<PAGE> 1
As filed with the Securities and Exchange Commission on May 26, 1999
Registration No. 333-73455
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
STUDENT LOAN FUNDING 1998 - A/B TRUST
(Issuer)
STUDENT LOAN FUNDING LLC
(Depositor)
(Exact name of registrant as specified in its charter)
Delaware 6159 31-1599686
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
ONE WEST FOURTH STREET, SUITE 210
CINCINNATI, OHIO 45202
(513) 763-4415
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
MICHAEL H. SHAUT, PRESIDENT
ONE WEST FOURTH STREET, SUITE 210
CINCINNATI, OHIO 45202
(513) 352-4300 (513) 763-4340 (TELECOPY)
(Name, address, including zip code and telephone number, including
area code, of agent for service)
COPIES TO: ROBERT A. SELAK AND TO: PAUL F. SEFCOVIC
THOMPSON HINE & FLORY LLP SQUIRE, SANDERS & DEMPSEY L.L.P.
312 WALNUT STREET, SUITE 1400 41 SOUTH HIGH STREET, SUITE 1300
CINCINNATI, OHIO 45202 COLUMBUS, OHIO 43215
(513) 352-6700 (614) 365-2700
(513) 241-4771 (TELECOPY) (614) 365-2499 (TELECOPY)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ] __________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Amount of
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Registration
Being Registered Registered(1) Offering Price Per Unit Aggregate Offering Price Fee(2)(3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series 1998A1-3 Notes $385,000,000 100% $385,000,000 $107,030
- -----------------------------------------------------------------------------------------------------------------------------
Series 1998A1-4 Notes $93,300,000 100% $93,300,000 $25,937
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Series 1998A1-5 Notes $90,000,000 100% $90,000,000 $25,020
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Series 1998A1-6 Notes $90,000,000 100% $90,000,000 $25,020
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Series 1998B1-3 Notes $54,500,000 100% $54,500,000 $15,151
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</TABLE>
(1) Equals the aggregate principal amount of the securities being registered.
(2) Pursuant to Rule 457(f)(2), the registration fee has been calculated using
the book value of the securities being offered.
(3) Previously paid.
THE REGISTRANT AMENDS THIS REGISTRATION STATEMENT ON THIS 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 UNDER SECTION 8(A) OF THE SECURITIES ACT OF
1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON THIS DATE AS
THE SEC, ACTING UNDER SAID SECTION 8(A), MAY DETERMINE.
<PAGE> 2
Prospectus
STUDENT LOAN FUNDING 1998 - A/B TRUST
(ISSUER)
OFFER TO EXCHANGE
$365,036,478.23 Senior Asset-Backed Notes, Series 1998A1-3 (LIBOR Floating
Rate)
$93,300,000 Senior Asset-Backed Callable Notes, Series 1998A1-4 (Auction Rate)
$90,000,000 Senior Asset-Backed Callable Notes, Series 1998A1-5 (Auction Rate)
$90,000,000 Senior Asset-Backed Callable Notes, Series 1998A1-6 (Auction Rate)
$54,500,000 Subordinate Asset-Backed Notes, Series 1998B1-3 (Fixed Rate)
for similarly titled notes issued by the issuer on December 22, 1998.
- --------------------------------------------------------------------------------
The notes are payable solely from the financed student loans and other
assets of the trust.
The principal amount of the notes, at March 31, 1999, exceeds the sum
of principal and accrued interest on the financed student loans and other assets
pledged to secure the notes by approximately $13,598,000.
In some cases, holders of auction rate notes may be required to tender
their notes for purchase.
- --------------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 OF THIS PROSPECTUS FOR A DISCUSSION OF
FACTORS THAT YOU SHOULD CONSIDER BEFORE DECIDING TO PARTICIPATE IN THE EXCHANGE
OFFER OR TO PURCHASE NOTES IN RESALES BY BROKER-DEALERS.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The dealer manager for the exchange offer is:
SALOMON SMITH BARNEY INC.
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The date of this prospectus is May 26, 1999.
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<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.................................................................................5
Risk Factors......................................................................................19
Where You Can Find More Information...............................................................30
The Issuer....................................................................................... 30
The Trust.................................................................................. 30
Co-owner Trustee............................................................................32
Owner Trustee...............................................................................32
The Administrator and Master Servicer.......................................................32
The Depositor.....................................................................................34
Use of Proceeds...................................................................................38
The Exchange Offer............................................................................... 38
Purpose of the Exchange Offer.............................................................. 38
Effect of the Exchange Offer................................................................39
Terms of the Exchange Offer.................................................................39
Expiration Date; Extensions; Amendments.....................................................40
Procedures for Tendering....................................................................41
Acceptance of Old Notes for Exchange; Delivery of New Notes.................................43
Guaranteed Delivery Procedures..............................................................44
Withdrawal of Tenders.......................................................................44
Conditions to the Exchange Offer............................................................45
The Financed Student Loans........................................................................47
Transfer and Sale Agreement.......................................................................53
Conveyance of Financed Student Loans; Representations and Warranties........................53
Maturity and Prepayment Considerations............................................................55
Description of the FFEL Program...................................................................58
Loan Terms..................................................................................62
Contracts with Guarantee Agencies...........................................................71
Servicing.........................................................................................76
Master Servicer.............................................................................81
The Guarantee Agencies........................................................................... 84
Guarantee Agency Information................................................................99
Description of the New Notes.....................................................................100
Interest...................................................................................103
Determination of LIBOR.....................................................................104
Determination of the Auction Rate..........................................................104
Auction Procedures.........................................................................108
Specific Limitations on Determinations of Auction Rate.....................................108
Auction Period Adjustment..................................................................108
Auction Period Conversion of and Mandatory Tender of the Auction Rate Notes................108
Principal..................................................................................109
Book-entry Registration....................................................................109
Redemption...................................................................................... 115
Security for the Notes.......................................................................... 117
The Trust................................................................................. 117
Subordination of the Series B-3 Notes..................................................... 118
Reserve Fund.............................................................................. 118
Interest Rate Exchange Agreements......................................................... 119
The Indenture................................................................................... 119
Indenture Trustee......................................................................... 119
Eligible Lender Trustee................................................................... 120
Reports to Holders........................................................................ 120
Acquisition Fund.......................................................................... 122
Student Loan Portfolio Fund............................................................... 123
Collection Fund........................................................................... 123
Reserve Fund.............................................................................. 129
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
Events of Default......................................................................... 132
Amendment and Supplemental Indentures..................................................... 137
Federal Income Tax Consequences................................................................. 141
Characterization of the Notes as Indebtedness............................................. 142
Characterization of the Trust..............................................................144
Original Issue Discount................................................................... 147
Market Discount........................................................................... 149
Gain or Loss or Disposition................................................................150
Backup Withholding, Foreign Holders, and Other Tax Matters................................ 151
State Tax Considerations........................................................................ 151
ERISA Considerations.............................................................................151
Legal Matters................................................................................... 151
Rating.......................................................................................... 152
Plan of Distribution............................................................................ 152
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE
NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE
FRONT COVER. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE AS OF ANY OTHER DATE.
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<PAGE> 5
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION ABOUT THE EXCHANGE OFFER
AND THE NEW NOTES AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU FIND
IMPORTANT IN MAKING YOUR DECISION TO PARTICIPATE IN THE EXCHANGE OFFER. THIS
PROSPECTUS CONTAINS MORE DETAILED TERMS ABOUT THE EXCHANGE OFFER AND THE NEW
NOTES BEING OFFERED TO YOU, AS WELL AS SELECTED BUSINESS INFORMATION AND
FINANCIAL DATA. YOU ARE STRONGLY ENCOURAGED TO READ THIS ENTIRE PROSPECTUS
BEFORE DECIDING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER.
THE EXCHANGE OFFER
You are entitled to exchange your old notes for new notes that have been
registered under the Securities Act. The new notes will have the same terms as
the old notes that you currently hold, except that the new notes will be
registered under the 1933 securities act and will not have registration rights.
The new notes will be backed by the same pool of financed student loans as the
old notes. Following the exchange offer, any old notes held by you that are not
exchanged will continue to have the existing restrictions on their transfer, and
we will have no further obligation to register your old notes under the 1933
securities act.
Student Loan Funding LLC entered into a registration rights agreement with the
initial purchasers of the old notes. Student Loan Funding LLC, as the depositor,
formed the issuer as a common law trust. Subsequently, the depositor sold the
financed student loans, eligible investments and some accounts to the issuer and
the issuer assumed all of the depositor's obligations under the indenture, the
registration rights agreement and the old notes. Under the registration rights
agreement, the issuer as the successor to the depositor's obligations, is
required to deliver this prospectus to you and to file a registration statement
with the SEC to register the new notes. You should read the discussion under the
heading "The Exchange Offer" for more detailed information about the exchange
offer and resales of the new notes. You should also read the discussion under
the headings "Prospectus Summary - Summary of Terms of the New Notes" for
further information regarding the new notes.
SUMMARY OF THE EXCHANGE OFFER
THE DEPOSITOR . . . . . . . . . . . . . . .Student Loan Funding LLC
THE ISSUER . . . . . . . . . . . . . . . . Student Loan Funding 1998-A/B Trust
SECURITIES OFFERED . . . . . . . . . . . . $365,031,478.23 in principal amount
of Senior Asset-Backed Notes, Series
1998A1-3 (LIBOR Floating Rate)
$93,300,000 in principal amount of
Senior Asset-Backed Callable Notes,
Series 1998A1-4 (Auction Rate)
$90,000,000 in principal amount of
Senior Asset-Backed Callable Notes,
Series 1998A1-5 (Auction Rate)
$90,000,000 in principal amount of
Senior Asset-Backed Callable Notes,
Series 1998A1-6 (Auction Rate)
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<PAGE> 6
$54,500,000 in principal amount of
Subordinate Asset-Backed Notes,
Series 1998B1-3 (Fixed Rate)
All of the financed student loans are
FFELP loans guaranteed by guarantee
agencies. The guarantee agencies that
collectively guarantee more than 99%
of the aggregate loan balances of the
initial pool of financed student
loans are the following:
- Florida Department of Education,
Office of Student Financial
Assistance
- Georgia Higher Education
Assistance Corporation
- United Student Aid Funds, Inc.
- Kentucky Higher Education
Assistance Authority
- Great Lakes Higher Education
Guaranty Corporation
REGISTRATION RIGHTS AGREEMENT . . . . . . .Student Loan Funding LLC sold the old
notes to the initial purchasers on
December 18, 1998 in a private
placement under exemptions from
registration available under the 1933
securities act. In connection with
the private placement, Student Loan
Funding LLC entered into the
registration rights agreement with
the initial purchasers and the issuer
subsequently assumed Student Loan
Funding LLC's obligations under the
registration rights agreement. Under
the registration rights agreement, we
are required to file this
registration statement in connection
with the exchange offer.
After the exchange offer is complete,
you will no longer be entitled to
exchange your old notes for new
notes.
THE EXCHANGE OFFER . . . . . . . . . . . . We are offering to exchange new notes
in principal amount equal to the
principal amount of the old notes
held by you. In order to be
exchanged, your old notes must be
properly tendered and accepted. All
old notes that are validly tendered
and not validly withdrawn will be
exchanged. We will issue new notes on
or promptly after the expiration of
the exchange offer.
ABILITY TO RESELL NEW NOTES . . . . . . . .The issuer has obtained an opinion of
its counsel that you may offer or
sell your new notes without
compliance with the registration
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<PAGE> 7
and prospectus delivery requirements
of the 1933 securities act if:
- you acquire the new notes in the
ordinary course of your
business;
- you are not participating, do
not intend to participate and
have no arrangement or
understanding with any person to
participate in the distribution
of new notes; and
- you are not our affiliate.
The exchange offer is not being made
to:
- holders of old notes in any
jurisdiction in which the
exchange offer or its acceptance
would not comply with the
applicable securities or blue
sky laws of that jurisdiction;
or
- holders of old notes who are our
affiliates.
CONSEQUENCES OF FAILURE TO EXCHANGE If you do not exchange your old notes
YOUR NOTES. . . . . . . . . . . . . . . . .for new notes, the restrictions on
transfer provided in the old notes
and in the indenture governing the
old notes will continue to apply to
your old notes.
EXPIRATION DATE . . . . . . . . . . . . . .The exchange offer will expire at
5:00 p.m., New York City time, on
June 28, 1999, unless it is extended.
The expiration date is the latest
date and time to which we extend the
exchange offer.
WITHDRAWAL RIGHTS . . . . . . . . . . . . .You may withdraw the tender of your
old notes at any time prior to 5:00
p.m., New York City time, on the
expiration date.
FEDERAL TAX CONSIDERATIONS. . . . . . . . .Thompson Hine & Flory LLP has
rendered an opinion, included as
Exhibit 8.1 to the registration
statement of which this prospectus is
a part, regarding the following items
that constitute all material federal
income tax consequences of
participating in the offering:
- there will be no federal income
tax consequences to you if you
exchange your old notes for new
notes in the exchange offer, and
- the new notes will be
characterized as debt
-7-
<PAGE> 8
for federal income tax purposes.
By acceptance of your new notes, you
will be deemed to have agreed to
treat your new notes as debt
instruments 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 regarding
federal income tax considerations,
you should read the discussion under
the heading "Federal Income Tax
Consequences."
USE OF PROCEEDS . . . . . . . . . . . . . .We will not receive any proceeds from
the issuance of the new notes in the
exchange offer. We will pay all
expenses incident to the exchange
offer.
EXCHANGE AGENT . . . . . . . . . . . . . . Firstar Bank, N.A. is serving as the
exchange agent for the exchange
offer. The exchange agent's address,
telephone number and facsimile number
is:
Firstar Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
Attention: Brian J. Gardner
Phone Number: (513) 762-8870
Facsimile: (513) 632-5511
DEALER MANAGER . . . . . . . . . . . . . . Salomon Smith Barney Inc. is serving
as the dealer manager for the
exchange offer.
SUMMARY OF TERMS OF THE NEW NOTES
The new notes to be issued to you in the exchange offer will evidence the same
obligations of the trust as the old notes you currently hold. You should be
aware that the indenture that currently governs your old notes will be the same
indenture that will govern the new notes, except that there will be no
restrictions on your ability to transfer the new notes.
THE DEPOSITOR . . . . . . . . . . . . . . Student Loan Funding LLC organized
the trust and acquired the pool of
student loans that secure the new
notes.
THE ISSUER . . . . . . . . . . . . . . . . Student Loan Funding 1998-A/B Trust
assumed the obligations under the old
notes and will issue and exchange the
new notes for the outstanding old
notes.
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<PAGE> 9
SECURITY FOR THE NOTES. . . . . . . . . . .The notes are secured by the financed
student loans. At March 31, 1999,
$90,732,249 (13.87%) of the financed
student loans were more than 30 days
delinquent. At March 31, 1999,
$794,184 (0.12%) of the financed
student loans had defaulted and had
claims filed with their guarantor.
The notes are also secured by the
reserve fund and other funds held
under the indenture. No other party
is providing any other security or
credit enhancement for the note
THE SERVICER . . . . . . . . . . . . . . . Student Loan Funding Resources, Inc.,
as the master servicer, will arrange
for the servicing of the student
loans under a master servicing
agreement. The master servicer will
arrange for one or more other
institutions to service the student
loans on a day-to-day basis.
Currently, the servicers servicing
the financed student loans are the
following:
- InTuition, Inc.
- USA Group Loan Services, Inc.
- Great Lakes Higher Education Loan
Servicing
- UNIPAC Servicing Corporation
InTuition, Inc. services
approximately 88% of the financed
student loans.
The Trustees . . . . . . . . . . . . . . . The institutional bank trustees are
as follows:
- Firstar Bank, N.A., a national
banking association, is the
eligible lender trustee. One or
more additional eligible lender
trustees may be added or
substituted for Firstar Bank,
N.A. from time to time;
- First Union Trust Company,
National Association, is the
owner trustee for purposes of
the trust's beneficial ownership
of the student loans;
- Firstar Bank, N.A., is the
co-owner trustee for purposes of
the trust's beneficial ownership
of the student loans; and
- Firstar Bank, N.A., a national
banking association, is the
indenture trustee.
ISSUE DATE . . . . . . . . . . . . . . . . Issuance of the new notes is
scheduled for June 28, 1999.
INTEREST. . . . . . . . . . . . . . . . . .We will pay you interest as described
below on the new notes in the same
manner as we have paid interest on
the old notes, from available funds.
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<PAGE> 10
<TABLE>
<CAPTION>
--------------------------------------------------
PAYMENT DATE INTEREST RATE MAXIMUM RATE
<S> <C> <C> <C>
Series A-3 Notes Last business day One-month LIBOR Lesser of 17% or
of each month plus 0.38% the net loan rate
Series A-4 Notes Business day Auction rate Lesser of 17% or
Series A-5 Notes following each the net loan rate
Series A-6 Notes auction period
Series B-3 Notes Last business 6.25%
day of each
month
--------------------------------------------------
</TABLE>
EXAMPLE: On March 29, 1999, LIBOR was
4.93875% and the interest rate on the
Series A-3 Notes for the period from
March 31, 1999 to April 29, 1999 was
5.31875%.
