrator. These
steps include the creation of the Issuer as a separate, special purpose
subsidiary pursuant to a limited liability company agreement containing certain
limitations (including restrictions on the nature of the Issuer's business and a
restriction on the Issuer's ability to commence a voluntary case or proceeding
under the United States Bankruptcy Code or other insolvency laws, as the case
may be ("Insolvency Laws"), without the unanimous affirmative vote of its
Management Committee, including the independent members). However, there can be
no assurance that the activities of the Issuer would not result in a court
concluding that the assets and the liabilities of the Issuer should be
consolidated with those of the Administrator in a proceeding under any
Insolvency Law.
The Issuer has received the advice of counsel to the effect that subject to
certain facts, assumptions and qualifications, it would not be a proper exercise
by a court of its equitable discretion to disregard the separate corporate
existence of the Issuer and to require the consolidation of the assets and
liabilities of the Issuer with the assets and liabilities of the Administrator
in the event of the application of any Insolvency Laws to the Administrator.
Among other things, it is assumed by counsel that the Issuer will follow certain
procedures in the conduct of its affairs, including maintaining records and
books of accounts separate from those of the Administrator, refraining from
commingling its assets with those of the Administrator and refraining from
holding itself out as having agreed to pay, or being liable for, the debts of
the Administrator. The Issuer intends to follow and has represented to such
counsel that it will follow these and other procedures related to maintaining
its separate identity. However, there can be no assurance that a court would not
conclude that the assets and liabilities of the Issuer should be consolidated
with those of the Administrator. If a court were to reach such a conclusion, or
a filing were made under any Insolvency Law by or against the Issuer, or if an
attempt were made to litigate any of the foregoing issues, delays in
distributions on the Notes could occur or reductions in the amounts of such
distributions could result.
Upon the occurrence of any of certain events of bankruptcy or insolvency with
respect to the Issuer, the Financed Student Loans and other assets constituting
a Trust Estate may be liquidated. The proceeds from any such liquidation would
be treated as collections on such assets and deposited in the Funds and Accounts
under the related Indenture. There can be no assurance that the proceeds from
the liquidation of such assets and amounts (if any) on deposit in the funds and
accounts held under such Indenture would be sufficient to pay the Notes issued
under such Indenture in full.
THE ADMINISTRATOR
Student Loan Funding Resources, Inc., the Administrator, is an Ohio corporation
that offers a broad range of educational related financial services, including
student loan secondary market services for lenders, education information
outreach, and technical and other assistance to colleges and universities. The
principal executive offices of the Administrator are located at One West Fourth
Street, Suite 200, Cincinnati, Ohio 45202. Its telephone number is (513)
352-0222. Pursuant to an Administration Agreement between the Administrator and
the Issuer, the Administrator will provide management and administrative
services to the Issuer. The Administrator will receive an administration fee as
compensation of the performance of its obligations and as reimbursement for its
expenses related thereto. However, the Notes are neither obligations of nor
guaranteed or insured by the Administrator.
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The Administrator is a wholly owned subsidiary of the Foundation. The
Administrator is governed by a Board of Directors that is currently authorized
to have up to seven members. The following table sets forth certain information
with respect to the directors and executive officers of Resources:
<TABLE>
<CAPTION>
<S> <C>
Susan E. Arnold....................................................Vice President and General Manager for Laundry Products,
Procter & Gamble of North America
Ronald D. Brown.......................................................Senior Vice President, Finance and Administration and
Chief Financial Officer, Cincinnati Milacron
Scott S. Brown.......................................................................Dean, William Jewett Tucker Foundation
of Dartmouth College
Thomas L. Conlan, Jr...........................................................President and Chief Executive Officer of the
Administrator and President of the Issuer
Lawrence A. Leser.......................................................................Chairman, The E. W. Scripps Company
William S. Newcomb, Jr...........................................................Partner, Vorys, Sater, Seymour & Pease LLP
Walker J. Wallace..................................................................Retired Vice President, Procter & Gamble
</TABLE>
Thomas L. Conlan, Jr., 60, is President and Chief Executive Officer of the
Administrator and is also President of the Issuer. He has been engaged generally
in financial analysis and financial feasibility work both in private business
and in public finance areas including higher education, energy, housing and
health care. He formerly was Executive Director for a joint select committee of
the Ohio legislature on energy financing and state-wide program development and
participated in developing an equivalent federal program. From its founding in
1981 through May, 1998, Mr. Conlan was President and CEO of The Student Loan
Funding Corporation.
Brian A. Ross, 40, is Senior Vice President and Chief Financial Officer of
the Administrator and is also Senior Vice President and Manager of the Issuer.
Mr. Ross has 15 years of domestic and international financing and financial
reporting experience with Fortune 500 firms in the manufacturing, retail and
telecommunications industries. He has received a Master of Arts from the
University of California, Berkeley and Bachelors of Arts from Miami University
(Ohio). He is a member of the Institute of Management Accountants, National
Association of Corporate Treasurers, and the American Economics Association.
Through May, 1998, Mr. Ross was Senior Vice President and CFO of The Student
Loan Funding Corporation.
Stephen T. MacConnell, 51, is Senior Vice President of Legal Services and
Human Resources of the Administrator. Prior to serving the Administrator, Mr.
MacConnell was a named partner for 21 years in a prominent Cincinnati law firm.
Mr. MacConnell is a trustee and/or officer of several national and local legal
and non-profit organizations and is currently the Immediate Past President of
the Cincinnati Bar Association. He received his Juris Doctorate from the
University of Cincinnati and Bachelor of Arts from Miami University (Ohio).
Through May, 1998, Mr. MacConnell was Senior Vice President of Legal Services
and Human Resources for The Student Loan Funding Corporation.
James H. Eickhoff, Jr., 37 , is Senior Vice President of Business
Development and Marketing Services of the Administrator. Mr. Eickhoff has 14
years of sales and marketing leadership experience within the health care and
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education fields. He has served on several state and national committees
promoting literacy and school-to-work initiatives. He has a Bachelors of Arts
from Hope College, Holland, Michigan.
THE FINANCED STUDENT LOAN POOL
A separate trust estate will be established for each issuance of Notes (each, a
"Trust Estate") under a separate Indenture of Trust entered into for each
issuance (each, an "Indenture") among the Issuer, one or more eligible lender
trustees (each, an "Eligible Lender Trustee") and an indenture trustee (each, an
"Indenture Trustee"). Provisions applicable to, including but not limited to,
any Event of Default under any Indenture are not applicable to and will not
constitute or cause an Event of Default under any other Indenture. The Notes are
limited obligations of the Issuer secured by and payable solely from their
related Trust Estate. Each Trust Estate will include: (i) a pool of Financed
Student Loans and moneys payable with respect thereto after their respective
dates of acquisition or origination from moneys under the related Indenture;
(ii) money and investment securities in the Funds and Accounts held by the
Indenture Trustee under the related Indenture; and (iii) all rights of the
Issuer and the Eligible Lender Trustee in and to certain contracts. See
"Security for the Notes -- The Trust Estates" in this Prospectus. The pool of
Financed Student Loans will include the Financed Student Loans acquired by
Issuer or the applicable Eligible Lender Trustee on behalf of the Issuer from
time to time as of the applicable Cut-off Date and, if set forth in the related
Prospectus Supplement, any additional Financed Student Loans to be acquired by
the Issuer or the applicable Eligible Lender Trustee on behalf of the Issuer
after the Cut-off Date as described in the related Prospectus Supplement.
The Financed Student Loans will include FFELP Loans and Private Loans that meet
several criteria, including the following: each Financed Student Loan (i) was or
will be originated in the United States or its territories or possessions under
and in accordance with the FFEL Program or the applicable Private Loan Program,
as the case may be, to, or on behalf of, a student who has graduated or is
expected to graduate from an accredited institution of higher education, a
for-profit educational institution or to, or on behalf of, a student who is
enrolled in private primary or secondary schools, (ii) contains terms in
accordance with those required by the applicable program, the Guarantee
Agreements and other applicable requirements, and (iii) is not more than 90 days
past due as of the related Cut-off Date. The relative percentages of each type
of Financed Student Loan to be included in the pool of Financed Student Loans
will be determined from time to time in accordance with the related Indenture.
See "Description of the FFEL Program," "Description of the Guarantee Agencies"
and "The Private Loan Programs" herein.
In addition to the criteria described in the preceding paragraphs, a provider of
Credit Enhancement may require certain other characteristics for additional
Financed Student Loans in the related Trust Estate. However, following each
acquisition of additional Financed Student Loans into a Trust Estate by the
Issuer or an Eligible Lender Trustee on behalf of the Issuer, the aggregate
characteristics of the entire pool of Financed Student Loans in the Trust
Estate, including the composition and type of the Financed Student Loans, the
distribution by weighted average interest rate and the distribution by principal
amount to be described in tables included in each Prospectus Supplement, may
vary significantly from those of the Financed Student Loans, if any, acquired by
the Issuer or the Eligible Lender Trustee on behalf of the Issuer and
constituting a portion of such Trust Estate as of the applicable Cut-off Date.
In addition, the distribution by weighted average interest rate applicable to
the Financed Student Loans in such Trust Estate on any date following the
related Cut-off Date may vary significantly from that set forth in the tables
included in the related Prospectus Supplement as a result of variation in the
effective rates of interest applicable to the Financed Student Loans. Moreover,
the information included in the related Prospectus Supplement with respect to
the original term to maturity and remaining term to maturity of Financed Student
Loans as of the related Cut-off Date may vary significantly from the actual term
to maturity of any of the Financed Student Loans as a result of the granting of
deferral and forbearance periods with respect thereto.
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Each Prospectus Supplement will set forth, as of the related Cut-off Date,
various information with respect to the initial Financed Student Loans in the
related Trust Estate. Such information may include the composition of the
Financed Student Loans, the distribution by loan type, the distribution by
interest rates, the distribution by outstanding principal balance, the
distribution by geography, the distribution by insurance or guarantee level, the
distribution by school type, the distribution by Guarantee Agency or Private
Loan Program, the distribution by remaining term to scheduled maturity and the
distribution by borrower payment status. See "The Financed Student Loans" in the
accompanying Prospectus Supplement. Each Prospectus Supplement will also contain
information with respect to other Financed Student Loans constituting the
related Trust Estate.
Each of the FFELP Loans provides or will provide for the amortization of the
outstanding principal balance of such Financed Student Loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of such
Financed Student Loan multiplied by the applicable interest rate and further
multiplied by the period elapsed (as a fraction of a calendar year) since the
preceding payment of interest was made. As payments are received in respect of
such Financed Student Loan, the amount received is applied first to interest
accrued to the date of payment and the balance is applied to reduce the unpaid
principal balance. Accordingly, if a borrower pays a regular installment before
its scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a 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,
subject to any applicable Grace Periods, Deferment Periods or Forbearance
Periods, the borrower pays a regular 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 of such
Financed Student Loan. Private Loans may contain different amortization
provisions.
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the Notes and the yield on the Notes will be
affected by (i) prepayments of the Financed Student Loans that may occur as
described below, (ii) the sale by the Issuer of Financed Student Loans, (iii)
Parity Percentage Payments, and (iv) deferrals or delays in payment on the
Financed Student Loans resulting from defaults, Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods or as a result of
refinancing through Consolidation Loans.
All the Financed Student Loans are prepayable in whole or in part by the
borrowers at any time (including by means of Consolidation Loans as discussed
below) and may be prepaid as a result of a borrower default, death, disability
or bankruptcy, a closing of or false certification by the borrower's school,
subsequent liquidation or collection of Guarantee Payments with respect thereto
(including for the purpose payments by any guarantor or escrow fund under a
Private Loan Program), and as a result of Financed Student Loans being
repurchased by the respective Seller as a result of a breach of a representation
and warranty. The rate of such prepayments cannot be predicted and may be
influenced by a variety of economic, social and other factors, including those
described below. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Financed
Student Loans. However, because many of the Financed Student Loans bear interest
at a rate that either actually or effectively is floating, it is impossible to
determine whether changes in prevailing interest rates will be similar to or
vary from changes in the interest rates on the Financed Student Loans.
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Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods or as a result of
refinancing through Consolidation Loans to the extent such Consolidation Loans
are sold to the applicable Eligible Lender Trustee on behalf of the Issuer as
described above. In that event, the fact such Consolidation Loans will likely
have longer maturities than the Financed Student Loans they are replacing may
lengthen the remaining term of the Financed Student Loans in the related Trust
Estate and the average life of the related Notes. The rate of payment of
principal of the Notes and the yield on the Notes may also be affected by the
rate of defaults resulting in losses on Financed Student Loans, by the severity
of those losses and by the timing of those losses.
The rate of prepayment on the Financed Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Financed Student Loans will be born entirely by the Noteholders. Such
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time Noteholders
receive payments from the related Trust Estate than such interest rates and such
spreads would otherwise have been had such prepayments not been made or had such
prepayments been made at a different time.
DESCRIPTION OF THE FFEL PROGRAM
The Higher Education Act sets forth provisions establishing the FFEL Program,
pursuant to which state agencies or private nonprofit corporations administering
student loan insurance programs (referred to as "Guarantee Agencies") are
reimbursed for losses sustained in the operation of their programs, and holders
of certain loans made under such programs are paid subsidies for owning such
loans.
The Higher Education Act currently authorizes certain student loans to be
covered under the FFEL Program if they are contracted for and paid to the
student prior to September 30, 2002, unless a student has received a loan under
the FFEL Program prior to such date, in which case that student may receive a
student loan covered by the FFEL Program until September 30, 2006. Congress has
extended similar authorization dates in prior versions of the Higher Education
Act; however, there can be no assurance that the current authorization dates
will again be extended or that the other provisions of the Higher Education Act
will be continued in their present form.
Various amendments to the Higher Education Act have revised the FFEL Program
from time to time. These amendments include, but are not limited to, the
Intermodal Surface Transportation Efficiency Act of 1998, the Balanced Budget
Act of 1997, the Higher Education Technical Amendments Act of 1993, the Omnibus
Budget Reconciliation Act of 1993 (the "1993 Amendments"), the Higher Education
Amendments of 1992, which reauthorized the FFEL Program, the Omnibus Budget
Reconciliation Act of 1990, the Omnibus Budget Reconciliation Act of 1989, the
Omnibus Budget Reconciliation Act of 1987, the Higher Education Technical
Amendments Act of 1987, the Higher Education Amendments of 1986, which
reauthorized the FFEL Program, the Consolidated Omnibus Budget Reconciliation
Act of 1985, the Postsecondary Student Assistance Amendments of 1981 and the
Education Amendments of 1980.
There can be no assurance that relevant federal laws, including the Higher
Education Act, will not be changed in a manner that may adversely affect the
receipt of funds by the Guarantee Agencies or by the Issuer or the Eligible
Lender Trustee with respect to Financed FFELP Loans. Reauthorization bills have
passed in both the House of Representatives and the Senate of the United States
which, if enacted into law, would amend the Higher Education Act and make
various changes to the FFEL Program, including changes that would reduce various
payments to Guarantee Agencies and restructure guarantee agencies' operations
and programs, and revise terms of student loans and payments to the Eligible
Lender Trustee. Differences between the bills passed in the House of
Representatives
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and the Senate will be negotiated in Conference Committee. There is no certainty
that any of the pending legislation will be enacted into law in its current form
or at all, and the Issuer cannot predict at this time how such legislation, if
enacted, would affect a Servicer's or Guarantee Agency's business or operations,
or those of the Issuer.
This is only a summary of certain provisions of the Higher Education Act.
Reference is made to the text of the Higher Education Act for full and complete
statements of its provisions.
LOAN TERMS
Four types of loans are currently available under the FFEL Program: Stafford
Loans, Unsubsidized Stafford Loans, Plus Loans and Consolidation Loans. These
loan types vary as to eligibility requirements, interest rates, repayment
periods, loan limits and eligibility for interest subsidies and Special
Allowance Payments. Some of these loan types have had other names in the past.
References herein to the various loan types include, where appropriate,
predecessors to such loan types.
The primary loan under the FFEL Program is the Stafford Loan. Students who are
not eligible for Stafford Loans based on their economic circumstances may be
able to obtain Unsubsidized Stafford Loans. Parents of students may be able to
obtain Plus Loans. Consolidation Loans are available to borrowers with existing
loans made under the FFEL Program and certain other federal programs to
consolidate repayment of such existing loans. For periods of enrollment
beginning prior to July 1, 1994, SLS Loans were available to students with costs
of education that were not met by other sources and that exceeded the Stafford
or Unsubsidized Stafford Loan limits.
Eligibility
General. A student is eligible for loans made under the FFEL Program only if he
or she: (i) has been accepted for enrollment or is enrolled in good standing at
an eligible institution of higher education (which term includes certain
vocational schools), (ii) is carrying or planning to carry at least one-half the
normal full-time workload for the course of study the student is pursuing as
determined by the institution (which, in the case of a loan to cover the cost of
a period of enrollment beginning on or after July 1, 1987, must either lead to a
recognized educational credential or be necessary for enrollment in a course of
study that leads to such a credential), (iii) has agreed to notify promptly the
holder of the loan concerning any change of address, (iv) if presently enrolled,
is maintaining satisfactory progress in the course of study he or she is
pursuing, (v) does not owe a refund on, and is not (except as specifically
permitted under the Higher Education Act) in default under, any loan or grant
made under the Higher Education Act, (vi) has filed with the eligible
institution a statement of educational purpose, (vii) meets certain citizenship
requirements, and (viii) except in the case of a graduate or professional
student, has received a preliminary determination of eligibility or
ineligibility for a Pell Grant.
Stafford Loans. Stafford Loans generally are made only to student borrowers who
meet certain needs tests. The educational institution must provide the lender
with a statement evidencing a determination of need for a loan, and the amount
of such need, calculated by subtracting from the estimated cost of attendance
the sum of the expected family contribution with respect to the student plus the
estimated financial assistance available to such student. The amounts of the
expected family contribution, estimated available financial assistance. and
estimated costs of attendance are to be computed in accordance with standards
set forth in the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the requirements set
forth under "General" above is eligible for an Unsubsidized Stafford Loan
without regard to need. Unsubsidized Stafford Loans were not available before
October 1, 1992.
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Plus Loans. Plus Loans are made only to borrowers who are parents (and, under
certain circumstances, spouses of remarried parents) of dependent undergraduate
students. For Plus Loans made on or after July 1, 1993, the parent borrower must
not have an adverse credit history (as determined pursuant to criteria
established by the Department of Education). Prior to the Higher Education
Amendments of 1986, the Higher Education Act did not distinguish between Plus
Loans and SLS Loans. Student borrowers were eligible for Plus Loans; however,
parents of graduate and professional students were ineligible.
SLS Loans. Eligible borrowers for SLS Loans were limited to (a) graduate or
professional students, (b) independent undergraduate students, and (c) under
certain circumstances, dependent undergraduate students, if such students'
parents were unable to obtain a Plus Loan and were also unable to provide such
students' expected family contribution. Except as described in clause (c),
eligibility was determined without regard to need.
Consolidation Loans. To be eligible for a Consolidation Loan a borrower must (a)
have outstanding indebtedness on student loans made under the FFEL Program
and/or certain other federal student loan programs, and (b) be in repayment
status or in a Grace Period, or be a defaulted borrower who has made
arrangements to repay the defaulted loan(s) satisfactory to the holder of the
defaulted loan(s). A married couple who agree to be jointly liable on a
Consolidation Loan, for which the application is received on or after January 1,
1993 may be treated as an individual for purposes of obtaining a Consolidation
Loan. For Consolidation Loans disbursed prior to July 1, 1994 the borrower was
required to have outstanding student loan indebtedness of at least $7,500. Prior
to the adoption of the Higher Education Technical Amendments Act of 1993, Plus
Loans could not be included in the Consolidation Loan. For Consolidation Loans
for which the applications were received prior to January 1, 1993, the minimum
student loan indebtedness was $5,000 and the borrower could not be delinquent
more than 90 days in the payment of such indebtedness.
Interest Rates
The Higher Education Act establishes maximum interest rates for each of the
various types of loans. These rates vary not only among loan types, but also
within loan types depending upon when the loan was made or when the borrower
first obtained a loan under the FFEL Program. The Higher Education Act allows
lesser rates of interest to be charged. Many lenders, including the Issuer, have
offered repayment incentives or other programs that involve reduced interest
rates on certain loans made under the FFEL Program.
Stafford Loans. For a Stafford Loan made prior to July 1, 1994, the applicable
interest rate for a borrower who, on the date the promissory note was signed,
did not have an outstanding balance on a previous loan which was made, insured
or guaranteed under the FFEL Program (a "New Borrower"):
(a) is 7% per annum for a loan covering a period of instruction
beginning before January 1, 1981;
(b) is 9% per annum for a loan covering a period of instruction
beginning on or after January 1, 1981, but before September 13, 1983;
(c) is 8% per annum for a loan covering a period of instruction
beginning on or after September 13, 1983, but before July 1, 1988;
(d) for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, is 8% per annum for the
period from the disbursement of the loan to the date which is four years
after the loan enters repayment, and thereafter shall be adjusted annually,
and for any 12-month period commencing
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on a July 1 shall be equal to the bond equivalent rate of 91-day U.S.
Treasury bills auctioned at the final auction prior to the preceding June
1, plus 3.25% per annum (but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be adjusted
annually, and for any 12-month period commencing on a July 1 shall be equal
to the bond equivalent rate of 91-day U.S. Treasury bills auctioned at the
final auction prior to the preceding June 1, plus 3.1 % per annum (but not
to exceed 9% per annum).
For a Stafford Loan made prior to July 1, 1994, the applicable interest
rate for a borrower who, on the date the promissory note evidencing the
loan was signed, had an outstanding balance on a previous loan made,
insured or guaranteed under the FFEL Program (a "Repeat Borrower"):
(f) for a loan made prior to July 23, 1992 is the applicable
interest rate on the previous loan or, if such previous loan is not a
Stafford Loan. 8% per annum, or
(g) for a loan made on or after July 23, 1992 shall be adjusted
annually, and for any twelve month period commencing on a July 1 shall be
equal to the bond equivalent rate of 91-day U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.1% per annum but
not to exceed:
(i) 7% per annum in the case of a Stafford Loan made to a
borrower who has a loan described in clause (a) above;
(ii) 8% per annum in the case of (A) a Stafford Loan made to a
borrower who has a loan described in clause (c) above, (B)
a Stafford Loan which has not been in repayment for four
years and which was made to a borrower who has a loan
described in clause (d) above (C) a Stafford Loan for
which the first disbursement was made prior to December
20, 1993 to a borrower whose previous loans do not include
a Stafford Loan or an Unsubsidized Stafford Loan;
(iii) 9% per annum in the case of (A) a Stafford Loan made to a
borrower who has a loan described in clauses (b) or (e)
above or (B) a Stafford Loan for which the first
disbursement was made on or after December 20, 1993 to a
borrower whose previous loans do not include a Stafford
Loan or an Unsubsidized Stafford Loan; and
(iv) 10% per annum in the case of a Stafford Loan which has
been in repayment for four years or more and which was
made to a borrower who has a loan described in clause (d)
above.
The interest rate on all Stafford Loans made on or after July 1, 1994 but prior
to July 1, 1998, regardless of whether the borrower is a New Borrower or a
Repeat Borrower, is the rate described in clause (g) above, except that such
rate shall not exceed 8.25% per annum. For any Stafford Loan made on or after
July 1, 1995, the interest rate is further reduced prior to the time the loan
enters repayment and during any Deferment Periods. During such periods, the
formula described in clause (g) above is applied, except that 2.5% is
substituted for 3.1%, and the rate shall not exceed 8.25% per annum.
For Stafford Loans made on or after July 1, 1998 but before October 1, 1998, the
applicable interest rate shall be adjusted annually, and for any twelve month
period commencing on a July 1 shall be equal to the bond equivalent rate of
91-day U.S. Treasury bills auctioned at the final auction prior to the
proceeding June 1, plus (x) 1.7% per annum prior to the time the loan enters
repayment and during any Deferment Periods, and (y) 2.3% per annum during
repayment, but not to exceed 8.25% per annum.
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For loans made on or after October 1, 1998, the applicable rate will continue to
be adjusted annually, but for any 12- month period commencing on a July 1 will
be equal to the bond equivalent rate of securities with a comparable maturity
(as established by the Secretary of Education), plus 1% per annum, but not to
exceed 8.25% per annum. There can be no assurance that the interest rate
provisions for such loans will not be further amended, either before or after
the rate described herein becomes effective.
Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to the same
interest rate provisions as Stafford Loans.
Plus Loans. The applicable interest rate on a Plus Loan:
(a) made on or after January 1, 1981, but before October 1,
1981, is 9% per annum;
(b) made on or after October 1, 1981, but before November 1,
1982, is 14% per annum;
(c) made on or after November 1, 1982, but before July 1,
1987, is 12% per annum;
(d) made on or after July 1, 1987, but before October 1, 1992
shall be adjusted annually, and for any 12-month period beginning on July 1
shall be equal to the bond equivalent rate of 52-week U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus 3.25%
per annum (but not to exceed 12% per annum);
(e) made on or after October 1, 1992, but before July 1, 1994,
shall be adjusted annually, and for any 12-month period beginning on July 1
shall be equal to the bond equivalent rate of 52-week U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus 3.1% per
annum (but not to exceed 10% per annum).
(f) made on or after July 1, 1994, but before July 1, 1998, is
the same as that described in clause (e) above, except that such rate shall
not exceed 9% per annum; or
(g) made on or after July 1, 1998, but before October 1, 1998,
shall be adjusted annually, and for any 12-month period beginning on July 1
shall be equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the proceeding June 1, plus 3.1%
per annum (but not to exceed 9% per annum).
For Plus Loans made on or after October 1, 1998, the applicable rate will
continue to be adjusted annually, but for any 12-month period commencing on a
July 1 will be equal to the bond equivalent rate of securities with a comparable
maturity (as established by the Secretary of Education), plus 2.1% per annum,
but not to exceed 9% per annum.
If requested by the borrower, an eligible lender may consolidate SLS or Plus
Loans of the same borrower held by the lender under a single repayment schedule.
The repayment period for each included loan shall be based on the commencement
of repayment of the most recent loan. The consolidated loan shall bear interest
at a rate equal to the weighted average of the rates of the included loans. Such
a consolidation shall not be treated as the making of a new loan. In addition,
at the request of the borrower, a lender may refinance an existing fixed rate
SLS or Plus Loan (including an SLS or Plus Loan held by a different lender who
has refused so to refinance such loan at a variable interest rate. In such a
case, proceeds of the new loan are used to discharge the original loan.
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SLS Loans. The applicable interest rates on SLS Loans made prior to October 1,
1992 are identical to the applicable interest rates on Plus Loans made at the
same time. For SLS Loans made on or after October 1, 1992, the applicable
interest rate is the same as the applicable interest rate on Plus Loans, except
that the ceiling is 11% per annum instead of 10% per annum.
Consolidation Loans. A Consolidation Loan made prior to July 1, 1994 bears
interest at a rate equal to the weighted average of the interest rates on the
loans retired, rounded to the nearest whole percent, but not less than 9% per
annum. Except as described in the next sentence, a Consolidation Loan made on or
after July 1, 1994 bears interest at a rate equal to the weighted average of the
interest rates on the loans retired, rounded upward to the nearest whole
percent, but with no minimum rate. For a Consolidation Loan for which the
application is received by an eligible lender on or after November 13, 1997 and
before October 1, 1998, the interest rate shall be adjusted annually, and for
any twelve month period commencing on a July 1 shall be equal to the bond
equivalent rate of 91-day U.S. Treasury bills auctioned at the final auction
prior to the preceding June 1, plus 3.1% per annum, but not to exceed 8.25% per
annum. Notwithstanding these general interest rates, the portion, if any, of a
Consolidation Loan that repaid a loan made under Title VII, Sections 700-721 of
the Public Health Services Act, as amended, has a different variable interest
rate. Such portion is adjusted on July 1 of each year, but is the sum of the
average of the T-Bill Rates auctioned for the quarter ending on the preceding
June 30, plus 3.0%, without any cap on the interest rate. For a discussion of
required payments that reduce the return on Consolidation Loans, see "Fees --
Rebate Fees on Consolidation Loans" below.
Loan Limits
Each type of loan (other than Consolidation Loans, which are limited only by the
amount of eligible loans to be consolidated) is subject to limits as to the
maximum principal amount, both with respect to a given year and in the
aggregate. All of the loans are limited to the difference between the cost of
attendance and the other aid available to the student. Stafford Loans are also
subject to limits based upon the needs analysis as described above under
"Eligibility Stafford Loans" above. Additional limits are described below.
Stafford and Unsubsidized Stafford Loans. Except as described in the next
paragraph, Stafford and Unsubsidized Stafford Loans are generally treated as one
loan type for loan limit purposes. A student who has not successfully completed
the first year of a program of undergraduate education may borrow up to $2,625
in an academic year. A student who has successfully completed such first year,
but who has not successfully completed the second year may borrow up to $3,500
per academic year. An undergraduate student who has successfully completed the
first and second year, but who has not successfully completed the remainder of a
program of undergraduate education, may borrow up to $5,500 per academic year.
For students enrolled in programs of less than an academic year in length, the
limits are generally reduced in proportion to the amount by which such programs
are less than one year in length. A graduate or professional student may borrow
up to $8,500 in an academic year. The maximum aggregate amount of Stafford and
Unsubsidized Stafford Loans (including that portion of a Consolidation Loan used
to repay such loans) which an undergraduate student may have outstanding is
$23,000. The maximum aggregate amount for a graduate and professional student,
including loans for undergraduate education, is $65,500. The Secretary is
authorized to increase the limits applicable to graduate and professional
students who are pursuing programs which the Secretary determines to be
exceptionally expensive.
At the time that SLS Loans were eliminated, the loan limits for Unsubsidized
Stafford Loans to independent students, or dependent students whose parents
cannot borrow a Plus Loan, were increased by amounts equal to the prior SLS Loan
limits (as described below under "SLS Loans").
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Prior to the enactment of the Higher Education Amendments of 1992, an
undergraduate student who had not successfully completed the first and second
year of a program of undergraduate education could borrow Stafford Loans in
amounts up to $2,625 in an academic year. An undergraduate student who had
successfully completed such first and second year, but who had not successfully
completed the remainder of a program of undergraduate education could borrow up
to $4,000 per academic year. The maximum for graduate and professional students
was $7,500 per academic year. The maximum aggregate amount of Stafford Loans
which a borrower could have outstanding (including that portion of a
Consolidation Loan used to repay such loans) was $17,250. The maximum aggregate
amount for a graduate or professional student, including loans for undergraduate
education, was $54,750. Prior to the 1986 changes, the annual limits were
generally lower.
Plus Loans. For Plus Loans made on or after July 1, 1993, the amounts of Plus
Loans are limited only by the student's unmet need. Prior to that time Plus
Loans were subject to limits similar to those to which SLS Loans were then
subject (see "SLS Loans" below), applied with respect to each student on behalf
of whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and second
year of a program of undergraduate education could borrow an SLS Loan in an
amount of up to $4,000. A student who had successfully completed such first and
second year, but who had not successfully completed the remainder of a program
of undergraduate education could borrow up to $5,000 per year. Graduate and
professional students could borrow up to $10,000 per year. SLS Loans were
subject to an aggregate maximum of $23,000 ($73,000 for graduate and
professional students). Prior to the 1992 changes, SLS Loans were available in
amounts of $4,000 per academic year, up to a $20,000 aggregate maximum. Prior to
the 1986 changes, a graduate or professional student could borrow $3,000 of SLS
Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year minus
the amount of all other FFEL Program loans to such student for such academic
year, up to a maximum amount of all FFEL Program loans to that student of
$12,500. In 1989, the amount of SLS Loans for students enrolled in programs of
less than an academic year in length were limited (similar to the limits
described above under "Stafford Loans").
Repayment
Loans made under the FFEL Program (other than Consolidation Loans) must provide
for repayment of principal in periodic installments over a period of not less
than five nor more than ten years. A Consolidation Loan must be repaid during a
period agreed to by the borrower and lender, subject to maximum repayment
periods which vary depending upon the principal amount of the borrower's
outstanding student loans (but no longer than 30 years). For Consolidation Loans
for which the application was received prior to January 1, 1993, the repayment
period could not exceed 25 years. The repayment period commences (a) not more
than twelve months after the borrower ceases to pursue at least a half-time
course of study with respect to Stafford Loans for which the applicable rate of
interest is 7% per annum, (b) not more than six months after the borrower ceases
to pursue at least a half-time course of study with respect to other Stafford
Loans and Unsubsidized Stafford Loans (the six month or twelve month periods are
the "Grace Periods") and (c) on the date of final disbursement of the loan in
the case of SLS, Plus and Consolidation Loans, except that the borrower of an
SLS Loan who also has a Stafford or Unsubsidized Stafford Loan may defer
repayment of the SLS Loan to coincide with the commencement of repayment of the
Stafford or Unsubsidized Stafford Loan. During periods in which repayment of
principal is required, payments of principal and interest must in general be
made at a rate of not less than the greater of $600 per year or the interest
that accrues during the year, except that a borrower and lender may agree at any
time before or during the repayment period that repayment may be at a lesser
rate. A borrower may agree, with concurrence of the lender, to repay the loan in
less than five years with the right subsequently to extend his minimum repayment
period to five years. Borrowers may accelerate, without penalty, the repayment
of all or any part of the loan.
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In addition, since 1992, lenders of Consolidation Loans have been required to
establish graduated or income-sensitive repayment schedules and lenders of
Stafford and SLS Loans have been required to offer borrowers the option of
repaying in accordance with graduated or income-sensitive repayment schedules.
The Issuer may implement graduated repayment schedules and income-sensitive
repayment schedules. Use of income-sensitive repayment schedules may extend the
ten-year maximum term for up to five years. In addition, if the repayment
schedule on a loan that has been converted to a variable interest rate does not
provide for adjustments to the amount of the monthly installment payments, the
ten-year maximum term may be extended for up to three years.
No principal repayments need be made during certain periods of deferment
prescribed by the Higher Education Act ("Deferment Periods"). For loans to a
borrower who first obtained a loan which was disbursed before July 1, 1993,
deferments are available (i) during a period not exceeding three years while the
borrower is a member of the Armed Forces, an officer in the Commissioned Corps
of the Public Health Service or, with respect to a borrower who first obtained a
student loan disbursed on or after July 1, 1987, or a student loan to cover the
cost of instruction for a period of enrollment beginning on or after July 1,
1987, an active duty member of the National Oceanic and Atmospheric
Administration Corps, (ii) during a period not in excess of three years while
the borrower is a volunteer under the Peace Corps Act, (iii) during a period not
in excess of three years while the borrower is a full-time volunteer under the
Domestic Volunteer Act of 1973, (iv) during a period not exceeding three years
while the borrower is in service, comparable to the service referred to in
clauses (ii) and (iii), as a full-time volunteer for an organization which is
exempt from taxation under Section 501(c)(3) of the Code, (v) during a period
not exceeding two years while the borrower is serving an internship, the
successful completion of which is required to receive professional recognition
required to begin professional practice or service, or a qualified internship or
residency program, (vi) during a period not exceeding three years while the
borrower is temporarily totally disabled, as established by sworn affidavit of a
qualified physician, or while the borrower is unable to secure employment by
reason of the care required by a dependent who is so disabled, (vii) during a
period not to exceed twenty-four months while the borrower is seeking and unable
to find full-time employment, (viii) during any period that the borrower is
pursuing a full-time course of study at an eligible institution (or, with
respect to a borrower who first obtained a student loan disbursed on or after
July 1, 1987, or a student loan to cover the cost of instruction for a period of
enrollment beginning on or after July 1, 1987, is pursuing at least a half-time
course of study for which the borrower has obtained a loan under the FFEL
Program), or is pursuing a course of study pursuant to a graduate fellowship
program or a rehabilitation training program for disabled individuals approved
by the Secretary of Education, (ix) during a period, not in excess of 6 months,
while the borrower is on parental leave, and (x) only with respect to a borrower
who first obtained a student loan disbursed on or after July 1, 1987, or a
student loan to cover the cost of instruction for a period of enrollment
beginning on or after July 1, 1987, (A) during a period not in excess of three
years while the borrower is a full-time teacher in a public or nonprofit private
elementary or secondary school in a "teacher shortage area" (as prescribed by
the Secretary of Education), and (B) during a period not in excess of 12 months
for mothers, with preschool age children, who are entering or re-entering the
work force and who are compensated at a rate not exceeding $1 per hour in excess
of the federal minimum wage. For loans to a borrower who first obtains a loan on
or after July 1, 1993, deferments are available (a) during any period that the
borrower is pursuing at least a half-time course of study at an eligible
institution or a course of study pursuant to a graduate fellowship program or
rehabilitation training program approved by the Secretary, (b) during a period
not exceeding three years while the borrower is seeking and unable to find
full-time employment, and (c) during a period not in excess of three years for
any reason which the lender determines, in accordance with regulations under the
Higher Education Act, has caused or will cause the borrower economic hardship.
Economic hardship includes working full time and earning an amount not in excess
of the greater of the minimum wage or the poverty line for a family of two.
Additional categories of economic hardship are based on the relationship between
a borrower's educational debt burden and his or her income. Prior to the 1992
changes, only the Deferment Periods described above in clauses (vi) and (vii)
(with respect to the parent borrower) and the Deferment Period described in
clause (viii) (with respect to
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the parent borrower or a student on whose behalf the parent borrowed) were
available to Plus Loan borrowers, and only the Deferment Periods described above
in clauses (vi), (vii) and (viii) were available to Consolidation Loan
borrowers. Prior to the 1986 changes, Plus Loan borrowers were not entitled to
Deferment Periods. Deferment Periods extend the ten-year maximum term.
The Higher Education Act also provides for periods of forbearance during which
the borrower, in case of temporary financial hardship, may defer any payments (a
"Forbearance Period"). A borrower is entitled to forbearance for a period not to
exceed three years while the borrower's debt burden under Title IV of the Higher
Education Act (which includes the FFEL Program) equals or exceeds 20% of the
borrower's gross income, and also is entitled to forbearance while he or she is
serving in a qualifying medical or dental internship program or in a "national
service position" under the National and Community Service Trust Act of 1993. In
addition, mandatory administrative forbearances are provided when exceptional
circumstances such as a local or national emergency or military mobilization
exist; or when the geographical area in which the borrower or endorser resides
has been designated a disaster area by the President of the United States or
Mexico, the Prime Minister of Canada, or by the governor of a state. In other
circumstances, forbearance is at the lender's option. Such forbearance also
extends the ten year maximum term.
As described under "Contracts with Guarantee Agencies -- Federal Interest
Subsidy Payments" below, the Secretary of Education makes interest payments on
behalf of the borrower of certain eligible loans while the borrower is in school
and during Grace and Deferment Periods. Interest that accrues during Forbearance
Periods and, if the loan is not eligible for interest Subsidy Payments, while
the borrower is in school and during the Grace and Deferment Periods, may be
paid monthly or quarterly or capitalized (added to the principal balance) not
more frequently than quarterly.
Disbursement
Loans made under the FFEL Program (except Consolidation Loans) generally must be
disbursed in two or more installments, none of which may exceed 50% of the total
principal amount of the loan.
Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to borrowers
of Consolidation Loans. However, lenders may be charged an insurance fee to
cover the costs of increased or extended liability with respect to Consolidation
Loans. For loans made prior to July 1, 1994, the maximum guarantee fee was 3% of
the principal amount of the loan, but no such guarantee fee was authorized to be
charged with respect to Unsubsidized Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the borrower of a
Stafford or Plus Loan an origination fee in an amount not to exceed 3% of the
principal amount of the loan, and is required to charge the borrower of an
Unsubsidized Stafford Loan an origination fee in the amount of 3% of the
principal amount of the loan. These fees must be deducted proportionately from
each installment payment of the loan proceeds prior to payment to the borrower
and are not retained by the lender, but must be passed on to the Secretary of
Education. For loans made prior to July 1, 1994, the maximum authorized fee for
Stafford, Plus and SLS Loans was 5%, and the required fee for Unsubsidized
Stafford Loans was 6.5%, of the principal amount of the loan.
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Lender Origination Fee. The lender of any loan under the FFEL Program made on or
after October 1, 1993 is required to pay to the Secretary of Education a fee
equal to 0.5% of the principal amount of such loan.
Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan made on
or after October 1, 1993 is required to pay to the Secretary of Education a
monthly fee equal to .0875% (1.05% per annum) of the principal amount of, and
accrued interest on, such Consolidation Loan.
Loan Guarantees
Under the FFEL Program, Guarantee Agencies are required to guarantee the payment
of not less than 100% of the principal amount of loans made prior to October 1,
1993 and covered by their respective guarantee programs. For a description of
the requirements for loans to be covered by such guarantees, see "Description of
the Guarantee Agencies." For loans made on or after October 1, 1993, the minimum
percentage of the principal amount of loans which a Guarantee Agency must pay is
98% and the Department of Education has taken the position that a Guarantee
Agency may not pay more than 98% of the principal amount of and accrued interest
on such a loan. Under certain circumstances, guarantees may be assumed by the
Secretary of Education or another Guarantee Agency. See "-- Contracts with
Guarantee Agencies" below.
CONTRACTS WITH GUARANTEE AGENCIES
Under the FFEL Program, the Secretary of Education is authorized to enter into
guaranty and interest subsidy agreements with Guarantee Agencies. The FFEL
Program provides for reimbursements to Guarantee Agencies for default claims
paid by Guarantee Agencies, support payments to Guarantee Agencies for
administrative and other expenses, advances for a Guarantee Agency's reserve
funds, and Interest Subsidy Payments and Special Allowance Payments to the
holders of qualifying student loans made pursuant to the FFEL Program.
The Secretary of Education has certain oversight powers over Guarantee Agencies.
Guarantee Agencies are required to maintain their reserves at certain levels
based on the amount of outstanding loans that they have guaranteed. If a
Guarantee Agency falls below the required level in two consecutive years, or its
claims rate exceeds 9% in any year, or if the Secretary determines that the
agency's administrative or financial condition jeopardizes its ability to meet
its obligations, the Secretary can require the Guarantee Agency to submit and
implement a plan by which it will correct such problem(s). If a Guarantee Agency
fails to timely submit an acceptable plan or fails to improve its condition, or
if the Secretary determines that the Guarantee Agency is in danger of financial
collapse, the Secretary may terminate the Guarantee Agency's reimbursement
contract. The circumstances under which the Secretary may terminate such
reimbursement contracts also includes a determination that such action is
necessary to protect the federal fiscal interest or to ensure continued
availability of student loans or a smooth transition to direct lending.
See "-- Direct Loans" below.
The Secretary of Education is authorized to assume the guarantee obligations of
a Guarantee Agency. The Higher Education Act now provides that, if the Secretary
terminates a Guarantee Agency's agreements under the FFEL Program, the Secretary
shall assume responsibility for all functions of the Guarantee Agency under its
program. To that end, the Secretary is authorized to, among other options,
transfer the guarantees to another Guarantee Agency or assume the guarantees. It
also provides that in the event the Secretary has determined that a Guarantee
Agency is unable to meet its guarantee obligations, holders of loans guaranteed
by such Guarantee Agency may submit claims directly to the Secretary for
payment, unless the Secretary has provided for the assumption of such guarantees
by another Guarantee Agency.
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Federal Reimbursement
A Guarantee Agency's right to receive federal reimbursements for various
guarantee claims paid by such Guarantee Agency is governed by the Higher
Education Act and various contracts entered into between Guarantee Agencies and
the Secretary of Education. See "Description of the Guarantee Agencies --
Federal Agreements" herein. Under the Higher Education Act and the Federal
Reimbursement Contracts, the Secretary of Education currently agrees to
reimburse a Guarantee Agency for the amounts expended by the Guarantee Agency in
the discharge of its guarantee obligation (i.e., the unpaid principal balance of
and accrued interest on loans guaranteed by the Guarantee Agency, which loans
are referred to herein as "guaranteed loans") as a result of the default of the
borrower. With respect to loans made prior to October 1, 1993, the Secretary of
Education currently agrees to reimburse the Guarantee Agency for up to 100% of
the amounts so expended. For loans made on or after October 1, 1993, the
Secretary currently agrees to reimburse the Guarantee Agency for a maximum of
98% of the amount expended with respect to guaranteed loans. Depending on the
claims rate experience of a Guarantee Agency, such 100% (or 98%) reimbursement
may be reduced as discussed in the formula described below. The Secretary of
Education also agrees to repay 100% of the unpaid principal plus applicable
accrued interest expended by a Guarantee Agency in discharging its guarantee
obligation as a result of the bankruptcy, death, or total and permanent
disability of a borrower (or in the case of a Plus Loan, the death of the
student on behalf of whom the loan was borrowed), or in certain circumstances,
as a result of school closures, which reimbursements are not to be included in
the calculations of the Guarantee Agency's Claims Rate experience for the
purpose of federal reimbursement under the Federal Reimbursement Contracts.
The formula for computing the percentage of federal reimbursement under the
Federal Reimbursement Contracts is not accumulated over a period of years but is
measured by the amount of federal reimbursement payments in any one federal
fiscal year as a percentage of the original principal amount of loans under the
FFEL Program guaranteed by the Guarantee Agency and in repayment at the end of
the preceding fiscal year. Under the formula, federal reimbursement payments to
a Guarantee Agency in any one fiscal year not exceeding 5% of the original
principal amount of loans in repayment at the end of the preceding fiscal year
are to be paid by the Secretary of Education at 100% (or 98% for loans made on
or after October 1, 1993). Beginning at any time during any fiscal year that
federal reimbursement payments exceed 5%, and until such time as they may exceed
9%, of the original principal amount of loans in repayment at the end of the
preceding fiscal year, then reimbursement payments on claims submitted during
that period are to be paid at 90% (or 88% for loans made on or after October 1,
1993). Beginning at any time during any fiscal year that federal reimbursement
payments exceed 9% of the original principal amount of loans in repayment at the
end of the preceding fiscal year, then such payments for the balance of that
fiscal year will be paid at 80% (or 78% for loans made on or after October 1,
1993). The original principal amount of loans in repayment for purposes of
computing reimbursement payments to a Guarantee Agency means the original
principal amount of all loans guaranteed by such Guarantee Agency less: (1)
guarantee payments on such loans, (2) the original principal amount of such
loans that have been fully repaid, and (3) the original principal amount of such
loans for which the first principal installment payment has not become due or
such first installment need not be paid because of a Deferment Period.