The net loan rate is an annualized
percentage rate and for a monthly
interest period equals the weighted
average interest rate of the student
loans as of the first day of the
applicable collection period, minus
the program operating expenses.
Program operating expenses means all
reasonable and proper expenses,
including both operating expenses and
capital expenditures incurred or to
be incurred in connection with the
program of financing the financed
student loans under the indenture.
Principal . . . . . . . . . . . . . . . . .We will pay principal as described
below on the new notes in the same
manner as we have paid principal on
the old notes, from available funds.
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<PAGE> 11
<TABLE>
<CAPTION>
--------------------------------------------------
PRIORITY OF AMOUNT OF
PAYMENT DATE PAYMENT PAYMENT
<S> <C> <C> <C>
Series A-3 Notes Last business day Equal to the reduction in
day of each month the student loan principal
balance, minus, for each
monthly payment date after
June 30, 2003, the amount of
principal paid on the date on
the Series B-3 Notes
Series A-4 Notes Business day following After the Series A-3 Notes Equal to the reduction in
each auction period have been paid in full the student loan principal
balance, minus, for each
monthly payment date after
June 30, 2003, the amount of
principal paid on the date on
the Series B-3 Notes
Series A-5 Notes Business day following After the Series A-3 Notes Equal to the reduction in
each auction period and the Series A-4 Notes the student loan principal
have been paid in full balance minus, for each
monthly payment date after
June 30, 2003, the amount of
principal paid on the date
on the Series B-3 Notes
Series A-6 Notes Business day following After the Series A-3 Notes, Equal to the reduction in the
each auction period the Series A-4 Notes and the student loan principal balance
Series A-5 Notes have been minus, for each monthly
paid in full payment date after June 30,
2003, the amount of principal
paid on the date on the
Series B-3 Notes
</TABLE>
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<PAGE> 12
<TABLE>
<CAPTION>
PRIORITY OF AMOUNT OF
PAYMENT DATE PAYMENT PAYMENT
<S> <C> <C> <C>
Series B-3 Notes Last business day of After the Series A-3 Notes, Equal to the reduction in the
each month the Series A-4 Notes, the student loan principal
Series A-5 Notes and the balance
Series A-6 Notes have been
paid in full
After June 30, 2003, principal
payments on the Series B-3
Notes will equal the lesser
of:
- An amount generally equal
to the reduction in the student
loan principal balance and
- The greatest amount
that would result in a senior
parity percentage of not less
than 109% and a parity
percentage of not less than
101% after the payment of
principal on the Series B-3
Notes.
--------------------------------------------------
</TABLE>
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<PAGE> 13
If an event of default occurs,
principal will be paid pro rata on
the Series A-3 Notes, the Series A-4
Notes, the Series A-5 Notes and the
Series A-6 Notes.
ACCELERATED PRINCIPAL The notes entitled to principal
payments also will receive on each
monthly payment date or auction
period payment date, as applicable,
parity percentage payments of
principal until the parity percentage
equals 101%.
PARITY PERCENTAGE. . . . . . . . . . . . . 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 acquisition
fund, the collection fund and
the reserve fund, by
- The principal balance of all
notes plus accrued and unpaid
interest and expenses.
SENIOR PARITY PERCENTAGE. . . . . . . . . The senior 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 acquisition
fund, the collection fund and
the reserve fund, by
- The principal balance of all
Series 1998A Notes plus accrued
and unpaid interest and expenses
relating to all notes.
FINAL MATURITY. . . . . . . . . . . . . . .
The final payment of principal and
interest will be made no later than
these dates:
- December 1, 2006 on the Series
A-3 Notes
- December 1, 2019 on the Series
A-4 Notes
- December 1, 2019 on the Series
A-5 Notes
- December 1, 2019 on the Series
A-6 Notes
- December 1, 2019 on the Series
B-3 Notes
The financed student loans include
loans that mature prior to the final
maturity of each series of the notes.
For this and other reasons, the
actual maturity of each series may
occur sooner.
PRIORITY OF PAYMENTS. . . . . . . . . . .
On each payment date, we will apply
funds available after paying expenses
in the following priority.
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<PAGE> 14
o FIRST, to pay interest on the
Series A-3 Notes, the Series A-4
Notes, the Series A-5 Notes and
the Series A-6 Notes and to pay
any related interest rate
exchange payment;
o SECOND, to pay interest on the
Series B-3 Notes and any related
interest rate exchange payment;
o THIRD, to pay principal on the
Series A-3 Notes and, subject to
limitations, to pay principal
after June 30, 2003 on the
Series B-3 Notes;
o FOURTH, after the principal
balance of the Series A-3 Notes
has been paid, to pay principal
on the Series A-4 Notes and,
subject to limitations, to pay
principal occurring after June
30, 2003 on the Series B-3
Notes;
o FIFTH, after the principal
balance of the Series A-3 Notes
and Series A-4 Notes has been
paid, to pay principal on the
Series A-5 Notes and, subject to
limitations, to pay principal
after June 30, 2003 on the
Series B-3 Notes;
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<PAGE> 15
o SIXTH, after the principal
balance of the Series A-3 Notes,
the Series A-4 Notes and the
Series A-5 Notes has been paid,
to pay principal on the Series
A-6 and, subject to limitations,
to pay principal after June 30,
2003 on the Series B-3 Notes;
o SEVENTH, after the principal
balance of the Series A-3 Notes,
the Series A-4 Notes, the Series
A-5 Notes and the Series A-6
Notes has been paid, to pay
principal on the Series B-3
Notes;
o EIGHTH, to the reserve fund the
amount, if any, necessary to
attain the specified reserve
fund balance;
o NINTH, if the parity percentage
is not at least 101%, to pay
principal until the parity
percentage equals 101%:
first on the Series A-3 Notes
until the principal balance
has been paid, then
on the Series A-4 Notes until
the principal balance has been
paid, then
on the Series A-5 Notes until
the principal balance has been
paid, then
on the Series A-6 Notes until
the principal balance has been
paid, and then,
on the Series B-3 Notes;
o TENTH, to pay carryover
interest, if any:
first, on the Series A-3
Notes, then
on the Series A-4 Notes, then
on the Series A-5 Notes, and
then
on the Series A-6 Notes;
o ELEVENTH, the amount, if any,
owed an exchange counterparty in
respect of an early termination
or as a result of a default by
the issuer; and
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<PAGE> 16
o TWELFTH, any remainder will be
transferred to the excess
surplus account established
under the indenture.
The above payment order will be
modified if, after giving effect to
the payments on any payment date,
either:
o The aggregate principal amount
of the Series A-3 Notes, the
Series A-4 Notes, the Series A-5
Notes and the Series A-6 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
o a payment event of default has
occurred under the indenture,
but prior to the acceleration of
maturity of the notes.
As long as either of the above
conditions exist, the Series B-3
Notes will not receive any payments.
As long as any Series A-3 Notes,
Series A-4 Notes, Series A-5 Notes or
Series A-6 Notes remain outstanding,
any deferral of payments on the
Series B-3 Notes will not constitute
an event of default under the
indenture unless the deferral exists
on the maturity date for the Series
B-3 Notes. Where an event of default
has occurred, we will allocate pro
rata, without preference or priority
of any kind principal distributions
on the Series A-3 Notes, the Series
A-4 Notes, the Series A-5 Notes and
the Series A-6 Notes.
RESERVE FUND. . . . . . . . . . . . . . . In any case, we will make principal
payments on the Series A-4 Notes, the
Series A-5 Notes and the Series A-6
Notes only in multiples of $50,000.
The indenture trustee made an initial
deposit of $10,917,000 from the
proceeds of the original sale of the
old notes into a reserve fund for the
notes. This amount is the reserve
fund's specified reserve fund balance
which is subject to reduction as the
principal balance of the notes is
paid. To the extent necessary, the
initial deposit will be supplemented
on each monthly payment date with all
amounts remaining after making all
required prior distributions on that
date until the specified reserve fund
balance is attained.
REDEMPTION. . . . . . . . . . . . . . . . On or after May 31, 2007, if the
AUCTION OF THE FINANCED STUDENT LOANS principal balance of the student
loans (including capitalized
interest) is equal to or less than
10% of the initial principal amount
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<PAGE> 17
of the student loans in the trust,
the indenture trustee will offer the
student loans for sale. If the
indenture trustee receives at least
two bids (which may include bids from
the issuer or its affiliates), the
indenture trustee will accept the
higher bid if it will pay transaction
costs and all amounts due to the
holders, 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 all
amounts due to the holders, the
indenture trustee may, but shall be
under no obligation to, solicit bids
for the sale of student loans on
future payment dates. The proceeds of
any sale will be used to redeem any
outstanding notes at par plus accrued
interest on the next applicable
payment date. The indenture trustee
can give no assurance as to whether
it will be successful in soliciting
acceptable bids to purchase the
student loans on any auction date.
OPTIONAL REDEMPTION. . . . . . . . . . . All outstanding series of notes will
be subject to redemption in whole on
any applicable payment date in the
event the depositor exercises its
option to repurchase all remaining
student loans, and cause the early
retirement of the notes, on any
payment date on or after the monthly
payment date on which the pool
balance is equal to 10% or less of
the initial pool balance, at a price
at least equal to, for each student
loan, the outstanding principal
balance of the student loan as of the
end of the preceding collection
period, together with all accrued
interest and unamortized premiums, if
any, and sufficient to pay
transaction costs and all amounts due
to the holders, including carryover
interest, after application of funds
on deposit in the reserve fund. An
optional purchase of the student
loans will result in the prepayment
of all outstanding notes.
In addition, on and after the payment
date that the Series A-3 Notes have
been paid in full, the Series A-4
Notes, the Series A-5 Notes and the
Series A-6 Notes will be subject to
redemption in whole or in part on any
applicable auction period payment
date at the option of the issuer,
with 15 days' notice given by the
indenture trustee, at a redemption
price equal to their principal
amount, plus all accrued interest
including carryover interest,
provided that after any redemption,
the parity percentage must be no less
than 101% and other conditions must
be satisfied.
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<PAGE> 18
ERISA CONSIDERATIONS. . . . . . . . . . The new 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.
REGISTRATION, CLEARING AND SETTLEMENT . . Your new 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
limited circumstances.
The Series 1998A1-3 Notes will be
offered in minimum denominations of
$50,000 and integral multiples of
$1,000 in excess of $50,000, reduced
by the amount of principal payments
made before the exchange offer, if
any.
The Series 1998A1-4 Notes, the Series
1998A1-5 Notes and the Series
1998A1-6 Notes will be offered in
minimum denominations of $50,000 and
any integral multiple of $50,000.
The Series 1998B1-3 Notes will be
offered in minimum denominations of
$50,000 and integral multiples of
$1,000 in excess of $50,000.
RATING. . . . . . . . . . . . . . . . . . It is a condition to the issuance of
the new notes that they be rated by
the following rating agencies as
follows:
<TABLE>
<CAPTION>
Moody's Fitch
------- -----
<S> <C> <C>
Series 1998A1-3 Notes Aaa AAA
Series 1998A1-4 Notes Aaa AAA
Series 1998A1-5 Notes Aaa AAA
Series 1998A1-6 Notes Aaa AAA
Series 1998B1-3 Notes A2 A
</TABLE>
These ratings are the same ratings
that currently apply to the related
series of old notes.
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<PAGE> 19
RISK FACTORS
You should carefully consider the following factors together with the other
matters set forth in this prospectus before deciding whether to exchange your
old notes for new notes in the exchange offer.
<TABLE>
<S> <C>
YOU ARE RESTRICTED FROM If you do not exchange old notes for new notes in this exchange offer,
TRANSFERRING YOUR OLD NOTES you will be restricted from transferring your old notes in the future. In
IF YOU FAIL TO EXCHANGE general, outside of the exchange offer, you may not offer or sell your
THEM FOR NEW NOTES old notes unless they have been registered under the federal and state
securities laws or you offer or sell them in a transaction that is exempt
from these laws. We do not currently intend to register your old
notes except in connection with this exchange offer.
LIMITED TRADING MARKET MAY The new notes will constitute a new issue of securities without any
NOT BE SUFFICIENTLY LIQUID established trading market. The initial purchasers may assist in resales
TO ALLOW YOU TO RESELL YOUR of the new notes but they are not required to do so. A secondary
NEW NOTES market for any series of new notes may not develop. If a secondary
market does develop, it might not continue or it might not be
sufficiently active or liquid to allow you to resell any of your new
notes.
THE TRUST WILL HAVE LIMITED The trust will not have any significant assets or sources of funds
ASSETS WHICH COULD except for the student loans and related assets. Your new notes are
ADVERSELY AFFECT ITS ABILITY secured by and payable solely from the assets of the trust and will not
TO PAY PRINCIPAL AND INTEREST be insured or guaranteed by the depositor, the administrator, the
ON YOUR NEW NOTES master servicer, the guarantee agencies, the eligible lender trustee, any
of their affiliates, or the Department of Education. You must rely for
repayment on proceeds realized from the student loans and other assets in
the trust. See "Security for the Notes" and "The Indenture - Collection
Fund."
FAILURE BY LOAN HOLDERS OR The Higher Education Act requires loan holders and servicers to
SERVICERS TO COMPLY WITH follow specified procedures to ensure that the FFELP Loans are
STUDENT LOAN ORIGINATION AND properly originated and serviced. Failure to follow these procedures
SERVICING PROCEDURES COULD may result in:
ADVERSELY AFFECT ABILITY TO
PAY PRINCIPAL ON INTEREST ON - LOSS OF REINSURANCE PAYMENTS, INTEREST SUBSIDIES AND SPECIAL
YOUR NEW NOTES 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
- LOSS OF GUARANTEE PAYMENTS. The guarantee agencies' inability
or refusal to make guarantee payments with respect to the FFELP
Loans.
The loss of any of these payments may adversely affect the ability to
pay principal and interest on your new notes.
</TABLE>
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<PAGE> 20
<TABLE>
<S> <C>
HOLDERS OF SERIES B-3 NOTES Your Series B-3 Notes and any exchange counterparties under an
COULD SUFFER LOSSES DUE TO interest rate exchange agreement relating to your Series B-3 Notes are
SUBORDINATION OF THE SERIES subordinated to the Series 1998A Notes and any exchange
B-3 NOTES TO THE SERIES counterparties under an interest rate exchange agreement relating to
1998A NOTES the Series 1998A Notes. In some circumstances payment of interest
on and any interest rate exchange payments relating to your Series B-3
Notes may be deferred and payment of principal of the Series B-3 Notes may
be suspended until all Series 1998A Notes have been paid in full.
Consequently, as holders of Series B-3 Notes, you will bear losses on the
student loans before these losses are borne by the holders of the Series
1998A Notes. In addition, as holders of the Series B-3 Notes, you may be
limited in the legal remedies that are available to you until the holders
of the Series 1998A Notes and any exchange counterparties under an interest
rate exchange agreement on a parity with the Series 1998A Notes are paid in
full.
OFFSET BY GUARANTEE AGENCIES If the Department of Education or a guarantee agency determines that
OR A REDUCTION IN THE AMOUNT the eligible lender trustee owes a liability to the Department of
OF AVAILABLE FUNDS BY THE Education or the guarantee agency on any FFELP Loan for which the
DEPARTMENT OF EDUCATION eligible lender trustee is or was legal titleholder, including FFELP
COULD ADVERSELY AFFECT THE loans held under the indenture or other indentures, the Department of
ABILITY TO PAY PRINCIPAL AND Education or the guarantee agency might seek to collect that liability
INTEREST ON NEW NOTES by offsetting against payments due the eligible lender trustee under the
trust. The offsetting or shortfall of payments due to the eligible lender
trustee with respect to the trust could adversely affect the amount of
available funds for any collection period and the ability to pay interest
and principal on your new notes.
Indentures of the depositor, the administrator and their affiliates prior
to September, 1998 do not contain provisions for cross-indemnification
with respect to the payments and offsets. The indenture for your new notes
and other indentures of the depositor, the administrator and their
affiliates entered into after September, 1998 will contain
cross-indemnification provisions. Although these indentures will include
these provisions, there can be no assurance that the amount of funds
available to the trust with respect to the right of indemnification may be
adequate to compensate the trust and you for any previous reductions in the
available funds for a collection period. Also, the fact that prior
indentures did not contain these provisions could adversely affect the
amount of available funds for any collection period to the extent any
shortfall or offset affects the trust and the trust cannot be adequately
compensated.
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C>
A DECLINE IN THE FINANCIAL The FFELP Loans are not secured by any collateral of the borrowers.
HEALTH OF GUARANTEE AGENCIES Payments of principal and interest are guaranteed by guarantee
COULD ADVERSELY AFFECT THE agencies to the extent described in this prospectus. Excessive
ABILITY TO PAY PRINCIPAL AND borrower defaults could impair a guarantee agency's ability to meet its
INTEREST ON YOUR NEW NOTES guarantee obligations. In addition, recently enacted legislation is
expected to reduce the guarantee agencies' reserves under the FFEL Program.
The financial health of a guarantee agency could affect the timing and
amount of available funds for any collection period and the ability to pay
principal of and interest on the new 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 obligations, there is no assurance that the Department
of Education would ever make that determination or that it would pay claims
in a timely manner. The eligible lender trustee may receive claim payments
directly from the Department of Education under Section 432(o) of the
Higher Education Act if that determination is made.
A DECLINE IN THE FINANCIAL If any interest rate exchange agreement relating to the notes is ever
HEALTH OF ANY EXCHANGE executed, any time that the exchange rate being paid by an exchange
COUNTERPARTY OR ANY counterparty is greater than the exchange rate being paid by the issuer,
PROVIDER OF AN EXCHANGE the ability to make principal and interest payments on your notes will
COUNTERPARTY GUARANTEE be adversely affected by the exchange counterparty's ability or the
COULD REDUCE THE FUNDS ability of any provider of an exchange counterparty guarantee to meet
AVAILABLE TO PAY YOUR its net payment obligation to the indenture trustee. In addition, under
NEW NOTES some circumstances, the failure by the issuer to make an exchange
payment (other than an early termination payment) under the interest
rate exchange agreement may constitute an event of default under the
indenture.
</TABLE>
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<PAGE> 22
<TABLE>
<S> <C>
CHANGES TO FFEL PROGRAM The Higher Education Act and other relevant federal or state laws may
COULD ADVERSELY AFFECT THE be amended or modified in the future. In particular, the level of
ABILITY TO PAY PRINCIPAL AND guarantee payments may be adjusted from time to time which may
INTEREST ON YOUR NEW NOTES effect the ability to pay principal and interest on your notes. The
issuer cannot predict whether any changes will be adopted or, if adopted,
what impact these changes may have on the trust or your notes.
INCREASED COMPETITION FROM The Federal Direct Student Loan Program has been established under
THE FEDERAL DIRECT STUDENT the Higher Education Act. This program could result in reductions in
LOAN PROGRAM COULD the volume of loans made under the FFEL Program. If so, the
ADVERSELY AFFECT THE ABILITY depositor, the administrator, the master servicer and the servicers may
TO PAY PRINCIPAL AND INTEREST experience increased costs due to reduced economies of scale. These
ON YOUR NEW NOTES cost increases could reduce the ability of the master servicer or 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. All
of these possibilities could effect the ability to pay principal and
interest on your notes.
The Department of Education also 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.
</TABLE>
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<PAGE> 23
<TABLE>
<S> <C>
REINVESTMENT RISK AND Student loans may be prepaid by borrowers at any time without
PREPAYMENTS BY BORROWERS penalty. The rate of prepayments cannot be predicted and may be
ARE UNPREDICTABLE AND MAY influenced by economic and other factors, such as interest rates, the
REDUCE YOUR YIELD ON YOUR availability of other financing and the general job market. In addition,
NEW NOTES under some circumstances, the depositor will be obligated to repurchase
student loans from the trust under the transfer and sale agreement as a
result of breaches of the depositor's representations and warranties.
To the extent borrowers elect to borrow money through consolidation
loans, you will receive as a prepayment of principal the aggregate
principal amount of the loan.
If loan prepayments result in a series of notes being prepaid before its
expected maturity date, 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 these prepayments
initially will be to increase the rate of payment on each series of notes
on which principal is then being paid. 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.
UNCERTAINTY OF THE MATURITY Scheduled payments on the student loans and the maturities of the
OF YOUR INVESTMENT MAY student loans may be extended without your consent, which may
CREATE REINVESTMENT RISK 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."
BORROWERS OF STUDENT LOANS Collections on the student loans during a collection period may vary
ARE SUBJECT TO A VARIETY OF greatly in both timing and amount from the payments actually due on
FACTORS THAT MAY ADVERSELY the student loan for that collection period for a variety of economic,
AFFECT THEIR REPAYMENT social and other factors.
ABILITY
Failures by borrowers to pay timely the principal and interest on the
student loans or an increase in deferments or forbearances could affect
the timing and amount of available funds for any collection period and
the trust's ability to pay principal and interest on your new notes. The
effect of these factors, including the effect on the timing and amount of
available funds for any collection period and the ability to pay
principal and interest on your new notes is impossible to predict.
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C>
THE INTEREST RATES ON THE The maximum rate of interest on the Series 1998A Notes will be
NOTES ARE SUBJECT TO limited by the net loan rate for each series which will equal the
LIMITATIONS WHICH MAY weighted average effective interest rate of the student loans, less the
CREATE AN INTEREST SHORTFALL program operating expenses. For a payment date on which the net loan
ON YOUR NEW NOTES WHICH rate applies, the shortfall resulting from the difference between the
MAY NOT BE RECOVERED amount of interest which would otherwise be borne by the Series 1998A
Notes at the applicable variable rate, auction rate or fixed rate 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.
THE INTEREST RATES ON STUDENT The interest rate on the financial student loans underlying your notes
LOANS AND OTHER INVESTMENTS may be lower than the interest rate on your notes. A shortfall may
MAY BE INSUFFICIENT TO COVER occur which would effect the issuer's ability to pay principal and
INTEREST ON THE NOTES DUE TO interest on your notes.
RATE-INDEX DIFFERENCES
The interest rates on your notes (except the Series B-3 Notes) are
variable and will fluctuate from one interest period to another in
response to changes in benchmark rates or general market conditions. The
issuer can make no representation as to what these rates may be in the
future.
As a result of these differences between the indices used to determine
the interest rates on student loans and the interest rates on the notes,
there could be periods of time when the interest rates on student loans
are inadequate to cover the interest due on the notes and expenses
required under the indenture. To the extent that the interest rates on
student loans decrease or do not increase as fast as the interest rates
on the notes, the interest rates with respect to the notes may be limited
to the net loan rate or may be deferred to future periods. There can be
no assurance that sufficient funds will be available in future periods to
make up for any shortfalls in the current payments of interest on the
notes. Further, if there is a decline in the interest rates on student
loans, the amount of funds representing interest deposited in to the
trust may be reduced and, even if there is a similar reduction in the
interest rates applicable to any series of notes, there may not
necessarily be a similar reduction in the other amounts required to be
paid out of these funds (such as administrative expenses). In addition,
proceeds of and revenues relating to the notes in the funds and accounts
under the indenture will be used to acquire investment agreements at
fluctuating interest rates. Although the issuer expects to structure the
investment agreements to minimize the risk resulting from differences in
the fluctuation of the interest rates on the investment agreements and
your notes, there can be no assurance that it will be successful.
</TABLE>
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<PAGE> 25
<TABLE>
<S> <C>
IF PRINCIPAL BALANCE OF NOTES The principal amount of the notes exceeds the principal amount of all
EXCEEDS THE POOL BALANCE assets in the trust. Payment of principal and interest on the notes is
THE TRUST MAY NOT HAVE dependent on collections on the financed student loans, particularly
SUFFICIENT FUNDS TO REPAY collection of interest on the financed student loans. If the yield on
YOUR NEW NOTES the student loans does not generally exceed the interest rate on the
notes and program operating expenses, the trust may not have sufficient
funds to repay your notes.
If an event of default occurs and the assets of the trust are liquidated,
the student loans would have to be sold at a premium for the holders of
the Series B-3 Notes and possibly the holders of the Series 1998A Notes
to avoid a loss. Neither the issuer, the depositor 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.
IF THE INDENTURE TRUSTEE Generally, during an event of default, the indenture trustee is
HAS DIFFICULTY LIQUIDATING authorized to sell the student loans. However, the indenture trustee
FINANCED STUDENT LOANS may not find a purchaser for the student loans. Also, the market value
YOU MAY SUFFER A LOSS of the student loans might not equal the principal amount of notes plus
accrued interest. In either event, there may not be sufficient funds to
pay principal and interest on the notes and you may suffer a loss.
THE INSUFFICIENCY OF FUNDS The principal amount required to be paid on the notes on any payment
FOR PRINCIPAL DISTRIBUTIONS IS date under the indenture generally is limited to amounts available for
NOT AN EVENT OF DEFAULT AND payment. Therefore, failure to pay principal will not result in the
YOU WOULD NOT HAVE ANY occurrence of an event of default until the legal final maturity of the
REMEDIES notes.
</TABLE>
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<PAGE> 26
<TABLE>
<S> <C>
BANKRUPTCY OF DEPOSITOR, If the depositor becomes bankrupt, and the
ISSUER OR STUDENT LOAN assets and liabilities of the trust are
FUNDING RESOURCES, INC. included in the depositor's bankruptcy estate,
COULD RESULT IN ACCELERATED the United States Bankruptcy Code could
PREPAYMENT ON THE NOTES, materially limit or prevent the enforcement of
REDUCTIONS OF PAYMENT OR the issuer's obligations, including, without
DELAYS IN PAYMENT limitation, its obligations under the notes.
The depositor's trustee in bankruptcy (or the
depositor itself as debtor-in-possession) may
seek to accelerate payment on the notes and
liquidate the assets in the trust. If the
principal on your notes is declared due and
payable, you may lose the right to future
payments and face the reinvestment risks
mentioned above.
The depositor has structured the issuer as
a common law trust under Delaware law,
rather than as a business trust. Business
trusts generally are eligible for relief under
the United States Bankruptcy Code. If a court
were to conclude that the issuer was a business
trust and, therefore, eligible to be a debtor
under the United States Bankruptcy Code, a
bankruptcy filing by or against the issuer
could result in delays in payments on your new
notes or reductions in the amounts of these
payments.
The depositor is organized to prevent any
voluntary or involuntary application for
relief by Resources under the United States
Bankruptcy Code or other insolvency laws, as
the case may be, resulting in the consolidation
of the assets and liabilities of the depositor
with those of Resources.
If a court were to conclude that the assets
and liabilities of the depositor should be
consolidated with those of Resources in a
bankruptcy or other proceeding under any
insolvency law, then any "true sale" to the
depositor would not be effective to remove the
student loans and other assets from the
bankruptcy estate of Resources and you could
experience delays in payments on your notes or
reductions in the amount of these payments. See
"Risk Factors - If Sale of the Student Loans
From the Depositor to the Issuer Is Not a True
Sale Delays or Reductions in Payments to You
Could Result."
CHANGES IN INCENTIVE AND Under borrower incentive programs, the
REPAYMENT TERMS FOR depositor may terminate or change the
BORROWERS RESULT IN YIELD terms of the incentives with respect to any or
UNCERTAINTIES FOR YOU 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. If the yield on
student loans is reduced it could adversely
affect the ability to pay principal and
interest on your new notes.
CONSUMER PROTECTION LAWS Consumer protection laws impose
MAY INCREASE COSTS AND substantial requirements on lenders and
UNCERTAINTIES OF YOUR servicers. Some state laws impose finance
INVESTMENT charge ceilings and other restrictions on
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 the promissory notes
evidencing loans made to borrowers attending
for-profit schools are subject to any claims
and legal defenses that the borrower may have
against the school.
</TABLE>
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<PAGE> 27
<TABLE>
<S> <C>
BOOK-ENTRY REGISTRATION MAY Your notes may be represented by one or more
LIMIT INVESTORS' ABILITY certificates registered in the name of Cede &
TO PARTICIPATE DIRECTLY Co., the nominee for DTC, and will not be
AS A HOLDER registered in your name. If so, you will only
be able to exercise your rights indirectly
through DTC and its participating
organizations.
CREDIT RATINGS ADDRESS A rating agency will rate each series of
ONLY A LIMITED SCOPE notes in one of its four highest rating
OF INVESTOR CONCERNS categories. A rating is not a recommendation to
buy, hold or sell notes or a comment concerning
the market price or 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. Any reduction or
withdrawal of a rating may have an adverse
effect on the liquidity and market price of the
notes.
</TABLE>
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<PAGE> 28
<TABLE>
<S> <C>
IF A SALE OF THE STUDENT LOANS The depositor has taken steps in structuring
FROM THE DEPOSITOR TO THE its purchase of student loans from affiliates
ISSUER IS NOT A TRUE SALE to increase the likelihood that each purchase
DELAYS OR REDUCTIONS IN will be deemed a "true sale."
PAYMENTS TO YOU COULD RESULT
If any transfer by an affiliate to the
depositor of student loans is deemed by a
court to be a secured financing rather than a
"true sale," other persons may have an
interest in the loans superior to the
interest of the issuer, the depositor, or the
eligible lender trustee, as applicable. Also,
if an affiliate became a debtor under the
United States Bankruptcy Code and a creditor,
or trustee in bankruptcy or the affiliate
itself took the position that its transfer of
student loans to the depositor was a secured
financing instead of a "true sale," then
delays in payments on your notes could occur
or (should the court rule in favor of the
creditor, trustee or affiliate) reductions in
the amount of payments to you could result.
In addition, the issuer and the eligible
lender trustee will treat the transfer of the
student loans from the depositor to the
eligible lender trustee as a "true 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. Despite our efforts, if the depositor
or the issuer were to become a debtor in a
bankruptcy case and a creditor or trustee in
the bankruptcy of the debtor or the debtor
itself were to take the position that the
transfer should instead be treated as a
secured financing, then delays in payments on
the new notes could occur. If the court ruled
in favor of any trustee, debtor or creditor,
reductions in the amount of payments on the
new notes could occur.
DELAY IN RECEIPT OF GUARANTEE If there is a default on any of the financed
PAYMENTS ON DEFAULTED STUDENT student loans, a claim for default cannot be
LOANS COULD REDUCE AMOUNT OF submitted by the indenture trustee to a
FUNDS TO PAY PRINCIPAL AND guarantee agency for either 180 or 270 days
INTEREST ON YOUR NEW NOTES depending on when the student loan
originated. It may be up to 60 days after
submission of the claim before the indenture
trustee receives payment from the guarantee
agency. This delay may decrease the issuer's
funds available to pay principal and interest
on your notes.
REGIONAL GEOGRAPHIC Approximately 78% of the borrowers of the
CONCENTRATION INCREASES RISK financed student loans are concentrated in
OF BORROWING DEFAULTS DUE TO Ohio, Florida, Georgia and Kentucky. A
REGIONAL ECONOMIC regional economic downturn in any of these
CONSIDERATIONS areas could increase the likelihood of
borrower defaults on financed student loans.
Any borrower default may decrease the ability
to pay principal and interest on your notes.
ABILITY OF MAJORITY HOLDERS TO Under the indenture, holders of a majority in
WAIVE DEFAULTS UNDER THE principal amount of notes may amend or
INDENTURE MAY ADVERSELY AFFECT supplement provisions of the indenture and
YOU the notes and waive defaults, events of
defaults and compliance provisions without
the consent of the other holders. You have no
recourse if the majority votes and you
disagree with the majority vote on these
matters. The majority of holders may vote in
a manner which impairs the ability to pay
principal and interest on your notes.
</TABLE>
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<PAGE> 29
DEPOSITOR MAY NOT HAVE The depositor is obligated to repurchase
RESOURCES TO MEET ITS student loans if it breaches any of its
OBLIGATIONS TO PURCHASE representations, warranties or obligations
FINANCED STUDENT LOANS FOR ITS and that breach results in a loss of
BREACH OF A REPRESENTATION OR insurance or guarantee payments. The
WARRANTY depositor may not have the financial
resources to repurchase any student loan. The
failure of the depositor to repurchase a
student loan is a breach of the transfer and
sale agreement, enforceable by the trust or
by the indenture trustee, but is not an event
of default under the indenture.
INABILITY OF SELLER TO The eligible lender trustee on behalf of the
MEET ITS REPURCHASE issuer, as the successor to the depositor
OBLIGATIONS MAY ADVERSELY under the transfer and sale agreement, has
AFFECT THE ABILITY TO PAY the right, under the related student loan
PRINCIPAL AND INTEREST ON YOUR purchase agreement or the transfer and sale
NEW NOTES agreement, as applicable, to cause any
seller, including the depositor as a seller
under the transfer and sale agreement, to
repurchase any student loan in the event of a
breach of the representations, warranties or
covenants of the seller with respect to the
student loan. There can be no assurance,
however, that any 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
student loan purchase agreement but would not
constitute an event of default under the
indenture.
PROBLEMS CAUSED BY YEAR 2000 If computer programs and information systems
ISSUES COULD RESULT IN used by the administrator, the master
REDUCTIONS OR DELAYS IN servicer or third parties on which the issuer
PAYMENT WHICH MAY ADVERSELY depends for its programming and financial
AFFECT THE ABILITY TO PAY operations or with which it conducts business
PRINCIPAL AND INTEREST ON YOUR (including without limitation, guarantee
NEW NOTES agencies, the Department of Education, the
trustee, the eligible lender trustee, DTC and
others providing services to the master
servicer, the administrator or these
parties), are not year 2000 compliant, the
administrator's, the master servicer's and
the parties' ability to provide services
required in connection with the
administration of the administrator's student
loan program and the payment of the principal
of and interests on your notes may be
adversely affected. See "The Depositor - Year
2000."