Under present practice, after the Secretary of Education reimburses a Guarantee
Agency for a default claim paid on a guaranteed loan, the Guarantee Agency
continues to seek repayment from the borrower. The Guarantee Agency returns to
the Secretary of Education payments that it receives from a borrower after
deducting and retaining (i) a percentage amount equal to the complement of the
reimbursement percentage in effect at the time the loan was reimbursed, and (ii)
an amount equal to 27% (or 18-1/2% in the case of a payment from the proceeds of
a Consolidation Loan) of such payments for certain administrative costs. The
Secretary of Education may, however, require the assignment to the Secretary of
defaulted guaranteed loans, in which event no further collections activity need
be undertaken by the Guarantee Agency, and no amount of any recoveries shall be
paid to the Guarantee
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Agency. Prior to the 1993 changes, the percentage of collections which Guarantee
Agencies could retain (as described in clause (ii) above) was 30%.
A Guarantee Agency may enter into an addendum to its Interest Subsidy Agreement
(as hereinafter defined), which addendum provides for the Guarantee Agency to
refer to the Secretary of Education certain defaulted guaranteed loans. Such
loans are then reported to the IRS to "offset" any tax refunds which may be due
any defaulted borrower. To the extent that the Guarantee Agency has originally
received less than 100% reimbursement from the Secretary of Education with
respect to such a referred loan, the Guarantee Agency will not recover any
amounts subsequently collected by the federal government which are attributable
to that portion of the defaulted loan for which the Guarantee Agency has not
been reimbursed.
Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, the Secretary of Education is
authorized to enter into an agreement with a Guarantee Agency pursuant to which
the Guarantee Agency shall sell defaulted loans that are eligible for
rehabilitation to an eligible lender. The Guarantee Agency shall repay the
Secretary of Education an amount equal to 81.5% of the then current principal
balance of such loan, multiplied by the reimbursement percentage in effect at
the time the loan was reimbursed. The amount of such repayment shall be deducted
from the amount of federal reimbursement payments for the fiscal year in which
such repayment occurs, for purposes of determining the reimbursement rate for
that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency must have
received consecutive payments for 12 months of amounts owed on such loan. Upon
rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred
(except that a borrower's loan may only be rehabilitated once).
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans must be made
by an eligible lender under the applicable Guarantee Agency's Guarantee Program,
which must meet requirements prescribed by the rules and regulations promulgated
under the Higher Education Act, including the borrower eligibility, loan amount,
disbursement, interest rate, repayment period and guarantee fee provisions
described herein and the other requirements set forth in Section 428(b) of the
Higher Education Act.
Under the Higher Education Act, a guaranteed loan must be delinquent for 180
days if it is repayable in monthly installments or 240 days if it is payable in
less frequent installments before a lender may obtain payment on a guarantee
from the Guarantee Agency. The Guarantee Agency must pay the lender for the
defaulted loan prior to submitting a claim to the Secretary of Education for
reimbursement. The Guarantee Agency must submit a reimbursement claim to the
Secretary of Education within 45 days after it has paid the lender's default
claim. As a prerequisite to entitlement to payment on the guarantee by the
Guarantee Agency, and in turn payment of reimbursement by the Secretary of
Education, the lender must have exercised reasonable care and diligence in
making, servicing and collecting the guaranteed loan. Generally, these
procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower attending an
eligible institution under the Higher Education Act be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and that the loan proceeds be
disbursed by the lender in a specified manner. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferments and forbearances and credit the borrower for payments made. If a
borrower becomes delinquent in repaying a loan, a lender must perform certain
collection procedures (primarily
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telephone calls, demand letters, skiptracing procedures and requesting
assistance from the applicable Guarantee Agency) that vary depending upon the
length of time a loan is delinquent.
Federal Interest Subsidy Payments
"Interest Subsidy Payments" are interest payments paid with respect to an
eligible loan during the period prior to the time that the loan enters repayment
and during Grace and Deferment Periods. The Secretary of Education and the
Guarantee Agencies entered into the Interest Subsidy Agreements as described in
"Description of the Guarantee Agencies -- Federal Agreements," whereby the
Secretary of Education agrees to pay Interest Subsidy Payments to the holders of
eligible guaranteed loans for the benefit of students meeting certain
requirements, subject to the holders' compliance with all requirements of the
Higher Education Act. Only Stafford Loans, and Consolidation Loans for which the
application was received on or after January 1, 1993, are eligible for Interest
Subsidy Payments. Consolidation Loans made after August 10, 1993 are eligible
for Interest Subsidy Payments only if all loans consolidated thereby are
Stafford Loans, except that Consolidation Loans for which the application is
received by an eligible lender on or after November 13, 1997 and before October
1, 1998, are eligible for Interest Subsidy Payments on that portion of the
Consolidation Loan that repays Stafford Loans or similar subsidized loans made
under the direct loan program. In addition, to be eligible for Interest Subsidy
Payments, guaranteed loans must be made by an eligible lender under the
applicable Guarantee Agency's Guarantee Program, and must meet requirements
prescribed by the rules and regulations promulgated under the Higher Education
Act, including the borrower eligibility, loan amount, disbursement, interest
rate, repayment period and guarantee fee provisions described herein and the
other requirements set forth in Section 428(b) of the Higher Education Act.
The Secretary of Education makes Interest Subsidy Payments quarterly on behalf
of the borrower to the holder of a guaranteed loan in a total amount equal to
the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any Deferment Period.
A borrower may elect to forego Interest Subsidy Payments, in which case the
borrower is required to make interest payments.
Federal Administrative Expense Allowances
Prior to the adoption of the 1993 Amendments, each Guarantee Agency was entitled
to receive from the Secretary of Education an administrative cost allowance
equal to 1% of the total principal amount of the loans (other than Consolidation
Loans) guaranteed by the Guarantee Agency in any fiscal year, for the purposes
of administrative costs of pre-claims assistance for default prevention and
collection of defaulted guaranteed loans, administrative costs of promoting
commercial lender participation, administrative costs of monitoring the
enrollment and repayment status of students, and for other such costs related to
the Guarantee Agency's Guarantee Program. The 1993 Amendments repealed such
entitlement, effective October 1, 1993. The 1993 Amendments, however, authorized
payments for transition support (including administrative costs) to Guarantee
Agencies, in connection with the transition to direct lending. See "Direct
Loans" below. Budget legislation adopted since that time has provided for the
payment to Guarantee Agencies of an administrative expense allowance equal to
0.85% of the agency's annual new guarantee volume, which has been extended
through the fiscal year ending September 30, 2002. After the fiscal year ending
September 30, 1997, however, such amounts are subject to decreasing aggregate
limits. There are no assurances as to the level of such payments that can be
made within such aggregate limits, or that Congress will require such payments
or that the Secretary of Education will determine to continue to make any such
payments in future years.
Federal Advances
Pursuant to agreements entered into between the Guarantee Agencies and the
Secretary of Education under Sections 422 and 422(c) of the Higher Education
Act, the Secretary of Education was authorized to advance moneys from time
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to time to the Guarantee Agencies for the purpose of establishing and
strengthening the Guarantee Agencies' reserves. Section 422(c) currently
authorizes the Secretary of Education to make advances to Guarantee Agencies in
various circumstances, on terms and conditions satisfactory to the Secretary,
including if the Secretary is seeking to terminate the Guarantee Agency's
reimbursement contract or assume the Guarantee Agency's functions, to assist the
Guarantee Agency in meeting its immediate cash needs or to ensure the
uninterrupted payment of claims.
FEDERAL SPECIAL ALLOWANCE PAYMENTS
The Higher Education Act provides for the payment by the Secretary of Education
of additional subsidies, called Special Allowance Payments, to holders of
qualifying student loans. The amount of the Special Allowance Payments, which
are made on a quarterly basis, is computed by reference to the average of the
bond equivalent rates of the 91-day Treasury bills auctioned during the
preceding quarter (the "T-Bill Rate"). The quarterly rate for Special Allowance
Payments for Student Loans made on or after October 1, 1981, and generally
before November 16, 1986, is computed by subtracting the applicable interest
rate on such loans from the T-Bill Rate, adding 3.5% to the resulting per
centum, and dividing the resulting per centum by four. For loans disbursed on or
after November 16, 1986, or loans to cover the costs of instruction for periods
of enrollment beginning on or after November 16, 1986, 3.25% has been
substituted for 3.5% in the foregoing formula. For loans disbursed on or after
October 1, 1992, 3.1% has been substituted for 3.5% in such formula. For
Stafford and Unsubsidized Stafford Loans made on or after July 1, 1995, 2.5% has
been substituted for 3.1% in such formula prior to the time such loans enter
repayment and during any Deferment Periods. For Stafford and Unsubsidized
Stafford Loans made on or after July 1, 1998, 1998 amendments substitute 2.1%
for 3.1% in such formula prior to the time such loans enter repayment and during
any Deferment Periods, and substitute 2.8% for 3.1% in such formula while such
loans are in repayment. For loans made on or after October 1, 1998, the special
allowance formula is to be revised similarly to the manner in which the
applicable interest rate formula is revised, as described above under "Loan
Terms -- Interest Rates -- Stafford Loans".
For Plus and SLS Loans which bear interest at rates adjusted annually, Special
Allowance Payments are made only in years during which the interest rate ceiling
on such loans operates to reduce the rate that would otherwise apply based upon
the applicable formula. See "Loan Terms -- Interest Rates -- Plus Loans" and "--
SLS Loans" above. Special Allowance Payments are paid with respect to Plus Loans
made on or after July 1, 1994 only if the rate that would otherwise apply
exceeds 10% per annum, notwithstanding that the interest rate ceiling on such
loans is 9% per annum. The portion, if any, of a Consolidation Loan that repaid
a loan made under Title VII, Sections 700-721 of the Public Health Services Act,
as amended, is ineligible for Special Allowance Payments.
The Balanced Budget and Deficit Control Act of 1985, as amended (known as the
"Gramm-Rudman Law") requires the President to issue a sequester order for any
federal fiscal year in which the projected budget exceeds the target for that
year. A sequester order for any fiscal year would apply to loans made on or
after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the T-Bill Rate
plus 3.0% (for loans with a special allowance formula of the T-Bill Rate plus
3.1%).
The Higher Education Act provides that if Special Allowance Payments or Interest
Subsidy Payments have not been made within 30 days after the Secretary of
Education receives an accurate, timely and complete request therefor, the
special allowance payable to such holder shall be increased by an amount equal
to the daily interest accruing on the special allowance and Interest Subsidy
Payments due the holder.
Special Allowance Payments and Interest Subsidy Payments are reduced by the
amount which the lender is authorized or required to charge as an origination
fee, as described above under "Loan Terms -- Fees -- Origination
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Fee." In addition, the amount of the lender origination fee described above
under "Loan Terms -- Fees -- Lender Origination Fees" is collected by offset to
Special Allowance Payments and Interest Subsidy Payments.
FEDERAL STUDENT LOAN INSURANCE FUND
The Higher Education Act authorizes the establishment of a Student Loan
Insurance Fund by the Federal government for making the federal insurance and
the federal reimbursement payments on defaulted student loans to Guarantee
Agencies. If moneys in the fund are insufficient to make the federal payments on
defaults of such loans, the Secretary of Education is authorized, to the extent
provided in advance by appropriation acts, to issue to the Secretary of the
Treasury obligations containing terms and conditions prescribed by the Secretary
of Education and approved by the Secretary of the Treasury, bearing interest at
a rate determined by the Secretary of the Treasury. The Secretary of the
Treasury is authorized and directed by the Higher Education Act to purchase such
obligations.
DIRECT LOANS
The 1993 Amendments authorized a program of "direct loans," to be originated by
schools with funds provided by the Secretary of Education. Under the direct loan
program, the Secretary of Education is directed to enter into agreements with
schools, or origination agents in lieu of schools, to disburse loans with funds
provided by the Secretary. Participation in the program by schools is voluntary.
The goals set forth in the 1993 Amendments call for the direct loan program to
constitute 5% of the total volume of loans made under the FFEL Program and the
direct loan program for academic year 1994-1995, 40% for academic year
1995-1996, 50% for academic years 1996-1997 and 1997-1998 and 60% for academic
year 1998-1999. No provision is made for the size of the direct loan program
thereafter. Based upon information released by the General Accounting Office,
participation by schools in the direct loan program has not been sufficient to
meet the goals for the 1995-1996 or 1996-1997 academic years.
The loan terms are generally the same under the direct loan program as under the
FFEL Program, though more flexible repayment provisions are available under the
direct loan program. At the discretion of the Secretary of Education, students
attending schools that participate in the direct loan program (and their
parents) may still be eligible for participation in the FFEL Program, though no
borrower could obtain loans under both programs.
It is difficult to predict the impact of the direct lending program. There is no
way to accurately predict the number of schools that will participate in future
years, or, if the Secretary authorizes students attending participating schools
to continue to be eligible for FFEL Program loans, how many students will seek
loans under the direct loan program instead of the FFEL Program. In addition, it
is impossible to predict whether future legislation will eliminate, limit or
expand the direct loan program or the FFEL Program.
DESCRIPTION OF THE GUARANTEE AGENCIES
The Financed Student Loans in a Trust Estate may be guaranteed by any one or
more Guarantee Agencies identified in the related Prospectus Supplement. The
following discussion relates to Guarantee Agencies under the FFEL Program. The
particular arrangements of a guarantor or escrow fund with respect to a Private
Loan Program will be described in the Prospectus Supplement for a Series, as
applicable.
A Guarantee Agency guarantees loans made to students or parents of students by
lending institutions such as banks, credit unions, savings and loan
associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Guarantee Fund") A lender may submit a default claim to the Guarantee Agency
after the student loan has been delinquent for at least 180 days; however,
lenders are strongly encouraged not to file a claim
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until a loan is at least 210 days delinquent. The default claim package must
include all information and documentation required under the FFEL Program
regulations and the Guarantee Agency's policies and procedures. Under the
Guarantee Agencies' current procedures, assuming that the default claim package
complies with the Guarantee Agency's loan procedures manual or regulations, the
Guarantee Agency pays the lender for a default claim within 90 days of the
lender's filing the claim with the Guarantee Agency (which generally is expected
to be 300 days following the date a loan becomes delinquent). The Guarantee
Agency will pay the lender interest accrued on the loan for up to 360 days after
delinquency. The Guarantee Agency must file a reimbursement claim with the
Department of Education within 45 days after the Guarantee Agency has paid the
lender for the default claim.
In general, a Guarantee Agency's Guarantee Fund has been funded principally by
administrative cost allowances paid by the Secretary of Education, guarantee
fees paid by lenders (the cost of which may be passed on to borrowers),
investment income on moneys in the Guarantee Fund, and a portion of the moneys
collected from borrowers on Guaranteed Loans that have been reimbursed by the
Secretary of Education to cover the Guarantee Agency's administrative expenses.
Various changes to the Higher Education Act have adversely affected the receipt
of revenues by the Guarantee Agencies and their ability to maintain their
Guarantee Funds at previous levels, and may adversely affect their ability to
meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the reduction and
possible elimination of administrative expense allowances from the Secretary of
Education; the reduction in supplemental preclaims assistance payments from the
Secretary of Education; and the reduction in retention by a Guarantee Agency of
collections on defaulted loans from 30% to 27%. Additionally, the adequacy of a
Guarantee Agency's Guarantee Fund to meet its guarantee obligations with respect
to existing student loans depends, in significant part, on its ability to
collect revenues generated by new loan guarantees. The Federal Direct Student
Loan Program may adversely affect the volume of new loan guarantees. Pending
legislation and future legislation may make additional changes to the Higher
Education Act that would significantly affect the revenues received by Guarantee
Agencies and the structure of the guarantee agency program. For a more complete
description of provisions of the Higher Education Act that relate to payments
described in this paragraph or affect the funding of a Guarantee Fund, see
"Description of the FFEL Program."
The Higher Education Act gives the Secretary of Education various oversight
powers over Guarantee Agencies. These include requiring a Guarantee Agency to
maintain its Guarantee Fund at a certain required level and taking various
actions relating to a Guarantee Agency if its administrative and financial
condition jeopardizes its ability to meet its obligations. These actions
include, among others, providing advances to the Guarantee Agency, terminating
the Guarantee Agency's Federal Reimbursement Contracts, assuming responsibility
for all functions of the Guarantee Agency, and transferring the Guarantee
Agency's guarantees to another guarantee agency or assuming such guarantees. The
Higher Education Act provides that a Guarantee Agency's Guarantee Fund shall be
considered to be the property of the United States to be used in the operation
of the FFEL Program or the Federal Direct Student Loan Program, and, under
certain circumstances, the Secretary of Education may demand payment of amounts
in the Guarantee Fund. The Secretary of Education is required to demand payment
on September 1, 2002 of a total of one billion dollars from all the Guarantee
Agencies participating in the FFEL Program. The amounts to be demanded of each
Guarantee Agency shall be determined in accordance with formulas included in the
Higher Education Act. Each Guarantee Agency will be required to deposit funds in
a restricted account in installments, beginning in the federal fiscal year
ending September 30, 1998, to provide for such payment. The Secretary of
Education has made the determinations, and advised the Guarantee Agencies, of
the amounts required to be so transferred by the Guarantee Agencies. There can
be no assurance that relevant federal laws, including the Higher Education Act,
will
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not be further changed in a manner that may adversely affect the ability of a
Guarantee Agency to meet its guarantee obligations. See "Description of the FFEL
Program" herein.
Pursuant to Section 432(o) of the Higher Education Act, if the Department of
Education has determined that a Guarantee Agency is unable to meet its insurance
obligations, the holders of loans guaranteed by such Guarantee Agency must
submit claims directly to the Department of Education, and the Department of
Education is required to pay the full Guarantee Payment due with respect thereto
in accordance with guarantee claims processing standards no more stringent than
those applied by the Guarantee Agency. See "Description of the FFEL Program"
herein.
There are no assurances as to the Secretary of Education's actions if a
Guarantee Agency encounters administrative or financial difficulties or that the
Secretary of Education will not demand that a Guarantee Agency transfer
additional portions or all of its Guarantee Fund to the Secretary of Education.
Information relating to the particular Guarantee Agencies guaranteeing the
Financed Student Loans will be set forth in the Prospectus Supplement. Such
information will be provided by the respective Guarantee Agencies, and neither
such information nor information included in the reports referred to therein has
been verified by, or is guaranteed as to accuracy or completeness by, the
Issuer, the Administrator or the Underwriters. No representation is made by the
Issuer, the Administrator or the Underwriters as to the accuracy or adequacy of
such information or the absence of material adverse changes in such information
subsequent to the dates thereof.
FEDERAL AGREEMENTS
Each Guarantee Agency and the Secretary of Education have entered into Federal
Reimbursement Contracts pursuant to Section 428(c) of the Higher Education Act
(which include, for older Guarantee Agencies, a supplemental contract pursuant
to former Section 428A of the Higher Education Act), which provide for the
Guarantee Agency to receive 80% to 100% reimbursement of insurance payments that
the Guarantee Agency makes to eligible lenders with respect to loans guaranteed
by the Guarantee Agency prior to the termination of the Federal Reimbursement
Contracts or the expiration of the authority of the Higher Education Act. The
1993 Amendments reduced the reimbursement percentages referred to above with
respect to claims on most loans made on or after October 1, 1993. See "- Effect
of Annual Claims Rate" below. The Federal Reimbursement Contracts provide for
termination under certain circumstances and also provide for certain actions
short of termination by the Secretary of Education to protect the federal
interest. See "Description of the FFEL Program -- Contracts with Guarantee
Agencies -- Federal Reimbursement."
In addition to guarantee benefits, qualified Student Loans acquired under the
FFEL Program benefit from certain federal subsidies. Each Guarantee Agency and
the Secretary of Education have entered into an interest subsidy agreement under
Section 428(b) of the Higher Education Act (as amended, an "Interest Subsidy
Agreement"), which entitles the holders of eligible loans guaranteed by the
Guarantee Agency to receive Interest Subsidy Payments from the Secretary of
Education on behalf of certain students while the student is in school, during a
six to twelve month Grace Period after the student leaves school, and during
certain Deferment Periods, subject to the holders' compliance with all
requirements of the Higher Education Act. See "Description of the FFEL Program
- -- Contracts with Guarantee Agencies -- Federal Interest Subsidy Payments "for a
more detailed description of the Interest Subsidy Payments.
United States Courts of Appeals have held that the federal government, through
subsequent legislation, has the right unilaterally to amend the contracts
between the Secretary of Education and the Guarantee Agencies described herein.
Amendments to the Higher Education Act in 1986, 1987, 1992 and 1993,
respectively (i) abrogated certain rights of guarantee agencies under contracts
with the Secretary of Education relating to the repayment of certain advances
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from the Secretary of Education, (ii) authorized the Secretary of Education to
withhold reimbursement payments otherwise due to certain guarantee agencies
until specified amounts of such guarantee agencies' reserves had been
eliminated, (iii) added new reserve level requirements for guarantee agencies
and authorized the Secretary of Education to terminate the Federal Reimbursement
Contracts under circumstances that did not previously warrant such termination,
and (iv) expanded the Secretary of Education's authority to terminate such
contracts and to seize guarantee agencies' reserves. There can be no assurance
that future legislation will not further adversely affect the rights of the
Guarantee Agencies, or holders of loans guaranteed by a Guarantee Agency under
such contracts.
EFFECT OF ANNUAL CLAIMS RATE
A Guarantee Agency's ability to meet its obligation to pay default claims on
Financed Student Loans will depend on the adequacy of its Guarantee Fund and,
under the current federal reinsurance arrangement, the default experience of all
lenders under the Guarantee Agency's Guarantee Program. A high default
experience among lenders participating in a Guarantee Agency's Guarantee Program
may cause the Guarantee Agency's Claims Rate (as defined below) for its
Guarantee Program to exceed the 5% and 9% levels described below, and result in
the Secretary of Education reimbursing the Guarantee Agency at lower percentages
of default claims payments made by the Guarantee Agency.
In general, Guarantee Agencies are currently entitled to receive reimbursement
payments under the Federal Reimbursement Contracts in amounts that vary
depending on the Claims Rate experience of the Guarantee Agency. The "Claims
Rate" is computed by dividing total default claims since the previous September
30 by the total original principal amount of the Guarantee Agency's guaranteed
loans in repayment on such September 30. On October 1 of each year the Claims
Rate begins at zero, regardless of the experience in preceding years. For loans
made prior to October 1, 1993, if the Claims Rate remains equal to or below 5%
within a given federal fiscal year (October 1 through September 30), the
Secretary of Education is currently obligated to provide 100% reimbursement; if
and when the Claims Rate exceeds 5% and until such time, if any, as it exceeds
9% during the fiscal year, the reimbursement rate is at 90%: if and when the
Claims Rate exceeds 9% during the fiscal year, the reimbursement rate for the
remainder of the fiscal year is at 80%. For loans made prior to October 1, 1993,
each Guarantee Agency is currently entitled to at least 80% reimbursement from
the Secretary of Education on default claims that it purchases, regardless of
its Claims Rate. The reimbursement percentages for loans made on or after
October 1, 1993 are reduced from 100%, 90% and 80% to 98%, 88% and 78%,
respectively. See "Description of the FFEL Program" herein.
THE PRIVATE LOAN PROGRAMS
To the extent described in the Prospectus Supplement for a Series, a Trust
Estate may include Financed Private Loans issued under one or more Private Loan
Programs. The Private Loan Programs will be specifically identified in the
Prospectus Supplement with respect to such Series. The Prospectus Supplement for
a Series may specify a maximum percentage of Financed Private Loans that may
comprise part of the related Trust Estate. This summary identifies
characteristics common to most Private Loan Programs but is qualified by the
specific disclosure set forth in the related Prospectus Supplement.
Private Loans made under most Private Loan Programs are based on the credit of
the borrower or his or her parents or co-borrowers. In general, applicants are
required to have a minimum annual income and a monthly debt burden, including
the Financed Student Loan, of no greater than a specified percentage of their
monthly income. In determining whether a student or co-borrower is creditworthy,
a credit bureau report is obtained for each applicant, including the student.
The various Private Loan Programs have different standards as to what
constitutes a satisfactory credit history.
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Eligible post-secondary borrowers of a Private Loan often are required to be
engaged in a course of study at a qualifying educational institution, which may
include two-year colleges, four-year colleges and for-profit schools. Certain
Private Loan Programs are specifically designed for graduate or professional
students, or for students attending elementary or secondary private schools. The
institutions generally must be located in the United States or Canada. Often,
the borrower (or a co-applicant) must be a citizen or resident of the United
States. Some Private Loans may be a consolidation of existing Private Loans.
The amount that may be borrowed under a Private Loan Program varies based upon
the Private Loan Program. Typically, borrowers must borrow at least a minimum
amount with respect to any academic year, and may not borrow more than a maximum
amount per academic year, or a maximum amount under the Private Loan Program.
However, the amount of the Private Loan plus other financial aid received by a
student, normally may not exceed the cost of education, as determined by the
school.
A guarantee fee or origination fee typically is deducted from the Private Loan
proceeds. Depending on the Private Loan Program, all or a portion of this fee is
either paid to the agency that has established the Private Loan Program and that
guarantees the repayment of all or a substantial portion of the Private Loan
under certain specified circumstances or deposited into an escrow fund to repay
all or a substantial portion of the Private Loan under certain specified
circumstances. The obligation to guarantee or the right to receive payment from
an escrow fund is typically dependent upon the proper servicing of such Private
Loan by the Servicer thereof.
The interest rate on a Private Loan varies based upon the Private Loan Program
and can either be fixed or variable. Floating rates may be based upon the prime
rate or the T-Bill Rate, or some other objective standard. Interest typically
accrues at a rate equal to the index plus a margin, but subject to a maximum
rate per annum, with the interest rate being adjusted periodically.
Repayment of a Private Loan usually is required to commence within 45 to 90 days
following the borrowing. However, certain Private Loan Programs permit a
borrower to defer the repayment of principal while the student is in school
(often up to a maximum number of years). In such event, principal repayments
typically begin promptly following graduation. Most Private Loan Programs permit
prepayment of the Private Loan at any time without penalty. borrowers typically
may schedule repayment over a 10 to 25-year period, subject to a minimum monthly
payment obligation.
SERVICING
The following is a summary of certain terms of the Servicing Agreements pursuant
to which one or more approved servicers (each, a "Servicer") will service the
Financed Student Loans. Forms of the Servicing Agreements have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
However, the summary does not purport to be complete and is qualified in its
entirety by reference to all provisions of the Servicing Agreements.
The Issuer has entered or will enter into Servicing Agreements with various
approved Servicers to service the Financed Student Loans. The Servicers will
have actual possession of notes evidencing, and other documents relating to, the
Financed Student Loans. Information relating to the initial Servicers for a
particular pool of Financed Student Loans will be set forth in the related
Prospectus Supplement. Such information will be provided by the respective
Servicers, and neither such information nor information included in the reports
referred to therein has been verified by, or is guaranteed as to accuracy or
completeness by, the Issuer, the Administrator or the Underwriters. No
representation is made by the Issuer, the Administrator or the Underwriters as
to the accuracy or adequacy of such information or the absence of material
adverse changes in such information subsequent to the dates thereof.
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SERVICING PROCEDURES
Pursuant to each Servicing Agreement, the related Servicer will agree to
service, and perform all other related tasks with respect to, all or a portion
of the Financed Student Loans. Each Servicer is obligated to perform all
services and duties customary to the servicing of Financed Student Loans
(including all collection practices), and to do so with reasonable care and in
compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements, all regulations and agreements
respecting Private Loans and all other applicable federal and state laws.
Without limiting the foregoing, the duties of the Servicer include, but are not
limited to, collecting and depositing all payments with respect to the Financed
Student Loans, including, with respect to Financed FFELP Loans, any Guarantee
Payments, Interest Subsidy Payments and Special Allowance Payments and guarantee
or escrow fund payments with respect to Private Loans; responding to inquiries
from borrowers on the Financed Student Loans; and investigating delinquencies
and sending out statements, payment coupons and tax reporting information to
borrowers. In addition, the Servicer will keep ongoing records with respect to
such Financed Student Loans and collections thereon and will furnish monthly and
annual statements to the related Indenture Trustee with respect to such
information, in accordance with the customary standards and as otherwise
required in the related Indenture.
A Servicer's failure to properly service Financed Student Loans or otherwise so
comply may result in the refusal of the United States Department of Education
(the "Secretary") to make reimbursement payments to a Guarantee Agency on such
loans or in a Guarantee Agency's (including for this purpose any guarantor or
escrow fund under a Private Loan Program) refusal to honor its guarantee or make
a Guarantee Payment on such loans to the Issuer and/or in the limitation,
suspension or termination of such Servicer's eligibility to contract to service
Financed Student Loans.
SERVICER COVENANTS
In each Servicing Agreement, the related Servicer covenants that: (a) it will
duly satisfy or cause to be duly satisfied all obligations on its part to be
fulfilled under or in connection with the Financed Student Loans, maintain in
effect all qualifications required to service the Financed Student Loans and, if
applicable, comply in all material respects with all requirements of law and
program requirements for Private Loans in connection with servicing the Financed
Student Loans; and (b) it will not permit any rescission or cancellation of a
Financed Student Loan except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the Issuer.
Following the discovery by or notice to the Servicer of a breach of any such
obligations with respect to any Financed Student Loan that results in the
failure of a Guarantee Agency (including for this purpose any guarantor or
escrow fund under a Private Loan Program) to make a Guarantee Payment, the
Servicer is obligated to purchase such Financed Student Loan and reimburse the
Issuer for certain payments, all on the terms of the applicable Servicing
Agreement. The Servicer's purchase and reimbursement obligations are contractual
obligations pursuant to the Servicing Agreement that may be enforced against the
Servicer, but the breach thereof will not constitute an Event of Default under
the Notes.
SERVICING COMPENSATION
Each Servicer will be entitled to receive a fee (the "Servicing Fee") with
respect to the servicing of the Financed Student Loans. The Servicing Fee is
payable out of Available Funds as part of the Program Operating Expenses, as
described in the related Prospectus Supplement.
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The Servicing Fee is intended to compensate the Servicers for performing the
functions of a third party servicer of student loans as an agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of borrowers on the Financed Student Loans, investigating
delinquencies, pursuing, filing and collecting any Guarantee Payments and
guarantee or escrow fund payments by guarantors of Financed Private Loans,
including litigation costs, accounting for collections and furnishing monthly
and annual statements to the Administrator. The Servicing Fee also will
reimburse the Servicers for certain taxes, accounting fees, outside auditor
fees, data processing costs and other costs incurred in connection with
administering the Financed Student Loans.
DESCRIPTION OF THE NOTES
The Notes are limited obligations of the Issuer and are payable solely from a
Trust Estate. A separate Trust Estate will be established for each issuance of
Notes under an Indenture entered into in connection with that issuance of Notes.
The Notes of any Series will be issued pursuant to the terms of an Indenture.
Each Indenture will be substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following summary
describes the material terms of the Notes. The summary does not purport to be
complete and is qualified in its entirety by reference to the provisions of the
Notes, the related Indentures and the Prospectus Supplement, which provisions
are incorporated by reference herein.
It is expected that each Series of the Notes will initially be represented by
one or more Notes registered in the name of the nominee of The Depository Trust
Company ("DTC", and together with any successor depository selected by the
Issuer, the "Depository"). Notes generally will be available for purchase in
denominations of $50,000 and integral multiples of $1,000 in excess thereof in
book-entry form. The Issuer has been informed by DTC that DTC's nominee will be
Cede & Co. Accordingly, Cede & Co. is expected to be the holder of record of the
Notes. Unless and until Definitive Notes are issued under the limited
circumstances described herein or in the accompanying Prospectus Supplement, no
Noteholder will be entitled to receive a physical certificate representing his
Note. All references herein to actions by Noteholders refer to actions taken by
DTC upon instructions from its participating organizations (the "Participants")
and all references herein to distributions, notices, reports and statements to
Noteholders refer to distributions, notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Notes, for distribution to
Noteholders in accordance with DTC's procedures with respect thereto. See
"-- Book-Entry Registration" and "-- Definitive Notes" herein.
Each Series of Notes will evidence the interests specified in the related
Prospectus Supplement, which may (i) include the right to receive payments
allocable only to principal, only to interest or to any combination thereof;
(ii) include the right to receive payments only of prepayments of principal
throughout the lives of the Notes or during specified periods; (iii) be
subordinated in its right to receive distributions of scheduled payments of
principal, prepayments or principal, interest or any combination thereof to one
or more other Series of Notes and any Exchange Counterparties under any Senior
Exchange Agreement, throughout the lives of the Notes or during specified
periods or may be subordinated with respect to certain losses or delinquencies;
(iv) include the right to receive such payments only after the occurrence of
events specified in the Prospectus Supplement; (v) include the right to receive
payments in accordance with a schedule or formula or on the basis of collections
from designated portions of the assets in the related Trust Estate; (vi)
include, as to Notes entitled to payments allocable to interest, the right to
receive interest at a fixed rate or an adjustable rate; (vii) include the right
to have interest accrue but not be paid until the occurrence of a specified
event or the passing of time; and (viii) include, as to Notes entitled to
payments allocable to interest, the right to payments allocable to interest only
after the occurrence of events specified in the related Prospectus Supplement.
One or more Series of Notes in an issuance ("Subordinate Notes") may be
subordinated to other Series of Notes in that issuance ("Senior Notes"). If so
provided in the related Prospectus Supplement, principal payments on the
35
<PAGE> 76
Subordinate Notes generally will not begin until the related Senior Notes are
repaid. In addition, if so provided in the related Prospectus Supplement,
interest payments on any Distribution Date on Subordinate Notes generally will
be made only after each related Series of Senior Notes has received its interest
entitlement on that Distribution Date and after each Senior Exchange Payment to
be made under a Senior Exchange Agreement, if any, is made, and sometimes will
be made only after each related Series of Senior Notes has received its
Principal Distribution Amount on such Distribution Date. See "-- Payment of
Available Funds" and "Security for the Notes -- The Trust Estates" herein. The
specific terms of any Senior Notes and Subordinate Notes in an issuance will be
described in the related Prospectus Supplement.
PAYMENT OF AVAILABLE FUNDS
On each Distribution Date with respect to an issuance of Notes, moneys in the
related Collection Account will be disbursed by the related Indenture Trustee
from Available Funds for each Collection Period as set forth in the related
Prospectus Supplement.
For purposes hereof, "Available Funds" for each issuance of Notes means, with
respect to any Collection Period, the excess of (A) the sum, without
duplication, of the following amounts with respect to such Collection Period:
(i) all collections received by the Indenture Trustee on the Financed Student
Loans (including any Guarantee Payments (including payments received from any
guarantor or escrow fund under any Private Loan Program) received with respect
to the Financed Student Loans) during such Collection Period; (ii) any payments,
including without limitation Interest Subsidy Payments and Special Allowance
Payments, received by the Eligible Lender Trustee during such Collection Period
with respect to Financed Student Loans; (iii) all proceeds from any sales of
Financed Student Loans during such Collection Period; (iv) any payments of or
with respect to interest received by the Indenture Trustee during such
Collection Period with respect to a Financed Eligible Loan for which a Realized
Loss was previously allocated; (v) the aggregate Purchase Amounts received for
those Financed Students Loans purchased by the Indenture Trustee during the
related Collection Period; (vi) the aggregate amounts, if any, received from the
Issuer or the Indenture Trustee as reimbursement of non-guaranteed or uninsured
interest amounts (which shall not include, with respect to Financed FFELP Loans,
the portion of such interest amounts for which the Guarantee Agency did not have
an obligation to make a Guarantee Payment), or lost Interest Subsidy Payments
and Special Allowance Payments, with respect to the Financed Student Loans;
(vii) Counterparty Exchange Payments; (viii) Investment Earnings for such
Collection Period; and (ix) any other sums identified in the related Prospectus
Supplement over (B) amounts received by the Issuer in connection with balance
reconciliations required by virtue of Student Loan consolidations for such
Collection Period; provided, however, that Available Funds will exclude (1) all
payments and proceeds of any Financed Student Loans the Purchase Amount of which
has been included in Available Funds for a prior Collection Period, which
payments and proceeds shall be paid to the Issuer, (2) amounts used to reimburse
the Issuer for Advances or any other amounts advanced by the Issuer on a
voluntary basis with respect to Guarantee Payments (including payments from any
guarantor or escrow fund under any Private Loan Program) or Interest Subsidy
Payments applied for but not received as of the end of the Collection Period
immediately preceding the date such advance is made, (3) payments by a bond
insurance company or other surety, credit enhancer or guarantor who is obligated
to pay debt service on a particular Series of Notes, and (4) amounts which are
paid to the Issuer pursuant to the Indenture.
Prior to making payments to the Note Payment Account established under the
Indenture, the Indenture Trustee will, if so provided in the Prospectus
Supplement for a Series, transfer from the Collection Account established under
the Indenture to the Expense Account established under the Indenture an amount
sufficient to pay the Program Expense Requirement calculated as of such
Distribution Date. On each Distribution Date (other than those relating to
Accrual Notes during the related Accrual Period), the Indenture Trustee will,
subject to the amount of Available Funds, transfer from the Collection Account
to the Note Payment Account an amount equal to the Series Interest Amount
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<PAGE> 77
on each Series of the Notes and any related Issuer Exchange Payment, as
described in the related Prospectus Supplement. For each Distribution Date
during the related Accrual Period relating to a Series of Accrual Notes, the
related Series Interest Amount will be added to the principal amount of such
Series of Notes and any related Issuer Exchange Payment will be transferred to
the Note Payment Account. On each Distribution Date on which a principal
distribution is to be made on the Notes, the Indenture Trustee will, subject to
the amount of Available Funds, transfer from the Collection Account to the Note
Payment Account an amount equal to the appropriate Principal Distribution
Amount, as described in the related Prospectus Supplement. The order and
priority for payment of interest, principal distributions and Issuer Exchange
Payments as between Senior Notes and Senior Exchange Agreements and Subordinate
Notes and Subordinate Exchange Agreements in an issuance will be described in
the related Prospectus Supplement for such issuance.
The "Program Expense Requirement" means, with respect to an issuance of Notes
and as of any date of calculation, such amount as may then be necessary to be
accumulated in the Expense Account for payment, in accordance with the related
Indenture, of the Program Operating Expenses due or to become due during the 3
months beginning on the first day of the next succeeding calendar month as
provided in such Indenture.
For purposes hereof, "Program Operating Expenses" means all items of expense
allocable to the operation of the Program, including (i) fees and expenses of
and any other amounts payable to the Indenture Trustee and the Authenticating
Agent, if any, and any fees charged by a Depository, (ii) the fees and expenses
of and any other amounts payable to the Calculation Agent, any auction agent,
broker-dealers, market agent or other agent in connection with any Notes issued
under the Indenture, (iii) fees and expenses of and any other amounts payable to
the Servicers, the Eligible Lender Trustee and any bank providing lock-box or
similar services in connection with Financed Student Loans and Servicing
Development Fees, (iv) the fees and expenses incurred by or on behalf of the
Issuer in the administration of the Program under the Higher Education Act, a
Guarantee Agreement (including for this purpose any agreement with a guarantor
or relating to an escrow fund under a Private Loan Program) and any other
agreement or legal requirement affecting the administration of the Program,
costs of legal, accounting, auditing, management, consulting, banking and
financial advisory services and expenses, costs of salaries, supplies,
utilities, mailing, labor, materials, office rent, maintenance, furnishings,
equipment, machinery, apparatus and insurance premiums, Costs of Issuance not
paid from proceeds of Notes, and (v) and other reasonable and proper expenses,
including both operating expenses and capital expenditures incurred or to be
incurred in connection with the operation of the Program and, with respect to
item (iv) above, any other similar program of the Issuer.
Following the payment of all required amounts due on the Notes on any
Distribution Date (and deposit of any required amounts in any Reserve Fund), the
Indenture Trustee will, if so provided in the Prospectus Supplement for a
Series, transfer from the Collection Account to the Note Payment Account, to the
extent of Available Funds, an amount equal to Parity Percentage Payments, if
any, to be made on such Distribution Date. If any Available Funds are available
after such transfer, the Indenture Trustee will, if so provided in the
Prospectus Supplement for a Series, transfer from the Collection Account to the
Note Payment Account, to the extent of Available Funds, the amount of any
Carryover Interest.
Following the payment of all required amounts as described above, the Indenture
Trustee will, if so provided in the Prospectus Supplement for a Series, transfer
from the Collection Account to an Exchange Counterparty the amount, if any, owed
an Exchange Counterparty in respect of an early termination payment or damages
for early termination by, or as a result of a default by, the Issuer under any
Exchange Agreement.
On each Distribution Date, as specified in the related Prospectus Supplement,
the Indenture Trustee will, after making all required transfers to the Expense
Account, Note Payment Account, the Reserve Fund and to any Exchange
Counterparties as described above, transfer to the Excess Surplus Account
established under the Indenture any
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<PAGE> 78
remaining Available Funds. Any amounts withdrawn by the Issuer from the Excess
Surplus Account will not thereafter be available to make payments on the Notes.
See "The Indentures -- Funds and Accounts" herein.
On each Distribution Date, the Indenture Trustee will pay to the Noteholders of
the applicable Series as of the related Record Date and any related Exchange
Counterparties all amounts transferred to the Note Payment Account as set forth
above and in the related Prospectus Supplement.
Notwithstanding the foregoing, if: (a) the Outstanding principal amount of all
Senior Notes issued under the Indenture would exceed the sum of the related Pool
Balance at the end of the immediately preceding Collection Period plus the
aggregate balance on deposit in the Funds and Accounts under the Indenture on
such Distribution Date following such distributions or (b) there has been an
Event of Default under the Indenture (but prior to the acceleration of the
maturity of the Notes issued under the Indenture), then until the applicable
conditions described in clauses (a) and (b) no longer exist, Noteholders of
Subordinate Notes issued under the Indenture will not be entitled to any
payments of principal or interest and no Subordinate Issuer Exchange Payments
will be made. For so long as any related Senior Notes are Outstanding, any such
deferral in the payment of principal or interest on the Subordinate Notes
(except with respect to the Legal Final Maturity of a related Series of
Subordinate Notes) or in the payment of Subordinate Issuer Exchange Payments
will not constitute an Event of Default under the Indenture.
INTEREST
Interest will accrue on the principal balance of each Series of Notes at a rate
per annum (calculated as provided below or in the related Prospectus Supplement)
equal to the related Series Interest Rate. Interest is expected to accrue
initially from and including the Closing Date on which the related Series was
issued through and including the date set forth in the related Prospectus
Supplement and, thereafter, except as otherwise set forth in the related
Prospectus Supplement, for periods (each, an "Interest Accrual Period")
consisting of (i) with respect to LIBOR Rate Notes, generally a one-month or
three-month period beginning and ending on the dates set forth in the related
Prospectus Supplement, (ii) with respect to T-Bill Rate Notes, generally a
three-month period beginning and ending on the dates set forth in the related
Prospectus Supplement, (iii) with respect to Auction Rate Notes, as set forth in
the related Prospectus Supplement, or (iv) with respect to Notes accruing
interest based on some other method, the period set forth in the related
Prospectus Supplement. Interest on each Series of Notes will be payable (or with
respect to Accrual Notes during the related Accrual Period, added to the
principal amount thereof) on the Distribution Dates described in the applicable
Prospectus Supplement.
Generally, the Series Interest Rate on each Series of Notes will equal the
lesser of (i) the interest rate and applicable margin, if any, and (ii) a cap
specified in the related Prospectus Supplement (the "Formula Rate"); provided
that it will not exceed the Net Loan Rate for such Series when it is required to
be determined.
If on any Interest Determination Date, an Auction for a Series of Auction Rate
Notes is not held for any reason, then the Series Interest Rate for such Series
of Notes will be the Net Loan Rate or such other rate as may be described in a
Prospectus Supplement. The Series Interest Rate on each Series of Notes bearing
interest based upon a method other than LIBOR, T-Bill or Auction Rate will be
described in the related Prospectus Supplement.
With respect to Auction Rate Notes, the Issuer may, from time to time, change
the length of one or more Auction Periods to conform with then current market
practice or accommodate other economic or financial factors that may affect or
be relevant to the length of the Auction Period or any Series Interest Rate (an
"Auction Period Adjustment"). An Auction Period Adjustment will not cause an
Auction Period to be less than 7 days nor more than one year and will not be
allowed unless certain conditions described in the Auction Procedures in an
Appendix to the related
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<PAGE> 79
Prospectus Supplement are satisfied. If an Auction Period Adjustment is made,
the intervals between Distribution Dates will be adjusted accordingly.
Payment of Interest. Payments of interest will be made on each Distribution
Date, as specified in the accompanying Prospectus Supplement. Interest payments
may include interest accrued on the assets of the related Trust Estate during
one or more Interest Accrual Periods. Interest payments on the Notes will
generally be funded from Available Funds and Advances (and, when applicable,
amounts on deposit in any Reserve Fund, Capitalized Interest Account or such
other account as may be set forth in a Prospectus Supplement) remaining after
the deposit of the Program Expense Requirement in the Expense Account, as
specified in the related Prospectus Supplement. If so provided in the related
Prospectus Supplement, if insufficient funds are available to pay the applicable
Series Interest Rate on a Distribution Date, such shortfall will be paid from
draws on the applicable forms of Credit Enhancement to the extent described in
the related Prospectus Supplement. If so provided in the related Prospectus
Supplement, interest payments on Subordinate Notes and Subordinate Issuer
Exchange Payments may be deferred or otherwise affected in certain
circumstances. For so long as any related Senior Notes are Outstanding, any such
deferral in the payment of interest on the Subordinate Notes (except with
respect to the Legal Final Maturity of the Subordinate Notes) or in the payment
of Subordinate Issuer Exchange Payments will not constitute an Event of Default
under the Indenture.
Carryover Interest. If set forth in a Prospectus Supplement, with respect to any
Series of Notes for any Interest Accrual Period the LIBOR Rate, T-Bill Rate,
Auction Rate or other applicable interest rate plus the applicable margin
exceeds the Net Loan Rate for such Series, the applicable Series Interest Rate
for such Interest Accrual Period will be the Net Loan Rate, and the excess of
the amount of interest on such Series of Notes that would have accrued at a rate
equal to the LIBOR Rate, T-Bill Rate, Auction Rate or other applicable interest
rate plus any applicable margin, over the amount of interest on such Series
actually accrued at the Net Loan Rate will accrue as the Carryover Interest with
respect to such Series of Notes. Such determination of the Carryover Interest
will be made separately for each Series of Notes. The Carryover Interest on any
Series of Notes will bear interest at a rate equal to the Formula Rate, or the
rate set forth in the related Prospectus Supplement, from the Distribution Date
for the Interest Accrual Period for which the Carryover Interest was calculated
until paid.
Carryover Interest will be paid as described in the related Prospectus
Supplement.
PRINCIPAL
All payments of principal of Notes of a Series will be made in an aggregate
amount determined as set forth in the related Prospectus Supplement and will be
paid at the times and will be allocated among the Series of Notes in an issuance
in the order and amounts, all as specified in the related Prospectus Supplement.
Principal will be paid pro rata to the Noteholders of any Series, as described
in the related Prospectus Supplement.
As described herein, several Series of Notes may be issued under an Indenture.
Any issuance of Notes may contain one or more Series of Senior Notes with a
payment priority higher than one or more other Series of Subordinate Notes or
any Exchange Counterparties under any Subordinate Exchange Agreement. In such
event, the Series of Subordinate Notes will receive limited or no payments of
principal until each related Series of Senior and other parties with a higher
payment priority have been paid to the extent set forth in the Prospectus
Supplement.
The aggregate outstanding principal amount of each Series of Notes will be
payable in full on the Distribution Date identified in the related Prospectus
Supplement (the "Legal Final Maturity"). The actual date on which the aggregate
outstanding principal and accrued interest of any Series of Notes are paid may
be, and in some cases will be expected to be, earlier than its respective Legal
Final Maturity, based on a variety of factors, including those described under
"Maturity and Prepayment Considerations" herein.
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<PAGE> 80
Realized Losses. The Issuer may experience losses with respect to the Financed
Student Loans. Realized Losses may result in the inability to pay the Notes of a
Series in full.
With respect to each Financed FFELP Loan submitted to a Guarantee Agency for a
Guarantee Payment, a "Realized Loss" means the excess, if any, of (i) the unpaid
principal balance of such Financed FFELP Loan on the date it was first submitted
to a Guarantee Agency for a Guarantee Payment over (ii) all amounts received on
or with respect to principal on such Financed FFELP Loan up through the earlier
to occur of (A) the date a related Guarantee Payment is made or (B) the last day
of the Collection Period occurring 12 months after the date the claim for such
Guarantee Payment is first denied.
With respect to each Private Loan, a "Realized Loss" generally will mean the
excess, if any, of (i) the unpaid principal balance of such Private Loan at the
time of default, plus accrued and unpaid interest thereon, if any, at such time
over (ii) all amounts received on or with respect to the liquidation of such
Private Loan. The Prospectus Supplement for any Series of Notes containing
Private Loans will describe the particular procedures with respect to the
realization of Realized Losses on the Private Loans of such Series.
DETERMINATION OF LIBOR
Pursuant to the related Prospectus Supplement, for each Interest Accrual Period
after the initial Interest Accrual Period, the Calculation Agent will determine
the applicable LIBOR rate for purposes of calculating the Series Interest Rate
on the LIBOR Rate Notes for each given Interest Accrual Period on the date which
is both two Business Days (in New York and Ohio) and two London Banking Days
preceding the commencement of each Interest Accrual Period (each, an "Interest
Determination Date"). "London Banking Day" means a business day on which
dealings in deposits in United States dollars are transacted in the London
interbank market.
"LIBOR" means the rate of interest per annum equal to the rate per annum at
which U.S. dollar deposits having a particular maturity are offered to prime
banks in the London interbank market which appear on Telerate Page 5 as of
approximately 11:00 a.m., Greenwich Mean Time, on the Interest Determination
Date. If such rate does not appear on Telerate Page 5, the rate for that day
will be determined on the basis of the Reuters Screen LIBOR Page. If at least
two such quotations appear, LIBOR will be the arithmetic mean (rounded to the
nearest one-hundredth of a percent (.01%)) of such offered rates. If fewer than
two such quotations appear, LIBOR with respect to such Interest Accrual Period
will be determined at approximately 11:00 A.M., London time, on such Interest
Determination Date on the basis of the rate at which deposits in United States
dollars having such particular a maturity are offered to prime banks in the
London interbank market by four major banks in the London interbank market
selected by the Calculation Agent and in a principal amount of not less than
U.S. $1,000,000 and that is representative for a single transaction in such
market at such time. The Calculation Agent will request the principal London
office of each of such banks to provide a quotation of its rate. If at least two
quotations are provided, LIBOR will be the arithmetic mean (rounded to the
nearest one-hundredth of a percent (.01%)). If fewer than two quotations are
provided, LIBOR with respect to such Interest Accrual Period will be the
arithmetic mean (rounded to the nearest one-hundredth of a percent (.01%)) of
the rates quoted at approximately 11:00 A.M., New York City time on such
Interest Determination Date by three major banks in New York, New York selected
by the Calculation Agent for loans in United States dollars to leading European
banks having a particular maturity and in a principal amount equal to an amount
of not less than U.S. $1,000,000 and that is representative for a single
transaction in such market at such time; provided, however, that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, LIBOR in
effect for the applicable Interest Accrual Period will be LIBOR in effect for
the previous Interest Accrual Period.
DETERMINATION OF THE T-BILL RATE
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Pursuant to the related Prospectus Supplement, for each Interest Accrual Period
after the initial Interest Accrual Period, the Calculation Agent will determine
the T-Bill Rate for purposes of calculating the Series Interest Rate on each
Series of T-Bill Rate Notes for each given Interest Accrual Period on the
related Interest Determination Date.
"T-Bill Rate" means, on any day, the weighted average per annum discount rate
(expressed on a bond equivalent basis and applied on a daily basis) for direct
obligations of the United States with a maturity of thirteen weeks ("91-day
Treasury Bills") sold at the most recent 91-day Treasury Bill auction prior to
such date, as reported by the U.S. Department of the Treasury. In the event that
the results of the auctions of 91-day Treasury Bills cease to be reported as
provided above, or that no such auctions is held in a particular week, then the
T-Bill Rate in effect as a result of the last such publication or report will
remain in effect until such time, if any, as the results of auctions of 91-day
Treasury Bills shall again be reported or such an auction is held, as the case
may be. The T-Bill Rate will be subject to a Lock-In Period of six Business
Days.
"Lock-In Period" means the period of days preceding any Distribution Date during
which the Series Interest Rate in effect on the first day of such period will
remain in effect until the end of the Interest Accrual Period related to such
Distribution Date.
Accrued interest on any Series of Notes from and including the Closing Date or
the preceding Distribution Date, as applicable, to but excluding the current
Distribution Date is calculated by multiplying the principal amount of such
Notes by an "accrued interest factor". This factor is calculated by adding the
interest rates applicable to each day on which each such Notes has been
Outstanding since the Closing Date or the preceding Distribution Date, as
applicable, and dividing the sum by 365 (or by 366 in the case of accrued
interest which is payable on a Distribution Date in a leap year) and rounding
the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would have been
applicable to any Note bearing interest at the indicated rates, assuming a
365-day year:
<TABLE>
<CAPTION>
ACCRUED
INTEREST ACCRUED
RATE ON INTEREST
DAYS THE RECEIVABLE
SETTLEMENT DATE OUTSTANDING NOTES FACTOR
- --------------- ----------- ------------ ------------
<S> <C> <C> <C>
1st........................................................ 0 5.50000% 0.000000000
2nd........................................................ 1 5.50000 0.000150685
3rd........................................................ 2 5.50000 0.000301370
4th........................................................ 3 5.50000 0.000452055
5th*....................................................... 4 5.65000 0.000606849
6th........................................................ 5 5.65000 0.000761644
</TABLE>
- ---------------------------------
* interest rate adjustment (91-day Treasury Bills are generally auctioned
weekly).
The numbers in this table are examples given for information purposes only
and are in no way a prediction of interest rates on any Notes.
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<PAGE> 82
<TABLE>
<CAPTION>
ACCRUED
INTEREST ACCRUED
RATE ON INTEREST
DAYS THE RECEIVABLE
SETTLEMENT DATE OUTSTANDING NOTES FACTOR
- --------------- ----------- ------------ ------------
<S> <C> <C> <C>
7th........................................................ 6 5.65000 0.000916438
8th........................................................ 7 5.65000 0.001071233
9th........................................................ 8 5.65000 0.001226027
10th....................................................... 9 5.65000 0.001380822
</TABLE>
AUCTION PROCEDURES
Any issuance of Notes may contain one or more Series of Auction Rate Notes. The
following discussion summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Notes. If any Auction Rate
Notes are issued, the related Prospectus Supplement will contain a more detailed
description of these procedures in an Appendix. Prospective investors in the
Auction Rate Notes should read carefully the following summary, along with the
more detailed description in the Prospectus Supplement.
The interest rate on each Series of Auction Rate Notes will be determined
periodically (generally, for periods ranging from 7 days to one year) by means
of a "Dutch Auction." In this Dutch Auction, investors and potential investors
submit orders through an eligible broker/dealer as to the principal amount of
Auction Rate Notes such investors wish to buy, hold or sell at various interest
rates. The broker/dealers submit their clients' orders to the auction agent, who
processes all orders submitted by all eligible broker/dealers and determines the
interest rate for the upcoming interest period. The broker/dealers are notified
by the auction agent of the interest rate for the upcoming interest period and
are provided with settlement instructions relating to purchases and sales of
Auction Rate Notes.
In the auction procedures, the following types of orders may be submitted:
(i) Bid/Hold Orders - the minimum interest rate that a current
investor is willing to accept in order to continue to HOLD
some or all of its Auction Rate Notes for the upcoming
interest period;
(ii) Sell Orders - an order by a current investor to SELL a
specified principal amount of Auction Rate Notes,
regardless of the upcoming interest rate; and
(iii) Potential Bid Orders - the minimum interest rate that a
potential investor (or a current investor wishing to
purchase additional Auction Rate Notes) is willing to
accept in order to BUY a specified principal amount of
Auction Rate Notes.
If an existing investor does not submit orders with respect to all its Auction
Rate Notes of the applicable Series, the investor will be deemed to have
submitted a Hold Order at the new interest rate for that portion of the Auction
Rate Notes for which no order was received.
In connection with each auction, Auction Rate Notes will be purchased and sold
between investors and potential investors at a price equal to their then
outstanding principal balance (i.e., par) plus any accrued interest. The
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<PAGE> 83
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the Auction Rate Notes.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
<TABLE>
<CAPTION>
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
<S> <C> <C>
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 Units Sell 50 Units at 3.05%
100 Units at 3.10% 50 Units at 3.10%
100 Units at 3.12% 50 Units at 3.11%
50 Units at 3.14%
100 Units at 3.15%
</TABLE>
Total units under existing Bid/Hold Orders and Sell Orders must always equal
issue size (in this case 500 Units).
(c) Auction Agent Organizes Orders In Ascending Order
<TABLE>
<CAPTION>
Order Number Cumulative Order Number Cumulative
Number of Units Total (Units) % Number of Units Total (Units) %
<S> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
</TABLE>
- ----------------------
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next Interest Accrual Period. Multiple orders at the
winning rate are allocated units on a pro rata basis. Notwithstanding the
foregoing, in no event will the interest rate exceed the lesser of the Net Loan
Rate or the Maximum Auction Rate for such Auction Rate Notes as described in the
related Prospectus Supplement.
The above example assumes that a successful auction has occurred (i.e., all Sell
Orders and all Bid/Hold Orders below the new interest rate were fulfilled). In
certain circumstances, there may be insufficient Potential Bid Orders to
purchase all the Auction Rate Notes offered for sale. In such circumstances, the
interest rate for the upcoming
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Interest Accrual Period will equal the lesser of the Net Loan Rate and the
Maximum Auction Rate for such Auction Rate Notes as described in the related
Prospectus Supplement. Also, if all the Auction Rate Notes are subject to Hold
Orders (i.e., each holder of Auction Rate Notes wishes to continue holding its
Auction Rate Notes, regardless of the interest rate) the interest rate for the
upcoming Interest Accrual Period will equal the lesser of the Net Loan Rate and
the rate at which all investors are willing to hold the Notes.
CREDIT ENHANCEMENT
The amounts and types of Credit Enhancement arrangements and the provider
thereof, if applicable, with respect to any issuance or Series of Notes will be
set forth in the related Prospectus Supplement. If specified in the applicable
Prospectus Supplement, Credit Enhancement for any Series of Notes may cover one
or more other Series of Notes, and, accordingly, may be exhausted for the
benefit of a particular Series and thereafter be unavailable to such other
Series. Further information regarding any provider of Credit Enhancement,
including financial information when material, will be included or incorporated
by reference in the related Prospectus Supplement. If and to the extent provided
in the related Prospectus Supplement, "Credit Enhancement" may include one or
more of the following or any combination thereof.
Reserve Fund. A Reserve Fund may be created with respect to any issuance of
Notes, and on each Closing Date, the Issuer may deposit cash or Eligible
Investments in an amount, if any, equal to or less than the Specified Reserve
Fund Balance identified in the related Prospectus Supplement. The Reserve Fund
may be augmented on certain Distribution Dates, as set forth in the related
Prospectus Supplement, by deposit therein of the amount, if any, necessary to
cause the balance of such Reserve Fund to equal the Specified Reserve Fund
Balance from the amount of Available Funds remaining after making all prior
distributions on such date as described in the related Prospectus Supplement,
provided, however, that, if set forth in the related Prospectus Supplement, such
Available Funds may be applied as an additional principal distribution. Also, if
amounts were transferred from the Reserve Fund to cover a Realized Loss on a
Financed Student Loan, any subsequent payments of principal received on or with
respect to such Financed Student Loan will be deposited into the Reserve Fund
or, if so provided in the related Prospectus Supplement, applied as an
additional principal distribution. Amounts on deposit in the Reserve Fund
exceeding the Specified Reserve Fund Balance will be distributed as set forth in
the related Prospectus Supplement.
A Reserve Fund is intended to enhance the likelihood of timely receipt by the
Noteholders of the full amount of interest due them on each Distribution Date
and principal due them on the Legal Final Maturity of the related Notes or a
date when the related Notes are to be redeemed in whole and to decrease the
likelihood that the Noteholders will experience losses. In certain
circumstances, however, a Reserve Fund could be depleted. Further, amounts
otherwise required to be deposited into a Reserve Fund may, with the consent of
any provider of Credit Enhancement for the related Series of Notes, if any, be
applied as additional principal distributions on such related Series of Notes.
If the amount required to be withdrawn from a Reserve Fund to cover shortfalls
in the amount of Available Funds exceeds the amount of cash in the Reserve Fund,
a temporary shortfall in the amount of principal and interest distributed to the
Noteholders could result. This shortfall could, in turn, increase the average
life of the Notes. Moreover, amounts on deposit in a Reserve Fund other than
amounts in excess of the related Specified Reserve Fund Balance will not be
available to cover any aggregate unpaid Carryover Interest.
Subordination. The rights of the Noteholders of a Series of Notes may be
subordinated to the rights of more senior Noteholders and to Exchange
Counterparties under any Senior Exchange Agreement, to the extent described
herein and in the related Prospectus Supplement. In some instances, the rights
of the Noteholders of a Series of Notes may also be subordinated to the rights
of Noteholders of other Subordinate Notes, and to Exchange Counterparties under
any Subordinate Exchange Agreement, to the extent described herein and in the
related Prospectus Supplement.
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Surety Bonds. A Surety Bond with respect to one or more Series of Notes may be
obtained by the Issuer in favor of the Indenture Trustee solely on behalf of the
Noteholders of the related issuance. Except as provided below or in a Prospectus
Supplement, a Surety Bond will provide for coverage of timely payment of all
interest and ultimate payment of all principal due on the related Series of
Notes; provided, however, that Surety Bonds will not ensure payment of any
Carryover Interest.
The amount required to be paid to the issuer of each Surety Bond will be
described in the applicable Prospectus Supplement.
Other Forms of Credit Enhancement. If and to the extent specified in the related
Prospectus Supplement, Credit Enhancement with respect to any issuance or Series
of Notes may also include overcollateralization, letters of credit, liquidity
facilities, interest rate cap agreements, Exchange Agreements, currency swap
agreements, insurance policies, spread accounts, one or more series of
subordinate securities, derivative products or other forms of credit enhancement
including but not limited to third party guarantees (collectively, "Credit
Enhancement"). The Credit Enhancement with respect to any issuance or Series of
Notes may be structured to provide protection against delinquencies and/or
losses on the Financed Student Loans, against changes in interest rates, or
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Any form of Credit Enhancement will have certain
limitations and exclusions from coverage thereunder, which will be described in
the related Prospectus Supplement.
BOOK-ENTRY REGISTRATION
The description which follows of the procedures and record keeping with respect
to beneficial ownership interests in a Series of Notes, payment of principal of
and interest on the Notes to DTC Participants, Cedel Participants and Euroclear
Participants or to purchasers of the Notes, confirmation and transfer of
beneficial ownership interests in the Notes, and other securities-related
transactions by and between DTC, Cedel, Euroclear, DTC Participants, Cedel
Participants, Euroclear Participants and Note Owners, is based solely on
information furnished by DTC, Cedel and Euroclear and has not been independently
verified by the Issuer, the Administrator or the Underwriters.
If specified in the accompanying Prospectus Supplement, Noteholders may hold
their certificates 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 will hold the global Notes. 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
"Depositories") which in turn will hold such positions in customers' securities
accounts in the Depositories' names on the books of DTC.
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 Securities Exchange
Act of 1934, as amended. 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
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directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its DTC Participants are on file with the SEC.
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.
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 Depository; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depository to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositories.
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. For additional information regarding clearance and settlement procedures
for the Notes, See Appendix B hereto.
Day traders that use Cedel or Euroclear and that purchase the globally offered
Notes from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades may fail on the sale side unless
affirmative actions are taken. Participants should consult with their clearing
system to confirm that adequate steps have been taken to assure settlement.
Purchases of Notes under the DTC system must be made by or through DTC
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual owner of a Note (a "Note Owner") is in turn to
be recorded on the DTC Participants' and Indirect Participants' records. Note
Owners will not receive written confirmation from DTC of their purchase, but
Note 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 Note Owner entered into
the transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of DTC Participants acting on behalf
of Note Owners. Note Owners will not receive certificates representing their
ownership interest in Notes, except in the event that use of the book-entry
system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by DTC Participants with
DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of Notes
with DTC and their registration in the name of Cede & Co. effects no change in
beneficial ownership. DTC has no knowledge of the actual Note Owners of the
Notes; DTC's records reflect only the identity of the DTC Participants to whose
accounts such Notes are credited, which may or may not be the Note Owners. The
DTC Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
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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 Note 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 Cede & Co. will consent or vote with respect to the Notes. Under
its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede's consenting or voting rights
to those DTC Participants to whose accounts the Notes are credited on the record
date (identified in a listing attached thereto).
Principal and interest payments on the Notes will be made to DTC. DTC's practice
is to credit DTC Participants' accounts on the applicable Distribution 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 Distribution Date.
Payments by DTC Participants to Note 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 Indenture
Trustee or the Issuer, 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 Indenture Trustee, disbursement of such payments to
DTC Participants shall be the responsibility of DTC, and disbursement of such
payments to Note Owners shall be the responsibility of DTC Participants and
Indirect Participants.
DTC may discontinue providing its services as securities depository with respect
to the Notes at any time by giving reasonable notice to the Issuer or the
Indenture Trustee. Under such circumstances, in the event that a successor
securities depository is not obtained, Definitive Notes are required to be
printed and delivered. The Issuer may decide to discontinue use of the system of
book-entry transfers through DTC (or a successor securities depository). In that
event, Definitive Notes will be delivered to Noteholders. See "-- Definitive
Notes" herein.
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 numerous
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 Notes. 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 be settled in numerous currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. 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
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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 Notes. 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 a fundable
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.
The Euroclear Operator has advised as follows: Under Belgian law, investors that
are credited with securities on the records of the Euroclear Operator have a
co-property right in the fungible pool of interests in securities on deposit
with the Euroclear Operator in an amount equal to the amount of interests in
securities credited to their accounts. In the event of the insolvency of the
Euroclear Operator, Euroclear Participants would have a right under Belgian law
to the return of the amount and type of interests in securities credited to
their accounts with the Euroclear Operator. If the Euroclear Operator did not
have a sufficient amount of interests in securities on deposit of a particular
type to cover the claims of all Euroclear Participants credited with such
interests in securities on the Euroclear Operator's records, all Euroclear
Participants having an amount of interests in securities of such type credited
to their accounts with the Euroclear Operator would have the right under Belgian
law to the return of their pro-rata share of the amount of interests in
securities actually on deposit. Under Belgian law, the Euroclear Operator is
required to pass on the benefits of ownership in any interests in securities on
deposit with it (such as dividends, voting rights and other entitlements) to any
person credited with such interests in securities on its records.
Distributions with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depository. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences" herein. Cedel or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Noteholder under
the Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depository's ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes 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.
Neither the Issuer, the Underwriters nor any Indenture Trustee will have any
responsibility or obligation to Participants, to Indirect Participants or to any
Note Owner with respect to (A) the accuracy of any records maintained by DTC,
Cedel or Euroclear, any Participant or any Indirect Participant; (B) the payment
by DTC or any Participant
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or any Indirect Participant of any amount with respect to the principal and
purchase price of, or interest or Carryover Interest, if any, on the Notes; (C)
any notice which is permitted or required to be given to Note Owners under the
Indenture; (D) the selection by DTC or any Direct or Indirect Participant of any
person to receive payment in the event of a partial distribution of principal of
the Notes; or (E) any consent given or other action taken by DTC as Note Owner.
In reading this Prospectus, it should be understood that while the Notes are in
Book-entry System, references in other sections of this Prospectus to Holders or
Noteholders should be read to include the person for whom the Participant
acquires an interest in the Notes, but (i) all rights of ownership must be
exercised through DTC and the Book-entry System and (ii) notices that are to be
given to Noteholders by the Issuer or the Indenture Trustee will be given only
to DTC.
DEFINITIVE NOTES
If set forth in the accompanying Prospectus Supplement, Notes of any Series will
be issued in fully registered, certificated form (the "Definitive Notes") to
Note Owners or their nominees rather than to DTC or its nominee, if (i) the
Issuer advises the Indenture Trustee for such Series in writing that DTC is no
longer willing or able to discharge properly its responsibilities as Depository
with respect to such Series of Notes, and the Issuer is unable to locate a
qualified successor, (ii) the Issuer, at its option, advises the Indenture
Trustee for such Series in writing that it elects to terminate the book-entry
system through DTC or successor securities depository or (iii) after the
occurrence of an Event of Default under an Indenture, Noteholders representing
not less than 50% of the Outstanding principal balance of the Directing Notes
advise the related Indenture Trustee and DTC through DTC Participants in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interest of the Noteholders, or as set forth
in the Prospectus Supplement.
Upon the occurrence of any of the events described in the immediately preceding
paragraph, the Indenture Trustee will cause DTC to notify all DTC Participants
of the availability through DTC of Definitive Notes. Upon surrender by DTC of
the definitive certificate representing the Notes and instructions for
registration, the Indenture Trustee will issue the Notes as Definitive Notes,
and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as Noteholders under the Indenture.
Distribution of principal of and interest on the Notes will be made by the
Indenture Trustee directly to Noteholders of Definitive Notes in accordance with
the procedures set forth in the related Indenture. Interest payments and any
principal payments on each Distribution Date will be made to Noteholders in
whose names the Definitive Notes were registered at the close of business on the
related Record Date. The final payment on any Note (whether Definitive Notes or
the Notes registered in the name of Cede & Co. representing the Notes), will be
made only upon presentation and surrender of such Note at the office or agency
specified in the notice of final distribution to Noteholders. The Indenture
Trustee will provide such notice to registered Noteholders prior to the
Distribution Date on which it expects such final distributions to occur.
Definitive Notes will be transferable and exchangeable at the offices of the
Indenture Trustee. No service charges will be imposed for any registration of
transfer or exchange.
LIST OF NOTEHOLDERS
By written request to the related Indenture Trustee, a Noteholder may obtain
access to the list of all Noteholders of Notes issued under the related
Indenture that is maintained by the Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
Indenture or the Notes. The Indenture
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Trustee may elect not to afford the requesting Noteholders access to the list of
Noteholders if it agrees to mail the desired communication or proxy, on behalf
and at the expense of the requesting Noteholders, to all Noteholders of Notes
issued under the related Indenture.
REPORTS TO NOTEHOLDERS
For each issuance of Notes, on each Distribution Date as set forth in the
related Prospectus Supplement, the related Indenture Trustee will provide to the
Rating Agencies and applicable Noteholders of record as of the related Record
Date, a statement setting forth at least the following information regarding
such Notes with respect to such date or the preceding Collection Period or
Collection Periods, to the extent applicable:
(a) the Principal Factor for each Series of Notes in the related
issuance;
(b) the amount of the payment allocable to principal of each Series of
Notes in the related issuance;
(c) the amount of the payment allocable to interest on each Series of
Notes in the related issuance together with the interest rates
applicable with respect thereto (indicating, whether such interest
rates are based on the Series Interest Rate or on the Net Loan
Rate with respect to each Series of, and specifying what each such
interest rate would have been if it had been calculated using the
alternate basis);
(d) the amount of the payment, if any, allocable to any Carryover
Interest for one or more Series of Notes in the related issuance,
together with the outstanding amount, if any, thereof after giving
effect to any such distribution;
(e) the Pool Balance for the related Trust Estate as of the close of
business on the last day of the preceding Collection Period;
(f) the aggregate outstanding principal amount of each Series of Notes
in the related issuance as of such Distribution Date after giving
effect to distributions allocated to principal on such
Distribution Date;
(g) the estimated amount to be allocated to Program Operating Expenses
for each Series in the related issuance on the upcoming
Distribution Date;
(h) the amount of the aggregate Realized Losses, if any, for the
preceding Collection Period and the aggregate amount, if any,
received (stated separately for interest and principal) during
such Collection Period relating to Financed Student Loans in the
related Trust Estate for which a Realized Loss was previously
allocated;
(i) the amount of the distribution attributable to amounts in any
Reserve Fund, Pre-Funding Fund, or other account established under
the related Indenture and identified in the related Prospectus
Supplement, the amount of any other withdrawals from such accounts
for such Distribution Date, the balance of such accounts on such
Distribution Date, after giving effect to changes therein on such
Distribution Date, the then applicable Parity Percentage, and the
amount of the distribution, if any, attributable to Parity
Percentage Payments for the related issuance;
(j) the aggregate amount, if any, paid for Financed Student Loans
purchased from the related Trust Estate during the preceding
Collection Period;
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(k) the following information as reported to the Indenture Trustee by
the Issuer or Servicer: the number and principal amount of
Financed Student Loans, as of the end of the preceding Collection
Period, that are (A) 31 to 60 days delinquent, (B) 61 to 90 days
delinquent, (C) 91 to 120 days delinquent, (D) more than 120 days
delinquent and (E) for which claims have been filed with the
appropriate Guarantee Agency, guarantor or escrow fund and which
are awaiting payment; and
(l) any other information 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 the Indenture, the Indenture Trustee will
mail to each person who at any time during such calendar year was a Noteholder
and received any payment thereon, a statement containing certain information for
the purposes of such Noteholder's preparation of federal income tax returns. See
"Federal Income Tax Consequences" herein.
REDEMPTION
Each Series of Notes may be subject to optional or mandatory redemption in whole
or in part. Each Prospectus Supplement will set forth various information with
respect to the redemption provisions for each Series of Notes.
SECURITY FOR THE NOTES
THE TRUST ESTATES
The Notes will be limited obligations of the Issuer. Each issuance of Notes,
together with all Exchange Agreements as may be entered into from time to time
related to such Notes, and Carryover Interest, if any, on such Notes are secured
by and payable solely from a Trust Estate established under an Indenture entered
into in connection with that issuance of Notes. A separate Trust Estate will be
established for each issuance of Notes. The property of each Trust Estate
includes: all Available Funds derived from amounts in that Trust Estate; the
balances of all Funds and Accounts established under the related Indenture,
whether derived from proceeds of sale of the Notes, from Available Funds, or
from any other source; all rights of the Issuer and the related Eligible Lender
Trustee in and to the Financed Student Loans, the Guarantee Agreements with
respect to the Financed Student Loans (including for this purpose any agreements
with a guarantor or relating to an escrow fund under a Private Loan Program);
any Spread Guaranty Agreement; the Eligible Investments, any Exchange Agreement
and any Exchange Counterparty Guarantee, the Purchase Agreements and the
Servicing Agreements with respect to Financed Student Loans serviced thereunder,
including all rights of the Issuer under the warranties of each Seller or
Servicer, as the case may be, thereunder; and any proceeds thereof. NO ASSETS OF
THE ISSUER OTHER THAN THE RELATED TRUST ESTATE ARE PLEDGED TO THE PAYMENT OF THE
NOTES. Any Subordinate Notes in an issuance will be secured on a basis junior
and subordinate to any Senior Notes in the issuance.
To secure payment of principal, interest and Carryover Interest, if any, on an
issuance of Notes and payment of any related Issuer Exchange Payment, the Issuer
and each Eligible Lender Trustee in the related Indenture each grants a pledge
of, a lien on, and a security interest in, and assigns to the related Indenture
Trustee all of the Issuer's and the Eligible Lender Trustee's rights in, the
related Trust Estate for the equal and ratable benefit first, of the holders of
the Senior Notes issued under the Indenture and the Exchange Counterparties
under any related Senior Exchange Agreement subject to the provisions of the
Indenture permitting their application for the purposes and on the terms and
conditions set forth in the Indenture, and second, to the holders of any
Subordinate Notes issued under the Indenture and the Exchange Counterparties
under any related Subordinate Exchange Agreement. Because the payment
obligations of the Issuer under any Senior Exchange Agreements would be on a
parity with payment of the
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Senior Notes, an Event of Default with respect to such Senior Exchange
Agreements could result in an Event of Default giving rise to an acceleration of
the Notes and other potentially adverse effects on the payment of the Notes.
Each Indenture provides for the above-described pledge of and grant of a lien on
and security interest in the related Trust Estate; however, such pledge, lien or
security interest will only be effective to the extent that (i) such Trust
Estate consists of assets as to which a pledge, lien or security interest can be
created or perfected under law by either (a) the due filing of appropriate
Uniform Commercial Code financing statements, or (b) the related Indenture
Trustee's possession or constructive possession of such assets, (ii) either such
filing or such possession is sufficient under law to create and continue a
pledge, lien or security interest which is prior to all other pledges, liens or
security interests, and (iii) either such act of filing or such act of
possession, as applicable, has in fact been taken by the related Indenture
Trustee.
In order to create, perfect and maintain a security interest in the related
Trust Estate, the Indenture Trustee intends, to the extent possible (i) to file
or cause to be filed appropriate duly executed financing statements (including
continuation statements) with respect to such Trust Estate among the appropriate
records maintained by the appropriate state and local filing officers pursuant
to the applicable Uniform Commercial Code, (ii) to possess or to constructively
possess through bailees those assets in such Trust Estate as to which a pledge,
lien or security interest may be created and perfected by possession, and (iii)
to take or cause to be taken any and all other action necessary to create or
perfect such pledge of, lien on or security interest in such Trust Estate.
EXCHANGE AGREEMENTS
Under an Indenture, the Issuer will have the ability to enter into one or more
interest rate exchange agreements (each, an "Exchange Agreement") with one or
more Exchange Counterparties. Payments by the Issuer under such Exchange
Agreements may be on a parity with the Senior Notes issued under the Indenture,
if any (a "Senior Exchange Agreement"), or on a parity with the Subordinate
Notes issued under the Indenture, if any (a "Subordinate Exchange Agreement").
If the Issuer enters into such an agreement with an Exchange Counterparty, such
Exchange Counterparty will agree to pay the related Indenture Trustee on each
Distribution Date a fixed or variable exchange rate on a notional amount, which
may be equal to, greater or less than the principal amount of any Series of
Notes issued under the Indenture; the Issuer will agree to pay on each
Distribution Date, by causing the related Indenture Trustee to pay to the
Exchange Counterparty, a fixed or variable exchange rate on such notional
amount. The Issuer expects that any such Exchange Agreement will provide that
the payment obligations of the Issuer and an Exchange Counterparty to each other
will be netted on each Distribution Date and only one payment will be made by
one party to the other. Any payment from an Exchange Counterparty to the
Indenture Trustee under the Exchange Agreement will be deposited to the
Collection Account. Payments under such Exchange Agreements may be on a parity
with other Senior Notes issued under the Indenture (a "Senior Exchange Payment")
or on a parity with Subordinate Notes issued under the Indenture (a "Subordinate
Exchange Payment"). At such times that the exchange rate being paid by the
Exchange Counterparty is greater than the exchange rate being paid by the
Issuer, the Indenture Trustee's ability to make principal and interest payments
on the Notes will be affected by the Exchange Counterparty's ability to meet its
net payment obligation to the Indenture Trustee. See "Risk Factors" herein. Each
Indenture requires that prior to the date that the Issuer enters into an
Exchange Agreement, the Issuer must obtain written evidence from each Rating
Agency then rating any of the Notes issued under the Indenture that the
execution and delivery of the Exchange Agreement will not adversely affect such
Rating Agency's rating on such Notes.
THE INDENTURES
Each issuance of Notes will be issued pursuant to a separate Indenture entered
into by and among the Issuer, one or more Eligible Lender Trustees and the
related Indenture Trustee, as supplemented from time to time. Provisions
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applicable to, including but not limited to, any Event of Default under any
Indenture are not applicable to and will not constitute or cause an Event of
Default under any another Indenture. The following is a summary of certain
provisions of each Indenture, as supplemented from time to time, pursuant to
which each issuance of Notes will be issued. The summary does not purport to be
complete and is qualified in its entirety by reference to the provisions of the
actual Indenture, which provisions are incorporated by reference herein, and the
related Prospectus Supplement. Each Indenture will be substantially in the form
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
INDENTURE TRUSTEE
The Indenture Trustee with respect to an issuance of Notes will be the entity
named in the related Prospectus Supplement. On the Closing Date for an issuance
of Notes, the Issuer and the Eligible Lender Trustee will pledge the Financed
Student Loans and other moneys received from the net proceeds of the Notes to
the Indenture Trustee under the related Indenture. The Indenture Trustee may
serve from time to time as an trustee under indentures or eligible lender trust
agreements with the Issuer or its affiliates relating to other issues of their
securities. In addition, the Issuer or its affiliates may maintain other banking
relationships with any Indenture Trustee and its affiliates from time to time.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee will be the entity or entities named in the
applicable Prospectus Supplement and will acquire and hold on behalf of the
Issuer legal title to all Financed FFELP Loans (and, if so provided in the
related Prospectus Supplement, all Financed Private Loans) pledged to the
related Trust Estate from time to time pursuant to one or more related Eligible
Lender Trust Agreements. The Eligible Lender Trustee on behalf of the Issuer
will enter into a Guarantee Agreement with each of the Guarantee Agencies with
respect to such Financed FFELP Loans. One or more additional Eligible Lender
Trustees may be added or substituted for one or more of the initial Eligible
Lender Trustees from time to time subject to certain conditions set forth in the
related Indenture. Each Eligible Lender Trustee qualifies, or prior to taking
title to the Financed FFELP Loans for which additional qualifications are
necessary, will qualify, as an eligible lender and owner of Financed FFELP Loans
for all purposes under the Higher Education Act and the Guarantee Agreements
with respect to such Financed FFELP Loans. Failure of the Financed FFELP Loans
to be owned by an eligible lender would result in the loss of Guarantee
Payments, Interest Subsidy Payments and Special Allowance Payments with respect
to Financed FFELP Loans. See "Description of the FFEL Program" herein.
The Issuer or its affiliates may maintain from time to time other banking
relationships with any Eligible Lender Trustee and its affiliates.
FUNDS AND ACCOUNTS
Each Indenture will establish several Funds and Accounts to be held by the
related Indenture Trustee for the benefit of the related Noteholders. Any
accounts to be established with respect to an issuance of Notes, including any
Pre- Funding Fund and any Reserve Fund, will be described in the related
Prospectus Supplement. Each Indenture will provide for the balances of these
Funds and Accounts to be applied as described in the related Prospectus
Supplement.
Pre-Funding Fund
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If a Pre-Funding Fund has been established with respect to an issuance of Notes,
on the Closing Date, the Indenture Trustee will make deposits to the related
Pre-Funding Fund a portion of the proceeds of the Notes as described in the
Prospectus Supplement (a "Pre-Funded Amount"). From the related Closing Date
until a specified date set forth in the related Prospectus Supplement (the
"Pre-Funding Period"), moneys in the related Pre-Funding Fund will be applied by
the Indenture Trustee as described in the related Prospectus Supplement for the
Financing by the Issuer, directly or indirectly through the Eligible Lender
Trustee, of Student Loans from Sellers. The Financed Student Loans may include
FFELP Loans and/or Private Loans in such amounts as may be set forth in the
Indenture and satisfying any conditions imposed by the Rating Agencies and any
provider of Credit Enhancement, if applicable. Any amounts remaining in the
Pre-Funding Fund at the end of the related Pre-Funding Period will be
distributed to the Noteholders as an additional principal distribution, as set
forth in the related Prospectus Supplement.
The moneys to be applied from a Pre-Funding Fund for the Financing of Student
Loans will be an amount equal to the full remaining unpaid principal amount of
such Student Loans that have been fully disbursed, plus the full remaining
unpaid principal amount of such Student Loans that have not been fully
disbursed, plus the amount of accrued and unpaid interest on such Student Loans
payable by the borrowers in respect thereof, less a discount or plus a premium,
and, when directed by the Issuer, less any accrued but unpaid interest on such
Student Loans, and plus reasonable transfer fees payable to or on behalf of the
Sellers with respect to such Student Loans pursuant to the applicable Purchase
Agreements, and plus any interest paid by the Indenture Trustee to a Seller at
the direction of the Issuer on the amount of principal and accrued interest on
such Student Loans being Financed, directly or indirectly, from the date of
transfer of such Student Loans until the date funds are actually paid to said
Seller at a rate of interest not to exceed the current yield on funds in the
related Expense Account, in any case not exceeding the amount permitted by law.
In addition to any other requirements set forth for the use of proceeds from a
Pre-Funding Fund, the Issuer may only Finance Student Loans serviced by
Servicers and guaranteed by Guarantee Agencies (including for this purpose any
guarantor or escrow fund under a Private Loan Program) that have been approved
by each Rating Agency at the time of purchase.
During the Pre-Funding Period, any portion of the balances of a Pre-Funding Fund
which the Indenture Trustee at any time determines cannot for any reason be used
to Finance additional Student Loans shall, at the written direction of the
Issuer, be transferred to the related Collection Account, unless and to the
extent that the Issuer shall have filed with the Indenture Trustee a certificate
of the Issuer stating that continued investment of such moneys until used to
Finance Student Loans will not materially adversely affect the sufficiency of
Available Funds to meet obligations of the Issuer under the Indenture with
respect to the related Notes.
Student Loan Portfolio Fund
A Student Loan Portfolio Fund will be established for each issuance of Notes.
All Financed Student Loans in the related Trust Estate shall be included in the
balances of that Indenture's Student Loan Portfolio Fund, as described in the
Prospectus Supplement. As described in the Prospectus Supplement, Financed
Student Loans may also be applied: (i) as provided in the applicable Purchase
Agreements with respect to rejections and repurchases thereof, (ii) as provided
for defeasance of the related Indenture, and (iii) as required to obtain the
benefits of a guarantee in case of default on such Financed Student Loan.
The Indenture Trustee may permit the sale or exchange of Financed Student Loans
selected by the Issuer in the Student Loan Portfolio Fund subject to any
conditions imposed under the related Indenture as set forth in the related
Prospectus Supplement.
Collection Fund
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The Collection Fund consists of specific Accounts established for an issuance of
Notes as described in the related Prospectus Supplement. The Issuer will, and
will cause each Seller and Servicer to, transfer all Available Funds received by
it to the Indenture Trustee, promptly or otherwise in accordance with the
applicable Purchase Agreement or Servicing Agreement, as the case may be, and
the Indenture Trustee will, upon receipt of any Available Funds, immediately
deposit and credit such Available Funds to the Collection Fund as described in
the related Prospectus Supplement.
To the extent described in the related Prospectus Supplement, certain issuances
of Notes may permit the application of principal payments to be used for the
Financing of additional Financed Student Loans for a specified period of time
before such payments are distributed to the Noteholders of such issuance.
Collection Account. A "Collection Account" will be established in the Collection
Fund, as described in the related Prospectus Supplement. On each Distribution
Date with respect to a Series of Notes, moneys in the Collection Account will be
disbursed by the Indenture Trustee from Available Funds for each Collection
Period as set forth in the related Prospectus Supplement. The order and priority
for moneys to be disbursed from the Collection Account will be described in the
related Prospectus Supplement.
Note Payment Account. A "Note Payment Account" will be established in the
Collection Fund, as described in the related Prospectus Supplement. On each
Distribution Date with respect to a Series of Notes, following the transfers to
the Note Payment Account from the Collection Account, the Indenture Trustee will
distribute to the related Noteholders as of the related Record Date the amounts
transferred to the Note Payment Account, together with any amounts transferred
from any Reserve Fund, Capitalized Interest Account and any Advances, as
described in the related Prospectus Supplement.
Expense Account. An "Expense Account" will be established in the Collection
Fund, as described in the related Prospectus Supplement. Funds will be deposited
into the Expense Account as described in the related Prospectus Supplement.
Funds in the Expense Account will be applied to pay Program Operating Expenses
and Costs of Issuance, as described in the Indenture.
Excess Surplus Account. An "Excess Surplus Account" will be established in the
Collection Fund, as described in the related Prospectus Supplement. If so
provided in the related Prospectus Supplement for a Series of Notes, on each
Distribution Date, any Available Funds remaining after all required
distributions are made on such Distribution Date will be deposited to the credit
of the Excess Surplus Account. Amounts on deposit in the Excess Surplus Account
may be withdrawn by the Issuer at any time upon written request to the Indenture
Trustee to be used for any lawful purpose; provided that after such withdrawal
the Parity Percentage is at a certain specified level as set forth in the
related Prospectus Supplement. Any Available Funds distributed to the Issuer
from the Excess Surplus Account will not thereafter be available to make
payments on the Notes. Until withdrawal by the Issuer, amounts on deposit in the
Excess Surplus Account, if so provided in the related Prospectus Supplement,
will be available for transfer by the Indenture Trustee to the Reserve Fund, if
any, if, and to the extent that, a deficiency in such Reserve Fund remains after
transfers from the Collection Account. The Issuer may also direct in writing
that the Indenture Trustee transfer amounts on deposit in the Excess Surplus
Account as described in the related Prospectus Supplement.
ADVANCES
If the Issuer or the Eligible Lender Trustee on behalf of the Issuer has applied
for a Guarantee Payment from a Guarantee Agency (including for this purpose a
payment from a guarantor or escrow fund under a Private Loan Program) or an
Interest Subsidy Payment or a Special Allowance Payment from the Department of
Education, and
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the Issuer or the Eligible Lender Trustee, as applicable, has not received the
related payment prior to the end of the Collection Period immediately preceding
the Distribution Date on which such amount would be required to be distributed
as a payment of interest, the Issuer may, no later than the third Business Day
before such Distribution Date, deposit into the Note Payment Account an amount
up to the amount of such payments applied for but not received (such deposits by
the Issuer are referred to herein as "Advances"). Such Advances are recoverable
by the Issuer, (i) first, from the source for which such Advance was made and
(ii) second, from payments received generally on or with respect to the Financed
Student Loans. Funds used to reimburse the Issuer for prior Advances are
excluded from Available Funds and, accordingly, repayment of Advances have
priority over all other payments under the related Indenture. The Issuer will
have no obligation, legal or otherwise, to make any Advance, and a determination
by the Issuer to make an Advance will not create any obligation of the Issuer,
legal or otherwise, to make any future Advances.
INVESTMENT
Pending application of moneys in the Funds and Accounts in accordance with an
Indenture, such moneys will be invested in Eligible Investments. "Eligible
Investments" include the following:
(a) Direct obligations of (including obligations issued or held in
book entry form on the books of) the Department of the
Treasury of the United States of America;
(b) Obligations of any of the following federal agencies which
obligations represent the full faith and credit of the United
States of America, including:
- Export-Import Bank
- Farm Credit System Financial Assistance Corporation
- Rural Economic Community Development Administration
(formerly the Farmers Home Administration)
- General Services Administration
- U.S. Maritime Administration
- Small Business Administration
- Government National Mortgage Association (GNMA)
- U.S. Department of Housing & Urban Development
(PHA's)
- Federal Housing Administration;
(c) Senior debt obligations rated "AAA" or "Aaa" by each Rating
Agency issued by the Federal National Mortgage Association or
the Federal Home Loan Mortgage Corporation, and senior debt
obligations of other federal government-sponsored agencies
approved by each Rating Agency;
(d) U.S. dollar denominated deposit accounts, federal funds and
banker's acceptance with domestic commercial banks which have
a rating of their short term certificates of deposit on the
date of purchase of "A-1+" or "P-1" by each Rating Agency and
maturing no more than 360 days after the date of purchase
(ratings on holding companies are not considered as the rating
on the bank);
(e) Commercial paper which is rated at the time of purchase in the
single highest classification, "A-1+" or "P-1" by each Rating
Agency and which matures not more than 270 days after the date
of purchase;
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(f) Investments in a money market fund rated in the highest
applicable rating category by (i) a nationally recognized
rating service acceptable to each Rating Agency, or (ii) each
Rating Agency;
(g) Pre-refunded Municipal Obligations defined as follows: Any
bonds or other obligations of any state of the United States
of America or of any agency, instrumentality or local
governmental unit of any such state which are not callable at
the option of the obligor prior to maturity or as to which
irrevocable instructions have been given by the obligor to
call on the date specified in the notice; and
(i) which are rated, based on an irrevocable escrow
account or fund (the "escrow"), in the highest rating
category of each Rating Agency; or
(ii) (A) which are fully secured as to principal and
interest and redemption premium, if any, by an escrow
consisting only of cash or obligations described in
paragraph (a) above, which escrow may be applied only
to the payment of such principal of and interest and
redemption premium, if any, on such bonds or other
obligations on the maturity date or dates thereof or
the specified redemption date or dates pursuant to
such irrevocable instructions, as appropriate, and
(B) which escrow is sufficient, as verified by a
nationally recognized independent certified public
accountant, to pay principal of and interest and
redemption premium, if any, on the bonds or other
obligations described in this paragraph on the
maturity date or dates specified in the irrevocable
instructions referred to above, as appropriate;
(h) Investment agreements approved in writing by each Rating
Agency and supported by appropriate opinions of counsel for
the investment agreement provider; and
(i) Other forms of investments (including repurchase agreements)
approved in writing by each Rating Agency.