PROBLEMS CAUSED BY YEAR 2000 If computer programs and information systems
ISSUES WITH THE DEPARTMENT OF used by the Department of Education are not
EDUCATION COULD RESULT IN year 2000 compliant, the master servicer, the
REDUCTIONS OR DELAYS IN servicers and the guarantee agencies ability
PAYMENT WHICH MAY ADVERSELY to provide services required in connection
AFFECT THE ABILITY TO PAY with administration of student loan programs
PRINCIPAL AND INTEREST ON YOUR and the payment of reimbursement payments to
NEW NOTES guarantee agencies and of special allowance
payments and interest subsidy payments and
the payment of principal and interest on your
notes may be adversely affected.
All terms that are unique to our industry and this transaction are defined in
"Appendix A - Glossary" of this prospectus.
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<PAGE> 30
WHERE YOU CAN FIND MORE INFORMATION
The issuer has filed with the SEC a registration statement on Form S-4
under the Securities Act and the rules and regulations thereunder covering the
new notes being offered by this prospectus. This prospectus does not contain all
the information set forth in the registration statement and its exhibits and
schedules, as portions have been omitted as permitted by the rules and
regulations of the SEC. For further information with respect to the issuer and
the new notes offered by this prospectus, reference is made to the registration
statement which is on file at the offices of the SEC and may be obtained on
payment of the fee prescribed by the SEC or may be examined without charge at
the offices of the SEC. Statements contained in this prospectus as to the
contents of any documents referred to are not necessarily complete, and, in each
instance, are qualified in all respects by reference to the applicable documents
filed with the SEC.
The issuer is not currently subject to the information reporting
requirements of the 1934 securities exchange act. The issuer will become subject
to these requirements on the effectiveness of the registration statement, and in
accordance therewith will file reports and other information with the SEC. The
registration statement and periodic reports and other information filed by the
issuer with the SEC can be inspected and copied at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C., or at its regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New
York 10048 at prescribed rates. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains a web site that contains reports and other information regarding
registrants that file electronically with the SEC. The address of this site is
http://www.sec.gov.
THE ISSUER
THE TRUST
Student Loan Funding 1998-A/B Trust is a common law trust formed under the laws
of the State of Delaware. The trust will not engage in any activity other than:
(1) acquiring, holding, selling and managing the financed student loans
and the other assets of the trust and proceeds from the financed
student loans,
(2) issuing one or more classes of its certificates and notes,
(3) making payments on its certificates and notes and
(4) engaging in other activities related to the activities listed in (1)
through (3) above.
The trust was formed and initially capitalized with nominal equity represented
by a trust certificate held by the depositor.
The old notes were issued by the depositor under an indenture dated as of
December 1, 1998 between the depositor and Firstar Bank, N.A., as trustee. The
proceeds from the sale of the old notes were used by the eligible lender
trustee, on behalf of the depositor, to acquire the initial financed student
loans. The trust purchased the financed student loans from the depositor by
assuming the obligations of the depositor under the old notes and the indenture.
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<PAGE> 31
The assumption by the trust was completed on April 20, 1999. The trust will
enter into the Second Amended and Restated Indenture of Trust and the Second
Amended and Restated Terms Supplement, each to be dated as of June 1, 1999
between itself and Firstar Bank, N.A. under which the new notes will be issued.
The assets of the trust include:
(1) the pool of financed student loans;
(2) all funds related to the financed student loans collected after the
applicable cut-off date; and
(3) all moneys and investments on deposit in the collection account, note
payment account, expense account, reserve account and excess surplus
account.
All of the accounts in (3) above are held in the name of the indenture trustee.
To facilitate servicing and to minimize administrative burden and expense, the
related servicer will be appointed custodian of the promissory notes
representing the financed FFELP loans by the eligible lender trustee.
Under the trust agreement, the co-owner trustee, on behalf of the trust, will
not engage in any activity other than:
(1) assigning, granting, transferring, pledging, mortgaging and conveying
its right, title and interest in the assets of the trust to the
indenture trustee for the benefit of the holders of the notes:
(2) to holding, managing and distributing to the holder any portion of the
assets of the trust released from the lien of, and remitted to, the
co-owner trustee for deposit in the trust under the indenture;
(3) issuing and exchanging the new notes for the outstanding old notes;
(4) making payments on the notes of the issuer; and
(5) engaging in other activities that are related to the activities listed
in (1) through (4) above.
The depositor structured the issuer as a common law trust as opposed to a
business trust. Business trusts generally are eligible for relief under the
United States Bankruptcy Code or other insolvency laws. Common law trusts may
not be eligible to be debtors under the insolvency laws if their activities are
insufficient to allow them to be characterized as business trusts. The depositor
has restricted the activities of the issuer in the trust agreement so that it
would not be characterized as a business trust eligible to be a debtor under the
insolvency laws. If a court were to conclude that the issuer was a business
trust and, therefore, eligible to be a debtor under the insolvency laws, a
bankruptcy filing by or against the issuer could result in delays in payments on
your new notes or reductions in the amounts of these payments.
The trust's principal offices are located in the offices of the co-owner
trustee, c/o Firstar Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202.
The new notes are obligations of the trust only and are payable solely from the
assets of the trust under the indenture. See "Security for the Notes -- The
Trust Assets."
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<PAGE> 32
CO-OWNER TRUSTEE
Firstar Bank, N.A., a national banking corporation, will serve as co-owner
trustee of the trust. Its address is 425 Walnut Street, Cincinnati, Ohio 45202.
The trust, the depositor, the administrator or their affiliates may maintain
other banking relationships with Firstar Bank, N.A. and its affiliates from time
to time.
OWNER TRUSTEE
First Union Trust Company, National Association, a national banking corporation,
will serve as owner trustee of the trust. Its address is One Rodney Square,
Suite 100, 920 King Street, Wilmington, Delaware 19801. The trust, the
depositor, the administrator or their affiliates may maintain other banking
relationships with First Union Trust Company and its affiliates from time to
time.
THE ADMINISTRATOR AND MASTER SERVICER
Student Loan Funding Resources, Inc., an Ohio corporation, 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. Resources is a wholly-owned
subsidiary of the Thomas L. Conlan Education Foundation (formerly known as The
Student Loan Funding Corporation), an Ohio nonprofit corporation. The principal
executive offices of Resources are located at One West Fourth Street, Suite 200,
Cincinnati, Ohio 45202. Its telephone number is (513) 352-0222.
Resources will undertake some responsibilities of the co-owner trustee, on
behalf of the issuer, under the indenture. Under an Administration Agreement
between Resources and the co-owner trustee, on behalf of the issuer, Resources,
as administrator, will provide management and administrative services to the
issuer. The administrator will receive an administration fee as compensation for
the performance of its obligations and as reimbursement for its expenses related
to its duties as administrator.
Under a master servicing agreement between Resources, as master servicer, and
the co-owner trustee, on behalf of the issuer, Resources will provide for the
servicing of the financed student loans. The master servicer will receive a
master servicing fee as compensation for the performance of the obligations and
the reimbursement for its expenses related to its duties as master servicer.
However, the notes are neither obligations of nor guaranteed or insured by
Resources in its capacity as the administrator or the master servicer.
Directors of Resources
Resources is governed by a board of directors that is currently authorized to
have seven members. The following table sets forth information with respect to
the directors of Resources:
STUDENT LOAN FUNDING RESOURCES, INC. BOARD OF DIRECTORS INFORMATION
<TABLE>
<CAPTION>
Joined Term Board Positions Occupation
Director Age Board Ending and Offices Principal Address (past five years)
<S> <C> <C> <C> <C> <C> <C>
Susan E. Arnold 45 1998 2002 One Procter & Gamble Plaza Vice President & General Manager,
Cincinnati, Ohio 45201 Procter & Gamble North America
Ronald D. Brown 45 1998 2000 4701 Marburg Avenue Senior Vice President & CFO, Milacron,
Cincinnati, Ohio 45209 Inc.
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
Joined Term Board Positions Occupation
Director Age Board Ending and Offices Principal Address (past five years)
<S> <C> <C> <C> <C> <C> <C>
Lawrence A. Leser 63 1998 2001 Chairman P.O. Box 5380 Chairman,
Cincinnati, Ohio 45201 The E.W. Scripps Company
Chairman & CEO (1994-96)
Serves as Director of:
The E.W. Scripps Company, Union
Central Life Insurance Company & AK
Steel Holding Company
William S.
Newcomb, Jr. 55 1998 2001 Vice Chairman 52 East Gay Street Partner,
Columbus, Ohio 43215 Vorys, Sater, Seymour & Pease LLP
Michael H. Shaut 48 1999 2002 President & CEO One West 4(th) St., Su. 200 Previously: President, Education
Cincinnati, Ohio 45202 Planning Services, Inc.
Previously:
Executive Vice President and Chief
Operating Officer,
The Student Loan Funding
Corporation
Patricia Mann
Smitson 53 Ex- Ex-Officio Secretary 312 Walnut Street, Suite 1400 Partner, Thompson Hine & Flory LLP
Officio Cincinnati, Ohio 45202
Walker J. Wallace 55 1998 2001 1017 Choctawhatchee Dr. Retired, Vice President, Procter &
Niceville, FL 32578 Gamble
</TABLE>
OFFICERS OF RESOURCES
The following is information with respect to the key officers of Resources:
Michael H. Shaut, 48, is President and Chief Executive Officer of Resources.
Mr. Shaut assumed that position on May 18, 1999. Mr. Shaut has 19 years of
diversified financial services industry experience including student and
consumer lending and corporate development. From December, 1995 though June,
1997, Mr. Shaut was Executive Vice President and Chief Operating Officer of the
Foundation (then known as The Student Loan Funding Corporation). Mr. Shaut holds
a Bachelor of Arts degree from Colgate University and a Juris Doctorate from
Georgetown University Law Center. Mr. Shaut is a member of the Bar Associations
of the States of Arizona, Ohio, Pennsylvania, Virginia and the District of
Columbia.
Stephen T. MacConnell, 52, is Senior Vice President of Legal Services and Human
Resources of Resources. Prior to serving Resources, 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
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<PAGE> 34
nonprofit 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 Resources. Mr. Eickhoff has 14 years of sales and
marketing leadership experience within the health care and education fields. He
has served on several state and national committees promoting literacy and
school-to-work initiatives. He has a Bachelor of Arts from Hope College,
Holland, Michigan.
Perry D. Moore, 36, is Vice President and Interim Chief Financial Officer of
Resources. Mr. Moore has over 10 years of financial management experience. He
has also been employed by a major public accounting firm where he participated
in the audits of numerous financial institutions including The Student Loan
Funding Corporation. Mr. Moore has over 7 years experience in the student loan
industry in the areas of accounting, finance, product development and
operations. He holds a bachelor's degree in Accounting from Bowling Green State
University and is a member of the American Institute of Certified Public
Accountants, Ohio Society of Certified Public Accountants and Institute of
Management Accountants.
YEAR 2000
For information describing the level of the trust's, the depositor's and the
administrator's readiness for year 2000, see "The Depositor - Year 2000."
THE DEPOSITOR
Student Loan Funding LLC, a Delaware limited liability company organized as a
bankruptcy remote special purpose entity, is the depositor. The members of the
depositor are Resources (99% ownership) and SLF Enterprises, Inc.
(1% ownership), an Ohio corporation and wholly-owned subsidiary of Resources.
The depositor is governed by a five-member management committee, which consists
of the following individuals: Christopher P. Chapman, Mark A. Ferrucci, Kim
Lutthans, Perry D. Moore and Michael H. Shaut. Mr. Chapman, Mr. Moore and Mr.
Shaut are officers and employees of Resources and Ms. Lutthans and Mr. Ferrucci
are independent members of the management committee. The depositor has no
full-time employees. The principal executive offices of the depositor are
located at One West Fourth Street, Suite 210, Cincinnati, Ohio 45202. The
telephone number of the offices is (513) 352-0570.
On June 1, 1998, the Foundation, in connection with an election under Section
150(d)(3) the Internal Revenue Code of 1986, transferred to Resources
substantially all of the assets and liabilities of Foundation, and Resources
subsequently transferred substantially all of the transferred assets and
liabilities to the depositor. As a result of these transfers and assumptions,
the depositor 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
depositor, and Foundation and Resources have no liability on that debt. Until
June 1, 1998, the Foundation was a tax-exempt charitable organization under
Section 501(C)(3) of the Internal Revenue Code and a "qualified scholarship
funding corporation" within the meaning of Section 150(d) of the Internal
Revenue 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 under Section 150(d)(3) of the Internal Revenue Code to
terminate its status as a qualified scholarship
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<PAGE> 35
funding corporation while continuing to qualify as a tax-exempt charitable
organization under Section 501(C)(3) of the Internal Revenue Code.
Under the depositor's limited liability company agreement, the depositor will
not engage in any activity other than
(1) acquiring, holding, selling and managing student loans and other assets
(consisting of moneys and investment securities on deposit in the funds and
accounts under its indentures and the depositor's rights under particular
contracts) in any of the trusts established by the depositor,
(2) issuing one or more series of notes or other debt obligations under one or
more indentures of the depositor,
(3) making payments on the notes or other debt obligations of the depositor,
and
(4) engaging in other activities that are related to those activities.
DEPOSITOR AS BANKRUPTCY REMOTE ENTITY
Resources structured the depositor to prevent any voluntary or involuntary
application for relief by Resources under insolvency laws from resulting in
consolidation of the assets and liabilities of the depositor with those of
Resources. The depositor was created as a separate, special purpose subsidiary
under a limited liability company agreement containing limitations (including
restrictions on the nature of the depositor's business and a restriction on the
depositor's ability to commence a voluntary proceeding under insolvency laws
without the unanimous affirmative vote of its management committee, including
the independent members). There can be no assurance that the activities of the
depositor will not result in a court concluding that the assets and the
liabilities of the depositor should be consolidated with those of Resources in a
proceeding under any insolvency laws.
The depositor has received the advice of counsel to the effect that subject to
specific 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 depositor and to require the consolidation of the
assets and liabilities of the depositor with the assets and liabilities of
Resources in the event of the application of any insolvency laws to Resources.
Among other things, it is assumed by counsel that the depositor will follow
specific procedures in the conduct of its affairs, including:
- - maintaining records and books of accounts separate from those of Resources,
- - refraining from commingling its assets with those of Resources, and
- - refraining from holding itself out as having agreed to pay, or being liable
for, the debts of Resources.
The depositor intends to follow these and other procedures related to
maintaining its separate identity.
There can be no assurance that a court would not conclude that the assets and
liabilities of the depositor should be consolidated with those of Resources. If
a court were to reach that
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<PAGE> 36
conclusion, or a filing were made under any insolvency laws by or against the
depositor, or if an attempt were made to litigate any of the above issues,
delays in distributions on the notes could occur or reductions in the amounts of
these distributions could result.
After the occurrence of any of event of bankruptcy or insolvency of the
depositor, the financed student loans and other assets of the trust may be
liquidated. The proceeds from that liquidation would be treated as collections
on these assets and deposited in trust under the indenture. There can be no
assurance that the proceeds from the liquidation of these assets and amounts (if
any) on deposit in the funds and accounts held under the indenture would be
sufficient to pay the notes in full.
RELATIONSHIP WITH INTUITION HOLDINGS, INC. AND INTUITION, INC.
On November 30, 1998, Resources completed a transaction wherein Resources
acquired a 50% ownership interest in InTuition Holdings, Inc. and has the right
to appoint two members of the board of directors (which consists of four
members) of InTuition Holdings, Inc. As of September 30, 1998, InTuition
Holdings, Inc. had $4.1 million in assets, $3.1 million in liabilities and $1.0
million in shareholders' equity. InTuition, Inc. is wholly owned by InTuition
Holdings, Inc. Approximately 88% of the financed student loans in the initial
pool balance were acquired from InTuition Holdings, Inc. with recourse for
breach of representations, warranties and covenants with respect to the financed
student loans solely to InTuition Holdings, Inc. In some circumstances and
subject to limitations, InTuition Holdings, Inc. has the right to cause the
seller of specific loans to InTuition Holdings, Inc. to repurchase these student
loans in the event of a breach of the representations, warranties or covenants
of the seller with respect to these student loans under the purchase agreement
between InTuition Holdings, Inc. and the seller. See "Risk Factors -- Inability
of Seller to Meet its Repurchase Obligations May Adversely Affect Your Notes"
and "Servicing -- InTuition, Inc."
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, later
years 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 inability or
failure to adequately address year 2000 issues by any of the parties below
(including by any party on which any of the parties rely) could 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 amount
of payments on the notes could be adversely affected.
The issuer is wholly dependent on the administrator's information systems.
Currently, the administrator is in the process of migration to a new loan
acquisitions system. Migration is expected to be complete by November 30, 1999.
If by June 1, 1999, the administrator determines that the migration will not be
completed by November 30, a contingency plan will be executed whereby the
existing system will be remediated on or before July 31, 1999. The administrator
is conducting a review of its own information systems and expects to have
completed all critical modifications to those systems by July 31, 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. 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 spent approximately $43,000 in 1998 and expects to
spend approximately an additional $40,000 in 1999 on the project.