Moneys are required to be invested in Eligible Investments with respect to which
payments of principal and interest are scheduled or otherwise payable not later
than the date on which it is estimated that such moneys will be required by the
related Indenture Trustee for the purposes intended. Except as otherwise
provided in an Indenture and the related Prospectus Supplement, any earnings on
or income from such Eligible Investments will be treated as collections of
interest on the related Financed Student Loans and will be deposited in the
Collection Account.
COVENANTS OF THE ISSUER
The Issuer covenants under each Indenture that: it will administer the Issuer's
program of Financing Student Loans pursuant to such Indenture (the "Program") in
accordance with the Higher Education Act, to the extent applicable; it will
maintain or cause to be maintained proper books of record and account and will
permit those to be inspected by the Indenture Trustee and by Noteholders of more
than 10% of the aggregate principal amount of the Notes issued under such
Indenture, as provided in such Indenture; it will maintain and enforce any
guarantees of Financed Student Loans; it will diligently cause to be collected
all principal and interest payments on each Financed Student Loan and any
grants, subsidies, donations, Guarantee Payments (including for this purpose
payments from any guarantor or escrow fund under a Private Loan Program),
Interest Subsidy Payments and Special Allowance Payments with respect to each
Financed Student Loan; and it will diligently cause to be taken all reasonable
steps to enforce all Financed Student Loans, Servicing Agreements and Purchase
Agreements.
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The Issuer also covenants that it will file with the related Indenture Trustee a
projection of Program Operating Expenses for each calendar year and that it will
not, in any calendar quarter, exceed those projected for such calendar quarter
except on certain conditions described in the related Indenture. If the Issuer
fails to file a report for any calendar year, the report filed for the preceding
calendar year will apply.
EVENTS OF DEFAULT
Under an Indenture, the following constitute Events of Default:
1. Failure in the due and punctual payment of:
(i) the principal of or interest on any Note issued under
such Indenture when due, either at maturity or upon
redemption or otherwise (excluding, however, (a) any
shortfall on a Distribution Date other than the Legal
Final Maturity of any Series of Notes issued under
such Indenture if Available Funds are insufficient to
pay the related Principal Distribution Amount on such
date, and (b) for so long as any Senior Notes are
Outstanding under such Indenture, any deferral in the
payment of interest of Subordinate Notes issued under
such Indenture on a Distribution Date other than the
Legal Final Maturity of any Series of Subordinate
Notes), or
(ii) any Issuer Exchange Payment when due (excluding,
however, (a) payment in respect of an early
termination, and (b) for so long as any Senior Notes
are Outstanding under such Indenture, any deferral in
the payment of Subordinate Issuer Exchange Payments);
2. Failure by the Issuer in the observance and performance of any
other of the covenants, conditions and agreements of the
Issuer contained in such Indenture and the continuation of
such failure for a period of 30 days after written notice
thereof from the Indenture Trustee or from the Noteholders of
not less than a majority in aggregate principal amount of the
Notes then Outstanding under the Indenture;
3. Certain events of bankruptcy, insolvency, receivership or
liquidation of the Issuer; and
4. The entry of a final judgment against the Issuer which
judgment constitutes or could result in a lien or charge upon
the Available Funds or the related Trust Estate equal or
superior to the lien granted under such Indenture for the
benefit of the Noteholders of Senior Notes issued under such
Indenture, or which materially and adversely affects the
ownership, control or operation of the Program, if such
judgment will not be discharged within 60 days from the entry
thereof, or if an appeal will not be taken therefrom, or from
the order, decree or process upon which or pursuant to which
such judgment was granted or entered, in such manner as to
conclusively set aside the execution or levy under such
judgment, order, decree or process, or the enforcement
thereof.
In the case of an occurrence of an Event of Default described in clause (1)
above, so long as such Event of Default has not been remedied, unless the
principal of all of the Notes issued under the Indenture has already become due
and payable, the Indenture Trustee may, and upon written request of the
Noteholders of not less than a majority in aggregate principal amount of the
Senior Notes then Outstanding under the Indenture (or, if no Senior Notes are
then Outstanding, a majority in aggregate principal amount of Notes then
Outstanding under the Indenture) and, with respect to an Exchange Agreement of
the same seniority as the Notes of the Noteholders of which are entitled to give
direction, upon the designation by an Exchange Counterparty of an early
termination date for the related Exchange
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Agreement, the Indenture Trustee, by written notice to the Issuer, must declare
the principal of all the Notes then Outstanding under the Indenture and the
interest accrued thereon (including Carryover Interest) to be due and payable
immediately.
In the case of an occurrence of an Event of Default described in clauses (2) and
(4) above, so long as such Event of Default has not been remedied, unless the
principal of all of the Notes issued under the Indenture has already become due
and payable, the Indenture Trustee may, and upon written request of the
Noteholders of not less than 100% in the case of an Event of Default under
clause (2) above and not less than a majority in the case of an Event of Default
under clause (4) above in aggregate principal amount of the Notes then
Outstanding under the Indenture, the Indenture Trustee, by written notice to the
Issuer, must declare the principal of all the Notes then Outstanding under the
Indenture and the interest accrued thereon (including Carryover Interest) to be
due and payable immediately.
In the case of an occurrence of an Event of Default described in clause (3)
above, so long as such Event of Default will not have been remedied, the
principal of and all accrued interest on the Notes then Outstanding under the
Indenture (including Carryover Interest) will become immediately due and payable
without notice or any action by the Indenture Trustee of any kind and a
declaration of such acceleration will be deemed to have been made.
The right of an Indenture Trustee to make any such declaration, however, is
subject to the condition that if, at any time after such declaration, but before
any judgment or decree for the payment of moneys due will have been obtained or
entered unless the same has been discharged:
1. all defaults under the Notes or under the Indenture (other than
the payment of principal and interest due and payable solely by
reason of such declaration) will be cured to the satisfaction of
the Indenture Trustee or provision deemed by the Indenture Trustee
to be adequate will be made therefor, and
2. the following amounts will either be paid by or for the account of
the Issuer or provision satisfactory to the Indenture Trustee will
be made for such payment:
(i) all overdue installments of interest upon (a) the Senior Notes
for so long as any Senior Notes are Outstanding under the
Indenture, or (b) the Subordinate Notes if no Senior Notes are
Outstanding under the Indenture, and
(ii)the reasonable and proper charges, expenses and liabilities of
the Indenture Trustee, any Exchange Counterparty and the
Noteholders and their respective agents and attorneys, and all
other sums then payable by the Issuer under the Indenture
(except the principal of and interest accrued since the next
preceding Distribution Date on the Notes due and payable
solely by virtue of such declaration),
then, the Noteholders of a majority in principal amount of the Notes then
Outstanding under the Indenture, by written notice to the Issuer and to the
Indenture Trustee, may rescind such declaration with respect to the Notes and
annul such Event of Default with respect to the Notes, or, if the Indenture
Trustee has acted with respect to the Notes without a direction from the
Noteholders of not less than a majority in aggregate principal amount of the
Notes Outstanding under the Indenture at the time of such request, and if there
has not been theretofore delivered to the Indenture Trustee written direction to
the contrary by the Noteholders of a majority in aggregate principal amount of
the Notes then Outstanding under the Indenture, then the Indenture Trustee may
annul, by written notice to the Issuer, such declaration and any such default
with respect to the Notes and its consequences will be annulled; provided that
no such rescission and annulment will extend to or affect any subsequent Event
of Default or impair or exhaust any right or power consequent thereon.
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Upon any declaration of acceleration of the Notes under an Indenture, the
related Indenture Trustee will give notice of such declaration and its
consequences to the Noteholders of Notes issued under the Indenture and to any
related Exchange Counterparty as described in the Indenture. Interest will cease
to accrue on such Notes from and after the date set forth in such notice (which
will be not more than five days from the date of such declaration).
If an Event of Default has occurred and is continuing and at any time the moneys
held by an Indenture Trustee will be insufficient for the payment of the
principal of and interest then due on the Notes issued under such Indenture or
for the payment of any related Issuer Exchange Payment, then such moneys and all
Available Funds received or collected from the related Trust Estate or otherwise
for the benefit or for the account of Noteholders and/or an Exchange
Counterparty by the Indenture Trustee will be applied first to the payment of
the reasonable and proper fees and expenses of the Indenture Trustee and of such
other expenses as are necessary in the judgment of the Indenture Trustee to
prevent loss of Available Funds and to protect the interests of the Noteholders
and/or each Exchange Counterparty, and thereafter as follows:
1. If the principal of all of the Notes issued under the Indenture
has not become or has not been declared due and payable,
First, to the payment to the Persons entitled thereto of all
installments of interest then due on the Senior Notes issued under the
Indenture (including any interest on overdue principal at the rates
borne by the respective Senior Notes) and to each Exchange Counterparty
of all related Senior Issuer Exchange Payments then due, in the order
that such installments of interest and/or Senior Issuer Exchange
Payments will have become due, and, if the amounts available will not
be sufficient to pay in full all installments of interest and/or Senior
Issuer Exchange Payments coming due on the same date, then to the
payment thereof ratably, according to the amount due thereon, to such
Persons entitled thereto, without any discrimination or preference;
Second, to the payment to the Persons entitled thereto of the
unpaid Noteholders' Principal Distribution Amount and/or principal due
and unpaid on the Senior Notes issued under the Indenture at the time
of such payment without preference or priority of any Senior Notes over
any other Senior Notes issued under the Indenture, ratably, according
to the Noteholders' Principal Distribution Amount and/or amounts due
for principal, to such Persons entitled thereto without any
discrimination or preference;
Third, to the payment to the Persons entitled thereto of all
installments of interest then due on the Subordinate Notes issued under
the Indenture (including any interest on overdue principal at the rates
borne by the respective Subordinate Notes) and to each Exchange
Counterparty of all related Subordinate Issuer Exchange Payments then
due, in the order that such installments of interest and/or Subordinate
Issuer Exchange Payments will have become due, and, if the amounts
available will not be sufficient to pay in full all installments of
interest and/or Subordinate Issuer Exchange Payments coming due on the
same date, then to the payment thereof ratably, according to the amount
due thereon, to such Persons entitled thereto, without any
discrimination or preference; and
Fourth, to the payment to the Persons entitled thereto of the
unpaid Noteholders' Principal Distribution Amount and/or principal due
and unpaid on the Subordinate Notes issued under the Indenture at the
time of such payment without preference or priority of any Subordinate
Notes over any other Subordinate Notes issued under the Indenture,
ratably, according to the Noteholders' Principal Distribution Amount or
amounts due for principal, to such Persons entitled thereto without any
discrimination or preference.
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2. If the principal of all of the Notes issued under the Indenture
has become or has been declared due and payable,
First, to the payment of the principal and interest then due and
unpaid on the Senior Notes issued under the Indenture and all related
Senior Issuer Exchange Payments then due, without preference or
priority of principal over interest or over any Senior Issuer Exchange
Payment, or of interest over principal or over any Senior Issuer
Exchange Payment, or of any installment of interest over any other
installment of interest, or of any Senior Note over any other Senior
Note issued under the Indenture, or of any Senior Issuer Exchange
Payment over any other Senior Issuer Exchange Payment or over principal
or interest, ratably, according to the amounts due respectively for
principal and interest and all Senior Issuer Exchange Payments, to the
Persons entitled thereto without any discrimination or preference;
Second, to the payment of the principal and interest then due and
unpaid on the Subordinate Notes issued under the Indenture and all
related Subordinate Issuer Exchange Payments then due, without
preference or priority of principal over interest or over any
Subordinate Issuer Exchange Payment, or of interest over principal or
over any Subordinate Issuer Exchange Payment, or of any installment of
interest over any other installment of interest, or of any Subordinate
Note over any other Subordinate Note issued under the Indenture, or of
any Subordinate Issuer Exchange Payment over any other Subordinate
Issuer Exchange Payment or over principal or interest, ratably,
according to the amounts due respectively for principal and interest
and all Subordinate Issuer Exchange Payments, to the Persons entitled
thereto without any discrimination or preference;
Third, to the payment of all Carryover Interest due and unpaid on
the Senior Notes issued under the Indenture, without preference or
priority of any Senior Notes over any other Senior Notes issued under
the Indenture, ratably, according to the amounts due for Carryover
Interest, to the persons entitled thereto without any discrimination or
preference; and
Fourth, to the payment of all Carryover Interest due and unpaid on
the Subordinate Notes issued under the Indenture, without preference or
priority of any Subordinate Notes over any other Subordinate Notes
issued under the Indenture, ratably, according to the amounts due for
Carryover Interest, to the persons entitled thereto without any
discrimination or preference.
If an Event of Default has happened and has not been remedied, then the
Indenture Trustee, either in its own name or as trustee of an express trust, or
as attorney-in-fact for the related Noteholders and/or each related Exchange
Counterparty or in any one or more of such capacities by its agents and
attorneys, is entitled and empowered to institute such suits, actions and
proceedings at law or in equity for the collection of all sums due in connection
with the Notes issued under such Indenture and any related Issuer Exchange
Payment and to protect and enforce its rights and the rights of the Noteholders
and/or each such Exchange Counterparty under such Indenture for the specific
performance of any covenant therein contained, or in aid of the execution of any
power therein granted, or for an accounting as trustee of any express trust, or
in the enforcement or any legal or equitable right as the Indenture Trustee,
being advised by counsel, deems most effectual to enforce any of its rights, or
to perform any of its duties under such Indenture. Such Indenture Trustee is
entitled and empowered either in its own name or as a trustee of an express
trust, or as attorney-in-fact for the related Noteholders and/or each such
Exchange Counterparty, or in any one or more of such capacities, to file such
proof of debt, claim, petition or other document as may be necessary or
advisable in order to have the claims of such Indenture Trustee, the Noteholders
and any related Exchange Counterparty allowed in any equity, receivership,
insolvency, bankruptcy, liquidation, readjustment, reorganization or other
similar proceedings.
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An Indenture Trustee, at the written request of Noteholders of not less than a
majority in aggregate principal amount of the Notes then Outstanding under the
Indenture, and upon being furnished with reasonable security and indemnity, will
take such steps and institute such suits, actions or proceedings for the
protection and enforcement of the rights of any related Exchange Counterparty or
Noteholders, as the case may be, to collect any amount due and owing from the
Issuer or by injunction or other appropriate proceeding in law or in equity to
obtain other appropriate relief.
Except as specifically provided in an Indenture, no Noteholder or Exchange
Counterparty will have any right to institute any suit, action or proceeding in
equity or at law for the enforcement of any provision of, or the execution of,
any trust or for any remedy under such Indenture.
No remedy by the terms of an Indenture conferred upon or reserved to the
Indenture Trustee or the related Noteholders or any related Exchange
Counterparty is intended to be exclusive of any other remedy, but each and every
such remedy will be cumulative and will be in addition to every other remedy
given under such Indenture or existing at law or in equity or by statute on or
after the date of adoption of such Indenture.
Except as specifically provided in an Indenture, prior to a declaration
accelerating the maturity of the Notes issued under such Indenture as provided
in such Indenture, the Noteholders of not less than two-thirds (2/3) in
principal amount of the Notes then Outstanding under such Indenture and each
related Exchange Counterparty that is not in default or their attorneys-in-fact
duly authorized may on behalf of the Noteholders of all of the Notes issued
under such Indenture and each such Exchange Counterparty waive any past failure
under such Indenture and its consequences with respect to the Notes, except a
failure in payment of the principal of or interest on any of the Notes.
AMENDMENT AND SUPPLEMENTAL INDENTURES
Without Consent of Noteholders. The Issuer, each related Eligible Lender Trustee
and the related Indenture Trustee, with written confirmation from each Rating
Agency then rating the Notes issued under an Indenture that execution of the
proposed Supplemental Indenture will not adversely affect the rating of such
Rating Agency on such Notes, from time to time and at any time without the
consent or concurrence of any Noteholder, may execute a Supplemental Indenture
for any one or more of the following purposes:
(1) To make any changes or corrections in the Indenture as are
required for the purpose of curing or correcting any ambiguity or
defective or inconsistent provision or omission or mistake or manifest
error contained in the Indenture or to insert in the Indenture such
provisions clarifying matters or questions arising under the Indenture as
are necessary or desirable;
(2) To add additional covenants and agreements of the Issuer for the
purpose of further securing the payment of the Notes;
(3) To surrender any right, power or privilege reserved to or
conferred upon the Issuer by the terms of the Indenture;
(4) To confirm as further assurance any lien, pledge, security
interest, assignment or charge, or the subjection to any lien, pledge,
security interest, assignment or charge, created or to be created by the
provisions of the Indenture;
(5) To grant to or confer upon the Noteholders any additional rights,
remedies, powers, authority or security that lawfully may be granted to or
conferred upon them, or to grant to or to confer upon the Indenture
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Trustee for the benefit of the Noteholders or any Exchange Counterparty
any additional rights, duties, remedies, powers or authority;
(6) To make such amendments to the Indenture as are required to
permit the Issuer fully to comply with the Higher Education Act or as
required in order for the Indenture, as amended by such Supplemental
Indenture, not to be contrary to the terms of the Higher Education Act;
(7) To make such amendments to the Indenture as may be necessary or
convenient to provide for issuance of the Notes in coupon form or issuance
and registration of the Notes in book-entry form and to provide for other
related provisions of the Notes;
(8) To modify, amend or supplement the Indenture or any indenture
supplemental thereto in such manner as to permit the qualification thereof
under the Trust Indenture Act of 1939 or any similar federal statute
hereafter in effect, and, if the Issuer and the Indenture Trustee so
determine, to add to the Indenture or any indenture supplemental thereto
such other terms, conditions and provisions as may be permitted by said
Trust Indenture Act of 1939 or similar federal statute, and which will not
materially adversely affect the interests of the Noteholders of the Notes;
(9) To authorize the establishment of agreements providing for the
pledge of certain funds to other indentures, and for the pledge of certain
funds under other indentures to the Indenture;
(10) To permit any changes or modifications of the Indenture required
by (a) a Rating Agency to maintain the outstanding rating on the Notes or
(b) by the issuer of (i) a policy of bond insurance or (ii) any similar
financial guaranty insuring the payment of the principal of and interest
on any Notes to obtain an internal rating of at least investment grade or
as a condition of the issuance of such insurance or guaranty;
(11) To make the terms and provisions of the Indenture, including the
lien and security interest granted therein, applicable to an Exchange
Agreement;
(12) To make such amendments to the Indenture as may be necessary to
permit the Issuer to make loans under the Higher Education Act;
(13) To provide for the issuance of Credit Enhancement, including,
but not limited to, a policy or policies of bond insurance with respect to
the Notes;
(14) To add any additional Eligible Lender Trustee or replace any
existing Eligible Lender Trustee; and
(15) To make any other amendment which, in the judgment of the
Indenture Trustee, is not to the material prejudice of the Indenture
Trustee, the Noteholders or any Exchange Counterparty.
The Issuer, each related Eligible Lender Trustee and the related Indenture
Trustee, from time to time and at any time without the consent or concurrence of
any Noteholder may execute a Supplemental Indenture, if the Issuer determines
that the provisions of such Supplemental Indenture are necessary or desirable to
maximize Available Funds.
With Consent of Noteholders and Exchange Counterparties. The Issuer, each
related Eligible Lender Trustee and the related Indenture Trustee from time to
time and at any time may execute a Supplemental Indenture, with the prior
consent of the Noteholders of not less than a majority in aggregate principal
amount of the Notes then Outstanding under an Indenture for the purpose of
adding any provisions to, or changing in any manner or eliminating any of the
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provisions of, such Indenture, or modifying or amending the rights and
obligations of the Issuer, or modifying or amending in any manner the rights of
an Exchange Counterparty or the Noteholders of Notes then Outstanding under such
Indenture; provided, however, that, without the specific consent of the
Noteholder of each such Note which would be affected thereby, no Supplemental
Indenture amending or supplementing the provisions of such Indenture may: (1)
change the Legal Final Maturity for the payment of the principal of any Note or
any date for the payment of interest thereon, or reduce the principal amount of
any Note or, except on an Interest Determination Date, the interest rate
thereon; (2) reduce the aforesaid proportion of Notes the Noteholders of which
are required to consent to any Supplemental Indenture amending or supplementing
the provisions of such Indenture; (3) except as shall otherwise be provided in
such Indenture, give to any Note any preference over any other Note secured
thereby; (4) except as shall otherwise be provided in such Indenture, authorize
the creation of any pledge of the related Trust Estate prior, superior or equal
to, or deprive the Noteholders or any Exchange Counterparty of, the pledge,
lien, security interest and assignment created in such Indenture for the payment
of the Notes or any Issuer Exchange Payment; or (5) materially adversely affect
the right of the Noteholder of any Note to demand payment of such Note.
DEFEASANCE
The obligations of the Issuer under an Indenture and the liens, pledges,
security interests, charges, trusts, assignments, covenants and agreements of
the Issuer and each related Eligible Lender Trustee therein made or provided
for, will be fully discharged and satisfied as to (a) any Note issued under such
Indenture, when either of items (i) or (ii) below shall have occurred; (b) any
Program Operating Expenses, when item (iii) shall have occurred; (c) any related
Exchange Agreement, when item (iv) shall have occurred; (d) Carryover Interest,
when item (v) below shall have occurred, and such Note, Program Operating
Expense, Exchange Agreement, or Carryover Interest will no longer be deemed to
be Outstanding thereunder (provided, however, that such Indenture shall not
deemed to be defeased unless and until all of the following shall have
occurred):
(i) when such Note has been canceled;
(ii) as to any such Note not canceled, when payment of the
principal of such Note, plus interest on such principal to the
due date thereof (whether such due date is by reason of
maturity or upon redemption, or otherwise), either:
(a) has been made or caused to be made in accordance with
the terms thereof, or
(b) has been provided for by an irrevocable deposit with
the related Indenture Trustee or the Authenticating
Agent, which is irrevocably appropriated and set
aside exclusively for such payment, and which is
derived from a source which is not a transfer of
property voidable under Sections 544 or 547 of the
United States Bankruptcy Code, should the Issuer be a
debtor under such Code, (accompanied by an opinion of
counsel experienced in bankruptcy matters to that
effect) of:
(1) moneys sufficient to make such payment,
and/or
(2) Eligible Investments (which for this purpose
shall include only those obligations which
are described in item (a) of the definition
thereof and which are not subject to call
for redemption prior to maturity), maturing
as to principal and interest in such amounts
and at such times as will insure the
availability of sufficient moneys to make
such payment, the sufficiency of said moneys
or Eligible Investments to be verified in
writing by a firm of independent certified
public accountants;
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(iii) all Program Operating Expenses then owed by the Issuer,
including related necessary and proper fees, compensation and
expenses of the related Indenture Trustee, each related
Eligible Lender Trustee and the Authenticating Agent when they
have been paid or the payment thereof provided for to the
satisfaction of the related Indenture Trustee;
(iv) in the case of payment of any related Issuer Exchange Payment
and the applicable Exchange Agreement, when payment of all
Issuer Exchange Payments due and payable to each Exchange
Counterparty under its respective Exchange Agreement has been
made or duly provided for to the satisfaction of each Exchange
Counterparty and each Exchange Agreement has been terminated;
and
(v) in the case of payment of any amount of Carryover Interest,
when the first of the following occurs:
(a) payment of all such Carryover Interest that has
accrued and remains unpaid has been made or duly
provided for to the satisfaction of the related
Indenture Trustee, or
(b) all amounts held in the related Funds and Accounts
under such Indenture which are available pursuant to
the provisions of such Indenture to pay Carryover
Interest have been paid out, and no further amounts,
or assets the proceeds of which could be used to pay
Carryover Interest, are so available under such
Indenture to make payment of Carryover Interest.
NONPRESENTMENT
If any Note issued under an Indenture is not presented for payment when the
principal thereof becomes due, whether at maturity or at the date fixed for the
redemption thereof, or otherwise, and if moneys and/or Eligible Investments are
held at such due date by the Indenture Trustee, in trust for that purpose
sufficient and available to pay the principal of such Note, together with all
interest due on such principal to the due date thereof (including any Carryover
Interest), or to the date fixed for redemption thereof, as the case may be, all
liability of the Issuer for such payment will cease and be completely
discharged. Thereafter, it will be the duty of such Indenture Trustee to hold
such moneys and/or Eligible Investments without liability to the holder of such
Note for interest thereon, in trust for the benefit of the holder of such Note,
who thereafter will be restricted exclusively to such moneys and/or Eligible
Investments for any claim of whatever nature on its part on or with respect to
such Note, including for any claim for the payment thereof; provided, however,
that any such moneys and/or Eligible Investments held by such Indenture Trustee
remaining unclaimed by the Noteholders of such Notes for 4 years after the
principal of the respective Notes with respect to which such moneys and/or
Eligible Investments have been so set aside has become due and payable (whether
at maturity or upon redemption or otherwise) will be paid to the Issuer free
from the trusts created by the related Indenture, and all liabilities of such
Indenture Trustee with respect to such moneys and/or Eligible Investments will
cease. In such event, the Noteholders will thereafter be deemed to be general
unsecured creditors of the Issuer for the amounts so paid to the Issuer (without
interest thereon), subject to any applicable statute of limitation.
REMOVAL OF AN INDENTURE TRUSTEE; RESIGNATION; SUCCESSORS
An Indenture Trustee may be removed at any time with or without cause by the
written direction or upon affirmative vote of the Noteholders of majority in
aggregate principal amount of the Notes then Outstanding under the related
Indenture or their attorneys-in-fact duly authorized.
In case at any time any of the following occurs:
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(1) an Indenture Trustee has or shall fail to comply with certain
obligations imposed on it under the Trust Indenture Act of
1939 with respect to Notes of any related Series after written
request therefor by the Issuer or any Noteholder of such
Series who has been a bona fide Noteholder of a Note of such
Series for at least 6 months,
(2) an Indenture Trustee ceases to be eligible in accordance with
the provisions of the related Indenture and thereafter fails
to resign after written request therefor has been given to
such Indenture Trustee by the Issuer or by any related
Noteholder, or
(3) an Indenture Trustee becomes incapable of acting, or is
adjudged a bankrupt or insolvent or a receiver of such
Indenture Trustee or of its property is appointed, or any
public officer takes charge or control of such Indenture
Trustee or of its property or affairs for the purpose of
reorganization, conservation or liquidation,
then, the Issuer may remove such Indenture Trustee by an instrument in writing,
or, subject to certain provisions of the Trust Indenture Act of 1939, any
Noteholder of Notes issued under such Indenture may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the removal of such Indenture Trustee. Such court may thereupon, after such
notice, if any, as it may deem proper and prescribe and as may be required by
law, remove such Indenture Trustee.
An Indenture Trustee may resign by giving not less than 60 days' written notice
to the Issuer and all related Noteholders.
A successor trustee may be appointed by the Noteholders of not less than a
majority in aggregate principal amount of the Notes then Outstanding under the
related Indenture by an instrument or concurrent instruments in writing signed
by such Noteholders or their attorneys-in-fact duly authorized; provided,
however, that in case at any time there will be a vacancy in the office of an
Indenture Trustee, the Issuer, by an instrument in writing, will appoint a
successor to fill such vacancy until a new Indenture Trustee is appointed by the
Noteholders of the Notes as described above. Any successor trustee must meet the
qualifications set forth in the related Indenture.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a general summary of material federal income tax consequences
of the purchase, ownership and disposition of the Notes. Thompson Hine & Flory
LLP has reviewed this summary with respect to federal income tax matters and is
of the opinion that the descriptions of the law and legal conclusions contained
herein are correct in all material respects and the discussions hereunder fairly
summarize the federal income tax considerations that are likely to be material
to Noteholders. The discussion is based upon the provisions of the Code, the
Treasury Regulations promulgated thereunder, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. Consequently, the IRS may disagree with
certain aspects of the discussion below. The statutory provisions, regulations,
and interpretations on which this discussion is based are subject to change, and
such a change could apply retroactively. No ruling on any of the issues
discussed below will be sought from the IRS.
The discussion does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain categories of investors subject to special
treatment under the federal income tax laws. For example, it does not discuss
the tax treatment of Noteholders that are insurance companies, regulated
investment companies or dealers in securities. This discussion focuses primarily
on investors who will hold Notes as "capital assets" (generally held for
investment) within the meaning of Section 1221 of the
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Code, but much of the discussion is applicable to other investors as well. The
discussion does not purport to address the anticipated state income tax
consequences to investors of owning and disposing of the Notes. Consequently,
potential purchasers of Notes are advised to consult their own tax advisors
concerning the federal, state or local tax consequences to them of the purchase,
holding, and disposition of the Notes.
Payments received by Noteholders on the Notes generally will be accorded the
same tax treatment under the Code as payments received on other taxable debt
instruments. Except as described below for Notes issued with original issue
discount, acquired with market discount, or issued or acquired at a premium,
interest paid or accrued on a Note will be treated as ordinary income to the
Noteholder and a principal payment on a Note will be treated as a return of
capital. In general, interest paid to Noteholders who report their income on the
cash receipts and disbursements method should be taxable to them when received.
Interest earned by Noteholders who report their income on the accrual method
will be taxable when accrued, regardless of when it is actually received. The
Indenture Trustee will report annually to the IRS and to Noteholders of record
with respect to interest paid or accrued, and original issue discount and market
discount, if any, accrued, on the Notes.
One or more Series of Notes may be subordinated to one or more other Series of
Notes issued under the same Indenture. In general, such subordination will not
affect the federal income tax treatment of either the subordinated or the senior
Notes. Employee benefit plans subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), should consult their tax advisors before
purchasing any subordinated Note. See "ERISA Considerations" herein and "Summary
of Terms-ERISA Considerations" in the accompanying Prospectus Supplement.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
In the opinion of Thompson Hine & Flory LLP, based upon certain assumptions and
representations of the Issuer, the Notes will be characterized as debt for
federal income tax purposes. Such opinion will not be binding on the courts or
the IRS. The Issuer and the related Noteholders express in each Indenture their
intent that the Notes will be indebtedness of the Issuer secured by the related
Trust Estate. The Issuer and such Noteholders, by accepting the Notes have
agreed to treat the Notes as indebtedness of the Issuer for federal income tax
purposes. The Issuer intends to treat this transaction as a financing reflecting
the Notes as its indebtedness for tax and financial accounting purposes.
Contrary to the opinion of Thompson Hine & Flory LLP, the IRS might assert that
the Notes did not represent debt for federal income tax purposes, but rather the
Notes should be treated as equity interests in the Issuer. If the IRS were
successful in such assertion, in the opinion of Thompson Hine & Flory LLP,
although the Issuer might be treated as a publicly traded partnership, it would
not be taxable as a corporation. 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 certain tax-exempt
entities (including pension funds) would be "unrelated business taxable income,"
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 Issuer
expenses. Furthermore, such a characterization could subject holders to state
and local taxation in jurisdictions in which they are not currently subject to
tax.
CHARACTERIZATION OF THE TRUST ESTATE
The Issuer believes that, for federal income tax purposes, the Trust Estate
established under each Indenture will be a security device and, accordingly, it
will not be treated as an entity separate from the Issuer. However, the IRS
might assert that the Trust Estate is a separate entity from the Issuer for
federal income tax purposes. If for federal
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income tax purposes the Trust Estate were instead treated as an entity separate
from the Issuer, the Trust Estate might be treated as a partnership among the
related Noteholders, and, possibly, the Issuer as well. The Issuer believes that
the resulting partnership would not be subject to federal income tax as a
publicly traded partnership taxable as a corporation because it is anticipated
that certain qualifying income tests would be met. Rather, each Noteholder would
be taxed individually on their respective distributive shares of the
partnership's income, gain, loss, deductions and credits. The IRS, however,
might assert that one or more of the activities of the Trust Estate constitutes
a financial business such that the qualifying income tests are not met. If such
qualifying income tests are not met, the Trust Estate would constitute a
publicly traded partnership taxable as a corporation. The amount and timing of
items of income and deduction of the Noteholders may differ if the Notes were
held to constitute partnership interests, rather than indebtedness.
If, alternatively, it were determined that the transaction results in the Trust
Estate being classified as a corporation or a publicly traded partnership
treated as an association taxable as a corporation, the Trust Estate would be
subject to federal income tax at corporate income tax rates on the income it
derives from the Financed Student Loans and other assets, which would reduce the
amounts available for payment to the related Noteholders. Cash payments to such
Noteholders generally would be treated as dividends for tax purposes to the
extent of such publicly traded partnership's or corporation's earnings and
profits. A similar result would apply if such Noteholders were deemed to have
acquired stock or other equity interests in the Issuer.
ORIGINAL ISSUE DISCOUNT
Notes issued at a price less than their stated principal amount ("Discount
Notes"), Notes upon which interest is accrued and is compounded and added to the
principal balance thereof periodically ("Accretion Notes"), and certain other
Series of Notes will be issued with "original issue discount" within the meaning
of Section 1273(a) of the Code. Such original issue discount will equal the
difference between the "stated redemption price at maturity" of the Note
(generally, its principal amount) and its issue price. Original issue discount
is treated as ordinary interest income, and Noteholders of Notes with original
issue discount must include the amount of original issue discount in income on
an accrual basis in advance of the receipt of the cash to which it relates.
The amount of original issue discount required to be included in a Noteholder's
income in any taxable year will be computed in accordance with Section
1272(a)(6) of the Code, which provides rules for the accrual of original issue
discount for certain debt instruments, such as the Notes, that are subject to
prepayment by reason of prepayments of underlying debt obligations. No
regulatory guidance currently exists under Code Section 1272(a)(6). Accordingly,
until the Treasury issues guidance to the contrary, the Issuer or other person
responsible for computing the amount of original issue discount to be reported
to a Noteholder each taxable year (the "Tax Administrator"), except as otherwise
provided herein, expects to base its computations on Code Section 1272(a)(6) and
final regulations governing the accrual of original issue discount on debt
instruments (the "OID Regulations"). The amount and rate of accrual of original
issue discount on a Note will be calculated by the Tax Administrator based on
(i) a single constant yield to maturity and (ii) the prepayment rate of the
Financed Student Loans and the reinvestment rate on amounts held pending
distribution that were assumed in pricing the Note (the "Pricing Prepayment
Assumptions"). Investors should be aware, however, that the OID Regulations do
not address directly the treatment of instruments that are subject to Code
Section 1272(a)(6), and, accordingly, there can be no assurance that such
methodology, which is described below, represents the correct manner of
calculating original issue discount on the Notes. The Tax Administrator intends
to account for income on certain Notes that provide for one or more contingent
payments as described in "-- Variable Rate Notes" herein.
The amount of original issue discount on a Note equals the excess, if any, of
the Note's "stated redemption price at maturity" over its "issue price." Under
the OID Regulations, a debt instrument's stated redemption price at maturity
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is the sum of all payments provided by the instrument other than "qualified
stated interest" ("Deemed Principal Payments"). Qualified stated interest, in
general, is stated interest that is unconditionally payable in cash or property
(other than debt instruments of the Issuer) at least annually at (i) a single
fixed rate or (ii) a variable rate that meets certain requirements set out in
the OID Regulations. See "-- Variable Rate Notes" herein. Thus, in the case of
any Note providing for such stated interest other than an Accretion Note, the
stated redemption price at maturity generally will equal the total amount of all
Deemed Principal Payments due on that Note. Because an Accretion Note generally
does not require unconditional payments of interest at least annually, the
stated redemption price at maturity of such a Note will equal the aggregate of
all payments due, whether designated as principal, accrued interest, or current
interest. The issue price of a tranche of Notes generally will equal the initial
price at which such tranche is sold to the public.
Under a de minimis rule, a Note will be considered to have no original issue
discount if the amount of original issue discount is less than 0.25% of the
Note's stated redemption price at maturity multiplied by the weighted average
maturity ("WAM") of the Note. No Treasury Regulations have been issued with
respect to computing the WAM of instruments like a Note. The Tax Administrator
will compute the WAM of a Note as equaling the sum of the amounts obtained by
multiplying the number of complete years from the Note's issue date until the
payment is made by a fraction, the numerator of which is the amount of each
Deemed Principal Payment, and the denominator of which is the Note's stated
redemption price at maturity. A Noteholder will include de minimis original
issue discount in income on a pro rata basis as stated principal payments on the
Note are received or, if earlier, upon disposition of the Note, unless the
Noteholder makes an "All OID Election" (as defined below).
Notes of certain Series may bear interest under terms that provide for a teaser
rate period, interest holiday, or other period during which the rate of interest
payable on the Notes is lower than the rate payable during the remainder of the
life of the Notes ("Teaser Notes"). The OID Regulations provide a more expansive
test under which a Teaser Note may be considered to have a de minimis amount of
original issue discount even though the amount of the original issue discount on
the Note would be more than de minimis as determined under the regular test. The
expanded test applies to a Teaser Note only if the stated interest on such Note
would be qualified stated interest but for the fact that during one or more
accrual periods its interest rate is below the rate applicable for the remainder
of its term. Under the expanded test, the amount of original issue discount on a
Teaser Note that is measured against the de minimis amount of original issue
discount allowable on the Note is the greater of (i) the excess of the stated
principal amount of the Note over its issue price ("True Discount") and (ii) the
amount of additional stated interest that would be necessary to be payable on
the Note in order for all stated interest to be qualified stated interest (the
"Additional Interest Amount").
The holder of a Note must include in gross income the sum, for all days during
his taxable year on which he holds the Note, of the "daily portions" of the
original issue discount on such Note. The daily portions of original issue
discount with respect to a Note will be determined by allocating to each day in
any accrual period the Note's ratable portion of the excess, if any, of (i) the
sum of (a) the present value of all payments under the Note yet to be received
as of the close of such period and (b) the amount of any Deemed Principal
Payments received on the Note during such period over (ii) the Note's "adjusted
issue price" at the beginning of such period. The present value of payments yet
to be received on a Note will be computed by using the Pricing Prepayment
Assumptions and the Note's original yield to maturity (adjusted to take into
account the length of the particular accrual period), and taking into account
Deemed Principal Payments actually received on the Note prior to the close of
the accrual period. The adjusted issue price of a Note at the beginning of the
first accrual period is its issue price. The adjusted issue price at the
beginning of each subsequent period is the adjusted issue price of the Note at
the beginning of the preceding period increased by the amount of original issue
discount allocable to that period and decreased by the amount of any Deemed
Principal Payments received during that period. Thus, an increased (or
decreased) rate of prepayments received with
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respect to a Note will be accompanied by a correspondingly increased (or
decreased) rate of recognition of original issue discount by the holder of such
Note.
The yield to maturity of a Note will be calculated based on (i) the Pricing
Prepayment Assumptions and (ii) any contingencies not already taken into account
under the Pricing Prepayment Assumptions that, considering all the facts and
circumstances as of the issue date, are significantly more likely than not to
occur. Contingencies, such as the exercise of "mandatory redemptions," that are
taken into account by the parties in pricing the Note typically will be subsumed
in the Pricing Prepayment Assumptions and thus will be reflected in the Note's
yield to maturity.
The Notes of a Series may be subject to optional redemption by the Issuer before
their Legal Final Maturities. Under the OID Regulations, the Issuer will be
presumed to exercise its option to redeem for purposes of computing the accrual
of original issue discount if, and only if, by using the optional redemption
date as the maturity date and the optional redemption price as the stated
redemption price at maturity, the yield to maturity of the Notes is lower than
it would be if the Notes were not redeemed early. If the Issuer is presumed to
exercise its option to redeem the Notes, original issue discount on such Notes
will be calculated as if the redemption date were the maturity date and the
optional redemption price were the stated redemption price at maturity. In cases
in which all of the Notes of a particular Series are issued at par or at a
discount, the Issuer will not be presumed to exercise its option to redeem the
Notes because a redemption by the Issuer would not lower the yield to maturity
of the Notes. If, however, some Notes of a particular Series are issued at a
premium, the Issuer may be able to lower the yield to maturity of the Notes by
exercising its redemption option. In determining whether the Issuer will be
presumed to exercise its option to redeem Notes when one or more Series of the
Notes are issued at a premium, the Tax Administrator will take into account all
Series of Notes that are subject to the optional redemption to the extent that
they are expected to remain outstanding as of the optional redemption date,
based on the Pricing Prepayment Assumptions. If, determined on a combined
weighted average basis, the Notes of such Series were issued at a premium, the
Tax Administrator will presume that the Issuer will exercise its option.
However, the OID Regulations are unclear as to how the redemption presumption
rules should apply to instruments such as the Notes, and there can be no
assurance that the IRS will agree with the Tax Administrator's position.
The OID Regulations provide that a Noteholder may make an election (an "All OID
Election") to include in gross income all stated interest, acquisition discount,
original issue discount, de minimis original issue discount, market discount (as
described below under "- Market Discount"), de minimis market discount that
accrues on the Note, and unstated interest (as reduced by any amortizable
premium, as described below under "Amortizable Premium," or acquisition premium,
as described below) under the constant yield method used to account for original
issue discount. To make an All OID Election, the holder of the Note must attach
a statement to its timely filed federal income tax return for the taxable year
in which the holder acquired the Note. The statement must identify the
instruments to which the election applies. An All OID Election is irrevocable
unless the holder obtains the consent of the IRS. If an All OID Election is made
for a debt instrument with market discount, the holder is deemed to have made an
election to include in income currently the market discount on all of the
holder's other debt instruments with market discount, as described in "- Market
Discount' below. In addition, if an All OID Election is made for a debt
instrument with amortizable premium, the holder is deemed to have made an
election to amortize the premium on all of the holder's other debt instruments
with amortizable premium under the constant yield method. See "-- Amortizable
Premium" herein. Noteholders should be aware that the law is unclear as to
whether an All OID Election is effective for a Note that is subject to the
contingent payment rules. See "-- Variable Rate Notes" herein.
A Note having original issue discount may be acquired in a transaction
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in such a Note, immediately after its
acquisition, exceeds the sum of all Deemed Principal Payments to be received on
the Note after the acquisition date, the Note will no longer have original issue
discount, and the holder may be entitled to reduce the amount of interest income
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recognized on the Note by the amount of amortizable premium. See "-- Amortizable
Premium" herein. If the subsequent holder's adjusted basis in the Note
immediately after the acquisition exceeds the adjusted issue price of the Note,
but is less than or equal to the sum of the Deemed Principal Payments to be
received under the Note after the acquisition date, the amount of original issue
discount on the Note will be reduced by a fraction, the numerator of which is
the excess of the Note's adjusted basis immediately after its acquisition over
the adjusted issue price of the Note and the denominator of which is the excess
of the sum of all Deemed Principal Payments to be received on the Note after the
acquisition date over the adjusted issue price of the Note. Alternately, the
subsequent purchaser of a Note having original issue discount may make an All
OID Election with respect to the Note.
If the interval between the issue date of a Note that pays interest at the
Series Interest Rate on a current basis (a "Current Interest Note") and the
first Distribution Date (the "First Distribution Period") contains more days
than the number of days of stated interest that are payable on the first
Distribution Date, the effective interest rate received by the Noteholder during
the first Distribution Period will be less than the Note's stated interest rate
making such Note a Teaser Note. If the amount of original issue discount on the
Note measured under the expanded de minimis test exceeds the de minimis amount
of original issue discount allowable on the Note, the amount by which the stated
interest on the Note exceeds the interest that would be payable on the Note at
the effective rate of interest for the First Distribution Period (the
"Nonqualified Interest Amount") would be treated as part of the Note's stated
redemption price at maturity. Accordingly, the holder of a Teaser Note may be
required to recognize ordinary income arising from original issue discount
attributable to the First Distribution Period in addition to any qualified
stated interest that accrues in that period.
Similarly, if the First Distribution Period is shorter than the interval between
subsequent Distribution Dates, the effective rate of interest payable on a Note
during the First Distribution Period will be higher than the stated rate of
interest if a Noteholder receives interest on the first Distribution Date based
on a full accrual period. Unless the "Pre-Issuance Accrued Interest Rule"
described below applies, such Note (a "Rate Bubble Note") would be issued with
original issue discount unless the amount of original issue discount is de
minimis. The amount of original issue discount on a Rate Bubble Note
attributable to the First Distribution Period would be the amount by which the
interest payment due on the first Distribution Date exceeds the amount that
would have been payable had the effective rate for that Period been equal to the
stated interest rate. However, under the Pre-Issuance Accrued Interest Rule, if
(i) a portion of the initial purchase price of a Rate Bubble Note is allocable
to interest that has accrued under the terms of the Note prior to its issue date
("Pre-Issuance Accrued Interest") and (ii) the Note provides for a payment of
stated interest on the first payment date within one year of the issue date that
equals or exceeds the amount of the Pre-Issuance Accrued Interest, the Note's
issue price may be computed by subtracting from the issue price the amount of
Pre-Issuance Accrued Interest. If the Noteholder opts to apply the Pre-Issuance
Accrued Interest Rule, the portion of the interest received on the first
Distribution Date equal to the Pre-Issuance Accrued Interest would be treated as
a return of such interest and would not be treated as a payment on the Note.
Thus, where the Pre-Issuance Accrued Interest Rule applies, a Rate Bubble Note
will not have original issue discount attributable to the First Distribution
Period, provided that the increased effective interest rate for that Period is
attributable solely to Pre-Issuance Accrued Interest, as typically will be the
case. The Tax Administrator intends to apply the Pre-Issuance Accrued Interest
Rule to each Rate Bubble Note for which it is available if the Note's stated
interest otherwise would be qualified stated interest. If, however, the First
Distribution Period of a Rate Bubble Note is longer than subsequent Distribution
Periods, the application of the Pre-Issuance Accrued Interest Rule typically
will not prevent disqualification of the Note's stated interest because its
effective interest rate during the First Distribution Period typically will be
less than its stated interest rate. Thus, a Note with a long First Distribution
Period typically will be a Teaser Note, as discussed above. The Pre-Issuance
Accrued Interest Rule will not apply to any amount paid at issuance for such a
Teaser Note that is normally allocable to interest accrued under the terms of
such Note before its issue date. All amounts paid for such a Teaser Note at
issuance, regardless of how designated, will be included in the issue price of
such Note for federal income tax accounting purposes.