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<PAGE> 37
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 student loan program due to year
2000 issues, then the operation of the student loan program could be adversely
affected, and the timing and amount of payments on the notes could be adversely
affected.
THIRD PARTY YEAR 2000 ISSUES
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.
The administrator made follow-up inquiries to material servicers to reasonably
assure the adequacy of Year 2000 testing and contingency plans. The
administrator visited key servicers as necessary to review these test plans,
test results and contingency plans. There can be no assurance that the computer
systems of these entities or other companies on which
- - the issuer, the depositor, the administrator, the master servicer, 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 of these parties or another party on which any of these
parties rely, or a remediation or conversion that is incompatible with the
administrator's, the master servicer'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 depositor, 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, or a replacement or
successor to the initial indenture trustee is necessary, the relative state of
preparedness or unpreparedness of these entities with regard to year 2000 issues
may have an adverse impact on the issuer, the depositor or the administrator and
the timing and amount of payments on the notes. The administrator will continue
to monitor the progress of the master servicer, the indenture trustee, the
eligible lender trustee, each of the servicers and each of the guarantee
agencies in addressing their respective year 2000 issues. For information
regarding the efforts of DTC in addressing year 2000 issues, see "Description of
the New Notes -- Book-entry Registration."
The administrator maintains other material third party vendor relationships with
human resources, finance and facilities providers. The administrator made
inquiries of those vendors whose failure of Year 2000 readiness would constitute
a potential material impact on its business. These inquiries have confirmed that
our vendors have taken, or are taking reasonable necessary steps toward
resolution of Year 2000 issues, if any, which may materially affect the
administrator. The administrator will continue to monitor the process of third
party vendors and has developed or is developing reasonable contingency plans to
address any material Year 2000 failures or deficiencies.
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. This website indicates that the Department of Education has
completed the five phases recommended by the General Accounting office for all
its mission critical systems. In addition, the Department of Education's Year
2000 Progress Report Card has been upgraded to a grade of "A-" by the U.S. House
of Representatives Committee on Government Reform and Oversight. Any failure by
the Department of Education to
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<PAGE> 38
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 depositor 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 depositor) in addressing year 2000 issues or the costs
involved in this 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.
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer.
The net proceeds to depositor from the sale of the $727,800,000 of old notes
were $727,397,583 after deducting discounts and paying offering expenses. The
depositor used the proceeds from the offering of the old notes in the following
amounts:
<TABLE>
<CAPTION>
Percentage of
Fund or Account Amount Proceeds
--------------- ------ --------
<S> <C> <C>
acquisition fund $708,205,483 97.36%
reserve fund 10,917,000 1.50%
collection account 5,000,000 0.69%
expense account 3,275,100 0.45%
--------- ----
Total Uses $727,397,583 100.00%
</TABLE>
We paid the initial purchasers a fee of $2,602,595 from moneys in the expense
account.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The depositor sold the old notes in a private offering on December 22, 1998, to
Salomon Smith Barney Inc., Fifth Third/The Ohio Company and NationsBanc
Montgomery Securities LLC, the initial purchasers, under a purchase agreement
dated December 18, 1998 among the depositor and the initial purchasers. The
initial purchasers subsequently resold the old notes to institutional investors.
Under the registration rights agreement that the depositor and the initial
purchasers entered into in connection with the private offering of the old notes
and that was subsequently assumed by the issuer, we are required to file the
registration statement of which this prospectus is a part. The assumption by the
trust was completed on April 20, 1999. The registration statement provides for a
registered exchange offer of new notes identical in all material respects to the
old notes, except that the new notes will be issued by the trust, will be freely
transferable and will not have any covenants regarding exchange and registration
rights. Under the registration rights agreement, we are required to use our best
efforts to:
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<PAGE> 39
- cause the registration statement to be declared effective no later May
31, 1999; and
- consummate the exchange offer as promptly as practicable, but no later
than June 30, 1999.
We are also required to keep the exchange offer open for not less than 20
business days (or longer if required by applicable law) after the date that
notice of the exchange offer is mailed to holders of the old notes.
For a more complete understanding of your exchange and registration rights, you
should refer to the registration rights agreement, which is included as an
exhibit to the registration statement of which this prospectus is a part.
EFFECT OF THE EXCHANGE OFFER
Based on interpretations by the staff of the SEC set forth in no-action letters
issued to third parties, Thompson Hine & Flory LLP, counsel to the issuer, has
rendered an opinion that you may offer for resale, resell and otherwise transfer
the new notes issued to you under the exchange offer in exchange for your old
notes without compliance with the registration and prospectus delivery
provisions of the 1933 securities act, so long as by tendering old notes in
exchange for new notes and by executing the letter of transmittal that
accompanies this prospectus you represent that:
- you are not our "affiliate" (as defined in Rule 405 of the 1933
securities act);
- you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of the new notes; and
- you are acquiring the new notes in the ordinary course of your
business.
In addition, each broker-dealer that receives new notes for its own account in
exchange for old notes, where the old notes were acquired by the broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
the new notes. See "Plan of Distribution." In the registration agreement,
depositor has agreed that it will allow exchanging dealers (and any other
persons subject to similar prospectus delivery requirements) to use this
prospectus in connection with a resale.
To the extent old notes are tendered and accepted in the exchange offer, the
principal amount of outstanding old notes will decrease with a resulting
decrease in the liquidity in the market for the old notes. Old notes that are
still outstanding following the consummation of the exchange offer will continue
to be subject to transfer restrictions.
TERMS OF THE EXCHANGE OFFER
On the terms and subject to the conditions set forth in this prospectus and in
the letter of transmittal, we will accept any and all old notes validly tendered
and not validly withdrawn prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer. As of the date of this prospectus, a
total of $692,836,478.23 principal amount of the old notes is outstanding. We
will issue and exchange new notes of each series in principal amounts equal to
the principal amounts of outstanding old notes of each series accepted in the
exchange offer. You may tender some or all of your old notes under the exchange
offer.
You only may tender and exchange your old notes for a corresponding series of
new notes, such that you may tender and exchange:
- - Series 1998A-3 Notes for Series 1998A1-3 Notes;
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- Series 1998A-4 Notes for Series 1998A1-4 Notes;
- Series 1998A-5 Notes for Series 1998A1-5 Notes;
- Series 1998A-6 Notes for Series 1998A1-6 Notes; and
- Series 1998B-3 Notes for Series 1998B1-3 Notes.
The form and terms of the new notes will be identical in all material respects
to the form and terms of the old notes, except that:
- the new notes will be issued by the trust;
- the offering of the new notes has been registered under the 1933
securities act;
- the new notes will not be subject to transfer restrictions; and
- the new notes will be issued free of any covenants regarding exchange
and registration rights.
The new notes will evidence the same debt as the old notes and will be entitled
to the benefits of the indenture under which the old notes were, and the new
notes will be, issued.
This prospectus, together with the accompanying letter of transmittal, is
initially being sent to all registered holders of old notes on or about May 27,
1999. The exchange offer is not conditioned on any minimum aggregate principal
amount of old notes being tendered. However, the exchange offer is subject to
conditions, which we may waive, and to the terms and provisions of the
registration agreement. See "--Conditions to the Exchange Offer."
You do not have any appraisal or dissenters' rights under law or the indenture
in connection with the exchange offer. During the exchange offer, we will
comply with the applicable requirements of the 1934 Securities Exchange Act and
the rules and regulations of the SEC established under the 1934 Securities
Exchange Act.
If we do not accept for exchange any tendered old notes because of an invalid
tender, the occurrence of other events set forth in this prospectus or for
another reason, certificates for any unaccepted old notes will be returned,
without expense to you, as promptly as practicable after the expiration date of
the exchange offer.
If you tender old notes in the exchange offer you will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of old notes under the
exchange offer. We will pay all charges and expenses, other than specific
applicable taxes, in connection with the exchange offer. See "--Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date is 5:00 p.m., New York City time, on June 28, 1999, unless
we, in our sole discretion, extend the exchange offer, in which case the
expiration date will be the latest date and time to which the exchange offer is
extended.
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We have the right to delay accepting any old notes, to extend the exchange offer
or, if any of the conditions set forth under the heading "--Conditions to the
Exchange Offer" have been satisfied, to terminate the exchange offer, by giving
oral or written notice of the delay, extension or termination to the exchange
agent. We also have the right to amend the terms of the exchange offer. If we
delay acceptance of any old notes, or terminate or amend the exchange offer, we
will make a public announcement to that effect as promptly as practicable. If we
believe that we have made a material amendment of the terms of the exchange
offer, we will promptly disclose the amendment in a manner reasonably calculated
to inform you of the amendment and we will extend the exchange offer to the
extent required by law. We will notify the exchange agent of any extension of
the exchange offer in writing or orally (which we will promptly confirm in
writing). Unless otherwise required by applicable law or regulation, we will
make a public announcement of any extension of the expiration date before 9:00
a.m., New York City time, on the first business day after the previously
scheduled expiration date. We have no obligation to publish, advise or otherwise
communicate any public announcement, other than by making a timely press
release.
INTEREST ON THE NEW NOTES
Interest on the new notes will accrue from the last interest payment date on
which we paid interest on the old notes surrendered in exchange for them. See
"Description of the New Notes--Interest."
PROCEDURES FOR TENDERING
Each holder of old notes wishing to accept the exchange offer must:
(1) complete, sign and date the letter of transmittal, or a facsimile of
it;
(2) have the signatures on it guaranteed if required by the letter of
transmittal; and
(3) mail or otherwise deliver the letter of transmittal or the facsimile,
together with the old notes and any other required documents, to the
exchange agent prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer (unless the tender is being
effected under the procedure for book-entry transfer described below).
Any financial institution that is a participant in the book-entry transfer
facility system of The Depository Trust Company may make book-entry delivery of
the old notes by causing DTC to transfer the old notes into the exchange agent's
account and to deliver an agent's message (as described below) on or prior to
the expiration date of the exchange offer under DTC's procedures for the
transfer and delivery. If delivery of old notes is made through book-entry
transfer into the exchange agent's account at DTC and an agent's message is not
delivered, the letter of transmittal (or facsimile of it), with any required
signature guarantees and any other required documents must be transmitted to and
received or confirmed by the exchange agent at its addresses set forth under the
heading"-- Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer. DELIVERY OF DOCUMENTS TO DTC UNDER ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The term agent's message means a message that states that DTC has received an
express acknowledgment from the tendering DTC participant that the DTC
participant has received and agrees to be bound by, and makes the
representations and warranties contained in, the letter of transmittal and that
we may enforce the letter of transmittal against the DTC participant. The
agent's message is transmitted by DTC to, and received by, the exchange agent
and forms a part of the confirmation of the book-entry tender of old notes into
the exchange agent's account at DTC.
A holder's tender (as set forth above) of old notes will constitute an agreement
between the holder and us under the terms and subject to the conditions set
forth in this prospectus and in the letter of transmittal.
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You must deliver all documents to the exchange agent at its address set forth in
this prospectus under "--Exchange Agent." Holders may also request that their
respective brokers, dealers, commercial banks, trust companies or nominees
effect the tender for the holders.
The method of delivery of old notes, the letter of transmittal and all other
required documents to the exchange agent is at the election and risk of the
holders. Instead of delivery by mail, we recommend that holders use an overnight
or hand delivery service. In all cases, you should allow enough time to assure
timely delivery. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO US.
Only a person in whose name old notes are registered on the register maintained
by the trustee or any other person who has obtained a properly completed bond
power from the registered holder, or any person whose old notes are held of
record by DTC who desires to deliver the old notes by book-entry transfer at DTC
may tender the old notes in the exchange offer.
Any beneficial holder whose old notes are registered in the name of his broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct the registered holder
to tender on his behalf. If the beneficial holder wishes to tender on his own
behalf, he must, prior to completing and executing the letter of transmittal and
delivering his old notes, obtain a properly completed bond power from the
registered holder. THE TRANSFER OF RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
- a commercial bank or trust company having an office or correspondent
in the United States; or
- an eligible guarantor institution within the meaning of Rule 17Ad-15
under the 1934 securities exchange act,
unless the old notes tendered under the letter of transmittal are tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
- for the account of an eligible guarantor institution.
If a person other than the registered holder of any old notes signs the letter
of transmittal, the old notes must be endorsed or accompanied by appropriate
bond powers that authorize that person to tender the old notes on behalf of the
registered holder, and, in either case, signed as the name of the registered
holder or holders appears on the old notes.
If a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other acting as a fiduciary or representative signs the letter of
transmittal or any old notes or bond powers, that person should so indicate when
signing, and, unless we waive the requirement, must submit with the letter of
transmittal evidence satisfactory to us of their authority to so act.
The validity, form, eligibility (including time of receipt), acceptance and
withdrawal of the tendered old notes will be determined by us in our sole
discretion. Our determination will be final and binding. We reserve the absolute
right to reject any and all old notes not properly tendered or any old notes
that, in the opinion of our counsel, it would be unlawful for us to accept. We
also reserve the absolute right to waive any irregularities or conditions of
tender as to particular old notes. Our interpretation of the terms and
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conditions of the exchange offer (including the instructions in the letter of
transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of old notes must be cured
within this time as we shall determine. Neither we, the exchange agent nor any
other person is under any duty to give notification of defects or irregularities
with respect to tenders of old notes. Also, neither we, the exchange agent nor
any other person has any liability for failure to give this notification.
Tenders of old notes will not be deemed to have been made until any
irregularities have been cured or waived. Any old notes received by the exchange
agent that are not properly tendered, and as to which the defects or
irregularities have not been cured or waived, will be returned without cost by
the exchange agent to the tendering holder of the old notes unless otherwise
provided in the letter of transmittal as soon as practicable following the
expiration date of the exchange offer.
In addition, we reserve the right in our sole discretion to:
- purchase or make offers for any old notes that remain outstanding
after the expiration date of the exchange offer, or (as set forth
under the heading "--Conditions to the Exchange Offer") to terminate
the exchange offer; and
- to the extent permitted by applicable law, purchase old notes in the
open market, in privately negotiated transactions or other ways.
The terms of any of these purchases or offers may differ from the terms of the
exchange offer.
By tendering, you represent to us that, among other things:
- the new notes acquired under the exchange offer in exchange for your
old notes are being obtained in the ordinary course of your business;
- you do not have an arrangement or understanding with any person to
participate in the distribution of the new notes; and
- you are not an "affiliate" of depositor within the meaning of Rule 405
under the 1933 securities act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
On satisfaction or waiver of all of the conditions to the exchange offer, we
will accept, promptly after the expiration date of the exchange offer, all old
notes properly tendered and will issue the new notes promptly after acceptance
of the old notes. See "--Conditions to the Exchange Offer." For each old note
that we accept for exchange, the holder of the old note will receive a new note
having a principal amount equal to that of the surrendered old note.
For purposes of the exchange offer, we will have accepted properly tendered old
notes for exchange when, as and if we give oral or written notice to that effect
to the exchange agent, with written confirmation of any oral notice to be given
promptly afterwards.
In all cases, we will issue new notes for old notes that we accept for exchange
under the exchange offer only after timely receipt by the exchange agent of:
- certificates for the old notes,
- a properly completed and duly executed letter of transmittal, and
- all other required documents or a timely book-entry confirmation of
the old notes into the exchange agent's account at DTC.
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If we do not accept any tendered old notes for any reason set forth in the terms
and conditions of the exchange offer or if old notes are submitted for a greater
principal amount than the holder desired to exchange, we will return these
unaccepted or non-exchanged old notes without expense to the tendering holder
(or, in the case of old notes tendered by book-entry transfer into the exchange
agent's account at DTC under the book-entry procedures described below, the
non-exchanged old notes will be credited to an account maintained with the
book-entry transfer facility) as promptly as practicable after the expiration
date of the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect to
the old notes at DTC for purposes of the exchange offer within two business days
after the date of this prospectus, and any financial institution that is a
participant in DTC's systems may make book-entry delivery of old notes by
causing DTC to transfer the old notes into the exchange agent's account at DTC
under DTC's procedures for transfer. Although delivery of old notes may be
effected through book-entry transfer at DTC, either:
- the letter of transmittal (or a facsimile of it or an agent's message
in lieu of it), with any required signature guarantees and any other
required documents, must always be transmitted to and received by the
exchange agent at one of the addresses set forth under the
heading"--Exchange Agent" on or prior to the expiration date of the
exchange offer, or
- the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their old notes and who cannot deliver their old
notes, the letter of transmittal, or any other required documents to the
exchange agent prior to the expiration date of the exchange offer, or holders
who cannot complete the procedure for book-entry transfer on a timely basis, may
effect a tender if:
- the tender is made through an eligible guarantor institution;
- prior to the expiration date of the exchange offer, the exchange agent
receives from the eligible guarantor institution a properly completed
and duly executed notice of guaranteed delivery (by facsimile
transmission, mail or hand delivery): (1) setting forth the name and
address of the holder of the old notes, the certificate number or
numbers of the old notes and the principal amount of old notes
tendered, (2) stating that the tender is being made, and (3)
guaranteeing that, within three business days after the expiration date
of the exchange offer, the letter of transmittal (or facsimile of it),
together with the certificate(s) representing the old notes to be
tendered in proper form for transfer and any other documents required
by the letter of transmittal, will be deposited by the eligible
guarantor institution with the exchange agent; and
- the properly completed and executed letter of transmittal (or facsimile
of it), together with the certificate(s) representing all tendered old
notes in proper form for transfer (or confirmation of a book-entry
transfer into the exchange agent's account at DTC of old notes
delivered electronically) and all other documents required by the
letter of transmittal are received by the exchange agent within three
business days after the expiration date of the exchange offer.
On request to the exchange agent, a notice of guaranteed delivery will sent to
holders who wish to tender their old notes according to the delivery procedures
set forth above.
WITHDRAWAL OF TENDERS
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Except as otherwise provided in this prospectus, tenders of old notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date of the exchange offer.
To withdraw a tender of old notes in the exchange offer, the exchange agent must
receive a facsimile transmission or letter notice of withdrawal at its address
set forth in this prospectus prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer. A notice of withdrawal must:
- specify the name of the person having deposited the old notes to be
withdrawn;
- include a statement that the note depositor is withdrawing its election
to have old notes exchanged and identify the old notes to be withdrawn
(including the certificate number or numbers and principal amount of
the old notes);
- be signed by the note depositor in the same manner as the original
signature on the letter of transmittal by which the old notes were
tendered (including any required signature guarantees) or be
accompanied by documents of transfer that will permit the trustee with
respect to the old notes to register the transfer of the old notes into
the name of the note depositor withdrawing the tender; and
- specify the name in which any the old notes are to be registered, if
different from that of the note depositor.
If you have tendered old notes under the procedures for book-entry transfer set
forth under the headings "--Procedures for Tendering" and "--Book-entry
Transfer," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of old notes, in which case a
notice of withdrawal will be effective if delivered to the exchange agent by
written, telegraphic, telex or facsimile transmission.
The validity, form and eligibility (including time of receipt) of withdrawal
notices will be determined by us, and our determination will be final and
binding on all parties. Any old notes withdrawn will be deemed not to have been
validly tendered for purposes of the exchange offer and no new notes will be
issued with respect to them unless the old notes that have been withdrawn are
validly re-tendered. Properly withdrawn old notes may be re-tendered by
following one of the procedures set forth under the heading "--Procedures for
Tendering," at any time prior to the expiration date of the exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
The exchange offer is not subject to any conditions, other than that:
- the exchange offer does not violate any applicable law or
interpretation of the staff of the SEC; and
- there is no injunction, order or decree issued by any court or any
governmental agency that would prohibit, prevent or otherwise
materially impair our ability to proceed with the exchange offer.
We cannot assure you that this condition will not occur. Holders of old notes
will have specific rights under the registration rights agreement if we fail to
consummate the exchange offer. If we determine that we may terminate the
exchange offer, as set forth above, we may:
- refuse to accept any old notes and return any old notes that have been
tendered to their holders;
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- extend the exchange offer and retain all old notes tendered before the
expiration date of the exchange offer, subject to the rights of holders
of tendered old notes to withdraw their tendered old notes; or
- waive the termination event with respect to the exchange offer and
accept all properly tendered old notes that have not been withdrawn.
If a waiver constitutes a material change in the exchange offer, we will
disclose the change by means of a supplement to this prospectus that will be
distributed to each registered holder of old notes, and we will extend the
exchange offer for a period of five to ten business days, depending on the
significance of the waiver and the manner of disclosure to the registered
holders of the old notes, if the exchange offer would otherwise expire during
this period.
Dealer Manager
Salomon Smith Barney Inc., as dealer manager, has agreed to solicit exchanges of
the old notes. The depositor will pay the dealer manager specified expenses
payable as of the completion of the exchange offer. Additional solicitation may
be made by telecopier, by telephone, or in person by officers and regular
employees of the depositor and its affiliates. No additional compensation will
be paid to any officers or employees who engage in soliciting exchanges.
The depositor has agreed to indemnify the dealer manager against some
liabilities, including civil liabilities under the 1933 securities act, and to
contribute to payments that the dealer manager may be required to make in
respect the securities act.
The dealer manager engages in transactions with, and from time to time has
performed services for, the depositor.
EXCHANGE AGENT
Firstar Bank, N.A., the trustee under the indenture, has been appointed as
exchange agent for the exchange offer. Questions and requests for assistance and
inquiries for additional copies of this prospectus or of the letter of
transmittal should be directed to the exchange agent addressed as follows:
By mail: By hand or overnight delivery:
Corporate Trust Department Corporate Trust Department
425 Walnut Street 425 Walnut Street
Mail Location 5155 6th Floor
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
Attention: Brian J. Gardner Attention: Brian J. Gardner
(if by mail, registered or certified mail recommended)
facsimile transmission number:
(for eligible institutions only)
(513) 632-5511
confirm by telephone:
(513) 762-8870
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Delivery of the letter of transmittal to an address other than as set forth
above or transmission of instructions via facsimile other than as set forth
above does not constitute a valid delivery of the letter of transmittal.
FEES AND EXPENSES
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay the cash expenses to be incurred
in connection with soliciting tenders under the exchange offer. These expenses
include fees and expenses of the exchange agent and the indenture trustee,
accounting and legal fees and printing costs, among others.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to pay any
transfer taxes in connection with the tender, except that holders will be
responsible for the payment of any applicable transfer tax if they instruct us
to register new notes in the name of, or request that old notes not tendered or
not accepted in the exchange offer be returned to, a person other than the
registered tendering holder.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes on
the date of the exchange. Accordingly, we will not recognize any gain or loss
for accounting purposes. The expenses of the exchange offer and the unamortized
expenses relating to the issuance of the old notes will be amortized over the
term of the new notes.
THE FINANCED STUDENT LOANS
The notes are secured by and payable solely from the assets of the trust. The
trust includes:
(1) a pool of financed student loans and moneys payable with respect to
these loans after their respective dates of acquisition or origination
from moneys under the indenture;
(2) money and investment securities in the funds and accounts held by the
indenture trustee under the indenture; and
(3) all rights of the issuer and the eligible lender trustee in and to
specific contracts. See "Security for the Notes -- The Trust."
Financed in the case of financed student loans refers to student loans made or
acquired through the eligible lender trustee, with the proceeds of the old notes
or moneys in the acquisition fund or the collection account. Financed also
refers to the exchange of financed student loans under the indenture, and
included in the student loan portfolio fund. The pool of financed student loans
includes the student loans to be financed by the issuer or the eligible lender
trustee of the issuer.
As a result of variation in the effective rates of interest applicable, the
distribution by weighted average interest rate, may be different from the tables
below. The information set forth below with respect to the original and
remaining terms to maturity of financed student loans may vary significantly
from the actual term to maturity of any of the financed student loans as a
result of deferral and forbearance periods being granted.
The financed student loans were acquired on or about December 31, 1998 at their
principal balance as of their purchase date. The financed student loans
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are FFELP loans that at the time of acquisition met the following criteria:
(1) originated in the United States or its territories or possessions under
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,
(2) bear interest at the maximum interest rate permitted under the Higher
Education Act, or a lesser rate of interest as is approved by the
rating agencies under the indenture;
(3) contain terms required by the FFEL program, the guarantee agreements
and other applicable requirements, and
(4) is not more than 120 days past due as of the date that financed student
loan is acquired. See "Description of the FFEL Program" and "The
Guarantee Agencies."
The following is a summary of the delinquency status of the financed student
loans as of March 31, 1999.
<TABLE>
<CAPTION>
Percent of Initial Financed
Aggregate Student Loans
Outstanding by Outstanding
Days Delinquent Principal Balance Principal Balance
--------------- ----------------- -----------------
<S> <C> <C>
0 - 30 ................................ $563,349,557 86.13%
31 - 60 ............................... 32,733,891 5.01
61 - 90 ............................... 18,799,141 2.87
91 - 120 .............................. 22,697,079 3.47
121 and above ......................... 16,502,138 2.52
---------- ----
Total ....................... $654,081,806 100%
</TABLE>
For this purpose, delinquency refers to the number of days for which any part of
a payment is past due. All of the financed student loans in the trust 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 as
provided under the Higher Education Act. Each financed student loan is eligible
for special allowance payments, those that are subsidized Stafford loans are
eligible for interest subsidy payments paid by the Department of Education. See
"Description of the FFEL Program."
Additional student loans that may be financed after the closing date include
specific financed student loans substituted for other financed student loans in
the trust meeting specific specified characteristics. See "The Indenture--
Student Loan Portfolio Fund" and "The Indenture-- Collection Fund."
Although characteristics of additional financed student loans are expected to be
similar to the initial loans, the aggregate characteristics of the entire pool
will vary from them, because additional financed student loans may be financed
after the closing date. The aggregate characteristics include the composition of
the financed student loans, the borrowers of the financed student loans and the
distribution by interest and by principal balance described by the tables below.
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Each of the financed student loans provides for the amortization of the
outstanding principal balance of that financed student loan over a series of
regular payments. Each regular payment consists of an installment of interest.
The interest installment is calculated on the basis of the outstanding principal
balance of that financed student loan multiplied by the applicable interest rate
and further multiplied by the period elapsed since the preceding payment of
interest was made. As payments are received in respect of that 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 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 that financed student loan.
A total of approximately $680,000,000 of financed student loans were acquired.
The tables below describe characteristics of the initial financed student loans
as of March 31, 1999.
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS
<TABLE>
<CAPTION>
<S> <C>
Aggregate Outstanding Principal Balance $654,081,806
Aggregate Outstanding Accrued Interest $ 5,293,278
Number of Borrowers 73,687
Average Outstanding Principal Balance Per Borrower $ 8,876
Number of Loans 205,667
Average Outstanding Principal Balance Per Loan $ 3,180
Weighted Average Annual Borrower Interest Rate 8.33%
Weighted Average Remaining Term (months) (does not include the months
remaining for the In-School, Grace, Deferment or Forbearance periods)(1) 108
Weighted Average Remaining Term (months) (including the months
remaining for the In-School, Grace, Deferment or Forbearance periods)(1) 109
</TABLE>
- ------------
(1)Refers to the payment status of the borrower of each financed student loan as
of March 31, 1999: the borrower may still be attending school, may be in a grace
period after completing school and prior to repayment commencing, may be
currently required to repay that loan or may have temporarily ceased repaying
that loan through a deferral or a forbearance period. See "Description of the
FFEL Program."
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DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY LOAN TYPE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Loan Type Loans Balance Balance
- --------- ----- ------- -------
<S> <C> <C> <C>
Stafford-Subsidized 45,431 $133,844,830 20.46%
Stafford-Unsubsidized 153,782 478,927,034 73.22
Consolidation 696 16,230,557 2.48
PLUS 2,619 11,560,539 1.77
SLS 3,139 13,518,845 2.07
------- ------------ ------
Total 205,667 $654,081,806 100.00%
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY MINIMUM GUARANTEE LEVEL
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Minimum Guarantee Level Loans Balance Balance
- ----------------------- ----- ------- -------
<S> <C> <C> <C>
FFELP Loan Guaranteed 100% 94,273 $270,606,537 41.37%
FFELP Loan Guaranteed 98% 111,394 383,475,268 58.63
------- ------------ ------
Total 205,667 $654,081,806 100.00%
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY GUARANTEE AGENCY
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guarantee Agency Loans Balance Balance
- ---------------- ----- ------- -------
<S> <C> <C> <C>
Florida Department of Education, Office of Student 128,819 $393,724,755 60.20%
Financial Assistance
Georgia Higher Education Assistance Corporation 14,394 44,695,738 6.83
United Student Aid Funds, Inc. 31,659 139,594,151 21.34
Kentucky Higher Education Assistance Authority 18,803 41,438,957 6.34
Great Lakes Higher Education Guaranty Corporation 10,650 24,987,155 3.82
Other Guarantee Agencies 1,342 9,641,050 1.47
------- ------------ ------
Total 205,667 $654,081.086 100.00%
</TABLE>
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<PAGE> 51
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY BORROWER INTEREST RATE
<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% 1,575 $ 3,685,723 0.56%
7.50% to 7.99% 2,252 6,396,610 0.98
8.00% to 8.49% 173,081 506,185,361 77.39
8.50% to 8.99% 25,127 95,121,099 14.54
9.00% to 9.49% 3,248 41,843,853 6.40
9.50% or greater 384 849,162 0.13
------- ------------ ------
Total 205,667 $654,081,806 100.00%
</TABLE>
(1) Determined using the interest rates applicable to the initial financed
student loans as of March 31, 1999. However, because some of the initial
financed student loans bear interest at variable rates, the existing interest
rates are not indicative of future interest rates on the financed student loans.
See "Description of the FFEL Program."
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY RANGE OF OUTSTANDING PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Principal Balance Loans Balance Balance
- ----------------- ----- ------- -------
<S> <C> <C> <C>
Less than $500 13,134 $ 3,735,490 0.57%
$500-$999.99 20,410 15,479,574 2.37
$1,000-$1,999.99 46,224 68,374,285 10.45
$2,000-$2,999.99 50,031 119,730,367 18.31
$3,000-$3,999.99 24,664 83,201,016 13.68
$4,000-$5,999.99 28,917 138,729,564 21.21
$6,000-$7,999.99 8,797 56,341,809 8.61
$8,000-$9,999.99 5,982 50,096,525 7.66
$10,000-$14,999.99 4,693 50,368,484 7.70
$15,000-$19,999.99 1,251 18,127,451 2.77
$20,000 or greater 1,564 43,670,667 6.67
------- ------------ ------
Total 205,667 $654,081,806 100.00%
</TABLE>
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<PAGE> 52
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER PAYMENT STATUS
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Borrower Payment Status Loans Balance Balance
- ----------------------- ----- ------- -------
<S> <C> <C> <C>
In School 5,187 $ 14,856,181 2.27%
Grace 3,953 11,029,437 1.69
Repayment 137,108 413,714,224 63.25
Deferment 28,710 93,224,498 14.25
Forbearance 30,475 120,463,282 18.42
Claim 234 794,184 0.12
------- ------------ ------
Total 205,667 $654,081,806 100.00%
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY REMAINING TERM TO SCHEDULED MATURITY
<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 5,935 $ 3,260,671 0.50%
13 to 24 9,231 10,485,667 1.60
25 to 36 17,262 29,295,045 4.48
37 to 48 28,015 67,461,528 10.31
49 to 60 96,233 338,077,083 51.69
61 to 72 5,051 12,680,581 1.94
73 to 84 5,196 20,917,908 3.20
85 to 96 5,386 21,632,009 3.31
97 to 108 5,871 26,188,855 4.00
109 to 120 27,451 123,158,273 18.82
121 to 180 22 360,435 0.06
181 to 240 10 330,423 0.05
241 to 300 4 233,329 0.04
Over 300 0 0 0.00
------- ------------ ------
Total 205,667 $654,081,806 100.00%
</TABLE>
GEOGRAPHIC DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Location (1) Loans Balance Balance
- ------------ ----- ------- -------
<S> <C> <C> <C>
Ohio 9,999 $ 20,228,679 3.09%
Florida 115,925 382,156,038 59.36
Georgia 17,088 54,702,836 8.36
Kentucky 14,660 32,327,979 4.94
Others (57) 47,995 164,666,274 24.25
------- ------------ ------
Total 205,667 $654,081,806 100.00%
</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 46 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 2.00% of the initial
pool balance.
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<PAGE> 53
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 that borrowers to repay
their financed student loans may be impacted to a larger extent than if that
borrowers were dispersed more geographically.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY SCHOOL TYPES
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
School Type Loans Balance Balance
- ----------- ----- ------- -------
<S> <C> <C> <C>
4 Year Institution 133,265 $408,774,525 62.96%
2 Year Institution 31,364 94,455,833 14.44
Graduate 25,733 99,584,662 15.23
Proprietary 844 2,649,950 0.41
Other/Unknown 14,461 45,492,763 6.96
------- ------------ ------
Total 205,667 $654,081,806 100.00%
</TABLE>
INCENTIVE PROGRAMS
Some of the financed student loans, known as reduced rate loans, are eligible
for a reduction in interest rate that is less than the maximum rate permitted by
the Higher Education Act. Reduced rate loans are Stafford loans and unsubsidized
Stafford loans originated on or after July 1, 1996, wherein the applicable
interest rate on that a reduced rate loan is reduced by 2.00% . The reduction in
interest rate is effective on the receipt of the initial 48 consecutive monthly
payments, with no missed or late payments, following commencement of repayment
status, and continuing as long as no payments are missed on the reduced rate
loans. In addition, after receipt of the initial 24 consecutive monthly payments
following commencement of repayment status, a borrower is entitled to receive a
credit to their principal balance of any origination fee paid by the borrower in
excess of $250. The indenture provides that 15% of the financed student loans
are eligible to become reduced rate loans.
TRANSFER AND SALE AGREEMENT
Under the transfer and sale agreement the depositor and its eligible lender
trustee sold and transferred to the trust and its eligible lender trustee,
without recourse, their entire right, title and interest in the financed student
loans and all collections received and to be received after the effective date
of the transfer and sale agreement. In consideration of this transfer and sale
the trust assumed all payment obligations of the depositor on the notes.