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In view of the complexities and current uncertainties as to the manner of
inclusion in income of original issue discount on the Notes, potential investors
should consult their own tax advisors to determine the appropriate amount and
method of inclusion in income of original issue discount on the Notes for
federal income tax purposes.
VARIABLE RATE NOTES
A Note may pay interest at a variable rate (a "Variable Rate Note"). A Variable
Rate Note that qualifies as a "variable rate debt instrument" as that term is
defined in the OID Regulations (a "VRDI") will be governed by the rules
applicable to VRDIs in the OID Regulations, which are described below. A
Variable Rate Note qualifies as a VRDI under the OID Regulations if (i) the Note
is not issued at a premium to its noncontingent principal amount in excess of
the lesser of (a) .015 multiplied by the product of such noncontingent principal
amount and the WAM (as that term is defined above in the discussion of the de
minimis rule) of the Note or (b) 15 percent of such noncontingent principal
amount (an "Excess Premium"); (ii) stated interest on the Note compounds or is
payable unconditionally at least annually at (a) one or more qualified floating
rates, (b) a single fixed rate and one or more qualified floating rates, (c) a
single "objective rate," or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate," and (iii) the qualified floating
rate or the objective rate in effect during an accrual period is set at a
current value of that rate (i.e., the value of the rate on any day occurring
during the interval that begins three months prior to the first day on which
that value is in effect under the Note and ends one year following that day).
However, if the Variable Rate Note provides for any contingent payments (which
do not include qualified stated interest), the Tax Administrator intends to
account for the income thereon as described below.
Under the OID Regulations, a rate is a qualified floating rate if variations in
the value of the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing costs for the Issuer of the debt instrument or for
Depositors in general. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate. If a Note provides for two or more qualified floating
rates that reasonably can be expected to have approximately the same values
throughout the term of the Note, the qualified floating rates together will
constitute a single qualified floating rate. Two or more qualified floating
rates conclusively will be presumed to have approximately the same values
throughout the term of a Note, if the values of all such rates on the issue date
of the Note are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is subject to
a restriction or restrictions on the maximum stated interest rate (a "Cap"), a
restriction or restrictions on the minimum stated interest rate (a "Floor"), a
restriction or restrictions on the amount of increase or decrease in the stated
interest rate (a "Governor"), or other similar restriction only if (a) the Cap,
Floor, or Governor is fixed throughout the term of the related Note or (b) the
Cap, Floor, Governor, or similar restriction is not reasonably expected, as of
the issue date, to cause the yield on the Note to be significantly less or
significantly more than the expected yield on the Note determined without such
Cap, Floor, Governor, or similar restriction, as the case may be.
Under the OID Regulations, an objective rate is a rate (other than a qualified
floating rate) that (i) is determined using a single fixed formula, (ii) is
based on objective financial or economic information, and (iii) is not based on
information that either is within the control of the Issuer (or a related party)
or is unique to the circumstances of the Issuer (or related party), such as
dividends, profits, or the value of the Issuer's (or related party's) stock.
That definition would include a rate that is based on changes in a general
inflation index. In addition, a rate would not fail to be an objective rate
merely because it is based on the credit quality of the Issuer.
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Under the OID Regulations if interest on a Variable Rate Note is stated at a
fixed rate for an initial period of less than one year followed by a variable
rate that is either a qualified floating rate or an objective rate for a
subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A fixed
rate and a variable rate conclusively will be presumed to approximate an initial
fixed rate if the value of the variable rate on the issue date does not differ
from the value of the fixed rate by more than 25 basis points.
Under the OID Regulations, all interest payable on a Variable Rate Note that
qualifies as a VRDI and provides for stated interest unconditionally payable in
cash or property at least annually at a single qualified floating rate or a
single objective rate (a "Single Rate VRDI Note") is treated as qualified stated
interest. The amount and accrual of OID on a Single Rate VRDI Note is
determined, in general, by converting such Note into a hypothetical fixed rate
Note and applying the rules applicable to fixed rate Notes described under
"Original Issue Discount" above to such hypothetical fixed rate Note. Qualified
stated interest or original issue discount allocable to an accrual period with
respect to a Single Rate VRDI Note also must be increased (or decreased) if the
interest actually accrued or paid during such accrual period exceeds (or is less
than) the interest assumed to be accrued or paid during such accrual period
under the related hypothetical fixed rate Note.
Except as provided below, the amount and accrual of OID on a Variable Rate Note
that qualifies as a VRDI but is not a Single Rate VRDI Note (a "Multiple Rate
VRDI Note") is determined by converting such Note into a hypothetical equivalent
fixed rate Note that has terms that are identical to those provided under the
Multiple Rate VRDI Note, except that such hypothetical equivalent fixed rate
Note will provide for fixed rate substitutes in lieu of the qualified floating
rates or objective rates provided for under the Multiple Rate VRDI Note. A
Multiple Rate VRDI Note that provides for a qualified floating rate or rates or
a qualified inverse floating rate is converted to a hypothetical equivalent
fixed rate Note by assuming that each qualified floating rate or the qualified
inverse floating rate will remain at its value as of the issue date. A Multiple
Rate VRDI Note that provides for an objective rate or rates is converted to a
hypothetical equivalent fixed rate Note by assuming that each objective rate
will equal a fixed rate that reflects the yield that reasonably is expected for
the Multiple Rate VRDI Note. Qualified stated interest or original issue
discount allocable to an accrual period with respect to a Multiple Rate VRDI
Note must be increased (or decreased) if the interest actually accrued or paid
during such accrual period exceeds (or is less than) the interest assumed to be
accrued or paid during such accrual period under the hypothetical equivalent
fixed rate Note.
Under the OID Regulations, the amount and accrual of OID on a Multiple Rate VRDI
Note that provides for stated interest at either one or more qualified floating
rates or at a qualified inverse floating rate and in addition provides for
stated interest at a single fixed rate (other than an initial fixed rate that is
intended to approximate the subsequent variable rate) is determined using the
method described above for all other Multiple Rate VRDI Notes except that prior
to its conversion to a hypothetical equivalent fixed rate Note, such Multiple
Rate VRDI Note is treated as if it provided for a qualified floating rate (or a
qualified inverse floating rate), rather than the fixed rate. The qualified
floating rate (or qualified inverse floating rate) replacing the fixed rate must
be such that the fair market value of the Multiple Rate VRDI Note as of its
issue date would be approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the qualified floating
rate (or qualified inverse floating rate), rather than the fixed rate.
Notes of certain Series may provide for the payment of interest at a rate
determined as the difference between two interest rate parameters, one of which
is a variable rate and the other of which is a fixed rate or a different
variable rate ("Inverse Floater Notes"). The Inverse Floater Notes are expected
to bear interest at objective rates. Consequently, generally if the interest
rates of such Notes meet the test for qualified stated interest, the income on
such Notes will be accounted for under the rules applicable to VRDIs described
above.
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The OID Regulations contain provisions (the "Contingent Payment Regulations")
that address the federal income tax treatment of debt obligations with one or
more contingent payments ("Contingent Payment Obligations"). Under the
Contingent Payment Regulations, any variable rate debt instrument that is not a
VRDI is classified as a Contingent Payment Obligation. However, the Contingent
Payment Regulations, by their terms, do not apply to debt instruments that are
subject to Section 1272(a)(6) of the Code. In the absence of further guidance,
the Tax Administrator will account for Notes that are Contingent Payment
Obligations in accordance with Code Section 1272(a)(6). Income will be accrued
on such Notes based on a constant yield that is derived from a projected payment
schedule as of the Closing Date. The projected payment schedule will take into
account the Pricing Payment Assumptions and the interest payments that are
expected to be made based on the value of any relevant indices on the issue
date. To the extent that actual payments differ from projected payments for a
particular taxable year, appropriate adjustments to interest income and expense
accruals will be made for that year.
The method described in the foregoing paragraph for accounting for Notes that
are Contingent Payment Obligations is consistent with Code section 1272(a)(6)
and the legislative history thereto. Because of the uncertainty with respect to
the treatment of such Notes under the OID Regulations, however, there can be no
assurance that the IRS will not assert successfully that a method less favorable
to Noteholders will apply. In view of the complexities and the current
uncertainties as to income inclusions with respect to Notes that are Contingent
Payment Obligations, potential investors should consult their own tax advisors
to determine the appropriate amount and method of income inclusion on such Notes
for federal income tax purposes.
ANTI-ABUSE RULE
Concerned that taxpayers might be able to structure debt instruments or
transactions, or to apply the bright-line or mechanical rules of the OID
Regulations in a way that produces unreasonable tax results, the Treasury issued
regulations containing an anti-abuse rule. Those regulations provide that if a
principal purpose in structuring a debt instrument or engaging in a transaction
is to achieve a result that is unreasonable in light of the purposes of the
applicable statutes, the IRS can apply or depart from the OID Regulations as
necessary or appropriate to achieve a reasonable result. A result is not
considered unreasonable under regulations, however, in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
MARKET DISCOUNT
A subsequent purchaser of a Note at a discount from its outstanding principal
amount (or, in the case of a Note having original issue discount, its "adjusted
issue price") will acquire such Note with market discount. The purchaser
generally will be required to recognize the market discount (in addition to any
original issue discount remaining with respect to the Note) as ordinary income.
A person who purchases a Note at a price lower than the Note's outstanding
principal amount but higher than its adjusted issue price does not acquire the
Note with market discount, but will be required to report original issue
discount, appropriately adjusted to reflect the excess of the price paid over
the adjusted issue price. See "Original Issue Discount." A Note will not be
considered to have market discount if the amount of such market discount is de
minimis, i.e., less than the product of (i) 0.25% of the remaining principal
amount (or, in the case of a Note having original issue discount, the adjusted
issue price of such Note), multiplied by (ii) the WAM of the Note (determined as
for original issue discount) remaining after the date of purchase. Regardless of
whether the subsequent purchaser of a Note with more than a de minimis amount of
market discount is a cash-basis or accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of a Note having original issue discount, any Deemed Principal Payments)
are received, in an amount equal to the lesser of (i) the amount of the
principal payment received or (ii) the amount of market discount that has
"accrued" (as described below), but that has not yet been included in income.
The purchaser may make a special election, which applies to all market discount
instruments held or acquired by the purchaser in the
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taxable year of election or thereafter, to recognize market discount currently
on an uncapped accrual basis (the "Current Recognition Election"). In addition,
the purchaser may make an All OID Election with respect to a Note purchased with
market discount. See "-- Original Issue Discount" herein.
Until the Treasury promulgates applicable regulations, the purchaser of a Note
with market discount may elect to accrue the market discount either: (i) on the
basis of a constant interest rate; (ii) in the case of a Note not issued with
original issue discount, in the ratio of stated interest payable in the relevant
period to the total stated interest remaining to be paid from the beginning of
such period; or (iii) in the case of a Note issued with original issue discount,
in the ratio of original issue discount accrued for the relevant period to the
total remaining original issue discount at the beginning of such period.
Regardless of which computation method is elected, the Pricing Prepayment
Assumptions must be used to calculate the accrual of market discount.
A Noteholder who has acquired any Note with market discount generally will be
required to treat a portion of any gain on a sale or exchange of the Note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial principal payments were
received. Moreover, such Noteholder generally must defer interest deductions
attributable to any indebtedness incurred or continued to purchase or carry the
Note to the extent they exceed income on the Note. Any such deferred interest
expense, in general, is allowed as a deduction not later than the year in which
the related market discount income is recognized. If a Noteholder makes a
Current Recognition Election or an All OID Election, the interest deferral rule
will not apply. Under the Contingent Payment Regulations, a secondary market
purchaser of a Contingent Payment Obligation at a discount generally would
continue to accrue interest and determine adjustments on such Note based on the
original projected payment schedule devised by the Issuer of such Note. See "--
Original Issue Discount" herein. The holder of such a Note would be required,
however, to allocate the difference between the adjusted issue price of the Note
and its basis in the Note as positive adjustments to the accruals or projected
payments on the Note over the remaining term of the Note in a manner that is
reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet been
issued, and uncertainty exists with respect to many aspects of those rules. For
example, the treatment of a Note subject to redemption at the option of the
Issuer that is acquired at a market discount is unclear. It appears likely,
however, that the market discount rules applicable in such a case would be
similar to the rules pertaining to original issue discount. Due to the
substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Series of Notes. Prospective investors should consult their
own tax advisors regarding the application of the market discount rules to the
Notes.
AMORTIZABLE PREMIUM
A purchaser of a Note who purchases the Note at a premium over the total of its
Deemed Principal Payments may elect to amortize such premium under a constant
yield method that reflects compounding based on the interval between payments on
the Notes. Treasury Regulations were issued on December 30, 1997 concerning the
treatment of bond premium. Under these Treasury Regulations, bond premium may be
amortized to offset interest income only as a Noteholder takes the qualified
stated interest into account under the Noteholder's regular accounting method.
Moreover, such Treasury Regulations generally provide that in the case of Notes
subject to optional redemption, the Noteholder is deemed to exercise or not
exercise such option in the manner that maximizes the Noteholder's yield on the
Note while the Issuer generally is deemed to exercise or not exercise such
option in the manner that minimizes the Noteholder's yield on the Note. However,
the Issuer is deemed to exercise or not exercise a call option or a combination
of call options in the manner that maximizes the Noteholder's yield on the Note.
Such Treasury Regulations are effective for Notes acquired on or after March 2,
1998. However, if a Noteholder elects to amortize
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bond premium for the taxable year containing March 2, 1998, or any subsequent
taxable year, such Treasury Regulations would apply to all of the Noteholder's
Notes held on or after the first day of that taxable year.
Under the Contingent Payment Regulations, a secondary market purchaser of a
Contingent Payment Obligation at a premium generally would continue to accrue
interest and determine adjustments on such Note based on the original projected
payment schedule devised by the Issuer of such Note. See "-- Original Issue
Discount" herein. The holder of such a Note would allocate the difference
between its basis in the Note and the adjusted issue price of the Note as
negative adjustments to the accruals or projected payments on the Note over the
remaining term of the Note in a manner that is reasonable (e.g., based on a
constant yield to maturity).
GAIN OR LOSS ON DISPOSITION
If a Note is sold, the Noteholder will recognize gain or loss equal to the
difference between the amount realized on the sale and his adjusted basis in the
Note. The adjusted basis of a Note generally will equal the cost of the Note to
the Noteholder, increased by any original issue discount or market discount
previously includable in the Noteholder's gross income with respect to the Note
and reduced by the portion of the basis of the Note allocable to payments on the
Note other than qualified stated interest) previously received by the Noteholder
and by any amortized premium. Similarly, a Noteholder who receives a scheduled
or prepaid principal payment with respect to a Note will recognize gain or loss
equal to the difference between the amount of the payment and the allocable
portion of his adjusted basis in the Note. Except to the extent that the market
discount rules apply and except as provided below, any gain or loss on the sale
or other disposition of a Note generally will be capital gain or loss. Such gain
or loss will be long-term gain or loss if the Note is held as a capital asset
for the applicable long term holding period.
If the holder of a Note is a bank, thrift, or similar institution described in
Section 582 of the Code, any gain or loss on the sale or exchange of the Note
will be treated as ordinary income or loss. In addition, a portion of any gain
from the sale of a Note that might otherwise be capital gain may be treated as
ordinary income to the extent that such Note is held as part of a "conversion
transaction" within the meaning of Section 1258 of the Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in Notes or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in such transaction. The amount of gain realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate "applicable federal rate" (which rate
is computed and published monthly by the IRS) at the time the taxpayer entered
into the conversion transaction, subject to appropriate reduction for prior
inclusion of interest and other ordinary income from the transaction.
The highest marginal individual income tax bracket is 39.6%. The alternative
minimum tax rate for individuals is 26% with respect to alternative minimum tax
income up to $175,000 and 28% with respect to alternative minimum tax income
over $175,000. The recently enacted Internal Revenue Service Restructuring and
Reform Act of 1998 established the highest marginal federal tax rate on net
capital gains for individuals with respect to assets held for more than one year
at 20%. The highest marginal corporate tax rate is 35% for corporate taxable
income over $10 million, and the marginal tax rate on corporate net capital
gains is 35%, although the distinction between capital gains and ordinary income
remains relevant for other purposes. Investors should note that the
deductibility of capital losses is subject to certain limitations.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. A Note may, under certain circumstances, be subject to
"backup withholding" at the rate of 31% with respect to "reportable payments,"
which include interest payments and principal payments to the extent
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of accrued original issue discount as well as distributions of proceeds from a
sale of Notes. This withholding generally applies if the Noteholder of a Note
(i) fails to furnish the related Indenture Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the related Indenture Trustee or
the Issuer an incorrect TIN; (iii) fails to report properly interest, dividends
or other "reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the related Indenture Trustee or the Issuer or
such Noteholder's securities broker with a certified statement, signed under
penalty of perjury, that the TIN is its correct number and that the Noteholder
is not subject to backup withholding. Backup withholding will not apply,
however, with respect to certain payments made to Noteholders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below) complying with requisite certification
procedures. Noteholders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The related Indenture Trustee will report to the Noteholders and to the IRS each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Notes within a
reasonable time after the end of each calendar year.
Foreign Noteholders. Under the Code, interest and original issue discount income
(including accrued interest or original issue discount recognized on sale or
exchange) paid or accrued with respect to Notes held by Noteholders who are
nonresident alien individuals, foreign corporations, foreign partnerships or
certain foreign estates and trusts ("Nonresidents") or Noteholders holding on
behalf of a Nonresident generally will be treated as "portfolio interest" and
therefore will not be subject to any United States tax provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Noteholder and (ii) the Issuer (or other person who would
otherwise be required to withhold tax from such payments) is provided with an
appropriate statement that the beneficial owner of a Note is a Nonresident.
Interest (including original issue discount) paid on Notes to Noteholders who
are foreign persons will not be subject to withholding if such interest is
effectively connected with a United States business conducted by the Noteholder.
Such interest (including original issue discount) will, however, generally be
subject to the regular United States income tax.
On October 6, 1997, Treasury Regulations (the "New Withholding Tax Regulations")
were issued which alter the rules described above in certain respects. The New
Withholding Tax Regulations generally will be effective with respect to payments
made after December 31, 1999, regardless of the issue date of the instrument
with respect to which such payments are made. Prospective investors should
consult their tax advisors concerning the requirements imposed by the New
Withholding Tax Regulations and their effect on the holding of the Notes.
Due to the complexity of the Federal Income Tax Rules applicable to Noteholders
and the considerable uncertainty that exists with respect to many aspects of
those rules, potential investors should consult their own tax advisors regarding
the tax treatment of the acquisition, ownership, and disposition of the Notes.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal Income
Tax Consequences," potential investors should consider the state income tax
consequences of the acquisition, ownership, and disposition of the Notes. State
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state. Therefore, potential investors should consult their own tax
advisors with respect to the various state tax consequences of an investment in
the Notes.
USE OF PROCEEDS
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The Issuer will use a portion of the proceeds of the sale of each issuance of
Notes, net of Underwriters' discount, to Finance Student Loans and the remainder
of such proceeds will be transferred to the related Indenture Trustee for
deposit to the credit of the Funds and Accounts established under the related
Indenture, as set forth in the related Prospectus Supplement. The order of
application of the net proceeds and the amounts to be deposited in each Fund or
Account will be set forth in the related Prospectus Supplement.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans and
arrangements that are subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or corresponding provisions of the Code, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds in which such plans, accounts, annuities or arrangements are
invested (any of the foregoing, a "Plan"), persons acting on behalf of a Plan,
or persons using the assets of a Plan ("Plan Investors"), should review
carefully with their legal advisors whether the purchase or holding of a Series
of Notes could either give rise to a transaction that is prohibited under ERISA
or the Code or cause the assets of the Trust Estate to be treated as plan assets
for purposes of regulations of the Department of Labor set forth in 29 C.F.R.
2510.3-101 (the "Plan Asset Regulations"). Prospective investors should be aware
that, although certain exceptions from the application of the prohibited
transaction rules and the Plan Asset Regulations exist, there can be no
assurance that any such exception will apply with respect to the acquisition of
a Note.
The acquisition or holding of the Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the parties to the
issuance transaction, or any of their respective affiliates is or becomes a
party in interest or a disqualified person with respect to such Plan. However,
one or more exemptions may be available with respect to certain prohibited
transaction rules of ERISA and might apply in connection with the initial
purchase, holding and resale of the Notes, depending in part upon the type of
Plan fiduciary making the decision to acquire Notes and the circumstances under
which such decision is made. Those exemptions include, but are not limited to:
(i) Prohibited Transaction Class Exemption ("PTCE") 95-60, regarding investments
by insurance company pooled accounts; (ii) PTCE 91-38, regarding investments by
bank collective investment funds; (iii) PTCE 90-1, regarding investments by
insurance company pooled separate accounts; or (iv) PTCE 84-14, regarding
transactions negotiated by qualified professional asset managers. Before
purchasing Notes, a Plan subject to the fiduciary responsibility provisions of
ERISA or described in Section 4975(e)(1) (and not exempt under Section 4975(g))
of the Code should consult with its counsel to determine whether the conditions
of any exemption would be met. A purchaser of a Note should be aware, however,
that even if the conditions specified in one or more exemptions are met, the
scope of the relief provided by an exemption might not cover all acts that might
be construed as prohibited transactions.
AVAILABLE INFORMATION
The Issuer has filed with the SEC a registration statement (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended, with respect to the Notes offered hereby.
This Prospectus and the accompanying Prospectus Supplement, which forms part of
the Registration Statement, does not contain all the information contained
therein. For further information, reference is made to the Registration
Statement which may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington D.C. 20549; and at
the SEC's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies of all or any part thereof may be obtained from the Public
Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 upon
the payment of certain fees prescribed by the SEC. You may obtain information on
the operation of the SEC's public reference facilities by calling the SEC at
1-800-SEC-0330. In addition, the
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Registration Statement may be accessed electronically through the SEC's
Electronic Data Gathering, Analysis and Retrieval system at the SEC's site on
the World Wide Web located at http://www.sec.gov.
REPORTS TO NOTEHOLDERS
Unless Definitive Notes are issued for any Series of Notes, periodic unaudited
reports as described in the related Prospectus Supplement containing information
concerning the Financed Student Loans in the related Trust Estate will be
prepared by the Issuer and sent only to Cede & Co., as nominee of DTC and
registered holder of such Notes but will not be sent to any beneficial holder of
such Notes. Such reports will not constitute financial statements prepared under
generally accepted accounting principles. See "Description of the Notes --
Book-Entry Registration" and "-- Reports to Noteholders" herein. The Issuer will
file with the SEC such periodic reports as are required under the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the SEC
thereunder. The Issuer intends to suspend the filing of such reports under the
Securities Exchange Act of 1934, as amended, when and if the filing of such
reports is no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Issuer, pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus and prior to the termination of the
offering of any Series of Notes shall be deemed to be incorporated by reference
into this Prospectus and the accompanying Prospectus Supplement and to be a part
hereof. Any statement contained herein or 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 and the accompanying Prospectus
Supplement to the extent that a statement contained herein or therein or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein or therein 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 and the accompanying
Prospectus Supplement.
The Issuer will provide without charge to each person to whom a copy of this
Prospectus and the accompanying, Prospectus Supplement are delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein by reference, except the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Written requests for such copies should be directed to Brian A.
Ross, Senior Vice President & Chief Financial Officer, Student Loan Funding
Resources, Inc. One West Fourth Street, Suite 200, Cincinnati, Ohio 45202 or
"[email protected]" on the Internet. Telephone requests for such copies should
be directed to (513) 763-0222.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference in this Prospectus
and the accompanying Prospectus Supplement (including, without limitation,
statements using the words "anticipates," "believes," "expects," "estimates,"
"intends," "may," "future," "could," "will"and similar words or expressions as
well as other words or expressions referencing future events, conditions or
circumstances) may be considered "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995, and such statements involve
risks and uncertainties. While it is impossible to identify all such risks and
uncertainties, such risks and uncertainties include but are not limited to
changes in political and economic conditions, interest rate fluctuations,
competition within the Issuer's market, market fluctuations, borrowers'
bankruptcies, inflation, risks relating to Year 2000 issues (particularly with
respect to compliance by third parties on which the Issuer relies), compliance
with governmental regulations, and various other events, conditions and
circumstances, many of which are beyond the Issuer's ability
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to control or predict. Prospective investors in the Notes should refer to "Risk
Factors" beginning on Page 1 of this Prospectus and in the Prospectus Supplement
for a more detailed discussion of certain risk factors. Prospective investors in
the Notes are cautioned that although the Issuer believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Given these
risks and uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date of
this Prospectus and the accompanying Prospectus Supplement or, in the case of
any documents incorporated by reference, the date of such document. The Issuer
disclaims any intent or obligation to update publicly these forward-looking
statements, whether as a result of new information, changes in assumptions,
future events or otherwise.
PLAN OF DISTRIBUTION
Each issuance of Notes will be offered in one or more Series through one or more
underwriters or underwriting syndicates ("Underwriters") . The Prospectus
Supplement for each issuance of Notes will set forth the terms of the offering
of each Series in such issuance, including the name or names of the Underwriters
and either the initial public offering price, the discounts and commissions to
the Underwriters and any discounts or concessions allowed or reallowed to
certain dealers, or the method by which the price at which the Underwriters will
sell the Notes will be determined.
The Notes may be acquired by Underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of any Underwriters will be subject to
certain conditions precedent, and such Underwriters will be severally obligated
to purchase all of a Series of Notes described in the related Prospectus
Supplement, if any are purchased. If Notes of a Series are offered other than
through Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the seller and purchasers of Notes of such Series.
The time of delivery for the Notes of a Series in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
RATING
It is a condition to the issuance and sale of each Series of Notes that they
each be rated by at least one nationally recognized statistical rating
organization in one of its four highest applicable rating categories. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning Rating
Agency. See "Rating" in the accompanying Prospectus Supplement.
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APPENDIX A
GLOSSARY OF PRINCIPAL DEFINITIONS
Set forth below is a glossary of the principal defined terms used in this
Prospectus.
"91-day Treasury Bills" mean direct obligations of the United States
with a maturity of thirteen weeks.
"Account" means any of the accounts established and maintained by an
Indenture Trustee under an Indenture.
"Accrual Notes" means any Series of Notes on which all or a portion of
the interest thereon accrues and is capitalized and not payable until a date
certain or until one or more other Series are paid in full.
"Accrual Period" means the period of time during which interest accrues
but is not payable with respect to a Series of Accrual Notes.
"Administration Agreement" means the agreement among the Administrator
and the Issuer.
"Administrator" means one who performs certain administrative duties
for the Issuer under the Administration Agreement.
"Advances" means deposits made by the Issuer with respect to
anticipated future collections on the Financed Student Loans.
"Auction Agent" is the party identified as such in the Prospectus
Supplement.
"Auction Period" means with respect to each Auction Rate Note, the
Interest Accrual Period applicable to such Note during which time the applicable
Series Interest Rate is determined pursuant to the related Indenture.
"Auction Period Adjustment" means, with respect to any Auction Rate
Notes, the ability of the Issuer to change the length of one or more Auction
Periods to conform with then current market practice or accommodate other
economic or financial factors that may affect or be relevant to the length of
the Auction Period or any Series Interest Rate.
"Auction Procedures" means the auction procedures that will be used in
determining the interest rates on the Auction Rate Notes, as set forth in this
Prospectus and in an Appendix to any Prospectus Supplement relating to a Series
of Auction Rate Notes.
"Auction Rate Notes" means any Series of Notes bearing interest at an
Auction Rate, as identified in the Prospectus Supplement.
"Authenticating Agent" means the authenticating agent for any Notes
appointed pursuant to the related Indenture.
"Available Funds" with respect to each Trust Estate means, with respect
to any Collection Period, the excess of (A) the sum, without duplication, of the
following amounts with respect to such Collection Period: (i) all collections
received by the Indenture Trustee on the Financed Student Loans (including any
Guarantee Payments
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(including payments received from any guarantor or escrow fund under any Private
Loan Program) received with respect to the Financed Student Loans) during such
Collection Period; (ii) any payments, including without limitation Interest
Subsidy Payments and Special Allowance Payments, received by the Eligible Lender
Trustee during such Collection Period with respect to Financed Student Loans;
(iii) all proceeds from any sales of Financed Student Loans during such
Collection Period; (iv) any payments of or with respect to interest received by
the Indenture Trustee during such Collection Period with respect to a Financed
Eligible Loan for which a Realized Loss was previously allocated; (v) the
aggregate Purchase Amounts received for those Financed Students Loans purchased
by the Indenture Trustee during the related Collection Period; (vi) the
aggregate amounts, if any, received from the Issuer or the Indenture Trustee as
reimbursement of non-guaranteed or uninsured interest amounts (which shall not
include, with respect to Financed FFELP Loans, the portion of such interest
amounts for which the Guarantee Agency did not have an obligation to make a
Guarantee Payment), or lost Interest Subsidy Payments and Special Allowance
Payments, with respect to the Financed Student Loans; (vii) Counterparty
Exchange Payments; (viii) Investment Earnings for such Collection Period; and
(ix) any other sums identified in the related Prospectus Supplement over (B)
amounts received by the Issuer in connection with balance reconciliations
required by virtue of Student Loan consolidations for such Collection Period;
provided, however, that Available Funds will exclude (1) all payments and
proceeds of any Financed Student Loans the Purchase Amount of which has been
included in Available Funds for a prior Collection Period, which payments and
proceeds shall be paid to the Issuer, (2) amounts used to reimburse the Issuer
for Advances or any other amounts advanced by the Issuer on a voluntary basis
with respect to Guarantee Payments (including payments from any guarantor or
escrow fund under any Private Loan Program) or Interest Subsidy Payments applied
for but not received as of the end of the Collection Period immediately
preceding the date such advance is made, (3) payments by a bond insurance
company or other surety, credit enhancer or guarantor who is obligated to pay
debt service on a particular Series of Notes, and (4) amounts which are paid to
the Issuer pursuant to the Indenture.
"Business Day" means any day on which the related Indenture Trustee and
Authenticating Agent, if any, at their respective addresses set forth in or for
purposes of the related Indenture, are open for commercial banking business and
on which the New York Stock Exchange is open.
"Calculation Agent" means the calculation agent for any Notes appointed
pursuant to the related Indenture.
"Carryover Interest" means the difference between the interest that
would accrue on any Series of Notes at the Formula Rate and the interest that
accrues at the Net Loan Rate, together with interest thereon at the Formula Rate
from the Distribution Date on which it is due until paid at the Formula Rate.
"Cash Flow Statement" shall mean a report or reports prepared by the
Issuer with respect to the period covered by the Cash Flow Statement, which
period shall extend from the date of the Cash Flow Statement to the latest
maturity of the Notes then Outstanding under the related Indenture, showing, (i)
all Available Funds expected to be received during such period, (ii) the
application of all such Available Funds in accordance with such Indenture, (iii)
the resulting periodic balances and Parity Percentages, and (iv) that under all
assumptions and scenarios used for the cash flows accompanying such Cash Flow
Statement, (a) anticipated Available Funds will be at least sufficient to pay
the principal of and interest on the Notes issued under such Indenture when due
and all other amounts payable under the Indenture when due, and (b) a Parity
Percentage of at least a certain specified percentage as set forth in the
related Prospectus Supplement will be maintained at all times, including without
limitation each Distribution Date.
"Cedel" means a professional depository incorporated under the laws of
Luxembourg which holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Cedel Participants through electronic book-entry.
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"Cedel Participants" means recognized financial institutions around the
world that utilize the services of Cedel, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the underwriters of any Series of Notes.
"Claims Rates" means those rates determined by dividing total default
claims since the previous September 30 by the total original principal amount of
the Guarantee Agency's guaranteed loans in repayment on such September 30.
"Closing Date" means, for any Series, the date on which such Series is
issued, which will be specified in the related Prospectus Supplement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Fund" means the Fund maintained by an Indenture Trustee
into which all collections on the Financed Student Loans are to be deposited.
"Collection Period" means, unless otherwise provided in a related
Prospectus Supplement, each period of three calendar months from and including
the date next following the end of the preceding Collection Period.
"Consolidation Loan Fees" means, as to any Collection Period, an amount
equal to the per annum rate identified in the related Prospectus Supplement of
the outstanding principal balances of and accrued interest on the Consolidation
Loans owned by the related Trust Estate as of the last day of such Collection
Period.
"Cooperative" means Societe Cooperative, a Belgian cooperative
corporation.
"Costs of Issuance" shall mean all items of expense allocable to
establishment of the Program and the authorization, issuance, sale and delivery
of the related Notes, or any obligations of the Issuer the proceeds of which are
used in whole or in any part, directly or indirectly through the Eligible Lender
Trustee, to acquire Financed Student Loans from the related Indenture, including
without limitation costs of planning and feasibility studies, costs of obtaining
governmental registrations, qualifications and regulatory rulings and approvals,
costs of financial advisory, legal, accounting and management services and
services of other consultants and professionals and related charges, fees and
disbursements, costs of preparation and reproduction of documents, costs of
preparation and printing of any offering document relating to the related Notes,
advertising and printing costs, filing and recording fees, any initial fees and
charges of the related Indenture Trustee, Eligible Lender Trustee, Calculation
Agent, any auction agent, any broker-dealer, market agent and any Authenticating
Agent, Rating Agency fees, costs of preparation, execution, transportation and
safekeeping of the related Notes, and any other costs, charges or fees in
connection with the issuance of the related Notes.
"Counterparty Exchange Payment" means a payment due to the Issuer from
an Exchange Counterparty pursuant to the applicable Exchange Agreement.
"Credit Enhancement" means the credit support available to one or more
Series of Notes, including Reserve Funds, overcollateralization, letters of
credit, liquidity facilities, interest rate cap agreements, interest rate swap
agreements, currency swap agreements, insurance policies, spread accounts, one
or more Series of subordinate securities, derivative products or other forms of
credit enhancement including but not limited to third party guarantees.
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"Cut-off Date" means, for any Series, the date specified in the related
Prospectus Supplement as the date on or after which principal and interest
payments on the related Financed Student Loans are to be included in the related
Trust Estate.
"Deferment Period" means certain periods when no principal repayments
need be made on certain Financed Student Loans.
"Definitive Notes" means Notes to be issued in fully registered,
certificated form to Note Owners or their nominees rather than to DTC or its
nominee.
"Department of Education" means the U.S. Department of Education.
"Depositories" means DTC, Cedel and Euroclear, collectively.
"Depository" means DTC or any successor or other Clearing Agency
selected by the Issuer as depository for any Book-Entry Certificates.
"Directing Notes" means those Notes entitled to direct the action of
their related Indenture Trustee under certain specified conditions.
"Distribution Date" means with respect to any Series of Notes, the
Distribution Date set forth in related Prospectus Supplement.
"DTC" means The Depository Trust Company.
"DTC Participants" means the participating organizations that utilize
the services of DTC, including securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
"Eligible Investments" means one or more of the investments specified
in an Indenture in which moneys in the related Funds and Accounts and certain
other accounts are permitted to be invested.
"Eligible Lender Trust Agreement" means with respect to an issuance of
Notes, the Eligible Lender Trust Agreement or Eligible Lender Trust Agreements
set forth in the related Prospectus Supplement.
"Eligible Lender Trustee" means with respect to an issuance of Notes,
the one or more eligible lender trustees so specified in the related Prospectus
Supplement serving as eligible lender trustee for the Issuer.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Euroclear Operator" means Morgan Guaranty Trust Company of New York,
Brussels, Belgium office.
"Euroclear Participants" means the participating organizations that
utilize the services of Euroclear, including banks, securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any Series of Notes.
"Event of Default" shall have the meaning set forth in the related
Indenture.
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"Excess Surplus Account" means the Account so designated and
established in the Collection Fund pursuant to the related Indenture.
"Exchange Agreement" means an interest rate exchange agreement between
the Issuer and an Exchange Counterparty, as originally executed and as amended
or supplemented, or other interest rate hedge agreement between the Issuer and
an Exchange Counterparty, as originally executed and as amended or supplemented.
"Exchange Counterparty" means any Person with whom the Issuer shall,
from time to time, enter into an Exchange Agreement.
"Exchange Counterparty Guarantee" means a guarantee in favor of the
Issuer given in connection with the execution and delivery of an Exchange
Agreement hereunder.
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of (i) the amount of interest accrued, net of amounts required
to be paid to the Department of Education or to be repaid to Guarantee Agencies
(including for the purpose a guarantor or escrow fund under a Private Loan
Program), with respect to the Financed Student Loans in the related Trust Estate
for such Collection Period (whether or not such interest is actually paid), (ii)
all Interest Subsidy Payments and Special Allowance Payments pursuant to claims
submitted for such Collection Period (whether or not actually received), net of
amounts required to be paid to the Department of Education, with respect to
Financed FFELP Loans in the related Trust Estate, to the extent not included in
(i) above, and (iii) Investment Earnings on the amounts on deposit allocable to
the related Trust Estate with respect to such Collection Period prior to the
related Distribution Date.
"FFEL Program" means the Federal Family Education Loan Program
established by the Higher Education Act pursuant to which loans are made to
borrowers pursuant to certain guidelines, and the repayment of such loans is
guaranteed by a Guarantee Agency, and any predecessor or successor program.
"FFELP Loans" means student loans made under the FFEL Program.
"Financed" in the case of Financed Student Loans shall refer to Student
Loans made or acquired directly, or indirectly through the Eligible Lender
Trustee, with the proceeds of the Notes or moneys in a Pre-Funding Fund or a
Collection Account, or upon the exchange of Financed Student Loans pursuant to
an Indenture, and included in the related Student Loan Portfolio Fund; and to
"Finance" or "Financing" in the case of Student Loans means to make or acquire
or the making or acquisition of, respectively, directly, or indirectly through
the Eligible Lender Trustee, Financed Student Loans with such moneys or upon any
such exchange or transfer.
"Financed FFELP Loans" means those FFELP Loans that secure one or more
Series of Notes. "Financed Private Loans" means those Private Loans that secure
one or more Series of Notes.
"Financed Student Loans" means Financed FFELP Loans and Financed
Private Loans, as applicable.
"Fitch" means Fitch IBCA, Inc.
"Forbearance Period" means a period of time during which a borrower, in
case of temporary financial hardship, may defer the repayment of principal.
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"Formula Rate" means, with respect to any Series of Notes, the lesser
of (a) the rate established pursuant to an index or market (LIBOR, T-Bill or
Auction), and (b) a cap, if any, all as specified in the related Prospectus
Supplement for such Series.
"Foundation" means the Thomas L. Conlan Education Foundation (formerly
known as The Student Loan Funding Corporation), an Ohio nonprofit corporation.
"Fund" shall mean any of the Funds established and maintained by an
Indenture Trustee under an Indenture.
"Grace Period" means a period of time, following a borrower's ceasing
to pursue at least a half-time course of study and prior to the commencement of
a repayment period, during which principal need not be paid on certain Financed
Student Loans.
"Guarantee Agency" means a state agency or private nonprofit
corporation which guarantees certain payments of principal and interest on
Financed FFELP Loans pursuant to a Guarantee Agreement.
"Guarantee Agreements" means agreements between a Guarantee Agency and
a Lender.
"Guarantee Fund" means cash and reserves used for the purchase of
defaulted student loans by a Guarantee Agency.
"Guarantee Payments" means those payments made by a Guarantee Agency
with respect to a Financed Student Loan.
"Higher Education Act" means the Title IV, Part B of the Higher
Education Act of 1965, as amended, together with any rules and regulation
promulgated by the Department of Education or the Guarantee Agencies.
"Indenture" means an indenture between the Issuer, one or more Eligible
Lender Trustee and an Indenture Trustee, pursuant to which one or more Series of
Notes are issued, as such indenture may be supplemented or amended from time to
time.
"Indenture Trustee" means the trustee under the related Indenture.
"Index Maturity" means, with respect to a LIBOR Rate Series of Notes,
the offered rate for deposits having a maturity equal to the related Interest
Accrual Period.
"Indirect Participants" means organizations which have indirect access
to a Clearing Agency, such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
"Initial Pool Balance" for any issuance of Notes generally will mean
the Pool Balance of the Financed Student Loans allocable to such Notes as of the
Cut-off Date.
"Insolvency Laws" mean the United States Bankruptcy Code or other
insolvency laws, as the case may be.
"Interest Accrual Period" means with respect to any Series of Notes,
the period of time in which interest may accrue, as set forth in the related
Prospectus Supplement.
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"Interest Determination Date" means with respect to any Series of
Notes, the period set forth in the related Prospectus Supplement.
"Interest Shortfall" means, with respect to any Distribution Date for a
Series of Notes, the excess of (i) the Noteholders' Interest Distribution Amount
for such Series on the preceding Distribution Date over (ii) the amount of
interest actually distributed to the Series Noteholders on such preceding
Distribution Date, plus interest on the amount of such excess interest due to
the Series Noteholders, to the extent permitted by law, at the appropriate
Series Interest Rate from such preceding Distribution Date to the current
Distribution Date.
"Interest Subsidy Agreement" means, with respect to any Financed FFELP
Loans, the agreement between a Guarantee Agency and the Secretary of Education
pursuant to Section 428(b) of the Higher Education Act, as amended, which
entitles the holders of eligible loans guaranteed by the Guarantee Agency to
receive Interest Subsidy Payments from the Secretary of Education on behalf of
certain students while the student is in school, during a six to twelve month
Grace Period after the student leaves school, and during certain Deferment
Periods, subject to the holders' compliance with all requirements of the Higher
Education Act.
"Interest Subsidy Payments" are interest payments paid with respect to
an eligible loan during the period prior to the time that the loan enters
repayment and during Grace and Deferment Periods.
"Investment Earnings" means, with respect to any Distribution Date, the
investment earnings (net of losses and investment expenses) on amounts on
deposit in an Indenture's Funds and Accounts to be deposited into the Collection
Fund on or prior to such Distribution Date pursuant hereto.
"Issuer" means Student Loan Funding LLC, a Delaware limited liability
company.
"Issuer Exchange Payment" means a payment due to an Exchange
Counterparty from the Issuer pursuant to the applicable Exchange Agreement
(including, but not limited to, payments in respect of any early termination
date, as defined in the applicable Exchange Agreement).
"Legal Final Maturity" means the Distribution Date on which the
aggregate outstanding principal amount of each Series of Notes will be payable
in full, as identified in the related Prospectus Supplement with respect to each
Series of Notes.
"Lender" means any "eligible lender" as defined in the Higher Education
Act.
"LIBOR" means the rate of interest per annum equal to the rate per
annum at which U.S. dollar deposits having a particular maturity are offered to
prime banks in the London interbank market which appear on Telerate Page 5 as of
approximately 11:00 a.m., Greenwich Mean Time, on the Interest Determination
Date. If such rate does not appear on Telerate Page 5, the rate for that day
will be determined on the basis of the Reuters Screen LIBOR Page. If at least
two such quotations appear, LIBOR will be the arithmetic mean (rounded to the
nearest one-hundredth of a percent (.01%)) of such offered rates. If fewer than
two such quotations appear, LIBOR with respect to such Interest Accrual Period
will be determined at approximately 11:00 A.M., London time, on such Interest
Determination Date on the basis of the rate at which deposits in United States
dollars having such particular a maturity are offered to prime banks in the
London interbank market by four major banks in the London interbank market
selected by the Calculation Agent and in a principal amount of not less than
U.S. $1,000,000 and that is representative for a single transaction in such
market at such time. The Calculation Agent will request the principal London
office of each of such banks to provide a quotation of its rate. If at least two
quotations are provided, LIBOR will be the arithmetic mean (rounded to the
nearest one-hundredth of a percent (.01%)). If fewer than two quotations
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are provided, LIBOR with respect to such Interest Accrual Period will be the
arithmetic mean (rounded to the nearest one-hundredth of a percent (.01%)) of
the rates quoted at approximately 11:00 A.M., New York City time on such
Interest Determination Date by three major banks in New York, New York selected
by the Calculation Agent for loans in United States dollars to leading European
banks having a particular maturity and in a principal amount equal to an amount
of not less than U.S. $1,000,000 and that is representative for a single
transaction in such market at such time; provided, however, that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, LIBOR in
effect for the applicable Interest Accrual Period will be LIBOR in effect for
the previous Interest Accrual Period.
"LIBOR Rate Notes" means any Series of Notes the Series Interest Rate
of which is based upon LIBOR.
"Lock-In Period" means the period of days preceding any Distribution
Date during which the Series Interest Rate in effect on the first day of such
period will remain in effect until the end of the Accrual Period related to such
Distribution Date.
"London Banking Day" means a business day on which dealings in deposits
in United States dollars are transacted in the London interbank market.
"Maximum Auction Rate" means the maximum auction rate for a Series of
Auction Rate Notes as set forth in the related Prospectus Supplement.
"Net Loan Rate" means, with respect to the any Interest Accrual Period
for a Series of Notes, the annualized percentage rate determined by multiplying
(a) the ratio of 365 (or 366 in the case of a leap year) to the actual number of
days in such Interest Accrual Period, and (b) the ratio of (i) Expected Interest
Collections for the related Collection Period less Program Operating Expenses
with respect to such Collection Period, to (ii) the Pool Balance as of the first
day of such Collection Period. In making the determination of the Net Loan Rate
applicable to such Series of Notes, the Indenture Trustee shall take into
account as an increase to such Net Loan Rate the receipt of any Counterparty
Exchange Payments relating to such Series, expressed as a percentage per annum
of the Series.
"New Borrower" means a borrower who, on the date the promissory note
was signed, did not have an outstanding balance on a previous loan which was
made, insured or guaranteed under the FFEL Program.
"Nonresidents" means holders who are nonresident alien individuals,
foreign corporations, foreign partnerships or certain foreign estates and
trusts.
"Noteholder" means a holder of a Note.