CONVEYANCE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES.
Under the transfer and sale agreement the depositor sold its right, title and
interest in the financed student loans to the trust. A court could decide that
the financed student loans were not sold to the trust and continue to be the
property of the depositor. If this happens, the transfer and sale agreement says
that the transfer is a conveyance by the depositor of a valid and binding lien
on and a security interest in the financed student loans to the trust.
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<PAGE> 54
The depositor made representations and warranties with respect to the financed
student loans to the trust, including, among other things, that:
(1) it and its eligible lender trustee are the sole owners and holders of
each financed student loan and have full right and authority to
transfer the loans free and clear of all liens, pledges or encumbrances
(except for the lien and security interest of the indenture trustee)
and to the best of the depositor's knowledge, no counterclaim, offset,
defense or right to rescission exists with respect to any financed
student loan, with notice, lapse of time, or the occurrence or failure
to occur of any act or event;
(2) the information provided by the depositor about to the financed student
loans is true and correct in all material respects; and
(3) to the best of the depositor's knowledge, each financed student loan,
complies in all material respects with the requirements of the Higher
Education Act.
REPURCHASE OF FINANCED STUDENT LOANS
If the Secretary of Education or a guarantee agency refuses to honor all or part
of a claim filed with respect to a financed student loan:
(a) because of something that occurred after the depositor took title
to that financed student loan but prior to the transfer to the
trust, at the request of the trust, the depositor is obligated to
repurchase that financed student loan, or
(b) because something that occurred prior to the date on which the
depositor took title to that financed student loan, the depositor
is obligated to that financed student loan, but only after the
depositor has had reasonable time to exercise its rights under the
applicable purchase agreement to require the seller of that
financed student loan to repurchase it.
IN EITHER CASE, THE REPURCHASE PRICE WILL BE THE SUM OF
(1) the same percentage of the then-outstanding principal balance of that
financed student loan as the depositor originally paid;
(2) interest payable by the obligor accrued and unpaid with respect to that
financed student loan including the date of repurchase;
(3) an amount equal to any special allowance payments or interest subsidy
payments, if applicable, in respect of that financed student loan for
this period as the financed student loan was held by or on behalf of
the depositor to which the depositor was not entitled due to
ineligibility of that financed student loan; and
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<PAGE> 55
(4) any attorneys' fees, legal expenses, court costs, servicing fees or
other expenses incurred by the trust or the appropriate successors or
assigns in connection with that financed student loan and arising out
of the reasons for the repurchase.
The depositor is required to repurchase that financed student loan after
receiving notice form the co-owner trustee requesting repurchase by
depositor and setting forth the reason therefor. Any financed student loan
returned to the depositor which has been endorsed to the co-owner trustee shall
be endorsed by the eligible lender trustee on behalf of the trust to the
eligible lender trustee of the depositor on the form supplied by the eligible
lender trustee on behalf of the trust.
AMENDMENT.
The parties may agree in writing to amend the transfer and sale agreement, with
the consent of the indenture trustee, to add any provisions to or to change or
eliminate any provisions of the transfer and sale agreement. The parties may
amend it by modifying in any manner, the rights of holders of notes, provided
that no amendment may:
(1) increase or reduce in any manner the amount of, or accelerate or delay
the timing of, collections of payments with respect to the financed
student loans or distributions required for the benefit of the holders
of notes; or
(2) reduce the percentage of the notes required to consent to any such
amendment, without the consent of the holders of all the outstanding
notes affected thereby.
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the notes and the yield on the notes will be
affected by
(1) prepayments of the financed student loans that may occur as described
below;
(2) the sale by the issuer of financed student loans;
(3) parity percentage payments; and
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<PAGE> 56
(4) deferrals or delays in payments on the financed student loans resulting
from defaults, grace periods, deferment periods and, under some
circumstances, forbearance periods.
All the financed student loans, including those resulting from consolidation
loans, are prepayable in whole or in part by the borrowers at any time without
penalty and may be prepaid as a result of:
(1) borrower's default, death, disability or bankruptcy;
(2) a closing of or false certification by the borrower's school;
(3) subsequent liquidation or collection of guarantee payments with respect
the loans; and
(4) as a result of financed student loans being repurchased by depositor or
the respective sellers as a result of a breach of a representation and
warranty.
The rate of prepayments cannot be predicted and may be influenced by a variety
of economic, social and other factors, including those described below. As a
rule, prepayments are more likely to occur if other financing alternatives are
available to borrowers. 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, these financed student loans will be prepaid. See
"Description of the FFEL Program -- Loan Terms -- Consolidation Loans."
The indenture trustee will offer for sale any financed student loans remaining
in the trust on or after May 31, 2007, if the outstanding pool balance is equal
to or less than 10% of the initial pool balance . The depositor has an option to
repurchase all remaining financed student loans in the trust if, on any
distribution date, the outstanding pool balance is equal to or less than 10% of
the initial pool balance. The depositor has an option to redeem the Series A-4
Notes, the Series A-5 Notes and the Series A-6 Notes on any auction period
distribution date. See "Redemption."
Scheduled payments with respect to, and maturities of, the financed student
loans may be extended under grace periods, deferment periods and, under some
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 holders. These
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time holders
receive payments from the trust than these interest rates and these spreads
would otherwise have been had such prepayments not been made or had
these 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
-56-
<PAGE> 57
NOT A PREDICTION OF THE PREPAYMENT RATE THAT MIGHT ACTUALLY BE EXPERIENCED BY
THE FINANCED STUDENT LOANS IN THE TRUST.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of the 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. Payments on the financed student loans may be in the form of
scheduled amortization of principal or prepayments, including guarantee
payments. For this purpose, the term prepayments includes prepayments resulting
from making consolidation loans, in full or in part as a result of:
(1) borrower default, death, disability or bankruptcy;
(2) a closing of or a false certification by the borrower's school;
(3) subsequent liquidation of guarantee payments with respect the loans;
and
(4) as a result of financed student loans being repurchased by the
respective depositor or the sellers 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."
The constant prepayment rate prepayment model represents an assumed constant
rate of prepayment of financed student loans in the trust, outstanding as of the
beginning of each quarter expressed as a percentage. There can be no assurance
that the 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
(1) 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;
(2) the initial principal balance of the financed student loans is
$680,000,000 and the financed student loans have the characteristics
described under the heading "The Financed Student Loans";
(3) payments are made on the Series A-3 Notes on the last business day of
each month;
(4) payments are made on the auction rate notes on the business day
following the expiration of each auction period commencing June 30,
2003. This determination is made on the assumption of an auction period
of 28 days with no auction period adjustments or auction period
conversions;
(5) payments are made on the Series B-3 Notes on the last business day each
month commencing July 31, 2003;
(6) the financed student loans in the trust are auctioned on May 31, 2007;
and
(7) the new 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 will not experience
delinquencies or unanticipated losses.
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<PAGE> 58
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 A-3 Notes 2.92 2.41 2.15 1.95 1.78 1.39
Series B-3 Notes 5.73 5.55 5.46 5.37 5.31 5.31
</TABLE>
DESCRIPTION OF THE FFEL PROGRAM
The Higher Education Act sets forth provisions establishing the FFEL program,
according to which state agencies or private nonprofit corporations
administering student loan insurance programs are reimbursed for losses
sustained in the operation of their programs, and holders of specific loans made
under these programs are paid subsidies for owning these loans. These agencies
and nonprofit corporations administering student loan insurance programs are
known as guarantee agencies.
The Higher Education Act currently authorizes specific student loans to be
covered under the FFEL program through June 30, 2003. Congress has extended
similar authorization dates in prior versions of the Higher Education Act, but
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 Higher Education Amendments of 1998 (the 1998 Reauthorization
Bill);
- the Intermodal Surface Transportation Efficiency Act of 1998;
- the 1997 Budget Reconciliation Act (P.L. 105-33);
- the Emergency Student Loan Consolidation 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 Acts of 1990, 1989, 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
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<PAGE> 59
- the Education Amendments of 1980.
Omnibus Budget Reconciliation Act of 1993. Under the 1993 Amendments, Congress
made a number of changes that may adversely affect the financial condition of
the guarantee agencies, as these changes reduce financial benefits previously
enjoyed by guarantee agencies and give the Department of Education broad powers
over guarantee agencies and their reserves. See "Contracts with Guarantee
Agencies" and "The Guarantee Agencies" for a more detailed description of the
impact of this legislation on guarantee agencies. The changes create a
significant risk that the resources available to the guarantee agencies to meet
their guarantee obligations will be significantly reduced.
In addition, this legislation sought to greatly expand the loan volume under the
direct lending program of the Department of Education known as the Federal
Direct Student Loan Program, to a target of approximately 60% of student loan
demand in academic year 1998-1999. Only about 35% of the loan demand is
currently being met under the direct lending program. The expansion of this
program in the future could result in increasing reductions in the volume of
loans made under the FFEL program.
Under the Federal Direct Student Loan Program, the Department of Education
directly originates and holds student loans without the involvement of private
lenders. If the Federal Direct Student Loan Program expands, the master servicer
or the servicers may experience increased costs due to reduced economies of
scale or other adverse effects on their business to the extent the volume of
loans serviced by the servicers is reduced. Such consequences could occur from
reductions in either:
- the volume of new loans made under the FFEL program or
- the consolidation of existing loans under the Federal Direct Student
Loan Program.
These cost increases could affect the ability of the master servicer or the
servicers to satisfy their obligations to service the financed student loans or
to purchase financed student loans in the event of breaches of the servicers'
covenants. See "Servicing -- Servicer Covenants."
Volume reductions could further reduce revenues received by the guarantee
agencies available to pay claims on defaulted financed FFELP loans. Finally, the
level of competition currently in existence in the secondary market for loans
made under the FFEL program could be reduced, resulting in fewer potential
buyers of the financed FFELP loans and lower prices available in the secondary
market for those loans.
Emergency Student Loan Consolidation Act of 1997. On November 13, 1997,
President Clinton signed into law the Emergency Student Loan Consolidation Act
of 1997, which made significant changes to the Federal Consolidation Loan
Program. These changes include:
(1) providing that federal direct student loans are eligible to be included
in a consolidation loan;
(2) changing the borrower interest rate on new consolidation loans,
previously a fixed rate based on the weighted average of the loans
consolidated, rounded up to the nearest whole percent, to the annually
variable rate applicable to Stafford loans (i.e., the bond equivalent
rate at the last auction in May of 91-day Treasury Bills plus 3.10%,
not to exceed 8.25%);
(3) providing that the portion of a consolidation loan that is comprised of
subsidized Stafford loans retains its subsidy benefits during periods
of deferment; and
(4) establishing prohibitions against various forms of discrimination in
the making of consolidation loans.
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<PAGE> 60
Except for the last of the above changes, all of these provisions expired on
September 30, 1998. The combination of the change to a variable rate and the
8.25% interest cap reduced the lender's yield in most cases below the rate that
would have been applicable under the previous weighted average formula.
FY 1998 Budget. In the 1997 Budget Reconciliation Act (P.L. 105-33), several
changes were made to the Higher Education Act that impact the FFEL program.
These provisions include, among other things, requiring guarantee agencies to
return $1 billion of their reserves to the U.S. Treasury by September 1, 2002,
to be paid in annual installments, greater restrictions on use of reserves by
guarantee agencies and a continuation of the administrative cost allowance
payable to guarantee agencies (which is a fee paid to federal guarantors equal
to 0.85% of new loans guaranteed). See "Contracts with Guarantee Agencies."
1998 Amendments. On May 22, 1998, Congress passed, and on June 9, 1998, the
President signed into law, a temporary measure relating to the Higher Education
Act and FFELP loans as part of the Intermodal Surface Transportation Efficiency
Act of 1998, known as the 1998 Amendments, that revised interest rate changes
under the FFEL program that were scheduled to become effective on July 1, 1998.
For loans made during the period July 1, 1998 through September 30, 1998, the
borrower interest rate for Stafford loans and unsubsidized Stafford loans is
reduced to a rate of 91-day Treasury Bill rate plus 2.30% (1.70% during school,
grace and deferment), subject to a maximum rate of 8.25%. As described below,
the formula for special allowance payments on Stafford loans and unsubsidized
Stafford loans is calculated to produce a yield to the loan holder of 91-day
Treasury Bill rate plus 2.80% (2.20% during school, grace and deferment).
1998 Reauthorization Bill. On October 7, 1998, President Clinton signed into law
the 1998 Reauthorization Bill, which enacted significant reforms in the FFEL
program. The major provisions of the 1998 Reauthorization Bill include the
following:
- All references to a "transition" to full implementation of the
Federal Direct Student Loan Program were deleted from the FFEL
program statute.
- Guarantee agency reserve funds were restructured so that guarantee
agencies are provided with additional flexibility in choosing how
to spend the funds they receive.
- Additional recall of reserve funds by the Secretary of Education
was mandated, amounting to $85 million in fiscal year 2002, $82.5
million in fiscal year 2006, and $82.5 million in fiscal year
2007. However, minimum reserve levels are protected from recall.
- The administrative cost allowance was replaced by two new
payments, a student loan processing and issuance fee equal to 65
basis points (40 basis points for loans made on or after October
1, 2003) paid at the time a loan is guaranteed, and an account
maintenance fee of 12 basis points (10 basis points for fiscal
years 2001-2003) paid annually on outstanding guaranteed student
loans.
- The percentage of collections on defaulted student loans a
guarantee agency is permitted to retain is reduced from 27% to 24%
plus the complement of the reinsurance percentage applicable at
the time a claim was paid to the lender of the student loan. This
percentage will be further reduced to 23% beginning on October 1,
2003.
- Federal reinsurance provided to guarantee agencies is reduced from
98% to 95% for student loans first disbursed on or after October
1, 1998.
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<PAGE> 61
- The delinquency period required for a loan to be declared in default
is increased from 180 days to 270 days for loans on which the
first day of delinquency occurs on or after the date of enactment
of the 1998 Reauthorization Bill.
- Interest rates charged to borrowers on Stafford loans, and the
yield for Stafford loans holders established by the 1998
Amendments, were made permanent.
- Consolidation loan interest rates were revised to equal the
weighted average of the loans consolidated rounded up to the
nearest one-eighth of 1%, capped at 8.25%. When the 91-day
Treasury Bill rate plus 3.1% exceeds the borrower's interest rate,
special allowance payments are made to make up the difference.
- The lender-paid offset fee on consolidation loans of 1.05% is
reduced to .62% for loans made under applications received on or
after October 1, 1998 and on or before January 31, 1999.
- The consolidation loan interest rate calculation was revised to
reflect the rate of consolidation loans, and will be effective for
loans on which applications are received on or after October 1,
1998 and before July 1, 2003.
- Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill who
accumulate after this date outstanding loans under the FFEL
program totaling more than $30,000; under these extended schedules
the repayment period may extend up to 25 years subject to minimum
repayment amounts.
- The Secretary of Education is authorized to enter into six
voluntary flexible agreements with guarantee agencies under which
various statutory and regulatory provisions can be waived.
- Consolidation loan lending restrictions are revised to allow
lenders who do not hold one of the borrower's underlying FFELP
loans to issue a consolidation loan to a borrower whose underlying
FFELP loans are held by multiple holders.
- Inducement restrictions were revised to permit guarantee agencies
and lenders to provide assistance to schools comparable to that
provided to schools by the Secretary of Education under the
Federal Direct Student Loan Program.
- The Secretary of Education is now required to pay off student loan
amounts owed by borrowers due to failure of the borrower's school
to make a tuition refund allocable to the student loan.
- Discharge of FFELP loans and some other student loans in
bankruptcy is now limited to cases of undue hardship regardless of
whether the student loan has been due for more than seven years
prior to the bankruptcy filing.
The new recall of reserves and reduced reinsurance for guarantee agencies
increase the risk that resources available to the guarantee agencies to meet
their guarantee obligations will be significantly reduced.
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.
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This is only a summary of specific 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, 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
these 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 specific other federal programs to
consolidate repayment of these 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:
- has been accepted for enrollment or is enrolled in good standing at an
eligible institution of higher education, which includes some
vocational schools;
- 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 a credential;
- has agreed to notify promptly the holder of the loan concerning any
change of address;
- if presently enrolled, is maintaining satisfactory progress in the
course of study he or she is pursuing;
- 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;
- has filed with the eligible institution a statement of educational
purpose;
- meets the citizenship requirements; and
- except in the case of a graduate or professional student, has received
a preliminary determination of eligibility or ineligibility for a Pell
Grant.
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Stafford Loans. Stafford loans generally are made only to student borrowers who
meet specific needs tests. The educational institution must provide the lender
with a statement evidencing a determination of need for a loan, and the amount
of the 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 the student. The amounts of the
expected family contribution, estimated available financial assistance, and
estimated costs of attendance are to be computed under standards set forth in
the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the requirements set
forth under General is eligible for an unsubsidized Stafford loan without regard
to need. Unsubsidized Stafford loans were not available before October 1, 1992.