"Noteholders' Interest Distribution Amount" means, with respect to any
Distribution Date for a Series of Notes, the sum of (i) the amount of interest
accrued at the respective Series Interest Rate for the related Interest Accrual
Period on the aggregate outstanding principal balance of such Series on the
preceding Distribution Date after giving effect to all principal distributions
to holders of such Series on such preceding Distribution Date (or, in the case
of the first Distribution Date, the applicable Closing Date for such Series) and
(ii) Interest Shortfall for such Distribution Date; provided that the
Noteholders' Interest Distribution Amount for a Series will not include any
Carryover Interest on such Series.
"Noteholders' Principal Distribution Amount" means, with respect to any
Distribution Date for a Series of Notes, the Principal Distribution Amount for
such Series for such Distribution Date plus the Principal Shortfall for such
Series as of the close of the preceding Distribution Date; provided that the
Noteholders' Principal Distribution Amount for a Series will not exceed the
outstanding principal balance of such Series. In addition, on the Legal Final
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Maturity of such Series, the principal required to be distributed to the Series
Noteholders will include the amount required to reduce the outstanding principal
balance of such Series to zero.
"Note Owner" means the registered owner of a Note.
"Notes" means a manually executed written instrument evidencing the
borrower's promise to repay a stated sum of money, plus interest, to the
Noteholder by a specific date.
"Outstanding" when used with respect to Notes shall refer to any Notes
executed, authenticated, issued and delivered under an Indenture other than
Notes of the transfer or exchange of or in lieu of which other Notes shall be
have been authenticated and delivered by the related Indenture Trustee pursuant
to such Indenture and other than Notes which at the time are deemed not to be
Outstanding under such Indenture.
"Parity Percentage Payment" means those principal amounts required to
be paid on the Notes until a certain Parity Percentage is achieved, as specified
in the Prospectus Supplement.
"Parity Percentage" means with respect to any Series of Notes, the
percentage set forth in the related Prospectus Supplement, which percentage for
any Distribution Date is determined by dividing (i) the applicable Pool Balance
as of the end of the preceding Collection Period, plus accrued interest thereon,
accrued Special Allowance Payments and Interest Subsidy Payments as of the end
of such Collection Period and all amounts allocable to the Notes on deposit
(including accrued interest thereon) in the Pre-Funding Fund, if any, the
Collection Fund and the Reserve Fund, if any, as of the end of the Collection
Period (adjusted for payments made on such Distribution Date), by (ii) the sum
of the principal balance of the Notes issued under the related Indenture (after
payment thereon on such Distribution Date), accrued interest thereon, and
accrued and unpaid Program Operating Expenses relating to such Notes.
"Participants" means the participating organizations that utilize the
services of the Depository.
"Person" or words importing persons means firms, associations,
partnerships, joint ventures, societies, estates, trusts, corporations, public
or governmental bodies, other legal entities and natural persons.
"Plan" means any employee benefit plan or retirement arrangement,
including individual retirement accounts and annuities, Keogh plans, and
collective investment funds in which such plans, accounts, annuities or
arrangements are invested, that are described in or subject to the Plan Asset
Regulations, ERISA, or corresponding provisions of the Code.
"Plan Asset Regulations" means the Department of Labor regulations set
forth in 29 C.F.R. Section 2510.3-101, as amended from time to time.
"Plan Investors" are persons acting on behalf of a Plan, or persons
using the assets of a Plan.
"PLUS Loans" or "Plus Loans" are loans made only to borrowers who are
parents (and, under certain circumstances, spouses of remarried parents) of
dependent undergraduate students.
"Pool Balance" means, with respect to any Trust Estate, at any time, an
amount equal to the aggregate principal balance of the Financed Student Loans
(including accrued interest thereon capitalized through such date) allocable to
such Trust Estate as of the end of the Collection Period, after giving effect to
the following, without duplication: (i) all payments in respect of principal
received by the related Indenture Trustee during such Collection
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Period from or on behalf of borrowers and Guarantee Agencies (including for this
purpose any guarantors or escrow fund under a Private Loan Program) and, with
respect to certain payments on certain Financed Student Loans, the Secretary and
(ii) the principal portion of all Purchase Amounts received by such Indenture
Trustee for such Collection Period.
"Pre-Funding Fund" means a Fund established under an Indenture for the
purpose of enabling the Issuer to Finance Student Loans during the Pre-Funding
Period.
"Pre-Funding Fund Deposit" means for any issuance of Notes, the amount
specified in the related Prospectus Supplement.
"Pre-Funding Period" means any period specified as such in a Prospectus
Supplement during which the Issuer may acquire additional Financed Student Loans
using funds on deposit in the related Pre-Funding Fund.
"Principal Distribution Amount" means the principal amount on a Series
of Notes calculated to be distributed on a Distribution Date, as set forth in
the related Prospectus Supplement.
"Principal Factor" means the seven digit number that, when multiplied
by the initial principal amount of a Note, produces its outstanding principal
balance.
"Principal Shortfall" means, as of the close of any Distribution Date
for a Series of Notes, the excess of (i) the Principal Distribution Amount for
such Series on such Distribution Date over (ii) the amount of principal actually
distributed to the Series Noteholders on such Distribution Date.
"Private Loans" means loans that are originated under Private Loan
Programs.
"Private Loan Programs" mean one or more of the Private Loan Programs
that are identified in the related Prospectus Supplement.
"Program" means the Issuer's program of Financing the Financed Student
Loans pursuant to an Indenture.
"Program Expense Requirement" means, with respect to an issuance of
Notes and as of any date of calculation, such amount as may then be necessary to
be accumulated in the Expense Account for payment, in accordance with the
related Indenture, of the Program Operating Expenses due or to become due during
the 3 months beginning on the first day of the next succeeding calendar month as
provided in such Indenture.
"Program Operating Expenses" means all items of expense allocable to
the operation of the Program, including (i) fees and expenses of and any other
amounts payable to the Indenture Trustee and the Authenticating Agent, if any,
and any fees charged by a Depository, (ii) the fees and expenses of and any
other amounts payable to the Calculation Agent, any auction agent,
broker-dealers, market agent or other agent in connection with any Notes issued
under the Indenture, (iii) fees and expenses of and any other amounts payable to
the Servicers, the Eligible Lender Trustee and any bank providing lock-box or
similar services in connection with Financed Student Loans and Servicing
Development Fees, (iv) the fees and expenses incurred by or on behalf of the
Issuer in the administration of the Program under the Higher Education Act, a
Guarantee Agreement (including for this purpose any agreement with a guarantor
or relating to an escrow fund under a Private Loan Program) and any other
agreement or legal requirement affecting the administration of the Program,
costs of legal, accounting, auditing, management, consulting, banking and
financial advisory services and expenses, costs of salaries, supplies,
utilities, mailing, labor, materials, office rent, maintenance, furnishings,
equipment, machinery, apparatus and insurance premiums, Costs
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of Issuance not paid from proceeds of Notes, and (v) and other reasonable and
proper expenses, including both operating expenses and capital expenditures
incurred or to be incurred in connection with the operation of the Program and,
with respect to item (iv) above, any other similar program of the Issuer.
"Purchase Agreements" means the Student Loan Purchase Agreements
entered into between the Issuer and Sellers, for purposes of the Program (in
whole or in part), together with other similar Student Loan Purchase Agreements
entered into from time to time by the Issuer and Sellers for purposes of the
Program (in whole or in part), in each case as originally executed and as from
time to time amended or supplemented in accordance with the terms thereof and
with the related Indenture, and in each case only to the extent that such
Purchase Agreement covers Financed Student Loans.
"Purchase Amount" means, as of the end of any Collection Period, the
principal amount of a Financed Student Loan (including any interest required to
be capitalized through such date), together with accrued and unpaid interest
thereon.
"Rating Agency" means a nationally recognized statistical rating
organization identified in the related Prospectus Supplement that has been
requested by the Issuer to provide a credit rating with respect to one or more
Series of Notes as of the Closing Date for such Series.
"Realized Loss" means, for each Financed Student Loan submitted to a
Guarantee Agency for a Guarantee Payment or a Private Loan Program, the excess,
if any of (i) the unpaid principal balance of such Financed Student Loan on the
date it was first submitted to a Guarantee Agency for a Guarantee or a Private
Loan Program over (ii) all amounts received on or with respect to principal on
such Financed Student Loan up through the earlier to occur of (A) the date a
related Guarantee Payment or Private Loan Program payment is made or (B) the
last day of the Collection Period occurring 12 months after the date the claim
for such Guarantee Payment or Private Loan Program payment is first denied.
"Record Date" means, for any Distribution Date, the date on which the
identities of the Noteholders entitled to distributions on the related Notes on
such Distribution Date are fixed, as specified in the related Prospectus
Supplement.
"Reference Bank" means four leading banks, selected by the Calculation
Agent, or by the Indenture Trustee, as applicable, (i) engaged in transactions
in Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or the
Issuer and (iii) having an established place of business in London.
"Registration Statement" means a registration statement (together with
all amendments and exhibits thereto) filed by the Issuer with the SEC under the
Securities Act of 1933, as amended, with respect to the Notes offered hereby.
"Relief Act" means the Taxpayer Relief Act of 1997, as amended.
"Repayment Phase" means, with respect to any Financed Student Loan,
that period of time during which principal is repayable.
"Repeat Borrower" means an borrower who, on the date the promissory
note evidencing the loan was signed, had an outstanding balance on a previous
loan made, insured or guaranteed under the FFEL Program.
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"Reserve Fund" means a Fund established with the related Indenture
Trustee for a Series, the balance of which may be used to fund certain payments
by the related Trust Estate.
"Resources" means Student Loan Funding Resources, Inc., an Ohio
corporation.
"Reuters Screen LIBOR Page" means the display designated as page
"LIBOR" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBOR page for the purposes of displaying London interbank offered
rates of major banks).
"Seller" means a Lender or other party from which the Issuer is
purchasing or has purchased or agreed to purchase Financed Student Loans
pursuant to a Purchase Agreement between the Issuer and such party.
"Senior Exchange Agreement" means any Exchange Agreement on a parity
with Senior Notes issued under an Indenture.
"Senior Issuer Exchange Payment" means any Issuer Exchange payment, the
priority of payment of which is on a parity with Senior Notes issued under an
Indenture.
"Senior Notes" means any Series of Notes issued on a parity senior to
any Subordinate Notes issued under an Indenture.
"Serial Loan" means a loan made to the same borrower under the same
loan program and guaranteed by the same Guarantee Agency (or a successor), with
respect to FFELP Loans.
"Series" means any series of Notes as specified in the related
Prospectus Supplement.
"Series Account" means an Account established by the Indenture, the use
of which is related primarily to a specific Series of Notes.
"Series Asset Pool" means, with respect to a Series of Notes, the
related Series Loan Pool and the aggregate balance on deposit in the Indenture
Funds and Accounts allocable to the Notes issued in conjunction with such
Series.
"Series Interest Amount" means the interest payable on a Series of
Notes on any Distribution Date.
"Series Interest Rate" means with respect to any Series of Notes the
annual rate at which interest accrues on the Notes of such Series, as specified
in the related Prospectus Supplement.
"Series Loan Pool" means Financed Student Loans purchased with the
proceeds of the particular Series of Notes designated as relating to such Series
Loan Pool.
"Series Program Operating Expenses" shall mean the Program Operating
Expenses related to a Series of Notes.
"Servicer" means any servicer of Financed Student Loans, as specified
in a related Prospectus Supplement.
"Servicing Fee" means the fee payable to the Servicers in respect of a
Series, as specified in the related Prospectus Supplement.
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"Servicing Development Fees" mean costs, fees and expenses relating to
the development of electronic data information or systems in connection with the
servicing of Financed Student Loans, the establishment of a servicing center for
the servicing of Financed Student Loans, or reserves for current or future
servicing fees for Financed Student Loans; provided, however, that Servicing
Development Fees are payable only with the consent of the Rating Agencies then
rating the related Notes Outstanding.
"SLS Loans" are loans that were limited to (a) graduate or professional
students, (b) independent undergraduate students, and (c) under certain
circumstances, dependent undergraduate students, if such students' parents were
unable to obtain a Plus Loan and were also unable to provide such students'
expected family contribution.
"Special Allowance Payments" means payments designated as such made by
the Department of Education with respect to certain FFELP Loans pursuant to
Section 438 of the Higher Education Act.
"Specified Reserve Fund Balance" means with respect to any issuance of
Notes, the required amount of the related Reserve Fund, if any, set forth in the
related Prospectus Supplement.
"Spread Guaranty Agreement" means an agreement between the Issuer and
any Person providing a hedge with respect to the minimum difference between or
among the yield or yields on certain Eligible Investments and the interest rate
per annum on an issuance or Series of Notes.
"Stafford Loans" means loans that are generally made only to student
borrowers who meet certain needs tests, as set forth in the Higher Education
Act.
"Subordinate Exchange Agreement" means an Exchange Agreement on a
parity with Subordinate Notes issued under an Indenture.
"Subordinate Issuer Exchange Payment" means any Issuer Exchange
payment, the priority of payment of which is on a parity with Subordinate Notes
issued under an Indenture.
"Subordinate Notes" means any Series of Notes issued on a parity
subordinate to Senior Notes issued under an Indenture.
"Supplemental Indenture" means any supplement to or amendment of an
Indenture entered into by the Issuer, each related Eligible Lender Trustee and
the related Indenture Trustee pursuant to and in accordance with the provisions
of such Indenture.
"Surety Bond" means a bond that insures the timely payment of all
interest and ultimate payment of all principal due on a Series of Notes;
provided, however, that a Surety Bond will not insure payment of any Carryover
Interest.
"T-Bill Rate" means, on any day, the weighted average per annum
discount rate (expressed on a bond equivalent basis and applied on a daily
basis) for 91-day Treasury Bills sold at the most recent 91-day Treasury Bill
auction prior to such date, as reported by the U.S. Department of the Treasury.
In the event that the results of the auctions of 91-day Treasury Bills cease to
be reported as provided above, or that no such auctions is held in a particular
week, then the T-Bill Rate in effect as a result of the last such publication or
report will remain in effect until such time, if any, as the results of auctions
of 91-day Treasury Bills shall again be reported or such an auction is held, as
the case may be. The T-Bill Rate will be subject to a Lock-in Period of six
Business Days.
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"T-Bill Rate Notes" means any Series of Notes the Series Interest Rate
of which is based on the T-Bill Rate.
"Telerate Page 5" means the display page so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Terms and Conditions" means the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System.
"TIN" means taxpayer identification number assigned by the IRS.
"Trust Estate" means a trust estate established under an Indenture to
secure the issuance of one or more Series of Notes.
"Underwriters" means any firm that agrees to purchase one or more
Series of Notes of an issue from the Issuer.
"Underwriting Agreement" means an agreement among the Issuer and the
Underwriter(s) for purchase of the Notes of a Series.
"U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof, (iii) an estate the income of which
is includable in gross income for United States tax purposes, regardless of its
source, or (iv) a trust if a court within the United States is able to exercise
primary jurisdiction over the administration of the trust and one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust.
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APPENDIX B
GLOBAL CLEARANCE. SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Notes will be available
only in book-entry form (the "Global Securities"). Investors in the Global
Securities may hold such Global Securities through The Depository Trust Company
("DTC") or, if applicable, 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 nominal rules and operating procedures and in accordance with
conventional eurobond practice.
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 depositories of Cedel and Euroclear and as
participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S.
withholding taxes, provided that 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 & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
respective depositories, which in turn will hold such positions in accounts as
participants of DTC.
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 "lockup" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
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SECONDARY MARKET TRADING
Since the purchase 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 issues in same-day funds.
Trading between Cedel and/or Euroclear participants. Secondary market
trading between Cedel participants and/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, the purchaser
will send instructions to Cedel or Euroclear through a participant at least one
business day prior to settlement. Cedel or Euroclear will instruct the
respective depositary 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 depository 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 system the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement. either from cash on hand or exiting 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, participants can elect not to preposition funds and allow that credit
line to be drawn upon to 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 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 and Euroclear participants may
employ their customary procedures for transactions in which Global Securities
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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 participant at least one business day prior to settlement.
In this case, Cedel or Euroclear will instruct the respective depositary to
deliver the 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 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 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 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:
1. 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,
2. 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
3. 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.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the offering of $1,000,000 of the Student Loan Asset Backed Notes being
registered under this Registration Statement, other than underwriting discounts
and commission:
SEC Registration............................$ 295.00
Printing and Engraving...............................*
Legal Fees and Expenses..............................*
Accounting Fees and Expenses.........................*
Trustee Fees and Expenses............................*
Blue Sky Fees and Expenses...........................*
Rating Agency Fees...................................*
Miscellaneous........................................*
TOTAL...............................$
* To be provided by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Limited Liability Company Agreement ("LLC Agreement")
implements the provisions of the Delaware Limited Liability Company Act
("DLLCA"), which provide for the limitation of liability of the Registrant's
Members, Manager and members of its Management Committee ("Management Committee
Members") in certain circumstances, which may include liabilities under the
Securities Act of 1933. The Registrant's LLC Agreement limits the liability of
its Members, Manager and members of its Management Committee to the fullest
extent permitted under the DLLCA.
The Registrant's LLC Agreement provides for the mandatory indemnification,
to the fullest extent permitted under the DLLCA and to the extent of the
Registrant's assets, of each of the Registrant's present and former Management
Committee Members against any liabilities, including liabilities under the
Securities Act of 1933, incurred by reason of the fact that such person is or
was a Management Committee Member of the Registrant, except where such liability
arises out of a breach by such Management Committee Member of the Registrant's
LLC Agreement or out of any acts or omissions by such Management Committee
Member of that constitute fraud, willful misconduct or breach of fiduciary duty
to the Registrant. The Registrant's LLC Agreement also provides for the
mandatory indemnification, to the fullest extent permitted under the DLLCA, of
each of the Registrant's present and former Managers against any liabilities,
including liabilities under the Securities Act of 1933, incurred by reason of
the fact that such person is or was a Manager of the Registrant. The
Registrant's LLC Agreement provides for the discretionary indemnification to the
same extent as the Manager of any other officer or agent of the Registrant.
The Registrant has entered into an agreement with respect to its two
independent Management Committee Members in which the Registrant has agreed that
such Management Committee Members or any of their affiliates shall not be liable
to any party, except in the cases of bad faith or negligence, in connection with
any transaction of
II-1
<PAGE> 139
the Registrant. Furthermore, pursuant to such agreement, the Registrant has
agreed to indemnify and hold harmless such Management Committee Members and
their affiliates for any liabilities, including liabilities under the Securities
Act of 1933, incurred in good faith and without negligence in connection with
any of the transaction of the Registrant.
Reference is made to the Underwriting Agreement filed as an exhibit hereto
for provisions relating to the indemnification of Management Committee Members,
the Manager and other officers and controlling persons of the Registrant against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
Student Loan Funding Resources, Inc. carries an insurance policy providing
liability insurance for any liability that its directors or officers or the
Members, Management Committee Members, Managers or officers of the Registrant
may incur in their capacities as such.
ITEM 16. EXHIBITS.
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
1.1 Form of Underwriting Agreement*
3.1 Articles of Organization of Registrant
3.2 Operating Agreement of Registrant
3.3 Form of Eligible Lender Trust Agreement among the Registrant and
the Eligible Lender Trustee*
4.1 Form of Indenture among the Registrant, the Eligible Lender
Trustee and the Indenture Trustee*
4.2 Form of Administration Agreement among the Administrator and the
Issuer*
5.1 Opinion of Thompson Hine & Flory LLP*
8.1 Opinion of Thompson Hine & Flory LLP with respect to tax matters
23.1 Consent of Thompson Hine & Flory LLP is contained in their
opinions filed as Exhibits 5.1 and 8.1*
24.1 Power of Attorney (contained on the signature page hereof)*
25.1 T-1 Statement of Eligibility of Trustee under the Trust Indenture
Act of 1939*
99.1 Form of Auction Procedures Appendices
99.2 Form of Report to be Filed as Form 8-K to be furnished to
Noteholders*
* To be filed by amendment
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
II-2
<PAGE> 140
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change of such information in the
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in the post-effective
amendment by those paragraphs is contained in periodic reports filed by
the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are included by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering;
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Securities and Exchange Commission under
Section 305(b)(2) of the Act.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements (including, without limitation, the security rating requirement at
time of sale) for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cincinnati, State of Ohio on September 25, 1998.
STUDENT LOAN FUNDING LLC
(Registrant)
By: /S/ THOMAS L. CONLAN, JR.
--------------------------------
Thomas L. Conlan, Jr., President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Thomas
L. Conlan, Jr., and Brian A. Ross, as that person's true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/S/ THOMAS L. CONLAN, JR. Management Committee member, September 22, 1998
- ------------------------- Chief Executive
Thomas L. Conlan, Jr. Officer and President
(Principal Executive Officer)
/S/ BRIAN A. ROSS Management Committee member and September 22, 1998
- ----------------- Senior Vice President and Manager
Brian A. Ross (Principal Financial Officer
and Principal Accounting Officer)
</TABLE>
II-4
<PAGE> 142
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/S/ CHRISTOPHER P. CHAMPMAN Management Committee member September 22, 1998
- ---------------------------
Christopher P. Chapman
/S/ MARK A. FERRUCCI Management Committee member September 23, 1998
- --------------------
Mark A. Ferrucci
/S/ KIM LUTTHANS Management Committee member September 23, 1998
- ----------------
Kim Lutthans
</TABLE>
II-5
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF FORMATION
OF
STUDENT LOAN FUNDING LLC
This Certificate of Formation is being executed by the undersigned for
the purpose of forming a limited liability company pursuant to the Delaware
Limited Liability Act.
1. The name of the limited liability company is Student Loan
Funding LLC.
2. The address of the registered office and the registered agent
of the limited liability company in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered
agent of the limited liability company is The Corporation
Trust Company.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Formation on this 20th day of May, 1998.
/s/ CATHRYN D. GRIFFIN
-------------------------------------
Cathryn D. Griffin, Authorized Person
<PAGE> 1
Exhibit 3.2
LIMITED LIABILITY COMPANY AGREEMENT
(ALSO REFERRED TO AS THE "OPERATING AGREEMENT")
OF
STUDENT LOAN FUNDING LLC,
A DELAWARE LIMITED LIABILITY COMPANY
EFFECTIVE AS OF MAY 28, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I DEFINITIONS.................................................................................1
ARTICLE II FORMATION OF COMPANY........................................................................5
2.01 Formation...................................................................................5
2.02 Name........................................................................................5
2.03 Principal Place of Business.................................................................5
2.04 Registered Office and Registered Agent......................................................5
2.05 Effective Date..............................................................................5
2.06 Term........................................................................................5
2.07 Foreign Qualification.......................................................................5
2.08 No State Law Partnership....................................................................5
ARTICLE III BUSINESS OF COMPANY.........................................................................6
3.01 Purpose of the Company......................................................................6
3.02 Change in Purpose of Company................................................................7
ARTICLE IV ACTIVITIES SEPARATE FROM
AFFILIATES AND MEMBERS......................................................................7
4.01 Affirmative Covenants.......................................................................7
4.02 Negative Covenants..........................................................................8
ARTICLE V MEMBERS.....................................................................................8
5.01 Members.....................................................................................8
5.02 Admission of Additional Members.............................................................8
ARTICLE VI CONTRIBUTIONS TO THE COMPANY AND
CAPITAL ACCOUNTS............................................................................9
6.01 Initial Capital Contributions; Interests....................................................9
6.02 Additional Contributions....................................................................9
6.03 Loans and Securities.......................................................................10
6.04 Withdrawal and Return of Contributions.....................................................10
6.05 Interest on Contributions..................................................................10
6.06 Capital Accounts...........................................................................10
6.07 Limitation on Member's Deficit Make-up.....................................................11
6.08 Member Liability...........................................................................11
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE VII ALLOCATIONS AND DISTRIBUTIONS..............................................................11
7.01 Allocation of Net Profits and Net Losses from Operations...................................11
7.02 Distributions..............................................................................11
7.03 Limitation Upon Distributions..............................................................12
7.04 Tax Elections..............................................................................12
7.05 Tax Matters Partner........................................................................12
ARTICLE VIII RIGHTS, DUTIES, POWERS AND COMPENSATION
OF THE MANAGEMENT COMMITTEE................................................................12
8.01 Management of Business.....................................................................12
8.02 Management Committee.......................................................................12
8.03 Matters Reserved Exclusively to Management Committee.......................................13
8.04 Rights and Powers of Management Committee..................................................14
8.05 Initial Officers...........................................................................16
8.06 Reimbursement of Management Committee......................................................16
8.07 Consideration of the Company's Creditors by the
Management Committee.......................................................................16
ARTICLE IX MANAGER AND OFFICERS.......................................................................16
9.01 Designation................................................................................16
9.02 Duties.....................................................................................16
9.03 Matters Reserved Exclusively to Members....................................................16
9.04 Delegation of Authority; Officers..........................................................17
9.05 Standard of Conduct........................................................................17
9.06 Compensation...............................................................................17
9.07 Removal....................................................................................17
9.08 Resignation................................................................................18
9.09 Indemnification............................................................................18
9.10 Employees..................................................................................18
ARTICLE X RIGHTS AND OBLIGATIONS OF MEMBERS..........................................................18
10.01 Limitation of Liability....................................................................18
10.02 Company Debt Liability.....................................................................18
10.03 List of Members............................................................................18
10.04 Company Books..............................................................................18
10.05 Priority and Return of Capital.............................................................19
10.06 Binding Authority..........................................................................19
10.07 Consideration of the Company's Creditors by Members........................................19
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE XI MEETINGS OF MEMBERS........................................................................19
11.01 Meetings...................................................................................19
11.02 Place of Meetings..........................................................................19
11.03 Notice of Meetings.........................................................................19
11.04 Meeting of all Members.....................................................................19
11.05 Record Date................................................................................20
11.06 Quorum.....................................................................................20
11.07 Manner of Acting...........................................................................20
11.08 Proxies....................................................................................20
11.09 Action by Members Without a Meeting........................................................20
11.10 Waiver of Notice...........................................................................21
11.11 Participation by Electronic Communication..................................................21
11.12 Representations and Warranties.............................................................21
11.13 Conflicts of Interest......................................................................21
ARTICLE XII TRANSFERABILITY............................................................................22
12.01 Transfers..................................................................................22
12.02 Conditions to Transfers....................................................................22
12.03 Substitution of a Member...................................................................23
12.04 Pledge or Other Encumbrance................................................................23
ARTICLE XIII DISSOLUTION, TERMINATION AND
LIQUIDATION OF THE COMPANY.................................................................23
13.01 Dissolution................................................................................23
13.02 Winding Up, Liquidation and Distribution of Assets.........................................24
13.03 Certificate of Cancellation................................................................25
13.04 Return of Contribution Nonrecourse to Other Members........................................25
13.05 Final Accounting...........................................................................26
ARTICLE XIV MISCELLANEOUS PROVISIONS...................................................................26
14.01 Notices....................................................................................26
14.02 Fiscal Year................................................................................26
14.03 Application of Delaware Law................................................................26
14.04 Waiver of Action for Partition.............................................................26
14.05 Amendments to Organizational Documents.....................................................26
14.06 Construction...............................................................................26
14.07 Headings and Pronouns......................................................................27
14.08 Waivers....................................................................................27
14.09 Successors and Assigns.....................................................................27
</TABLE>
(iii)
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C> <C>
14.10 Creditors..................................................................................27
14.11 Counterparts...............................................................................27
14.12 Enforcement of Independent Committee Members...............................................27
14.13 Indemnification of Members and Committee Members...........................................27
</TABLE>
Exhibit 2.01 - Certificate of Formation
Exhibit 5.01 - Members
Exhibit 6.01 - Capital Contributions and Membership Interests
Exhibit 8.02 - Members of the Management Committee
Exhibit 8.05 - Initial Officers
(iv)
<PAGE> 6
LIMITED LIABILITY COMPANY AGREEMENT
OF
STUDENT LOAN FUNDING LLC
THIS LIMITED LIABILITY COMPANY AGREEMENT (also referred to as
the "Operating Agreement") is made and entered as of the 28th day of May, 1998,
between Student Loan Funding Resources, Inc., an Ohio corporation, and SLF
Enterprises, Inc., an Ohio corporation, as the initial members of the Company
(individually, a "Member" and collectively, "Members").
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the following
meanings:
1.01 "ACT" shall mean the Delaware Limited Liability Company Act
contained in Title 6, Chapter 18 of the Delaware Code Annotated, as amended from
time to time.
1.02 "ADDITIONAL CAPITAL CONTRIBUTION" shall have the meaning set forth
in Section 6.02(a) hereof.
1.03 "ADDITIONAL MEMBER" shall mean any Person admitted as an
additional member of the Company pursuant to Section 5.02 of this Agreement.
1.04 "AFFILIATE" shall mean with respect to any Person, any other
Person which directly or indirectly, through one or more intermediaries,
controls, is controlled by or is under common control with such Person. SLFC,
Inc., an Ohio nonprofit corporation, The Student Loan Funding Corporation, an
Ohio nonprofit corporation ("Student Loan Funding"), and the Members shall be
deemed Affiliates for the purposes of this Agreement.
1.05 "AGREEMENT" shall mean this Limited Liability Company Agreement
(also referred to as the "Operating Agreement") of the Company as originally
executed and as amended, restated or supplemented from time to time.
1.06 "APPROVAL OF THE MEMBERS" shall mean the approval of the Members
(i) holding a Majority Interest in accordance with Section 11.07 hereof or (ii)
by unanimous written consent as set forth in Section 11.09 hereof.
1.07 "CAPITAL ACCOUNT" as of any given date shall mean the Capital
Contribution to the Company by a Member as adjusted up to the date in question
pursuant to Article VI.
<PAGE> 7
1.08 "CAPITAL CONTRIBUTION" shall mean any contribution to the capital
of the Company in cash or property by a Member whenever made.
1.09 "CERTIFICATE OF FORMATION" shall mean the Certificate of Formation
of Student Loan Funding LLC, as filed with the Secretary of State of the State
of Delaware, as the same may be amended and/or restated from time to time.
1.10 "CODE" shall mean the Internal Revenue Code of 1986, as amended,
or corresponding provisions of subsequent superseding federal revenue laws, as
each of the foregoing may be amended from time to time.
1.11 "COMMITTEE MEMBER" shall mean a member of the Management Committee
of the Company designated in accordance with Section 8.02 hereof. A Committee
Member shall be deemed a manager of the Company within the meaning of Section
18-101(10) of the Act.
1.12 "COMPANY" shall refer to Student Loan Funding LLC.
1.13 "CONTRIBUTING MEMBER" shall have the meaning set forth in
Section 6.02(b) hereof.
1.14 "CONTRIBUTION DATE" shall have the meaning set forth in
Section 6.02(a) hereof.
1.15 "DISSOLUTION EVENT" shall have the meaning set forth in
Section 13.01(a) hereof.
1.16 "ENTITY" shall mean any general partnership, limited partnership,
limited liability company, corporation, joint venture, trust, business trust,
cooperative or association or any foreign trust or foreign business
organization.
1.17 "INDEMNITEE" shall have the meaning set forth in
Section 8.04(h).
1.18 "INDEPENDENT COMMITTEE MEMBER" shall mean a Person who is not, and
has not been for the preceding five (5) years, a direct, indirect or beneficial
shareholder, director (other than a member of the Management Committee of the
Company), officer, employee, Affiliate, customer, creditor or supplier of the
Members, any Affiliate (including, but not limited to, the Company) or any
Affiliate of any Member. In accordance with Section 8.02 of this Agreement, the
Independent Committee Members shall be designated on Exhibit 8.02. An
Independent Committee Member shall be deemed a manager of the Company within the
meaning of Section 18-101(10) of the Act.
1.19 "INITIAL CAPITAL CONTRIBUTION" shall have the meaning set forth in
Section 6.01.
1.20 "INITIAL MEMBERS" shall mean Student Loan Funding Resources, Inc.
and SLF Enterprises, Inc.
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<PAGE> 8
1.21 "MAJORITY INTEREST" shall mean one or more of the Membership
Interests of the Members, which individually or taken together exceed 50% of the
aggregate of all Membership Interests.
1.22 "MANAGEMENT COMMITTEE" shall mean the committee described in
Section 8.02 hereof.
1.23 "MANAGER" shall mean the Person appointed as manager of the
Company pursuant to Section 9.01 hereof.
1.24 "MEMBERS" shall mean the Initial Members, Substitute Members and
Additional Members.
1.25 "MEMBERSHIP INTEREST" shall mean a Member's entire limited
liability company interest in the Company, including such Member's share of the
Net Profits and Net Losses of the Company and distributions of the Company's
assets pursuant to this Agreement and the Act, a Member's rights to participate
in the management or affairs of the Company, including rights to vote on,
consent to or otherwise participate in, any decision of the Members and such
other rights and privileges that the Member may enjoy by being a Member.
1.26 "NET PROFITS" and "NET LOSSES" shall mean for each taxable year of
the Company an amount equal to the Company's net taxable income or loss for such
year as determined for federal income tax purposes (including separately stated
items and the proceeds from the sale of all or any portion of the Company's
assets) in accordance with the accounting method and rules used by the Company
and in accordance with Section 703 of the Code.
1.27 "NON-CONTRIBUTING MEMBER" shall have the meaning set forth in
Section 6.02(a).
1.28 "OFFICERS" shall mean the Manager, provided the Manager is not an
Entity, and the Persons elected by the Management Committee to act as officers
of the Company.
1.29 "PARENT" shall have the meaning set forth in Section 3.01(a).
1.30 "PERSON" shall mean any individual or Entity, and the heirs,
executors, administrators, legal representatives, successors and assigns, of
such "Person" where the context so permits.
1.31 "QUALIFIED DEBT" shall have the meaning set forth in
Section 3.01(a).
1.32 "RATING AGENCIES" shall mean Fitch IBCA, Inc., Moody's Investors
Service, Inc. and Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. and their respective successors.
-3-
<PAGE> 9
1.33 "RATING AGENCY CONDITION" shall mean, with respect to any action
referred to as such herein, that each Rating Agency shall have been given prior
written notice thereof and such Rating Agency shall have notified the Company in
writing that such action will not, in and of itself, result in a reduction or
withdrawal of the then current rating of the Qualified Debt and each additional
outstanding bond obligation, note obligation or other indebtedness of the
Company then outstanding and then rated by each Rating Agency, as applicable,
including, without limitation, any shadow rating.
1.34 "RESERVES" shall mean, with respect to any fiscal period, funds
set aside or amounts allocated during such period to reserves which shall be
maintained in amounts deemed sufficient by the Management Committee for working
capital and to pay taxes, insurance, debt service or other costs or expenses
incident to the ownership or operation of the Company's business.
1.35 "STUDENT LOANS" shall have the meaning set forth in
Section 3.01(a).
1.36 "SUBSTITUTE MEMBER" shall mean any transferee of a Membership
Interest permitted to become a member of the Company pursuant to Section 12.02
of this Agreement.
1.37 "TAX MATTERS PARTNER" shall have the meaning set forth in
Section 7.05.
1.38 "TRANSFER" means, with respect to a Membership Interest, to sell,
give, assign, bequeath, divest, dispose of, or transfer ownership or control of
all, any part of, or any interest in the Membership Interest, whether
voluntarily or by operation of law.
1.39 "TRANSFER AND SALE AGREEMENT" shall have the meaning set forth in
Section 3.01(a).
1.40 "TRANSFEROR" shall mean any Member that sells, assigns or
otherwise transfers in accordance with the terms of this Agreement either for or
without consideration all or any portion of its Membership Interest to any
Person permitted to be a member of a limited liability company under the Act.
1.41 "TREASURY REGULATIONS" shall include proposed, temporary and final
regulations promulgated under the Code in effect as of the date of filing the
Certificate of Formation and the corresponding sections of any regulations
subsequently issued that amend or supersede such regulations.
-4-
<PAGE> 10
ARTICLE II
FORMATION OF COMPANY
--------------------
2.01 FORMATION. The Members caused the Company to be formed as a
limited liability company effective May 20, 1998 by filing the executed
Certificate of Formation in the form of Exhibit 2.01 attached hereto, with the
Secretary of State of the State of Delaware in accordance with and pursuant to
the Act. Cathryn D. Griffin, in her capacity as an authorized person of the
Company, was authorized to execute, deliver and file the Certificate of
Formation with the Secretary of State of the State of Delaware.
2.02 NAME. The name of the Company is Student Loan Funding LLC and all
business of the Company shall be conducted under that name.
2.03 PRINCIPAL PLACE OF BUSINESS. The principal place of business of
the Company is One West Fourth Street, Suite 210, Cincinnati, Ohio 45202. The
Company may establish additional offices or relocate its place of business as
the Members may from time to time deem advisable; provided, that the Company
shall not establish an office or locate its place of business at the address of
any Affiliate, Member or Affiliate of a Member.
2.04 REGISTERED OFFICE AND REGISTERED AGENT. The Company's initial
registered agent for the service of process shall be The Corporation Trust
Company and the registered office in the State of Delaware shall be Corporation
Trust Center, 1209 Orange Street, Wilmington, Delaware. The Manager may change
the registered office and registered agent from time to time by making an
appropriate filing with the Delaware Secretary of State pursuant to the Act.
2.05 EFFECTIVE DATE. Pursuant to Section 18-201(d) of the Act, this
Agreement shall be effective as of May 28, 1998.
2.06 TERM. The Company shall exist perpetually, unless earlier
dissolved and its affairs wound up in accordance with either the provisions of
this Agreement or the Act. The existence of the Company as a separate legal
entity shall continue until the cancellation of the Certificate of Formation as
provided in the Act.
2.07 FOREIGN QUALIFICATION. The Company will qualify to do business in
each jurisdiction where its business requires it to be so qualified. Each Member
shall execute, acknowledge, swear to and deliver all certificates and other
instruments conforming with this Agreement that are necessary or appropriate to
qualify, continue and terminate, as appropriate, the Company as a foreign
limited liability company in all such jurisdictions in which the Company may
conduct business.
2.08 NO STATE LAW PARTNERSHIP. The Members intend that the Company be
operated in a manner consistent with its treatment as a partnership for federal
and state income tax purposes, but not be operated or treated as a "partnership"
(including, without limitation,
-5-
<PAGE> 11
a limited partnership or joint venture), and that no Member be a partner or
joint venturer with any other Member, for any other purpose, including but not
limited to Section 303 of the Federal Bankruptcy Code, and this Agreement shall
not be construed to suggest otherwise. No Member shall take any action
inconsistent with the express intent of the Members hereto as set forth herein.
ARTICLE III
BUSINESS OF COMPANY
-------------------
3.01 PURPOSE OF THE COMPANY. The nature of the business or purposes of
the Company shall be to engage exclusively in the following business and
financial activities, in accordance with the provisions and restrictions of this
Agreement:
(a) to acquire from Student Loan Funding Resources, Inc., an
Ohio corporation (the "Parent") and other Persons, and to hold, sell, transfer
or pledge, or to hold, sell, transfer or pledge interests in, or interests in
pools of, any rights to payment arising from student loan notes and additional
contract and other related rights, whether constituting accounts, chattel paper,
instruments, general intangibles or otherwise, including the right to payment of
any interest or finance charges and other obligations with respect thereto (such
rights to payment, together with any collateral security for and guarantees
thereof, and together with associated rights, being herein collectively called
"Student Loans") and, without limiting the generality of the foregoing, to pay
and otherwise perform its obligations with respect to the Qualified Debt (as
defined in the Transfer and Sale Agreement dated May 29, 1998, among the
Company, the Parent and Student Loan Funding [the "Transfer and Sale
Agreement"]), and each additional outstanding bond obligation, note obligation
or other indebtedness issued by the Company from time to time, in accordance
with the terms and provisions thereof;
(b) to borrow money to facilitate any activity authorized
herein and to pledge or otherwise grant security interests in the Student Loans
to secure such borrowing;
(c) to enter into any agreement that provides for the
administration, servicing and collection of amounts due on any Student Loans;
(d) to lend or otherwise invest proceeds from Student Loans
and any other funds determined by the Management Committee in accordance with
the contractual agreements to which the Company is subject; and
(e) to engage in any lawful act or activity and to exercise
any powers permitted to limited liability companies organized under the Act,
provided that such act, activity or power is incidental to and necessary,
suitable or convenient for the accomplishment of the purposes specified in
subsections (a) through (d) above.
-6-
<PAGE> 12
3.02 CHANGE IN PURPOSE OF COMPANY. Notwithstanding any other provision
of this Agreement, the Company shall not, and none of the Members, the
Management Committee or the Manager shall cause the Company to, change the
purpose of the Company as set forth in this Article III, without the unanimous
consent of (a) the Members and (b) the Management Committee, including the
affirmative vote of the Independent Committee Members.
ARTICLE IV
ACTIVITIES SEPARATE FROM
------------------------
AFFILIATES AND MEMBERS
----------------------
4.01 AFFIRMATIVE COVENANTS. The Company will take, and the Members, the
Management Committee and Manager shall cause the Company to take, all of the
following actions:
(a) operate its business separate and apart from the
business of any other Entity, including, without
limitation, any of its Affiliates, Members and
Affiliates of its Members;
(b) hold itself out as an independent Entity which
conducts business separate and apart from all other
Entities and correct any misunderstanding regarding
its separate identity;
(c) prepare and maintain separate records and books of
accounts from those of any other Entity, including,
without limitation, any of its Affiliates, Members
and Affiliates of its Members;
(d) maintain bank accounts and other accounts separate
and apart from any other Entity;
(e) pay its own liabilities, indebtedness and obligations
from its own assets;
(f) prepare financial statements based only upon its
operations and business;
(g) maintain separate phone numbers, mailing addresses,
stationery and other business forms from those of any
other Entity;
(h) observe all formalities set forth in this Agreement
and any other organizational document;
(i) maintain an arms-length relationship with its
Affiliates, Members and Affiliates of its Members;
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<PAGE> 13
(j) maintain a sufficient number of officers to conduct
its business and pay the salaries and wages of such
officers from its own assets or enter into arm-length
relationships with other parties for the conduct of
the business;
(k) maintain adequate working capital and Reserves to
conduct its business; and
(l) allocate fairly and reasonably any overhead expenses
for shared office space, if any.
4.02 NEGATIVE COVENANTS. Except as provided for herein, the Company
shall not take (or agree to take), and the Members or Manager shall cause the
Company not to take (or agree to take), any of the following actions:
(a) commingle its assets with the assets of any other
Entity;
(b) guarantee or become obligated for the debts of any
other Entity or hold out its credit as being
available to satisfy the debts or obligations of any
other Entity;
(c) acquire or assume the obligations of its Affiliates,
Members or Affiliates of a Member; or
(d) pledge any of its assets as collateral for the
benefit of any other Entity.
ARTICLE V
MEMBERS
-------
5.01 MEMBERS. The names and addresses of each of the Members are set
forth on Exhibit 5.01 attached hereto, as the same may be amended from time to
time.
5.02 ADMISSION OF ADDITIONAL MEMBERS. Additional Members may be
admitted to the Company only upon the Approval of the Members which approval
shall state the Capital Contribution of such Additional Member and prescribe
such other terms and conditions regarding such admission. Each Additional Member
approved for admission to the Company shall execute a copy of this Agreement.
Upon the admission of an Additional Member, this Agreement and the Exhibits
hereto shall be revised as appropriate to reflect such admission.
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<PAGE> 14
ARTICLE VI
CONTRIBUTIONS TO THE COMPANY AND
--------------------------------
CAPITAL ACCOUNTS
----------------
6.01 INITIAL CAPITAL CONTRIBUTIONS; INTERESTS. On or before the Closing
Date as defined in the Transfer and Sale Agreement, each Member shall make
contributions in cash, property or other assets to the capital of the Company in
such amounts as set forth on Exhibit 6.01 attached hereto (the "Initial Capital
Contribution") in exchange for the Membership Interests set forth on Exhibit
6.01. Exhibit 6.01 shall be amended from time to time to reflect changes in
Members and Membership Interests.
6.02 ADDITIONAL CONTRIBUTIONS.
(a) In the event that the Management Committee determines
additional funds (over and above the Initial Capital Contributions of the
Members which are made pursuant to Section 6.01) are required or desired to
carry on the business and purposes of the Company, and to the extent the
Management Committee determines that the Company should not borrow such
additional funds pursuant to Section 6.03, the Management Committee may approve
and authorize a call for additional capital contributions from each of the
Members in proportion to their respective Membership Interests ("Additional
Capital Contributions"). At the direction of the Management Committee, the
Manager shall give each Member a written notice calling for an Additional
Capital Contribution and stating the amount of such Additional Capital
Contribution to be paid by such Member and the date by which such Additional
Capital Contribution must be received (the "Contribution Date"), such date being
at least fifteen (15) days after the date the request for Additional Capital
Contributions is made. Each Member shall either (i) contribute its Additional
Capital Contribution to the Company on the Contribution Date, or (ii) give
written notice to the Manager and each other Member at least ten (10) days prior
to the Contribution Date of such Member's election not to make all or any part
of such Member's Additional Capital Contribution. In the event a Member makes
the election described in subsection (a)(ii) of this Section 6.02 (a
"Non-Contributing Member"), the other Members may, but are not obligated to,
contribute to the Company all or any portion of the unpaid capital call.
(b) If more than one Member desires to contribute a portion of
an unpaid capital call requested of any Non-Contributing Member (each a
"Contributing Member") and unless such Contributing Members otherwise agree
between or among themselves, each such Contributing Member shall be entitled to
contribute that portion of the unpaid capital call which is equal to the
Contributing Member's then Membership Interest in the Company divided by the
then aggregate Membership Interest of all of the Contributing Members. Any such
contribution made by a Contributing Member shall be deemed an Additional Capital
Contribution to the Company.
(c) On the Contribution Date, the Membership Interest of each
Member making any Additional Capital Contribution to the Company shall be
adjusted and increased to
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reflect such Additional Capital Contribution, and the Membership Interests of
Members not making Additional Capital Contributions shall be adjusted and
decreased to reflect such Additional Capital Contributions.
(d) The Management Committee shall not be required to seek
additional funds for the Company by borrowing funds pursuant to Section 6.03
before authorizing a call for Additional Capital Contributions under this
Section 6.02.
6.03 LOANS AND SECURITIES. In the event that the Management Committee
determines additional funds (over and above the Capital Contributions of the
Members as of that date) are required or desired to carry on the business
purposes of the Company, the Management Committee may, in lieu of or in addition
to its rights under Section 6.02, approve and authorize the borrowing of funds
on behalf of the Company or the issuance of debt securities at commercially
available rates, and, if necessary, secured by mortgages, deeds of trust or
security interests in the property or assets of the Company or the issuance of
equity interests or securities, provided, that, in each case (other than with
respect to warehouse lines of credit in existence as of the effective date of
this Agreement) the Rating Agency Condition shall have been satisfied. The
determination of the amount of the funds required from time to time for the
conduct of the Company's business and the source of those funds (which may
include Members) shall be within the sole discretion of the Management
Committee, subject to the satisfaction of the Rating Agency Condition. The
Management Committee shall not be required to seek additional funds for the
Company by calling for Additional Capital Contributions pursuant to Section 6.02
before authorizing the borrowing of funds under this Section 6.03.
6.04 WITHDRAWAL AND RETURN OF CONTRIBUTIONS. No Member shall be
entitled to withdraw or to the return of its Capital Contributions, except as
provided in this Agreement. No Member shall have the right to demand and receive
property other than cash in return for its Capital Contributions except that,
upon dissolution, the Members shall be entitled to share in the distribution of
the remaining assets of the Company in accordance with Article XIII of this
Agreement.
6.05 INTEREST ON CONTRIBUTIONS. Capital Contributions to the Company
shall not earn interest, unless otherwise agreed by the Members.
6.06 CAPITAL ACCOUNTS.
(a) Maintenance of Capital Accounts. A separate Capital
Account shall be maintained and adjusted for each Member on the books and
records of the Company in strict accordance with the Code and the Treasury
Regulations. The initial Capital Accounts of the Members are set forth on
Exhibit 6.01. Such Capital Accounts shall be adjusted from time to time as set
forth below.
(1) Increase. To each Member's Capital Account there
shall be credited the amount of any cash and the fair market value of
any property contributed by
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such Member to the Company, such Member's distributive share of
profits, and any other items in the nature of income or gain that are
allocated pursuant to Article VII hereof.
(2) Decrease. To each Member's Capital Account there
shall be debited the amount of cash and the fair market value of any
Company property distributed to such Member pursuant to any provision
of this Agreement, such Member's distributive share of losses, and any
other items in the nature of expenses or losses that are specially
allocated pursuant to Article VII hereof.
(b) Transfers. In the event of a permitted sale, transfer or
other disposition of a Membership Interest, the Capital Account of the
Transferor shall become the Capital Account of the transferee of such Membership
Interest to the extent it relates to the transferred Membership Interest in
accordance with Section 1.704-l(b)(2)(iv) of the Treasury Regulations.
(c) Interpretation. The manner in which Capital Accounts are
to be maintained pursuant to this Section 6.06 is intended to and shall be
construed so as to comply with the requirements of Section 704(b) of the Code
and the Treasury Regulations promulgated thereunder.
6.07 LIMITATION ON MEMBER'S DEFICIT MAKE-UP. No Member shall have any
obligation to restore any deficit in its Capital Accounts.
6.08 MEMBER LIABILITY. Except as otherwise provided under the Act, no
Member, solely by reason of being a Member, shall be liable for the debts,
obligations or liabilities of the Company, whether arising in contract, tort or
otherwise, including under any judgment, decree or order of any court.
ARTICLE VII
ALLOCATIONS AND DISTRIBUTIONS
-----------------------------
7.01 ALLOCATION OF NET PROFITS AND NET LOSSES FROM OPERATIONS. Except
as otherwise provided in Article XIII hereof, the Net Profits or Net Losses of
the Company, and each item of income, gain, loss, deduction, or credit
attributable thereto, will be allocated among the Members in proportion to their
respective Membership Interests and in accordance with Section 704(b) and (c) of
the Code and the Treasury Regulations thereunder.
7.02 DISTRIBUTIONS. All distributions shall be made to Members pro rata
in proportion to their respective Membership Interests on the record date of
such distribution. Except as provided in Section 7.03, all distributions of cash
and property shall be made at such time as determined by the Management
Committee. All amounts withheld pursuant to the Code or any provisions of state
or local tax law with respect to any payment or distribution to the Members
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<PAGE> 17
from the Company shall be treated as amounts distributed to the relevant Members
pursuant to this Section 7.02.
7.03 LIMITATION UPON DISTRIBUTIONS. No distribution shall be declared
and paid to a Member on account of its interest in the Company if such
distribution would violate Section 18-607 of the Act or other applicable law.
7.04 TAX ELECTIONS. The Management Committee may make any tax elections
for the Company allowed under the Code or the tax laws of any state or other
jurisdiction having taxing jurisdiction over the Company.
7.05 TAX MATTERS PARTNER. The Members shall designate a "tax matters
partner" of the Company (the "Tax Matters Partner"), as provided in the Treasury
Regulations pursuant to Code Section 6231(including Treasury Regulation
301.6231(a)(7)-2), to perform such duties as are required or appropriate
thereunder. The Tax Matters Partner shall not take any action contemplated by
Sections 6222 through 6232 of the Code without the Approval of the Members. The
Tax Matters Partner shall timely file and/or deliver to the appropriate taxing
authority and/or to each Member, as the case may be, all tax returns, reports
and documents required by local, state and federal law.
ARTICLE VIII
RIGHTS, DUTIES, POWERS AND COMPENSATION
---------------------------------------
OF THE MANAGEMENT COMMITTEE
---------------------------
8.01 MANAGEMENT OF BUSINESS. Except as otherwise provided or prohibited
herein, the Manager shall (i) be responsible for the day-to-day operation and
management of the business and affairs of the Company, (ii) shall make all
decisions, and take or cause to be taken all such actions, on behalf of the
Company or otherwise as are necessary in connection with the operation and
management of the Company in the ordinary course of business, and (iii) shall
have all the powers of a manager of a limited liability company permitted under
the Act. Notwithstanding the foregoing, in no event shall this Section 8.01
operate or be construed to allow the Manager to act in contravention of Sections
8.02, 8.03 or 9.03 of this Agreement.
8.02 MANAGEMENT COMMITTEE. A Management Committee shall be established
with the responsibility for (i) establishing policies and guidelines for the
conduct of the business and affairs of the Company, (ii) supervising and
directing the Manager, and (iii) making determinations with respect to certain
other significant and extraordinary matters (as more fully referenced in Section
8.03 below). The Management Committee shall consist of five (5) individuals
designated by the Members and listed on Exhibit 8.02 attached hereto. At any
given time, at least two (2) Committee Members must be, and must be designated
on Exhibit 8.02 as, Independent Committee Members. Independent Committee Members
may vote on any action taken by the Management Committee; provided that the
Independent Committee Members must
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<PAGE> 18
vote upon the matters set forth in Sections 3.02, 8.03(c) through (f), and
14.05. In the event of the removal, death, complete disability, or resignation
of any Committee Member, the Management Committee shall have the right to
designate a substitute Committee Member, provided, that any vacancy created by
the removal, death, complete disability or resignation of an Independent
Committee Member shall be filled by the Members. Each individual designated by
the Members may be removed by the Members at any time for any reason, provided
that no Independent Committee Member may be removed unless his or her successor
has been duly appointed. An individual who serves on the Management Committee
may voluntarily resign at any time by delivering written notice to the Members.
8.03 MATTERS RESERVED EXCLUSIVELY TO MANAGEMENT COMMITTEE. The Company
shall not take (or agree to take), and none of the Members, the Manager or the
Management Committee shall cause the Company to take (or agree to take), any
action with respect to the following matters except upon the approval of all of
the Members and the Management Committee, including the affirmative vote of both
Independent Committee Members and all of the other Committee Members with
respect to Sections 8.03(c) through (f):
(a) call for Additional Capital Contributions;
(b) declare and pay distributions to Members;
(c) make an assignment for the benefit of creditors,
file, or consent to the filing of, a petition in
bankruptcy, petition or apply to any tribunal for the
appointment of a custodian, receiver, trustee or
other similar official for it or for a substantial
part of its assets, commence, to the fullest extent
permitted by law, any proceeding under any
bankruptcy, reorganization, arrangement, readjustment
of debt, dissolution or liquidation law or statute or
similar law or statute of any jurisdiction, consent
or acquiesce in the filing of any such petition,
application, proceeding or appointment of or taking
possession by the custodian, receiver, liquidator or
trustee of the Company of substantially all or part
of its assets, or admit its inability to pay its debt
generally as they become due;
(d) cause or permit the Company to furnish any collateral
or issue a guarantee; provided, that, the Company
shall not be permitted to guarantee any indebtedness
of the Parent and the Rating Agency Condition shall
have been satisfied with respect to any such
transaction;
(e) sell, transfer, assign, convey or lease any
substantial part of the assets of the Company,
provided, that, the Rating Agency Condition shall
have been satisfied with respect to any such
transaction;
(f) merge, consolidate, liquidate or, subject to Article
XIII and to the fullest extent permitted by law,
dissolve the Company, provided, that, the Rating
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<PAGE> 19
Agency Condition shall have been satisfied with
respect to any such transaction;
(g) directly or indirectly purchase or otherwise acquire
all or substantially all of the assets of another
Entity;
(h) approve the terms of any material settlement
involving the payment of consideration by the
Company;
(i) enter into transactions between the Company and
either a Member or an Affiliate of a Member;
(j) change any benefit plans or arrangements offered by
the Company to its employees;
(k) select and remove the auditors or legal counsel of
the Company;
(l) declare bonuses to Officers and employees of the
Company;
(m) enter into a collective bargaining agreement;
(n) elect and remove Officers; and
(o) purchase or otherwise acquire additional Student
Loans, except as permitted by the Student Loan
Acquisition Policy adopted by the Management
Committee from time to time.
8.04 RIGHTS AND POWERS OF MANAGEMENT COMMITTEE.
(a) Meetings. Meetings of the Management Committee may be
called at any time by any Member and shall be held at the Company's principal
office unless otherwise agreed upon by the Members; provided that, the
Management Committee shall meet at least four (4) times during each calendar
year. Written notice stating the date, time and place of the meeting shall be
given to each Member and each Committee Member not less than five (5) nor more
than thirty (30) days before the date of such meeting. Such notice shall specify
the purpose for which the meeting is called and any issues that are proposed to
be discussed or voted upon at such meeting.
(b) Waiver of Notice. Any Committee Member may waive notice of
any meeting before or after the meeting. The waiver must be in writing, signed
by the Committee Member entitled to the notice and delivered to the Manager for
inclusion in the minutes or filing with the Company's records. A Committee
Member's attendance at or participation in a meeting waives any objection to
lack of notice or defective notice of the meeting unless the Committee Member at
the beginning of the meeting, or promptly upon arrival, objects to holding the
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meeting or to transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
(c) Quorum. Except as otherwise consented to in writing by
each Member, a quorum for the transaction of business at any meeting of the
Management Committee requires the presence at such meeting, in person or by
proxy, of at least two (2) Committee Members; provided that if the matter to be
voted upon requires the vote of the Independent Committee Members then a quorum
requires the presence at such meeting, in person or by proxy, of three (3)
Committee Members then in office.
(d) Proxy. Any Committee Member (other than an Independent
Committee Member with respect to matters specified in Sections 3.02, 8.03(c)
through (f), and 14.05 hereof) may grant any other Committee Member a proxy to
vote in his or her stead.
(e) Voting of Management Committee. Unless otherwise required
by the Act or this Agreement, all decisions of the Management Committee shall be
made by the vote of a majority of the Committee Members. Notwithstanding the
prior sentence, any decision requiring the approval of the Independent Committee
Members shall require the approval of all Committee Members. No issue shall be
voted on by the Management Committee unless notice of the issue is given or such
notice is waived by any Committee Member not receiving such notice as set forth
in Section 8.04(b) above.
(f) Action Without Meeting. Any action required or permitted
by this Agreement or by law to be taken at a meeting of the Management Committee
may be taken without a meeting if a written consent or consents, describing the
action so taken, is signed by all of the Committee Members entitled or required
to vote with respect to the subject matter thereof and delivered to the Company
for inclusion in the Company's records. Any such written consent may be signed
in two or more counterparts.
(g) Telephonic Meetings. Except as provided herein and
notwithstanding any place set forth in the notice of the meeting or this
Agreement, the Management Committee and any committees thereof may participate
in regular or special meetings by, or through the use of, any means of
communication by which all participants may simultaneously hear each other.
(h) Indemnification. The Company shall, to the maximum extent
provided by law, indemnify, defend and hold harmless each present or former
Committee Member ("Indemnitee"), to the extent of the Company's assets, from and
against any liability, damage, cost, expense, loss, claim, judgment or amounts
paid in settlement thereof (including reasonable attorneys' fees and costs in
settlement or defense thereof) incurred by reason of the fact that such
Indemnitee is or was a Committee Member. Notwithstanding the foregoing, no
Indemnitee shall be so indemnified, defended or held harmless for claims arising
out of a breach by the Indemnitee of this Agreement or any acts or omissions by
the Indemnitee that constitute fraud, willful misconduct or breach of fiduciary
duty to the Company or to the Members. The Company shall advance the expenses of
defense if the Indemnitee undertakes in writing to repay
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<PAGE> 21
the advanced funds to the Company if the Indemnitee is finally determined by a
court of competent jurisdiction not to be entitled to indemnification pursuant
to this Section 8.04(h).
8.05 INITIAL OFFICERS. The Persons designated on Exhibit 8.05 shall be
the initial Officers of the Company and shall hold the position or positions set
forth opposite their nameson Exhibit 8.05. Each initial Officer shall serve at
the pleasure of the Management Committee until his or her successor is duly
elected, or until his or her earlier resignation or removal.
8.06 REIMBURSEMENT OF MANAGEMENT COMMITTEE. The Company shall reimburse
Committee Members for all reasonable out-of-pocket expenses (including, but not
limited to, legal fees) incurred in connection with the carrying out of the
duties set forth in this Agreement and the management of the Company.
8.07 CONSIDERATION OF THE COMPANY'S CREDITORS BY THE MANAGEMENT
COMMITTEE. When voting on actions, to the fullest extent permitted by law,
including Section 18-1101(C) of the Act, each Committee Member shall consider
the interests of the Company's creditors.
ARTICLE IX
MANAGER AND OFFICERS
--------------------
9.01 DESIGNATION. The Manager shall be such Person as the Management
Committee shall designate from time to time. The Manager may be removed and
replaced upon the affirmative vote of the majority of the Management Committee.
9.02 DUTIES. In addition to the duties set forth in Section 8.01, the
Manager shall be primarily responsible for the general management of the
business of the Company, shall make the ordinary and usual decisions concerning
the business affairs of the Company, shall have authority to make contracts on
behalf of the Company in the ordinary course of the Company's business, shall be
responsible to effect all properly approved orders and resolutions of the
Management Committee and Members, except as may be otherwise delegated by the
Management Committee or provided by law, shall preside at all meetings of the
Members, and shall perform such other duties as from time to time may be
assigned by the Management Committee. Without limiting the generality of the
foregoing, the Manager is authorized to sign contracts and obligations on behalf
of the Company, including, without limitation, purchase contracts, sales
contracts, leases, promissory notes, mortgages, deeds of trust; institute and
defend legal proceedings, lend money; invest and reinvest Company funds; appoint
employees and agents; and purchase insurance on the life of any Members or any
member of the Management Committee.
9.03 MATTERS RESERVED EXCLUSIVELY TO MEMBERS. Notwithstanding Sections
8.01 or 9.02 herein, the Company shall not take (or agree to take), and neither
the Management Committee nor the Manager shall cause the Company to take (or
agree to take), any action with
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respect to the following matters except upon Approval of the Members, and after
providing written notice of such action to the Rating Agencies:
(a) combine or reclassify the Membership Interests;
(b) admit Additional or Substitute Members; or
(c) any other acts on behalf of or with respect to the
Company which under Delaware law would require action
by the Members.
9.04 DELEGATION OF AUTHORITY; OFFICERS. The Management Committee shall
have the authority and power to appoint Officers and to delegate to one or more
of such Officers, the rights and powers to manage and control the business and
affairs of the Company; provided, that the Management Committee may not delegate
the right to vote that is reserved exclusively to the Management Committee in
Section 8.03 hereof. The Officers of the Company, if deemed necessary by the
Management Committee, may include a president, one or more vice presidents,
secretary, treasurer, assistant secretary and assistant treasurer. The Officers
shall serve at the pleasure of the Management Committee, subject to all rights,
if any, of an Officer under any contract of employment. Any individual may hold
any number of offices. The Officers shall exercise such powers and perform such
duties as shall be determined from time to time by the Management Committee.
9.05 STANDARD OF CONDUCT. Each of the Officers (including the Manager)
shall discharge the duties of an office in good faith, in a manner he or she
reasonably believes to be in the best interest of the Company and with the care
an ordinarily prudent person in a like position would exercise under similar
circumstances. In discharging his or her duties, the Officer is entitled to rely
in good faith on information, opinions, reports or statements, including
financial statements and other financial data, if prepared or presented by
employees of the Company whom the Officer reasonably believes to be reliable and
competent in the matters presented; or legal counsel, public accountants, or
other persons as to matters the Officer reasonably believes are within the
person's professional or expert competence. An Officer is not acting in good
faith who has knowledge concerning the matter in question that makes reliance
otherwise permitted by this provision unwarranted. An Officer shall not be
liable for any action taken as an officer, or any failure to take any action, if
the Officer has performed the duties of the office in compliance with this
provision.
9.06 COMPENSATION. The salaries and other compensation of the Officers
and employees of the Company shall be as determined by the Management Committee,
in its discretion, from time to time.
9.07 REMOVAL. The Management Committee may remove any of the Officers
at any time, for any reason, but no such removal shall affect the contractual
rights, if any, of the Officer so removed.
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9.08 RESIGNATION. The Manager or an Officer may resign at any time by
delivering written notice to the Management Committee. A resignation is
effective without acceptance when the notice is delivered to the Management
Committee, unless the notice specifies a later effective date. If a resignation
is made effective at a later date and the Management Committee accepts the
future effective date, the Management Committee may fill the pending vacancy
before the effective date if it provides that the successor does not take office
until the effective date. An Officer's resignation does not affect the Company's
contractual rights, if any, with the Officer.
9.09 INDEMNIFICATION. Subject to applicable law, the Company shall
indemnify and advance expenses to each present and future Manager of the Company
(and, in either case, his heirs, estate, executors or administrators) to the
full extent allowed by the laws of the State of Delaware, both as now in effect
and as hereafter adopted. The Company may indemnify and advance expenses to any
Officer or agent of the Company who is not the Manager (and his or her heirs,
estate, executors or administrators) to the same extent as the Manager, if the
Management Committee determines that it is in the best interests of the Company
to do so. The Company shall also have the power to contract with any Officer or
agent for whatever additional indemnification the Management Committee shall
deem appropriate.
9.10 EMPLOYEES. The Company shall not have any employees other than the
Officers permitted under this Agreement or required by applicable law.
ARTICLE X
RIGHTS AND OBLIGATIONS OF MEMBERS
---------------------------------
10.01 LIMITATION OF LIABILITY. Each Member's liability shall be limited
as set forth in this Agreement, the Act and other applicable law.
10.02 COMPANY DEBT LIABILITY. A Member will not be personally liable
for any debts or losses of the Company beyond its respective Capital
Contributions and any obligation of the Member under Section VI to make Capital
Contributions, except as otherwise required by law.
10.03 LIST OF MEMBERS. Upon written request of any Member, the Manager
shall provide a list showing the names, addresses and Membership Interests of
all Members.
10.04 COMPANY BOOKS. Full and complete books of account of the Company
(separate and apart from its Affiliates, Members and Affiliates of Members)
shall be kept in accordance with generally accepted accounting principles and
shall be maintained at all times at the Company's principal office or such other
place as the Manager shall determine, and shall be open to the reasonable
inspection and examination of the Members during reasonable business hours. The
Manager shall maintain and preserve, during the term of the Company, and for
five (5) years thereafter, all accounts, books, and other relevant Company
documents. Upon reasonable
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request, each Member shall have the right, during ordinary business hours, to
inspect and copy such Company documents at the requesting Member's expense. The
Manager and Committee Members shall not have the right to keep confidential from
the Members any information that the Manager or Committee Members might
otherwise be permitted to keep confidential from the Members pursuant to Section
18-305(c) of the Act.
10.05 PRIORITY AND RETURN OF CAPITAL. Except as may be expressly
provided in Article VII, no Member shall have priority over any other Member,
either as to the return of Capital Contributions or as to Net Profits, Net
Losses or distributions; provided that this Section 9.05 shall not apply to
loans (as distinguished from Capital Contributions) which a Member has made to
the Company.
10.06 BINDING AUTHORITY. No Member shall have authority to bind the
Company without the approval of the Management Committee in accordance with
Section 8.04(e) hereof.
10.07 CONSIDERATION OF THE COMPANY'S CREDITORS BY MEMBERS. When voting
on actions, each Member to the fullest extent permitted by law, including
Section 18-1101(c) of the Act, shall consider the interests of the Company's
creditors.
ARTICLE XI
MEETINGS OF MEMBERS
-------------------
11.01 MEETINGS. Meetings of the Members may be called for any purpose
or purposes and, unless otherwise prescribed by statute, may be called by any
Member.
11.02 PLACE OF MEETINGS. The Members may designate any place, either
within or outside the State of Delaware, as the place of meeting for any meeting
of the Members. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal executive office of the
Company.
11.03 NOTICE OF MEETINGS. Except as provided in Section 11.04, written
notice stating the place, day and hour of the meeting and the purpose or
purposes for which the meeting is called shall be delivered not less than seven
(7) nor more than fifty (50) days before the date of the meeting, either
personally or by mail, by or at the direction of the Manager or person calling
the meeting, to each Member entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered two (2) calendar days after being
deposited in the United States mail, addressed to the Member at its address as
it appears on the books of the Company, with postage thereon prepaid.
11.04 MEETING OF ALL MEMBERS. If all of the Members shall meet at any
time and place, either within or outside of the State of Delaware, and consent
to the holding of a meeting at such
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time and place, such meeting shall be valid without call or notice, and at such
meeting lawful action may be taken.
11.05 RECORD DATE. For the purpose of determining Members entitled to
notice of or to vote at any meeting of Members or any adjournment thereof, or
Members entitled to receive payment of any distribution, or in order to make a
determination of Members for any other purpose, the date on which notice of the
meeting is mailed or the date on which the resolution declaring such
distribution is adopted, as the case may be, shall be the record date for such
determination of Members. All Members who have not withdrawn from the Company
shall be entitled to vote on any matter submitted to a vote of the Members. When
a determination of Members entitled to vote at any meeting of Members has been
made as provided in this Section 10.05, such determination shall apply to any
adjournment thereof.
11.06 QUORUM. Members holding at least a Majority Interest, represented
in person or by proxy, shall constitute a quorum at any meeting of Members. In
the absence of a quorum at any such meeting, a majority of the Membership
Interests so represented may adjourn the meeting from time to time for a period
not to exceed sixty (60) days without further notice. However, if the
adjournment is for more than sixty (60) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each Member of record entitled to vote at the meeting.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The Members present at a duly organized meeting may continue
to transact business until adjournment, notwithstanding the withdrawal during
such meeting of that number of Membership Interests whose absence would cause
less than a quorum.
11.07 MANNER OF ACTING. If a quorum is present, the affirmative vote of
Members holding a Majority Interest shall be the act of the Members, unless the
vote of a greater proportion or number is otherwise required by the Act. Such
action shall be evidenced by a written resolution for inclusion in the minutes
of the Company records.
11.08 PROXIES. At all meetings of Members, a Member that is entitled to
vote may vote in person or by proxy executed in writing by the Member or by a
duly authorized attorney-in-fact. Such proxy shall be filed with the Manager
before or at the time of the meeting. No proxy shall be valid after eleven (11)
months from the date of its execution, unless otherwise provided in the proxy.
11.09 ACTION BY MEMBERS WITHOUT A MEETING. Action required or permitted
to be taken at a meeting of Members may be taken without a meeting if the action
is evidenced by one or more written consents describing the action taken, signed
by each Member entitled to vote and delivered to the Manager for inclusion in
the minutes or for filing with the Company records. Action taken under this
Section 11.09 is effective when all Members entitled to vote have signed the
consent, unless the consent specifies a different effective date. The record
date for
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<PAGE> 26
determining Members entitled to take action without a meeting shall be the date
the first Member signs a written consent.
11.10 WAIVER OF NOTICE. When any notice is required to be given to any
Member, a waiver thereof in writing signed by the Member entitled to such
notice, whether before, at, or after the time stated therein, shall be
equivalent to the giving of such notice.
11.11 PARTICIPATION BY ELECTRONIC COMMUNICATION. A meeting among
Members may be held by any means of communication through which the participants
may simultaneously hear each other during the meeting, provided, that there is
at least one meeting each fiscal year at which all Members are present in
person. Subject to the preceding sentence, if all the other requirements for a
meeting are met, a Member participating in a meeting by electronic communication
shall be deemed to be present at the meeting in person or by proxy, as the case
may be, and the minutes may reflect such.
11.12 REPRESENTATIONS AND WARRANTIES. Each Member, and in the case of
an Entity, the Person(s) executing this Agreement on behalf of the Entity,
hereby represents and warrants to the Company and each other Member: (a) that
the Member is acquiring its interest in the Company for the Member's own account
as an investment and without an intent to distribute the interest and (b) that
the Member acknowledges that the interests have not been registered under the
Securities Act of 1933, as amended, or any state securities laws, and may not be
resold or transferred by the Member without appropriate registration or the
availability of an exemption from such requirements.
11.13 CONFLICTS OF INTEREST.
(a) A Member shall be entitled to enter into transactions that
may be considered to be competitive with, or a business opportunity that may be
beneficial to, the Company, it being expressly understood that one or more of
the Members may enter into transactions that are similar to the transactions
into which the Company may enter. Notwithstanding the foregoing, Members shall
account to the Company and hold as trustee for it any property, profit or
benefit derived by the Member, without the consent of the other Members, in the
conduct and winding up of the Company business or from a use or appropriation by
the Member of Company property, including, without limitation, information
developed exclusively for the Company and opportunities expressly offered to the
Company.
(b) No resolution adopted, or contract or transaction entered
into, by the Members of the Company (an "action"), shall be void or voidable
with respect to the Company for the reason that it is between or affects the
Company and one or more of its Members, or is between or affects the Company and
any other entity in which one or more of its Members is a member, manager,
director, trustee or officer, or has a financial or personal interest, or for
the reason that one or more interested Members participates in or votes at the
meeting that authorizes such contract, action or transaction, if in any case any
of the following apply:
-21-
<PAGE> 27
(i) The material facts as to his or their
relationship or interest and as to the contract, action or transaction
are disclosed or are known to the Manager and the Manager, in good
faith reasonably justified by such facts, authorize the contract,
action or transaction; or
(ii) The contract, action, or transaction is fair to
the Company as of the time it is authorized or approved by the Manager.
ARTICLE XII
TRANSFERABILITY
---------------
12.01 TRANSFERS. Subject to and in full compliance with the terms and
conditions of this Agreement, including, but not limited to, the conditions set
forth in Section 12.02, any Member may Transfer to any Person permitted to be a
member of a limited liability company under the Act, all or a fractional portion
of such Member's Membership Interest in the Company.
12.02 CONDITIONS TO TRANSFERS. No Member may make a Transfer of its
Membership Interest in the Company without the satisfaction of all of the
conditions set forth in this Section 12.02. The Company will register the
Membership Interest in the name of a transferee, and the transferee shall be
deemed to own such Membership Interest and shall become a Member, with the
rights and responsibilities of a Member, only if and when all of the following
conditions are satisfied:
(a) the Company has received a written instrument of
Transfer of such Membership Interest in a form
satisfactory to the Company, which instrument shall
be signed by the Transferor and the transferee and
shall contain the name and address of the transferee
and the transferee's express acceptance of and
agreement to be bound by all of the terms and
conditions of this Agreement;
(b) all requirements of applicable state and federal
securities laws have been met;
(c) such Transfer will not result in the Company being
classified as an "association" which is taxable as a
corporation for federal income tax purposes;
(d) the Company shall have been reimbursed by the
Transferor for all reasonable expenses incurred by
the Company in connection with such Transfer,
including but not limited to, reasonable attorneys'
fees and expenses relating to evaluation of the
proposed Transfer and the
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<PAGE> 28
preparation, filing and/or publishing of any and all
documents necessary or appropriate to effectuate such
Transfer; and
(e) in the case of a Transfer which results from a pledge
or other similar encumbrance arising in connection
with the securing of a loan or other obligation of
the Transferor, all applicable conditions to the
transfer of ownership of the Membership Interest to
the pledgee or holder of the pledge or encumbrance
set forth in the agreement(s) relating thereto shall
have been satisfied.
12.03 SUBSTITUTION OF A MEMBER. A transferee of a Membership Interest
shall be admitted as a Substitute Member and admitted to all the rights of the
Transferor upon the satisfaction of the conditions set forth in Section 12.02.
If so admitted, the Substitute Member shall have all the rights and powers, and
be subject to all the restrictions on and liabilities of, the Transferor. In
addition, the Substitute Member is liable for the obligations of the Transferor
to make an Initial Capital Contribution or Additional Capital Contributions, if
any. The admission of a Substitute Member shall not release the Transferor from
any liability to the Company that may have existed prior to the Transfer of the
Membership Interest to the Substitute Member.
12.04 PLEDGE OR OTHER ENCUMBRANCE. A Membership Interest can be pledged
or otherwise encumbered, provided that no transfer of ownership of the
Membership Interest shall occur in connection with such pledge or other
encumbrance unless the conditions of Section 12.02(e) are satisfied.
ARTICLE XIII
DISSOLUTION, TERMINATION AND
----------------------------
LIQUIDATION OF THE COMPANY
--------------------------
13.01 DISSOLUTION.
(a) Subject to Sections 7.03 and 13.01(d), the Company shall
be dissolved and its affairs wound up upon the first to occur of any of the
following events (which, unless in the case of the events described in section
13.01(a)(ii) the Members agree to continue the business of the Company, shall
constitute "Dissolution Events"):
(i) at any time there are no members of the Company
unless the business of the Company is continued without
dissolution in a manner permitted by the Act;
(ii) the entry of a decree of judicial dissolution
under the Act; or
(iii)the sale of all or substantially all of the
assets of the Company.
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<PAGE> 29
(b) The death, retirement, resignation, expulsion, bankruptcy
or dissolution of any Member of the Company or the occurrence of any other event
that terminates the continued membership of any Member of the Company shall not
cause the Company to be dissolved or its affairs to be wound up, and upon the
occurrence of any such event, the Company shall be continued without
dissolution. Notwithstanding any other provision in this Agreement, the
bankruptcy (as defined in Section 18-101(1) and 18-304 of the Act) of a Member
shall not cause the Member to cease to be a member of the Company, and upon the
occurrence of such an event, the business of the Company shall be continued
without dissolution. Notwithstanding any other provision of this Agreement, the
Members waive any right that they might have under Section 18-801(b) of the Act
to agree in writing to dissolve the Company upon the bankruptcy of a Member or
the occurrence of any other event that causes a Member to cease to be a member
of the Company.
(c) Upon the occurrence of a Dissolution Event, the Company
shall continue its existence until the winding up of the affairs is completed
and a certificate of cancellation of the Certificate of Formation has been filed
with the Secretary of State of the State of Delaware. A reasonable time shall be
allowed for the orderly liquidation of the assets of the Company and the
discharge of the Company's liabilities to creditors so as to minimize the normal
losses attendant to such liquidation.
(d) The Members shall not be permitted to dissolve the Company
by consent, unless the Management Committee, with the affirmative vote of both
Independent Committee Members, approves such dissolution and the Rating Agency
Condition shall have been satisfied.
13.02 WINDING UP, LIQUIDATION AND DISTRIBUTION OF ASSETS.
(a) Upon the occurrence of a Dissolution Event, an accounting
shall be made by the Company's independent accountants of the accounts of the
Company and of the Company's assets, liabilities and operations, from the date
of the last previous accounting until the date of dissolution. The Manager shall
immediately proceed to wind up the affairs of the Company.
(b) If the Company is dissolved and its affairs are to be
wound up, the Manager shall sell or otherwise liquidate all of the Company's
assets as promptly as practicable (except to the extent the Manager may
determine to distribute any assets to the Members in kind) and distribute the
proceeds of the liquidation of such assets and any other remaining, unliquidated
assets in the following order of priority:
(i) to creditors, excluding Members who are
creditors, to the extent permitted by law, in satisfaction of
the Company's liabilities (whether by payment or the making of
reasonable provision for payment thereof);
(ii) to Members who are creditors of the Company in
satisfaction of Company liabilities, including, without
limitation, the repayment of principal of
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<PAGE> 30
and interest on loans made by Members to the Company (whether
by payment or the making of reasonable provision for payment
thereof); and
(iii) to Members in accordance with positive Capital
Account balances taking into account all Capital Account
adjustments for the Company's fiscal year in which the
liquidation occurs.
Liquidation proceeds shall be paid within sixty (60) days of the end of the
Company's fiscal year or, if later, within ninety (90) days after the date of
dissolution; provided, that, any distributions of the positive balances of
Members' Capital Accounts shall be made in accordance with the time requirements
set forth in Section 1.704-1(b)(2)(ii)(b)(2) of the Treasury Regulations.
(c) If any assets of the Company are to be distributed in
kind, the net fair market value of such assets as of the date of dissolution
shall be determined by independent appraisal or by agreement of the Members.
Such assets shall be deemed to have been sold as of the date of dissolution for
their fair market value, and the Capital Accounts of the Members shall be
adjusted pursuant to the provisions of Article VI of this Agreement to reflect
such deemed sale.
(d) Notwithstanding anything to the contrary in this
Agreement, upon a liquidation within the meaning of Section 1.704-l(b)(2)(ii)(g)
of the Treasury Regulations, if any Member has a deficit balance in its Capital
Account (after giving effect to all contributions, distributions, allocations
and other Capital Account adjustments for all taxable years, including the year
during which such liquidation occurs), such Member shall have no obligation to
make any Capital Contribution, and the negative balance of such Member's Capital
Account shall not be considered a debt owed by such Member to the Company or to
any other Person for any purpose whatsoever.
(e) The Manager shall comply with any applicable requirements
of applicable law pertaining to the winding up of the affairs of the Company and
the final distribution of its assets.
13.03 CERTIFICATE OF CANCELLATION. When all debts, liabilities and
obligations have been paid and discharged or adequate provisions have been made
therefor and all of the remaining property and assets have been distributed to
the Members, a certificate of cancellation shall be executed and filed in
accordance with the Act. Upon the filing with the Secretary of State of the
State of Delaware of a certificate of cancellation of the Certificate of
Formation, the existence of the Company shall cease.
13.04 RETURN OF CONTRIBUTION NONRECOURSE TO OTHER MEMBERS. Except as
provided by law or as expressly provided in this Agreement, upon dissolution,
each Member shall look solely to the assets of the Company for the return of its
Capital Contribution. If the Company property remaining after the payment or
discharge of the debts and liabilities of the Company is
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<PAGE> 31
insufficient to return the cash contribution of one or more Members, such Member
or Members shall have no recourse against any other Member.
13.05 FINAL ACCOUNTING. Each of the Members shall be furnished a
statement reviewed by the Company's accountants, which shall set forth the
assets and liabilities of the Company as at the date of distribution and
liquidation of the Company.
ARTICLE XIV
MISCELLANEOUS PROVISIONS
------------------------
14.01 NOTICES. Any notice, demand, or communication required or
permitted to be given by any provision of this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally to
the party or to an executive officer of the party to whom the same is directed
or, if sent by registered or certified mail, postage and charges prepaid,
addressed to the Member's or Company's address, as appropriate, which is set
forth in this Agreement.
14.02 FISCAL YEAR. The Company's fiscal year for financial and income
tax purposes shall end on June 30 of each year.
14.03 APPLICATION OF DELAWARE LAW. This Agreement and the application
or interpretation hereof shall be governed exclusively by its terms and by the
laws of the State of Delaware, and specifically the Act, without regard to
principles of conflicts of laws.
14.04 WAIVER OF ACTION FOR PARTITION. Each Member irrevocably waives
during the term of the Company any right that it may have to maintain any action
for partition with respect to the property of the Company.
14.05 AMENDMENTS TO ORGANIZATIONAL DOCUMENTS. This Agreement and the
Certificate of Formation may not be amended, restated or otherwise modified in
any respect by the Members, Management Committee or Manager without the Approval
of the Members and the approval of the Management Committee, including the
affirmative vote of both Independent Committee Members nor may it be amended
without the consent of each Member adversely affected if such amendment would
(i) modify the limited liability of a Member or (ii) alter the interest of a
Member in Net Profits, Net Losses, other items, or any Company distributions.
Notwithstanding the foregoing, Sections 1.18, 1.33, 6.03, 8.02, 8.03, 8.04(d),
9.03, 9.10 and 13.01 of this Agreement shall not be amended, restated or
otherwise modified, unless the Rating Agency Condition shall have been
satisfied.
14.06 CONSTRUCTION. Whenever the singular number is used in this
Agreement and when required by the context, the same shall include the plural
and vice versa, and the masculine gender shall include the feminine and neuter
genders and vice versa.
-26-
<PAGE> 32
14.07 HEADINGS AND PRONOUNS. The headings in this Agreement are
inserted for convenience only and are in no way intended to describe, interpret,
define or limit the scope, extent or intent of this Agreement or any provision
hereof. All pronouns and any variations thereof shall be deemed to refer to
masculine, feminine or neuter, singular or plural as the identity of the Person
or Persons may require.
14.08 WAIVERS. The failure of any party to seek redress for violation
of or to insist upon the strict performance of any covenant or condition of this
Agreement shall not be deemed a waiver of such violation or failure to perform
or of any subsequent violation or failure to perform.
14.09 SUCCESSORS AND ASSIGNS. Each and all of the covenants, terms,
provisions and agreements herein contained shall be binding upon and inure to
the benefit of the parties hereto and, to the extent permitted by this
Agreement, their respective legal representatives, successors and assigns.
14.10 CREDITORS. Except as otherwise provided in this Agreement, none
of the provisions of this Agreement shall be for the benefit of or enforceable
by any creditors of the Company.
14.11 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
14.12 ENFORCEMENT OF INDEPENDENT COMMITTEE MEMBERS. Notwithstanding any
other provision of this Agreement, the Members agree that this Agreement,
including, without limitation, Article VIII, constitutes a legal, valid and
binding agreement of the Members, and is enforceable against the Members by the
Independent Committee Members, in accordance with its terms. In addition, the
Independent Committee Members shall be beneficiaries of this Agreement.
14.13 INDEMNIFICATION OF MEMBERS AND COMMITTEE MEMBERS. Subject to
applicable law, the Company shall indemnify and advance expenses to each present
and future Member and Committee Member of the Company (and, in either case, any
heirs, estate, executors or administrators of any of them) to the full extent
allowed by the laws of the State of Delaware, both as now in effect and as
hereafter adopted.
IN WITNESS WHEREOF, this Agreement has been executed by the Members as
evidenced by their signature on the attached signature page to be effective as
of the date first above written.
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<PAGE> 33
MEMBER'S SIGNATURE PAGE
Each of the undersigned agrees to become a Member in Student Loan
Funding LLC, and each shall be bound by all the terms of the Agreement to which
this signature page is attached.
Student Loan Funding Resources, Inc.
By: /S/ THOMAS L. CONLAN, JR.
---------------------------------
Its: President & CEO
--------------------------------
SLF Enterprises, Inc.
By: /S/ THOMAS L. CONLAN, JR.
---------------------------------
Its: President
--------------------------------
<PAGE> 34
EXHIBIT 2.01 - CERTIFICATE OF FORMATION
---------------------------------------
CERTIFICATE OF FORMATION
OF
STUDENT LOAN FUNDING LLC
This Certificate of Formation is being executed by the undersigned for
the purpose of forming a limited liability company pursuant to the Delaware
Limited Liability Act.
1. The name of the limited liability company is Student Loan
Funding LLC.
2. The address of the registered office and the registered agent
of the limited liability company in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered
agent of the limited liability company is The Corporation
Trust Company.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Formation on this 20th day of May, 1998.
/S/ CATHRYN D. GRIFFIN
-------------------------------------
Cathryn D. Griffin, Authorized Person
<PAGE> 35
EXHIBIT 5.01 - MEMBERS
----------------------
Name Address
- ---- -------
Student Loan Funding One West Fourth Street, Suite 200
Resources, Inc., an Ohio Cincinnati, Ohio 45202
corporation
SLF Enterprises, Inc., an One West Fourth Street, Suite 220
Ohio corporation Cincinnati, Ohio 45202
<PAGE> 36
EXHIBIT 6.01 - CAPITAL CONTRIBUTIONS AND MEMBERSHIP INTERESTS
-------------------------------------------------------------
<TABLE>
<CAPTION>
Initial Capital Membership
Member Name Contribution Interest
- ----------- --------------- ----------
<S> <C> <C>
Student Loan Funding Resources, $990.00 99%
Inc.
SLF Enterprises, Inc. $ 10.00 1%
</TABLE>
<PAGE> 37
EXHIBIT 8.02 - MEMBERS OF THE MANAGEMENT COMMITTEE
--------------------------------------------------
Thomas L. Conlan, Jr.
Brian A. Ross
Christopher P. Chapman
Kim E. Lutthans - Independent Committee Member
Mark A. Ferrucci - Independent Committee Member
<PAGE> 38
EXHIBIT 8.05 - INITIAL OFFICERS
-------------------------------
Name Office
- ---- ------
Thomas L. Conlan, Jr. President
Brian A. Ross Senior Vice President and Manager
Patricia Mann Smitson Secretary
<PAGE> 1
Exhibit 8.1
[Thompson Hine & Flory LLP Letterhead]
__________ ____, 199__
Student Loan Funding LLC
One West Fourth Street, Suite 210
Cincinnati, Ohio 45202
Re: Student Loan Funding LLC Registration Statement on Form S-3
(No. ______________)
Ladies and Gentlemen:
We have acted as special tax counsel for Student Loan Funding LLC, a Delaware
limited liability company (the "Issuer"), in connection with the
above-referenced Registration Statement (together with the exhibits and any
amendments thereto, the "Registration Statement"), filed by the Issuer with the
Securities and Exchange Commission in connection with the registration by the
Issuer of Asset Backed Notes (the "Notes") to be sold from time to time in one
or more series in amounts to be determined at the time of sale and to be set
forth in one or more Supplements (each, a "Prospectus Supplement") to the
Prospectus (the "Prospectus") included in the Registration Statement.
We are familiar with the proceedings to date in connection with the proposed
issuance and sale of the Notes and in order to express our opinion hereinafter
stated, (a) we have examined copies of the forms of (i) the Eligible Lender
Trust Agreement, (ii) the Indenture, (iii) the Notes filed as exhibits to the
Registration Statement (collectively the "Operative Documents") and (iv) the
Servicing Agreements and (b) we have examined such other records and documents
and such matters of law, and we have satisfied ourselves as to such matters of
fact, as we have considered relevant for purposes of this opinion.
The opinions set forth in this letter concerning Federal income tax matters are
based upon the applicable provisions of the Internal Revenue Code of 1986, as
amended, Treasury Regulations promulgated and proposed thereunder, current
positions of the Internal Revenue Service (the "IRS") including those contained
in published Revenue Rulings and Revenue Procedures, and existing judicial
decisions. This opinion is subject to the explanations and qualifications set
forth under the caption "Federal Income Tax Consequences" in the Prospectus
which constitutes a part of the Registration Statement.
<PAGE> 2
Student Loan Funding LLC
_________ ____, 199__
Based on the foregoing and assuming that the Operative Documents are executed
and delivered in substantially the form we have examined, we hereby confirm our
opinion with respect to the Federal income tax characterization of the Notes and
the Federal income tax treatment of the issuance of such Notes set forth under
the caption "Federal Income Tax Consequences" in the Prospectus. In our opinion,
for Federal income tax purposes, the Notes will be characterized as debt, and if
the Notes were not characterized as debt for federal income tax purposes,
although the Issuer might be treated as a publicly traded partnership, it would
not be taxable as a corporation. Moreover, we are of the opinion that the
statements set forth in the Prospectus Supplements under the heading "Summary of
Terms -- Federal Income Tax Consequences" and in the Prospectus under the
heading "Federal Income Tax Consequences" are a fair and accurate summary of the
material tax consequences of the issuance and holding of the Notes. There can be
no assurance, however, that the legal conclusions presented therein will not be
successfully challenged by the relevant administrative authorities, or
significantly altered by new legislation, changes in administrative positions,
or judicial decisions, any of which challenges or alterations may be applied
retroactively with respect to completed transactions.
We note that the Prospectus does not relate to a specific transaction.
Accordingly, the above-referenced description of federal income tax consequences
may, under certain circumstances, require modification in the context of an
actual transaction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the Prospectus
Supplements under the caption "Legal Matters" and in the Prospectus under the
caption "Federal Income Tax Consequences."
No opinion has been sought and none has been given concerning the tax treatment
of the issuance and sale of the Notes under the laws of any state.
Very truly yours,
Thompson Hine & Flory LLP
<PAGE> 1
EXHIBIT 99.1
[ONLY FOR TRANSACTIONS WITH AUCTION RATE NOTES]
APPENDIX I
GENERAL
The following description of the Auction Procedures applies to each Series of
Auction Rate Notes (to the extent set forth in the Prospectus Supplement). The
term "Note," as used in this Appendix, refers to each Series of Auction Rate
Notes, and the term "Noteholder" refers to Noteholders holding Auction Rate
Notes.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus and Prospectus Supplement. Additionally,
the following terms have the meanings ascribed to them:
"All Hold Rate" means 90% of One-Month LIBOR.
"Auction" means the implementation of the Auction Procedures on an Auction Date.
"Auction Agent" means the initial auction agent under the initial Auction Agent
Agreement unless and until a substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the substitute auction agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement unless and
until a substitute Auction Agent Agreement is entered into, after which "Auction
Agent Agreement" shall mean such substitute Auction Agent Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Auction Date" means, with respect to the Initial Period for each Series of
Notes, the date set forth in the related Prospectus Supplement, and thereafter,
the Business Day immediately preceding the first day of each Auction Period for
each Note, other than:
(i) each Auction Period commencing after the ownership of
the Notes is no longer maintained in book-entry form by the Depository;
(ii) each Auction Period commencing after and during the
continuance of an Event of Default; or
I-1
<PAGE> 2
(iii) each Auction Period commencing less than two Business
Days after the cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the Indenture, as described herein.
"Auction Period" means, with respect to each Note, the Interest Accrual Period
applicable to such Note during which time the applicable Series Interest Rate is
determined pursuant to the related Indenture, which Auction Period (after the
Initial Period for such Note) initially shall consist of between seven days and
one year (as set forth in the related Prospectus Supplement), as the same may be
adjusted pursuant to such Indenture.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the related Indenture, as described herein.
"Auction Procedures" means the procedures set forth in the related Indenture,
and described herein by which the Auction Rate applicable to a Note is
determined.
"Auction Rate" means, with respect to any Note, the rate of interest per annum
that results from the implementation of the Auction Procedures and is determined
as described in the Indenture and this Appendix I.
"Authorized Denominations" means, with respect to any Note, [$50,000] and any
integral multiple in excess thereof.
"Broker-Dealer" means the initial broker-dealer under the initial Broker-Dealer
Agreement or any other broker or dealer (each as defined in the Notes Exchange
Act of 1934, as amended), commercial bank or other entity permitted by law to
perform the functions required of a Broker-Dealer set forth in the Auction
Procedures that (a) is a Participant (or an affiliate of a Participant), (b) has
been appointed as such by the Issuer pursuant to the Indenture and (c) has
entered into a Broker-Dealer Agreement that is in effect on the date of
reference.
"Broker-Dealer Agreement" means each agreement between the Auction Agent and a
Broker-Dealer, and approved by the Issuer, pursuant to which the Broker-Dealer
agrees to participate in Auctions as set forth in the Auction Procedures, as
from time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Existing Noteholder" means (i) with respect to and for the purpose of dealing
with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Noteholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Note.
I-2
<PAGE> 3
"Existing Noteholder Registry" means the registry of Persons who are owners of
the Notes, maintained by the Auction Agent as provided in the Auction Agent
Agreement.
"Expected Interest Collections" means, with respect to any Collection Period,
the sum of (i) the amount of interest accrued, net of amounts required to be
paid to the Department of Education or to be repaid to Guarantee Agencies
(including for the purpose a guarantor or escrow fund under a Private Loan
Program), with respect to the Financed Student Loans in the related Trust Estate
for such Collection Period (whether or not such interest is actually paid), (ii)
all Interest Subsidy Payments and Special Allowance Payments pursuant to claims
submitted for such Collection Period (whether or not actually received), net of
amounts required to be paid to the Department of Education, with respect to
Financed FFELP Loans in the related Trust Estate, to the extent not included in
(i) above, and (iii) Investment Earnings on the amounts on deposit allocable to
the related Trust Estate with respect to such Collection Period prior to the
related Distribution Date.
"Federal Funds Rate" means, for any date of determination, the federal funds
(effective) rate as published on page [118] of the Dow Jones Telerate Service
(or such other page as may replace that page on that service for the purpose of
displaying comparable rates or prices) on the immediately preceding Business
Day. If no such rate is published on such page on such date, "Federal Funds
Rate" shall mean for any date of determination, the Federal funds (effective)
rate as published by the Federal Reserve Board in the most recent edition of
Federal Reserve Statistical Release No. H.15 (519) that is available on the
Business Day immediately preceding such date.
"Initial Period" means, as to any Note, the period commencing on the Closing
Date of such Note and continuing through the day immediately preceding the Note
Initial Interest Adjustment Date for such Note.
"Initial Rate" means, with respect to any Series of Notes, the rate identified
as such in the related Prospectus Supplement.
"Initial Rate Adjustment Date" means, with respect to any Series of Notes, the
date identified as such in the related Prospectus Supplement.
"Interest Adjustment Date" means, with respect to each Note, the date on which
the applicable Series Interest Rate is effective and means, with respect to each
such Note, the date of commencement of each Auction Period.
"Interest Determination Date" means, with respect to any Note, the Auction Date,
or if no Auction Date is applicable to such Series, the Business Day immediately
preceding the date of commencement of an Auction Period.
"Interest Accrual Period" means, with respect to a Note, the Initial Period for
such Note and each period commencing on the Interest Adjustment Date for such
Note and ending on the day before (i) the next Interest Adjustment Date for such
Note or (ii) the Legal Final Maturity of such Note, as applicable.
"Market Agent" means the entity named as market agent under the Indenture, or
any successor to it in such capacity thereunder.
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"Maximum Auction Rate" generally means (i) for Auction Periods of 34 days or
less, either (A) the greater of (1) One-Month LIBOR plus [0.60]% or (2) the
Federal Funds Rate plus [0.60]% (if both ratings assigned by the Rating Agencies
to the applicable Note are "Aa3" or "AA-" or better) or (B) One-Month LIBOR plus
[1.50]% (if any one of the ratings assigned by the Rating Agencies to the Note
is less than "Aa3" or "AA-") or (ii) for Auction Periods of greater than or
equal to 35 days, either (A) the greater of One-Month LIBOR or Three-Month
LIBOR, plus in either case, [0.60]% (if both of the ratings assigned by the
Rating Agencies to the applicable Note are "Aa3" or "AA-" or better) or (B) the
greater of One-Month LIBOR or Three-Month LIBOR, plus in either case, [1.50]%
(if any one of the ratings assigned by the Rating Agencies to the applicable
Note is less than "Aa3" or "AA-") or such other rate as may be set forth in the
related Prospectus Supplement. For purposes of the Auction Agent and the Auction
Procedures, the ratings referred to in this definition shall be the last ratings
of which the Auction Agent has been given notice pursuant to the Auction Agent
Agreement.
"Net Loan Rate" means, with respect to the any Interest Accrual Period for a
Series of Notes, the annualized percentage rate determined by multiplying (a)
the ratio of 365 (or 366 in the case of a leap year) to the actual number of
days in such Interest Accrual Period, and (b) the ratio of (i) Expected Interest
Collections for the related Collection Period less Program Operating Expenses
with respect to such Collection Period, to (ii) the Pool Balance as of the first
day of such Collection Period. In making the determination of the Net Loan Rate
applicable to such Series of Notes, the Indenture Trustee shall take into
account as an increase to such Net Loan Rate the receipt of any Counterparty
Exchange Payments relating to such Series, expressed as a percentage per annum
of the Series.
"Non-Payment Rate" means One-Month LIBOR plus [1.50]%, as the same may be
adjusted pursuant to an Indenture.
"One-Month LIBOR" means the London interbank offered rate for deposits in U.S.
dollars having a maturity of one month commencing on the related LIBOR
Determination Date (the "One-Month Index Maturity") which appears on Telerate
Page 5 as of 11:00 a.m., London time, on such LIBOR Determination Date. If such
rate does not appear on Telerate Page 5, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the One-Month Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the One-Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, One-Month
LIBOR in effect for the applicable Interest Accrual Period will be One-Month
LIBOR in effect for the previous Interest Accrual Period.
"Person" means any individual, corporation, estate, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization or government or any agency or political subdivision
thereof.
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"Potential Noteholder" means any Person (including an Existing Noteholder that
is (i) a Broker-Dealer when dealing with the Auction Agent and (ii) a potential
beneficial owner when dealing with a Broker-Dealer) who may be interested in
acquiring Notes (or, in the case of an Existing Noteholder thereof, an
additional principal amount of Notes).
"Three-Month LIBOR" means the London interbank offered rate for deposits in U.S.
dollars having a maturity of three months commencing on the related LIBOR
Determination Date (the "Three-Month Index Maturity") which appears on Telerate
Page 5 as of 11:00 a.m., London time, on such LIBOR Determination Date. If such
rate does not appear on Telerate Page 5, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the Three-Month Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Three-Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, Three-Month
LIBOR in effect for the applicable Interest Accrual Period will be Three-Month
LIBOR in effect for the previous Interest Accrual Period.
EXISTING NOTEHOLDERS AND POTENTIAL NOTEHOLDERS
Participants in each Auction will include: (1) "Existing Noteholders," which
shall mean any Noteholder according to the records of the Auction Agent at the
close of business on the Business Day preceding each Auction Date; and (ii)
"Potential Noteholders," which shall mean any Person, including any Existing
Noteholder or a Broker/Dealer, who may be interested in acquiring Notes (or, in
the case of an Existing Noteholder, an additional principal amount of the Notes
such Noteholder then holds). See "- Broker-Dealer" herein.
By purchasing a Note, whether in an Auction or otherwise, each prospective
purchaser of Notes or its Broker-Dealer must agree and will be deemed to have
agreed: (i) to participate in Auctions on the terms described herein; (ii) so
long as the beneficial ownership of the Notes is maintained in book-entry form
to sell, transfer or otherwise dispose of the Notes only pursuant to a Bid (as
defined below) or a Sell Order (as defined below) in an Auction, or to or
through a Broker-Dealer, provided that in the case of all transfers other than
those pursuant to an Auction, the Existing Noteholder of the Notes so
transferred, its Participant or Broker-Dealer advises the Auction Agent of such
transfer; (iii) to have its beneficial ownership of Notes maintained at all
times in book-entry form for the account of its Participant, which in turn will
maintain records of such beneficial ownership, and to authorize such Participant
to disclose to the Auction Agent such information with respect to such
beneficial ownership as the Auction Agent may request; (iv) that a Sell Order
placed by an Existing Noteholder will constitute an irrevocable offer to sell
the principal amount of the Note specified in such Sell Order; (v) that a Bid
placed by an Existing Noteholder will constitute an irrevocable offer to sell
the principal amount of the Note specified in such Bid if the rate specified in
such Bid is greater than, or in some cases equal to, the Series Interest Rate of
such Note, determined as described herein; and (vi) that a Bid placed by a
Potential Noteholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Note specified in such Bid if the
rate specified in such Bid
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is, respectively, less than or equal to the Series Interest Rate of the
specified Note, determined as described herein.
The principal amount of the Notes purchased or sold may be subject to probation
procedures on the Auction Date. Each purchase or sale of Notes on the Auction
Date will be made for settlement on the first day of the Interest Accrual Period
immediately following such Auction Date at a price equal to 100% of the
principal amount thereof, plus accrued but unpaid interest thereon. The Auction
Agent is entitled to rely upon the terms of any Order submitted to it by a
Broker-Dealer.
AUCTION AGENT
An entity named in the related Prospectus Supplement will be appointed as
Auction Agent to serve as agent for the Issuer in connection with Auctions. The
Indenture Trustee and the Issuer will enter into the Auction Agreement with the
Auction Agent. Any Auction Agent or Substitute Auction Agent will be (i) a bank,
national banking association or trust company duly organized under the laws of
the United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such other
location as approved by the Indenture Trustee and the Market Agent in writing
and having a combined capital stock or surplus of at least $50,000,000, or (ii)
a member of the National Association of Notes Dealers, Inc. having a
capitalization of at least $50,000,000, and, in either case, authorized by law
to perform all the duties imposed upon it under the Indenture and under the
Auction Agent Agreement. The Auction Agent may at any time resign and be
discharged of the duties and obligations created by the Indenture by giving at
least 90 days notice to the Indenture Trustee, the Issuer and the Market Agent.
The Auction Agent may be removed at any time by the Indenture Trustee upon the
written direction of any provider of Credit Enhancement, if applicable, or, with
the consent of the providers of Credit Enhancement, if applicable, the
Noteholders of 66-2/3% of the aggregate principal amount of the Notes then
outstanding, by an instrument signed by the providers of Credit Enhancement, if
applicable, or such Noteholders or their attorneys and filed with the Auction
Agent, the Issuer, the Indenture Trustee and the Market Agent upon at least 90
days' notice. Neither resignation nor removal of the Auction Agent pursuant to
the preceding two sentences will be effective until and unless a Substitute
Auction Agent has been appointed and has accepted such appointment. If required
by the Issuer or by the Market Agent, with the Issuer's consent, a Substitute
Auction Agent Agreement shall be entered into with a Substitute Auction Agent.
Notwithstanding the foregoing, the Auction Agent may terminate the Auction Agent
Agreement if, within 25 days after notifying the Indenture Trustee, the Issuer,
the providers of Credit Enhancement, if applicable, and the Market Agent in
writing that it has not received payment of any Auction Agent Fee due it in
accordance with the terms of the Auction Agent Agreement, the Auction Agent does
not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Indenture Trustee, at the direction of
the Issuer (after receipt of a certificate from the Market Agent confirming that
any proposed Substitute Auction Agent meets the requirements described in the
immediately preceding paragraph above), shall use its best efforts to appoint a
Substitute Auction Agent.
The Auction Agent is acting as agent for the Issuer in connection with Auctions.
In the absence of bad, faith, negligent failure to act or negligence on its
part, the Auction Agent will not be liable for any action taken, suffered or
omitted or any error of judgment made by it in the performance of its duties
under the Auction
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Agent Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining (or
failing to ascertain) the pertinent facts.
The Indenture Trustee will pay the Auction Agent the Auction Agent Fee on the
Distribution Date set forth in the related Prospectus Supplement, and will
reimburse the Auction Agent upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Auction Agent in accordance
with any provision of the Auction Agent Agreement or the Broker-Dealer
Agreements (including the reasonable compensation and the expenses and
disbursements of its agents and counsel). The Issuer will indemnify and hold
harmless the Auction Agent for and against any loss, liability or expense
incurred without negligence or bad faith on the Auction Agent's part, arising
out of or in connection with the acceptance or administration of its agency
under the Auction Agent Agreement and the Broker-Dealer Agreements including the
reasonable costs and expenses (including the reasonable fees and expenses of its
counsel) of defending itself against any such claim or liability in connection
with its exercise or performance of any of its respective duties thereunder and
of enforcing this indemnification provision; provided that the Issuer will not
indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under the Broker-Dealer Agreements,
such fees and expenses being payable as described above.
BROKER-DEALER
Existing Noteholders and Potential Noteholders may participate in Auctions only
by submitting orders (in the manner described below) through a "Broker-Dealer,"
including the Broker-Dealer, as the sole Broker-Dealer or any other broker or
dealer (each as defined in the Notes Exchange Act of 1934, as amended),
commercial bank or other entity permitted by law to perform the functions
required of a Broker-Dealer set forth below which (i) is a Participant or an
affiliate of a Participant, (ii) has been selected by the Issuer and (iii) has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is payable by the
Auction Agent from monies received from the Indenture Trustee, on the
Distribution Date set forth in the related Prospectus Supplement.
MARKET AGENT
In connection with each Series of Notes, the "Market Agent," will act solely as
agent of the Issuer and will not assume any obligation or relationship of agency
or trust for or with any of the Noteholders.
AUCTION PROCEDURES
GENERAL
Pursuant to the related Indenture, Auctions to establish the Auction Rate for
each Auction Rate Note will be held on each applicable Auction Date, except as
described below, by application of the Auction Procedures described herein. Such
procedures are to be applicable separately to each Series of Notes.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold Rate and
One-Month LIBOR or Three-Month LIBOR, as the case may be, on each Auction Date.
The Administrator will calculate and,
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no later than the Business Day preceding each Auction Date, will report to the
Auction Agent in writing, the Net Loan Rate. If the ownership of a Note is no
longer maintained in book-entry form, the Indenture Trustee will calculate the
Maximum Auction Rate, and Administrator will report to the Indenture Trustee in
writing the Net Loan Rate, on the Business Day immediately preceding the first
day of each Interest Accrual Period commencing after delivery of such Note. If
an Event of Default has occurred, the Indenture Trustee will calculate the
Non-Payment Rate on the Interest Determination Date for (i) each Interest
Accrual Period commencing after the occurrence and during the continuance of
such Payment Default and (ii) any Interest Accrual Period commencing less than
two Business Days after the cure of any Event of Default. The Auction Agent will
determine One-Month LIBOR or the Three-Month LIBOR, as applicable, for each
Interest Accrual Period other than the Initial Period for a Note; provided, that
if the ownership of the Notes is no longer maintained in book-entry form, or if
an Event of Default has occurred, then the Indenture Trustee will determine the
One-Month LIBOR or the Three-Month LIBOR, as applicable, for each such Interest
Accrual Period. The determination by the Indenture Trustee or the Auction Agent,
as the case may be, of the One-Month LIBOR or the Three-Month LIBOR, as
applicable, will (in the absence of manifest error) be final and binding upon
the Noteholders and all other parties. If calculated or determined by the
Auction Agent, the Auction Agent will promptly advise the Indenture Trustee of
the One-Month LIBOR or the Three-Month LIBOR, as applicable.
SUBMISSION OF ORDERS
As long as the ownership of the Notes is maintained in book-entry form, an
Existing Noteholder may sell, transfer or otherwise dispose of Notes only
pursuant to a Bid or Sell Order (as hereinafter defined) placed in an Auction or
through a Broker-Dealer, provided that, in the case of all transfers other than
pursuant to Auctions, such Existing Noteholder, its Broker-Dealer or its
Participant advises the Auction Agent of such transfer. Auctions for each Series
of Notes will be conducted on each applicable Auction Date, if there is an
Auction Agent on such Auction Date, in the following manner (such procedures to
be applicable separately to each Series of Notes).
Prior to the Submission Deadline (defined as 1:00 P.M., eastern time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time) on each Auction Date relating to a Note:
(a) each Existing Noteholder of the applicable Notes may submit to a
Broker-Dealer by telephone or otherwise information as to: (i) the principal
amount and Series of outstanding Notes, if any, held by such Existing Noteholder
that such Existing Noteholder desires to continue to hold without regard to the
Series Interest Rate for such Notes for the next succeeding Auction Period (a
"Hold Order"); (ii) the principal amount and Series of outstanding Notes, if
any, which such Existing Noteholder offers to sell if the Series Interest Rate
for such Notes for the next succeeding Auction Period will be less than the rate
per annum specified by such Existing Noteholder (a "Bid"); and/or (iii) the
principal amount and Series of outstanding Notes, if any, held by such Existing
Noteholder which such Existing Noteholder offers to sell without regard to the
Series Interest Rate for such Notes for the next succeeding Auction Period (a
"Sell Order"); and
(b) one or more Broker-Dealers may contact Potential Noteholders to
determine the principal amount and Series of Notes which each such Potential
Noteholder offers to purchase, if the Series Interest Rate for such Notes for
the next succeeding Auction Period will not be less than the rate per annum
specified by such Potential Noteholder (also a "Bid").
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Each Hold Order, Bid and Sell Order will be an "Order." Each Existing Noteholder
and each Potential Noteholder placing an Order is referred to as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid by
an Existing Noteholder will constitute an irrevocable offer to sell: (i) the
principal amount and Series of the outstanding Notes specified in such Bid if
the Series Interest Rate for such Notes will be less than the rate specified in
such Bid, (ii) such principal amount or a lesser principal amount and Series of
the outstanding Notes to be determined as described below in "Acceptance and
Rejection of Orders," if the Series Interest Rate for such Notes will be equal
to the rate specified in such Bid or (iii) such principal amount or a lesser
principal amount of the then outstanding Notes to be determined as described
below under "Acceptance and Rejection of Orders," if the rate specified therein
will be higher than the Series Interest Rate for such Notes and Sufficient Bids
(as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a Sell
Order by an Existing Noteholder will constitute an irrevocable offer to sell:
(i) the principal amount of the Note specified in such Sell Order or (ii) such
principal amount or a lesser principal amount of outstanding Notes of the
specified Note as described below under "Acceptance and Rejection of Orders," if
Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid by a
Potential Noteholder will constitute an irrevocable offer to purchase: (i) the
principal amount of the Note specified in such Bid if the Series Interest Rate
for such Notes will be higher than the rate specified in such Bid or (ii) such
principal amount or a lesser principal amount of such Notes as described below
in "Acceptance and Rejection of Orders," if the Series Interest Rate is equal to
the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and Series of
Note that are the subject of such Order; (iii) to the extent that such Bidder is
an Existing Noteholder: (a) the principal amount and Series of Notes, if any,
subject to any Hold Order placed by such Existing Noteholder; (b) the principal
amount, and Series of Notes, if any, subject to any Bid placed by such Existing
Noteholder and the rate specified in such Bid; and (c) the principal amount, and
Series of Notes, if any, subject to any Sell Order placed by such Existing
Noteholder, and (iv) to the extent such Bidder is a Potential Noteholder, the
rate specified in such Potential Noteholder's Bid.
If any rate specified in any Bid contains more than three figures to the right
of the decimal point, the Auction Agent will round such rate up to the next
highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Notes of the applicable Series held by any
Existing Noteholder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of such Existing Noteholder covering the principal amount of
Notes held by such Existing Noteholder and not subject to an Order submitted to
the Auction Agent.
Neither the Issuer, the Indenture Trustee nor the Auction Agent will be
responsible for any failure of a Broker-Dealer to submit an Order to the Auction
Agent on behalf of any Existing Noteholder or Potential Noteholder.
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An Existing Noteholder may submit multiple Orders, of different types and
specifying different rates, in an Auction with respect to Notes then held by
such Existing Noteholder. An Existing Noteholder that offers to purchase
additional Notes is, for purposes of such offer, treated as a Potential
Noteholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Noteholder and (ii) not be
accepted if submitted by a Potential Noteholder.
VALIDITY OF ORDERS
If any Existing Noteholder submits through a Broker-Dealer to the Auction Agent
one or more Orders covering in the aggregate more than the principal amount of
the Series of Notes held by such Existing Noteholder, such Orders will be
considered valid as follows and in the order of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the Series of Notes held by such Existing
Noteholder, and if the aggregate principal amount of the Series of Notes subject
to such Hold Orders exceeds the aggregate principal amount of the Series of
Notes held by such Existing Noteholder, the aggregate principal amount of the
Series of Notes subject to each such Hold Order will be reduced pro rata so that
the aggregate principal amount of the Series of Notes subject to all such Hold
Orders equals the aggregate principal amount of the Series of Notes held by such
Existing Noteholder.
Bids. Any Bid will be considered valid up to an amount equal to the excess of
the principal amount of the Series of Notes held by such Existing Noteholder
over the aggregate principal amount of such Note, subject to any Hold Orders
referred to above. Subject to the preceding sentence, if multiple Bids with the
same rate are submitted on behalf of such Existing Noteholder and the aggregate
principal amount of Notes subject to such Bids is greater than such excess, such
Bids will be considered valid up to an amount equal to such excess. Subject to
the two preceding sentences, if more than one Bid with different rates are
submitted on behalf of such Existing Noteholder, such Bids will be considered
valid first in the ascending order of their respective rates until the highest
rate is reached at which such excess exists and then at such rate up to the
amount of such excess. In any event, the aggregate principal amount of Notes, if
any, subject to Bids not valid under the provisions described above will be
treated as the subject of a Bid by a Potential Noteholder at the rate therein
specified.
Sell Orders. All Sell Orders will be considered valid up to an amount equal to
the excess of the principal amount of Notes of the Series held by such Existing
Noteholder over the aggregate principal amount of Notes subject to valid Hold
Orders and valid Bids as referred to above.
If more than one Bid for a Series of Note is submitted on behalf of any
Potential Noteholder, each Bid submitted will be a separate Bid with the rate
and principal amount therein specified. Any Bid or Sell Order submitted by an
Existing Noteholder covering an aggregate principal amount of Notes not equal to
an Authorized Denomination or an integral multiple thereof will be rejected and
will be deemed a Hold Order. Any Bid submitted by a Potential Noteholder
covering an aggregate principal amount of Notes not equal to an Authorized
Denomination or an integral multiple thereof will be rejected. Any Order
submitted in an Auction by a Broker-Dealer to the Auction Agent prior to the
Submission Deadline on any Auction Date will be irrevocable.
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A Hold Order, a Bid or a Sell Order that has been determined valid pursuant to
the procedures described above is referred to as a "Submitted Hold Order," a
"Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
DETERMINATION OF SUFFICIENT BID AND BID AUCTION RATE
Not earlier than the Submission Deadline on each Auction Date, the Auction Agent
will assemble all valid Submitted Orders and will determine:
(a) for the applicable Note, the excess of the total principal
amount of such Notes over the sum of the aggregate principal
amount of such Notes subject to Submitted Hold Orders (such
excess being hereinafter referred to as the "Available
Notes"); and
(b) from such Submitted Orders whether the aggregate principal
amount of Notes of such Series subject to Submitted Bids by
Potential Noteholders specifying one or more rates equal to or
lower than the Maximum Auction Rate exceeds or is equal to the
sum of (i) the aggregate principal amount of Notes of such
Series subject to Submitted Bids by Existing Noteholders
specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Notes of such
Series subject to Submitted Sell Orders (in the event such
excess or such equality exists other than because all of the
Notes are subject to Submitted Hold Orders, such Submitted
Bids by Potential Noteholders above will be hereinafter
referred to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will
be the lowest rate specified in such Submitted Bids such that
if:
(i) each such Submitted Bid from Existing Noteholders of
such Note specifying such lowest rate and all other
Submitted Bids from Existing Noteholders of such Note
specifying lower rates were rejected (thus entitling
such Existing Noteholders to continue to hold the
principal amount of Notes subject to such Submitted
Bids); and
(ii) each such Submitted Bid from Potential Noteholders of
such Note specifying such lowest rate and all other
Submitted Bids from Potential Noteholders specifying
lower rates, were accepted, the result would be that
such Existing Noteholders described in subparagraph
(c)(i) above would continue to hold an aggregate
principal amount of Notes which, when added to the
aggregate principal amount of Notes to be purchased
by such Potential Noteholders described in this
subparagraph (ii) would equal not less than the
Available Notes.
DETERMINATION OF AUCTION RATE AND SERIES INTEREST RATE; NOTICE
Promptly after the Auction Agent has made the determinations described above,
the Auction Agent is to advise the Indenture Trustee of the Net Loan Rate, the
Maximum Auction Rate, the All Hold Rate and the components thereof on the
Auction Date, and based on such determinations, the Auction Rate for the next
succeeding Interest Accrual Period for the applicable Note as follows:
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(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Accrual Period will be equal to the Bid
Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the
Notes of the applicable Note are subject to Submitted Hold
Orders), that the Auction Rate for the next succeeding
Interest Accrual Period will be equal to the Maximum Auction
Rate; or
(c) if all Notes of the applicable Note are subject to Submitted
Hold Orders, that the Auction Rate for the next succeeding
Interest Accrual Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the Auction
Agent will determine and advise the Indenture Trustee of the Series Interest
Rate for each applicable Note, which rate will be the lesser of (a) the Formula
Rate for each such Note and (b) the Net Loan Rate.
ACCEPTANCE AND REJECTION OF ORDERS
Existing Noteholders of the applicable Note will continue to hold the principal
amount of Notes of such Series that are subject to Submitted Hold Orders. If,
with respect to a Note, the Net Loan Rate is equal to or greater than the Bid
Auction Rate and if Sufficient Bids, as described above under "Determination of
Sufficient Bids and Bid Auction Rate," have been received by the Auction Agent,
the Bid Auction Rate will be the Series Interest Rate, and Submitted Bids and
Submitted Sell Orders will be accepted or rejected and the Auction Agent will
take such other action as provided in the Indenture and described below under
"Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Series Interest Rate
will be the Net Loan Rate. If the Auction Rate and the Net Loan Rate are both
greater than the Series Interest Rate limitation, the Series Interest Rate for
each Series shall be equal to the Series Interest Rate limitation. If the
Auction Agent has not received Sufficient Bids as described above under
"Determination of Sufficient Bids and Bid Auction Rate" (other than because all
of the Notes are subject to Submitted Holds Orders), the Series Interest Rate
will be the lesser of the Maximum Auction Rate or the Net Loan Rate. In any of
the cases described above in this paragraph, Submitted Orders will be accepted
or rejected and the Auction Agent will take such other action as described below
under "Insufficient Bids."
Sufficient Bids. If Sufficient Bids have been made with a respect to a Note and
the Net Loan Rate is equal to or greater than the Bid Auction Rate (in which
case the Series Interest Rate shall be the Bid Auction Rate), all Submitted Sell
Orders will be accepted and, subject to the denomination requirements described
below, Submitted Bids will be accepted or rejected as follows in the following
order of priority and all other Submitted Bids will be rejected:
(a) Existing Noteholders' Submitted Bids specifying any rate that
is higher than the Series Interest Rate will be accepted, thus
requiring each such Existing Noteholder to sell the aggregate
principal amount of Notes subject to such Submitted Bids;
(b) Existing Noteholders' Submitted Bids specifying any rate that
is lower than the Series Interest Rate will be rejected, thus
entitling each such Existing Noteholder to continue to hold
the aggregate principal amount of Notes subject to such
Submitted Bids;
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(c) Potential Noteholders' Submitted Bids specifying any rate that
is lower than the Series Interest Rate will be accepted;
(d) Each Existing Noteholder's Submitted Bid specifying a rate
that is equal to the Series Interest Rate will be rejected,
thus entitling such Existing Noteholder to continue to hold
the aggregate principal amount of Notes subject to such
Submitted Bid, unless the aggregate principal amount of Notes
subject to such Submitted Bids will be greater than the
principal amount of Notes (the "remaining principal amount")
equal to the excess of the Available Notes over the aggregate
principal amount of Notes subject to Submitted Bids described
in subparagraphs (b) and (c) above, in which event such
Submitted Bid of such Existing Noteholder will be rejected in
part and such Existing Noteholder will be entitled to continue
to hold the principal amount of Notes subject to such
Submitted Bid, but only in an amount equal to the aggregate
principal amount of Notes obtained by multiplying the
remaining principal amount by a fraction, the numerator of
which will be the principal amount of Notes held by such
Existing Noteholder subject to such Submitted Bid and the
denominator of which will be the sum of the principal amount
of Notes subject to such Submitted Bids made by all such
Existing Noteholders that specified a rate equal to the Series
Interest Rate; and
(e) Each Potential Noteholder's Submitted Bid specifying a rate
that is equal to the Series Interest Rate will be accepted,
but only in an amount equal to the principal amount of Notes
obtained by multiplying the excess of the aggregate principal
amount of Available Notes over the aggregate principal amount
of Notes subject to Submitted Bids described in subparagraphs
(b), (c) and (d) above by a fraction, the numerator of which
will be the aggregate principal amount of Notes subject to
such Submitted Bid and the denominator of which will be the
sum of the principal amount of Notes subject to Submitted Bids
made by all such Potential Noteholders that specified a rate
equal to the Series Interest Rate.
Insufficient Bids. If Sufficient Bids have not been made with respect to a Note
(other than because all of the Notes of such Series are subject to Submitted
Hold Orders) or if the Net Loan Rate is less than the Bid Auction Rate (in which
case the Series Interest Rate shall be the Net Loan Rate) or if the Series
Interest Rate limitation applies, subject to the denomination requirements
described below, Submitted Orders will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be rejected:
(a) Existing Noteholders' Submitted Bids specifying any rate that
is equal to or lower than the Series Interest Rate will be
rejected, thus entitling such Existing Noteholders to continue
to hold the aggregate principal amount of Notes subject to
such Submitted Bids;
(b) Potential Noteholders' Submitted Bids specifying any rate that
is equal to or lower than the Series Interest Rate will be
accepted, and specifying any rate that is higher than the
Series Interest Rate will be rejected; and
(c) each Existing Noteholder's Submitted Bid specifying any rate
that is higher than the Series Interest Rate and the Submitted
Sell Order of each Existing Noteholder will be accepted, thus
entitling each Existing Noteholder that submitted any such
Submitted Bid or Submitted Sell Order to sell the Notes
subject to such Submitted Bid or Submitted Sell Order, but in
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both cases only in an amount equal to the aggregate principal
amount of Notes obtained by multiplying the aggregate
principal amount of Notes subject to Submitted Bids described
in subparagraph (b) above by a fraction, the numerator of
which will be the aggregate principal amount of Notes held by
such Existing Noteholder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which will be the
aggregate principal amount of Notes subject to all such
Submitted Bids and Submitted Sell Orders.
All Hold Orders. If all Notes of a Series are subject to Submitted Hold Orders,
all Submitted Bids will be rejected.
Authorized Denominations Requirement. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Noteholder would be entitled or required to sell, or any Potential Noteholder
would be entitled or required to purchase, a principal amount of Notes that is
not equal to an Authorized Denomination or an integral multiple thereof, the
Auction Agent will, in such manner as in its sole discretion it will determine,
round up or down the principal amount of Notes to be purchased or sold by any
Existing Noteholder or Potential Noteholder so that the principal amount of
Notes purchased or sold by each Existing Noteholder or Potential Noteholder will
be equal to an Authorized Denomination or an integral multiple in excess
thereof. If, as a result of the procedures described above regarding
Insufficient Bids, any Potential Noteholder would be entitled or required to
purchase less than a principal amount of Notes equal to an Authorized
Denomination or any integral multiple thereof, the Auction Agent will, in such
manner as in its sole discretion it will determine, allocate Notes for purchase
among Potential Noteholders so that only Notes in an Authorized Denomination or
any integral multiples in excess thereof are purchased by any Potential
Noteholder, even if such allocation results in one or more of such Potential
Noteholders not purchasing any Notes.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Notes of each Series to be purchased and the
aggregate principal amount of Notes of each Series to be sold by Potential
Noteholders and Existing Noteholders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the
extent that such aggregate principal amount of Notes to be sold differs from
such aggregate principal amount of Notes to be purchased, determine to which
other Broker-Dealer or Broker-Dealers acting for one or more purchasers such
Broker-Dealer will deliver, or from which Broker-Dealers acting for one or more
sellers such Broker-Dealer will receive, as the case may be, Notes.
Any calculation by the Auction Agent (or the Indenture Trustee, if applicable)
of the Series Interest Rate, One-Month LIBOR, Three-Month LIBOR, the Maximum
Auction Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate
will, in the absence of manifest error, be binding on all other parties.
Notwithstanding anything in the Indenture to the contrary, no Auction is to be
held on any Auction Date on which there are insufficient moneys held by the
Indenture Trustee under the Indenture and available to pay the principal of and
interest due on the applicable Note on the Distribution Date immediately
following such Auction Date.
SETTLEMENT PROCEDURES
The Auction Agent is required to advise each Broker-Dealer that submitted an
Order in an Auction of the Series Interest Rate for a Note for the next Interest
Accrual Period and, if such Order was a Bid or Sell Order,
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whether such Bid or Sell Order was accepted or rejected, in whole or in part, by
telephone not later than 3:00 p.m., eastern time, on the Auction Date if the
Series Interest Rate is the Auction Rate and not later than 4:00 p.m. eastern
time on the Auction Date if the Series Interest Rate is the Net Loan Rate. Each
Broker-Dealer that submitted an Order on behalf of a Bidder is required to then
advise such Bidder of the applicable Series Interest Rate for the next Interest
Accrual Period and, if such Order was a Bid or a Sell Order, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, confirm purchases and
sales with each Bidder purchasing or selling Notes as a result of the Auction
and advise each Bidder purchasing or selling Notes as a result of the Auction to
give instructions to its Participant to pay the purchase price against delivery
of such Notes or to deliver such Notes against payment therefor, as appropriate.
Pursuant to the Auction Agent Agreement, the Auction Agent is to record each
transfer of Notes on the Existing Noteholders Registry to be maintained by the
Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the Depository, and the accounts of the respective Participants
at DTC will be debited and credited and Notes delivered as necessary to effect
the purchases and sales of Notes as determined in the Auction. Purchasers are
required to make payment through their Participants in same-day funds to DTC
against delivery through their Participants. DTC will make payment in accordance
with its normal procedures, which now provide for payment against delivery by
its Participants in immediately available funds.
If any Existing Noteholder selling Notes in an Auction fails to deliver such
Notes, the Broker-Dealer of any Person that was to have purchased Notes in such
Auction may deliver to such Person a principal amount of Notes that is less than
the principal amount of Notes that otherwise was to be purchased by such Person
but in any event equal to an Authorized Denomination or any integral multiple
thereof. In such event, the principal amount of Notes to be delivered will be
determined by such Broker-Dealer. Delivery of such lesser principal amount of
Notes will constitute good delivery. Neither the Indenture Trustee nor the
Auction Agent will have any responsibility or liability with respect to the
failure of a Potential Noteholder, Existing Noteholder or their respective
Broker-Dealer or Participant to deliver the principal amount of Notes or to pay
for the Notes purchased or sold pursuant to an Auction or otherwise. See
"Appendix II - Settlement Procedures" herein.
INDENTURE TRUSTEE NOT RESPONSIBLE FOR
AUCTION AGENT, MARKET AGENT AND
BROKER-DEALERS
The Indenture Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer under the
Indenture or under the Auction Agent Agreement, the Market Agent Agreement or
any Broker-Dealer Agreement. The Indenture Trustee may conclusively rely upon
any information required to be furnished by the Auction Agent, the Market Agent
or any Broker-Dealer without undertaking any independent review or investigation
of the truth or accuracy of such information.
CHANGES IN AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS
While any of the Notes are outstanding, the Administrator, may, from time to
time, change the length of the one or more Auction Periods in order to conform
with then current market practice with respect to similar
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Notes or to accommodate economic and financial factors that may affect or be
relevant to the length of the Auction Period and the interest rate borne by the
Notes (an "Auction Period Adjustment"). The Administrator will not initiate such
change in the length of the Auction Period unless it shall have received the
written consent from the Market Agent, which consent will not be unreasonably
withheld, not less than three days nor more than 20 days prior to the effective
date of an Auction Period Adjustment. The Administrator will initiate an Auction
Period Adjustment by giving written notice to the Indenture Trustee, the Auction
Agent, the Market Agent, any provider of Credit Enhancement and the Depository
in substantially the form of, or containing substantially the information
contained in, the Indenture at least 10 days prior to the Auction Date for such
Auction Period.
Any such Auction Period Adjustment shall not result in an Auction Period of less
than 7 days nor more than 91 days. If any such Auction Period Adjustment will
result in an Auction Period of less than the number of days in the then current
Auction Period, the notice described above will be effective only if it is
accompanied by a written statement of the Indenture Trustee, the Issuer, the
Auction Agent and the Depository to the effect that they are capable of
performing their duties, if any, under the Indenture, the Auction Agent
Agreement and any Broker-Dealer Agreement with respect to such changed Auction
Period.
An Auction Period Adjustment will take effect only if (A) the Indenture Trustee
and the Auction Agent receive, by 11:00 A.M., eastern time, on the Business Day
before the Auction Date for the first such Auction Period, a certificate from
the Issuer authorizing an Auction Period Adjustment specified in such
certificate, the certificate of the Market Agent described above and the written
statement of the Indenture Trustee, the Issuer, the Auction Agent and the
Depository described above and (B) Sufficient Bids exist at the Auction on the
Auction Date for such first Auction Period. If the condition referred to in (A)
is not met, the Series Interest Rate applicable for the next Auction Period will
be determined pursuant to the Auction Procedures and the Auction Period will be
the Auction Period determined without reference to the proposed change. If the
condition referred to in (A) is met, but the condition referred to in (B) above
is not met, the Series Interest Rate applicable for the next Auction Period will
be the lesser of the Maximum Auction Rate and the Net Loan Rate and the Auction
Period will be the Auction Period determined without reference to the proposed
change.
CHANGES IN THE AUCTION DATE
The Market Agent, at the written direction of the Issuer, may specify an earlier
Auction Date (but in no event more than five Business Days earlier) than the
Auction Date that would otherwise be determined in accordance with the
definition of "Auction Date" with respect to one or more specified Auction
Periods in order to conform with then current market practice with respect to
similar Notes or to accommodate economic and financial factors that may affect
or be relevant to the day of the week constituting an Auction Date and the
interest rate borne on the Notes. The Issuer will not consent to such change in
the Auction Date unless the Issuer will have received from the Market Agent not
less than three days nor more than 20 days prior to the effective date of such
change a written request for consent together with a certificate demonstrating
the need for change in reliance on such factors. The Market Agent will provide
notice of its determination to specify an earlier Auction Date for one or more
Auction Periods by means of a written notice delivered at least 10 days prior to
the proposed changed Auction Date to the Indenture Trustee, the Auction Agent,
the Issuer and the Depository.
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The changes in Auction terms described above may be made with respect to any
Series of the Notes. In connection with any change in Auction Terms described
above, the Auction Agent is to provide such further notice to such parties as is
specified in the Auction Agent Agreement.
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[ONLY FOR TRANSACTIONS WITH AUCTION RATE NOTES]
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each Series of Notes.
(a) Not later than (i) 3:00 P.M. if the Series Interest Rate is
the Auction Rate or (2) 4:00 p.m. if the Series Interest Rate
is the Net Loan Rate, the Auction Agent is to notify by
telephone each Broker-Dealer that participated in the Auction
held on such Auction Date and submitted an Order on behalf of
an Existing Noteholder or Potential Noteholder of:
(i) the Series Interest Rate fixed for the next Interest
Accrual Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an
Existing Noteholder, whether such Bid or Sell Order
was accepted or rejected, in whole or in part, and
the principal amount of Notes, if any, to be sold by
such Existing Noteholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Noteholder,
whether such Bid was accepted or rejected, in whole
or in part, and the principal amount of Notes, if
any, to be purchased by such Potential Noteholder;
(v) if the aggregate amount of Notes to be sold by all
Existing Noteholders on whose behalf such Seller's
Broker-Dealer submitted Bids or Sell Orders exceeds
the aggregate principal amount of Notes to be
purchased by all Potential Noteholders on whose
behalf such Buyer's Broker-Dealer submitted a Bid,
the name or names of one or more Buyer's
Broker-Dealers and the name of the Participant, if
any, of each such Buyer's Broker-Dealer (an
"Participant") acting for one or more purchasers of
such excess principal amount of Notes and the
principal amount of Notes to be purchased from one or
more Existing Noteholders on whose behalf such
Seller's Broker-Dealer acted by one or more Potential
Noteholders on whose behalf each of such Buyer's
Broker-Dealers acted;
(vi) if the principal amount of Notes to be purchased by
all Potential Noteholders on whose behalf such
Buyer's Broker-Dealer submitted a Bid exceeds the
amount of Notes to be sold by all Existing
Noteholders on whose behalf such Seller's
Broker-Dealer submitted a Bid or a Sell Order, the
name or names of one or more Seller's Broker-Dealers
(and the name of the Participant, if any, of each
such
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Seller's Broker-Dealer) acting for one or more
sellers of such excess principal amount of Notes and
the principal amount of Notes to be sold to one or
more Potential Noteholders on whose behalf such
Buyer's Broker-Dealer acted by one or more Existing
Noteholder on whose behalf each of such Seller's
Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an
Order on behalf of any Existing Noteholder or Potential
Noteholder is to:
(i) advise each Existing Noteholder and Potential
Noteholder on whose behalf such Broker-Dealer
submitted a Bid or Sell Order in the Auction on such
Auction Date whether such Bid or Sell Order was
accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Noteholder on
whose behalf such Buyer's Broker-Dealer submitted a
Bid that was accepted, in whole or in part, to
instruct such Potential Noteholder's Participant to
pay to such Buyer's Broker-Dealer (or its
Participant) through the Depository the amount
necessary to purchase the principal amount of the
Notes to be purchased pursuant to such Bid against
receipt of such Notes together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Noteholder on
whose behalf such Seller's Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part, or
a Bid that was accepted, in whole or in part, to
instruct such Existing Noteholder's Participant to
deliver to such Seller's Broker-Dealer (or its
Participant) through the Depository the principal
amount of the Notes to be sold pursuant to such Order
against payment therefor;
(iv) advise each Existing Noteholder on whose behalf such
Broker-Dealer submitted an Order and each Potential
Noteholder on whose behalf such Broker-Dealer
submitted a Bid of the Series Interest Rate for the
next Interest Accrual Period;
(v) advise each Existing Noteholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction
Date; and
(vi) advise each Potential Noteholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in
whole or in part, of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid
or Sell Order in an Auction is required to allocate any funds
received by it in connection with such Auction pursuant to
paragraph (b)(ii) above, and any Notes received by it in
connection with such Auction pursuant to paragraph (b)(iii)
above, among the Potential Noteholders, if any, on whose
behalf such Broker-Dealer submitted Bids, the Existing
Noteholder, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell Orders in such Auction, and any
Broker-Dealers identified to it by the Auction Agent following
such Auction pursuant to paragraph (a)(v) or (a)(vi) above.
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(d) On each Auction Date:
(i) each Potential Noteholder and Existing Noteholder
with an Order in the Auction on such Auction Date
will instruct its Participant as provided in (b)(ii)
or (b)(iii) above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant
of the Depository will instruct its Participant to
deliver such Notes through the Depository to a
Buyer's Broker-Dealer (or its Participant) identified
to such Seller's Broker-Dealer pursuant to (a)(v)
above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant
in the Depository will instruct its Participant to
pay through the Depository to Seller's Broker-Dealer
(or its Participant) identified following such
Auction pursuant to (a)(vi) above the amount
necessary to purchase the Notes to be purchased
pursuant to (b)(ii) above against receipt of such
Notes.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such
Auction Date referred to in (d)(i) above will
instruct the Depository to execute the transactions
described under (b)(ii) or (b)(iii) above for such
Auction, and the Depository will execute such
transactions;
(ii) each Seller's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions
described in (d)(ii) above for such Auction, and the
Depository will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions
described in (d)(iii) above for such Auction, and the
Depository will execute such transactions.
(f) If an Existing Noteholder selling Notes in an Auction fails to
deliver such Notes (by authorized book-entry), a Broker-Dealer
may deliver to the Potential Noteholder on behalf of which it
submitted a Bid that was accepted a principal amount of Notes
that is less than the principal amount of Notes that otherwise
was to be purchased by such Potential Noteholder. In such
event, the principal amount of Notes to be so delivered will
be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal
amount of Notes will constitute good delivery. Notwithstanding
the foregoing terms of this paragraph (f), any delivery or
nondelivery of Notes which will represent any departure from
the results of an Auction, as determined by the Auction Agent,
will be of no effect unless and until the Auction Agent will
have been notified of such delivery or nondelivery in
accordance with the provisions of the Auction Agent Agreement
and the Broker-Dealer Agreements. Neither the Indenture
Trustee nor the Auction Agent will have any responsibility or
liability with respect to the failure of a Potential
Noteholder, Existing Noteholder or their Respective
Broker-Dealer or Participant to take delivery of
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or deliver, as the case may be, the principal amount of the
Notes purchased or sold pursuant to an Auction or otherwise.
[Remainder of page intentionally left blank.]
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