PLUS Loans. PLUS loans are made only to borrowers who are parents, legal
guardians and, under some 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 under
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:
- - graduate or professional students;
- - independent undergraduate students; and
- - under some circumstances, dependent undergraduate students, if that student's
parents were unable to obtain a PLUS loan and were also unable to provide the
student's 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:
- - have outstanding indebtedness on student loans made under the FFEL Program
and/or other federal student loan programs; and
- - 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, each of whom has outstanding loans under the FFEL program, and
agrees 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 this 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 on when the
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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 depositor, have offered repayment incentives or other
programs that involve reduced interest rates on specific loans made under the
FFEL program.
Stafford Loans. A new borrower is one who does not have an outstanding balance
on a previous loan made under the FFEL program. For a Stafford loan made before
July 1, 1994, the applicable interest rate for a new borrower:
(1) is 7% for a loan covering a period of instruction beginning before
January 1, 1981;
(2) is 9% for a loan covering a period of instruction beginning on or after
January 1, 1981, but before September 13, 1983;
(3) is 8% for a loan covering a period of instruction beginning on or after
September 13, 1983, but before July 1, 1988;
(4) for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, is 8% for the period
from the disbursement of the loan to the date which is four years after
the loan enters repayment, and after is adjusted annually, and for any
12-month period commencing on a July 1 is equal to the bond equivalent
rate of 91-day Treasury Bills auctioned at the final auction prior to
the preceding June 1, plus 3.25%, not to exceed 10%; or
(5) for a loan made on or after October 1, 1992 is adjusted annually, and
for any 12-month period commencing on a July 1 is equal to the bond
equivalent rate of 91-day Treasury Bills auctioned at the final auction
prior to the preceding June 1, plus 3.1%, not to exceed 9%.
A repeat borrower is one who does have an outstanding balance on a previous loan
made under the FFEP Program. For a Stafford loan made before July 1, 1994, the
applicable interest rate for a repeat borrower is:
(6) for a loan made prior to July 23, 1992, is the applicable interest rate
on the previous loan or, if the previous loan is not a Stafford loan,
8% , or
(7) for a loan made on or after July 23, 1992, is adjusted annually, and
for any twelve month period commencing on a July 1, is equal to the
bond equivalent rate of 91-day Treasury Bills auctioned at the final
auction prior to the preceding June 1, plus 3.1% but not to exceed:
(a) 7% in the case of a Stafford loan made to a borrower who has
a loan described in clause (a) above;
(b) 8% in the case of:
(A) a Stafford loan made to a borrower who has a loan described
in clause (3) 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 (4) above;
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(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;
(c) 9% in the case of:
(A) a Stafford loan made to a borrower who has a loan
described in clauses (2) or (5) 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
(d) 10% 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 (4) above.
The interest rate on all Stafford loans made on or after July 1, 1994 but before
July 1, 1998, regardless of whether the borrower is a new borrower or a repeat
borrower, is the rate described in clause (7) above, but the rate shall not
exceed 8.25%. 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 these periods, the formula described in clause (7)
above is applied, except that 2.5% is substituted for 3.1%, and the rate shall
not exceed 8.25%.
For Stafford loans made on or after July 1, 1998 but before July 1, 2003, 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 Treasury Bills auctioned at the final auction prior to the proceeding
June 1, plus (x) 1.7% prior to the time the loan enters repayment and during any
deferment periods, and (y) 2.3% during repayment, but not to exceed 8.25%.
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:
(1) made on or after January 1, 1981, but before October 1, 1981, is 9%;
(2) made on or after October 1, 1981, but before November 1, 1982, is 14%;
(3) made on or after November 1, 1982, but before July 1, 1987, is 12%;
(4) 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 Treasury Bills
auctioned at the final auction prior to the preceding June 1, plus
3.25% , not to exceed 12%;
(5) 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 Treasury Bills
auctioned at the final auction prior to the preceding June 1, plus
3.1%, not to exceed 10%;
(6) made on or after July 1, 1994, but before July 1, 1998, is the same as
that described in clause (e) above, except that this rate shall not
exceed 9%; or
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(7) made on or after July 1, 1998, but before July 1, 2003, 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 Treasury Bills
auctioned at the final auction prior to the proceeding June 1, plus
3.1%, not to exceed 9%.
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. This
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. This includes an SLS or PLUS loan held by a different lender who
has refused so to refinance this loan at a variable interest rate). If this
happens, proceeds of the new loan are used to discharge the original loan.
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% instead of 10%.
Consolidation Loans. The interest rate on a consolidation loan made prior to
July 1, is the weighted average of the rates on the loans retired, rounded to
the nearest whole percent, but not less than 9%. A consolidation loan made on
or after July 1, 1994 and before November 13, 1997, 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.
Consolidation loans made on or after November 13, 1997 and before October 1,
1998 bear interest at the annual variable rate for Stafford loans. Consolidation
loans for which applications are received on or after October 1, 1998 bear
interest at a rate equal to the weighted average rate of the loans consolidated
rounded to the nearest one-eighth of 1%, but not to exceed 8.25%.
In addition, 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. This portion is adjusted on
July 1 of each year, but is the sum of the average of the Treasury 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."
Loan Limits
Every type of loan other than consolidation loans, 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 on the needs analysis as described above under
"Eligibility-- Stafford Loans". Additional limits are described below.
Stafford and Unsubsidized Stafford Loans. 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 the first year, but who has not successfully completed
the second year may borrow up to $3,500 per academic year. An undergraduate
student who successfully completes 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 these programs are less than one year in
length.
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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 these 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 of Education is authorized to
increase the limits applicable to graduate and professional students who are
pursuing programs which the Secretary of Education 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.
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 the first and second years, 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 these 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 the first and
second years, 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 for undergraduate students and
$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 that student
for that 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 similarly to the
limits of Stafford loans.
Repayment
Loans, other than consolidation loans, made under the FFEL program 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 not more than 30 years, agreed to by the borrower and lender, subject to
maximum repayment periods which vary depending on the principal amount of the
borrower's outstanding student loans. 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
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(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%;
(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.
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 under graduated or income-sensitive repayment schedules. The depositor
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 some deferment periods prescribed by
the Higher Education Act. For loans to a borrower who first obtained a loan
which was disbursed before July 1, 1993, deferments are available
(1) 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;
(2) during a period not in excess of three years while the borrower is a
volunteer under the Peace Corps Act;
(3) during a period not in excess of three years while the borrower is a
full-time volunteer under the Domestic Volunteer Act of 1973;
(4) during a period not exceeding three years while the borrower is in
service, comparable to the service referred to in clauses (2) and (3),
as a full-time volunteer for an organization which is exempt from
taxation under Section 501(c)(3) of the code;
(5) 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;
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(6) 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;
(7) during a period not to exceed 24 months while the borrower is seeking
and unable to find full-time employment;
(8) 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 in a graduate
fellowship program or a rehabilitation training program for disabled
individuals approved by the Secretary of Education;
(9) during a period, not in excess of six months, while the borrower is on
parental leave; and
(10) 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 in 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, under
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
(6) and (7) (with respect to the parent borrower) and the deferment period
described in clause (8) (with respect to 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 (6), (7) and (8) 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 forbearance periods during which the
borrower, in case of temporary financial hardship, may defer any payments. 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,
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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 the heading "-- Contracts with Guarantee Agencies-- Federal
Interest Subsidy Payments" below, the Secretary of Education makes interest
payments on behalf of the borrower of specific 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 o quarterly or capitalized (added to the principal
balance) not more frequently than quarterly.
Disbursement
All loans, except consolidation loans, made under the FFEL program 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 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 unsubsidized Stafford 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 a PLUS 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.
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 an
origination fee equal to 0.5% of the initial principal amount of that loan.
Rebate Fee on Consolidation Loans. The holder of any consolidation loan is
required to pay to the Secretary of Education a monthly fee at an annualized
rate of 1.05% (.62% for applications received between October 1, 1998 and
January 31, 1999) of the principal amount of, and accrued interest on, that
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 these
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guarantees, see "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 that loan. The 1998 Reauthorization Bill further reduces the
maximum reinsurance rate to guarantee agencies from 98% to 95% for loans made on
or after October 1, 1998. Under some circumstances, guarantees may be assumed by
the Secretary of Education or another guarantee agency. See "Contracts with
Guarantee Agencies."
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 under the FFEL program.
The Secretary of Education has specific oversight powers over guarantee
agencies. Guarantee agencies are required to maintain their reserves at 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 5% in any year, or if the Secretary of Education determines
that the agency's administrative or financial condition jeopardizes its ability
to meet its obligations the Secretary of Education can require the guarantee
agency to submit and implement a plan by which it will correct the problem(s).
If a guarantee agency fails to timely submit an acceptable plan or fails to
improve its condition, or if the Secretary of Education determines that the
guarantee agency is in danger of financial collapse, the Secretary of Education
may terminate the guarantee agency's reimbursement contract. The circumstances
under which the Secretary of Education may terminate these reimbursement
contracts also includes a determination that this action is necessary to protect
the federal fiscal interest or to ensure continued availability of student
loans. See "Direct Loans."
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
of Education terminates a guarantee agency's agreements under the FFEL program,
the Secretary of Education shall assume responsibility for all functions of the
guarantee agency under its program. To that end, the Secretary of Education 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 of Education has determined that a guarantee agency is unable to meet
its guarantee obligations, holders of loans guaranteed by a guarantee agency may
submit claims directly to the Secretary of Education for payment, unless the
Secretary of Education has provided for the assumption of these guarantees by
another guarantee agency.
Federal Reimbursement
A guarantee agency's right to receive federal reimbursements for various
guarantee claims paid by a guarantee agency is governed by the Higher Education
Act and various contracts entered into between guarantee agencies and the
Secretary of Education. See "The Guarantee Agencies-- Federal Agreements." 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 s 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 of
Education currently agrees to reimburse the guarantee agency for a maximum of
98% of the amount expended with respect to guaranteed loans. The 1998
Reauthorization Bill further reduced the maximum reinsurance rate to guarantee
agencies from 98% to 95% for loans
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made on or after October 1, 1998. Depending on the claims rate experience of a
guarantee agency, 100%, 98% or 95% 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, and in the case of a PLUS loan, the death of
the student on behalf of whom the loan was borrowed. In the instance of school
closures, 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%. The amount of payment is
98% for loans made on or after October 1, 1993 and 95% for loans made on or
after October 1, 1998.
Beginning at any time during any fiscal year that federal reimbursement payments
exceed 5%, and until 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, or 85% for loans made on or after
October 1, 1998. 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 these payments for the
balance of that fiscal year will be paid at 80%. This amount is 78% for loans
made on or after October 1, 1993 and 75% for loans made on or after October
1,1998). 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 the guarantee agency less:
(1) guarantee payments on these loans;
(2) the original principal amount of these loans that have been fully
repaid; and
(3) the original principal amount of these loans for which the first
principal installment payment has not become due or the 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:
(1) a percentage amount equal to the complement of the reimbursement
percentage in effect at the time the loan was reimbursed; and
(2) an amount equal to 24% (23% beginning October 1, 2003) or 18-1/2% in
the case of a payment from the proceeds of a consolidation loan of the
payments for administrative costs.
The Secretary of Education may require the assignment to the Secretary of
Education 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 agency. Prior to the 1998 changes, the
percentage of collections which guarantee agencies could retain was 27%.
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A guarantee agency may enter into an addendum to its interest subsidy agreement,
which addendum provides for the guarantee agency to refer to the Secretary of
Education specific 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 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, each guarantee agency must enter
into an agreement with the Secretary of Education under which the guarantee
agency must sell defaulted loans that are eligible for rehabilitation to an
eligible lender. The guarantee agency must repay the Secretary of Education an
amount equal to 81.5% of the then current principal balance of the loan,
multiplied by the reimbursement percentage in effect at the time the loan was
reimbursed. The amount of the repayment shall be deducted from the amount of
federal reimbursement payments for the fiscal year in which 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 that loan. Once
rehabilitated, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred.
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. These rules and regulations include 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 (or 270 days for loans on which the first day of delinquency occurs on or
after October 7, 1998) if it is repayable in monthly installments or 330 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.
A lender must have exercised reasonable care and diligence in making, servicing
and collecting the guaranteed loan for the loan to be eligible for guarantee
payments and reimbursement by the Secretary of Education. 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 specific
collection procedures that vary depending on the length of time a loan is
delinquent.
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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 "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 specific 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. However,
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 costs related to the
guarantee agency's guarantee program. The 1993 Amendments repealed entitlement,
effective October 1, 1993. The 1993 Amendments, however, authorized payments for
transition support to guarantee agencies, in connection with the transition to
direct lending. See "Direct Loans."
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,
these amounts are subject to decreasing aggregate limits.
Under the 1998 Reauthorization Bill, the administrative cost allowance was
replaced by two new payments:
(1) a student loan processing fee equal to 65 basis points (40 basis points
for loans made on or after October 1, 2003) paid at the time a loan is
guaranteed, and
(2) an account maintenance fee of 12 basis points (10 basis points for
fiscal years 2001-2003) paid annually on outstanding guaranteed student
loans.
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Federal Advances
Under 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 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 of Education, including if
the Secretary of Education 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. This average is considered the Treasury 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 these loans from the Treasury 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 above formula. For
loans disbursed on or after October 1, 1992, 3.1% has been substituted for 3.5%
in that formula. For Stafford and unsubsidized Stafford loans made on or after
July 1, 1995, 2.5% has been substituted for 3.1% in that formula prior to the
time these loans enter repayment and during any deferment periods. For Stafford
and unsubsidized Stafford loans made on or after July 1, 1998, the 1998
amendments to the Higher Education Act substitute 2.2% for 3.1% in that formula
prior to the time these loans enter repayment and during any deferment periods,
and substitute 2.8% for 3.1% in that formula while these loans are in repayment.
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 these loans operates to reduce the rate that would otherwise apply based on
the applicable formula. See "Loan Terms -- Interest Rates -- PLUS Loans" and "--
SLS Loans." 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%, although the interest rate ceiling on these loans is 9%. Special allowance
payments are made on consolidation loans whenever the bond equivalent rate of
91-day Treasury Bills plus 3.1% exceeds the borrower's interest rate. 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 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 that 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 the borrower as an
origination fee, as described above under "Loan Terms-- Fees-- Origination 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.
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EDUCATION LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Under the United States Bankruptcy Code, educational loans are not generally
dischargeable. Title 11 of the United States Code at Section 523(a)(8) provides
as follows:
(a) A discharge under Section 727, 1141, 1228(a), 1228(b), or 1328(b)
of this title does not discharge an individual debtor from any debt--
(8) for an educational benefit overpayment or loan made, insured,
or guaranteed by a governmental unit or made under any program funded in whole
or in part by a governmental unit or a nonprofit institution, or for an
obligation to repay funds received as an educational benefit, scholarship or
stipend unless excepting the debt from discharge under this paragraph will
impose an undue hardship on the debtor and the debtor's dependents.
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 Federal
Direct Student 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 of Education. Participation
in the program by schools is voluntary. The goals set forth in the 1993
Amendments call for the Federal Direct Student Loan Program to constitute 5% of
the total volume of loans made under the FFEL program and the Federal Direct
Student 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 Federal Direct Student
Loan Program after academic year 1998-1999. Based on available information,
participation by schools in the Federal Direct Student Loan Program has not been
sufficient to meet the goals for the 1995-1996, 1996-1997 or 1998-1999 academic
years.
The loan terms are generally the same under the Federal Direct Student Loan
Program as under the FFEL program, though more flexible repayment provisions are
available under the Federal Direct Student Loan program. At the discretion of
the Secretary of Education, students attending schools that participate in the
Federal Direct Student Loan Program, or 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 Federal Direct Student Loan
Program. There is no way to accurately predict the number of schools that will
participate in future years, or, if the Secretary of Education authorizes
students attending participating schools to continue to be eligible for FFEL
program loans, how many students will seek loans under the Federal Direct
Student Loan Program instead of the FFEL program. In addition, it is impossible
to predict whether future legislation will eliminate, limit or expand the
Federal Direct Student Loan Program or the FFEL program.
SERVICING
MASTER SERVICER
Resources, in its capacity as the master servicer, will arrange for the
servicing of the financed student loans under the Master Servicing Agreement,
dated as of March 15, 1999, between the depositor and the master servicer and
attached as an exhibit to the registration statement of which this prospectus is
part. The following is a summary of the servicing arrangements entered, or to
be entered,
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into with the master servicer and various approved servicers to arrange for the
servicing of the financed student loans.
Under the terms of the master servicing agreement between the master servicer
and the depositor, the master servicer has agreed to provide, arrange for and
maintain the continuous servicing and administration of the financed student
loans with one or more approved servicers. The master servicer has full
authority to do anything it deems reasonably necessary in providing for,
arranging and maintaining servicing relationships with servicers. The master
servicer is obligated to assure that adequate arrangements exist at all times to
provide for servicing of the financed student loans.
The master servicer and the depositor have entered or will enter into one or
more servicing agreements under which 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.
The master servicer will not have any liability for any act, error or omission
on the part of any servicer under a servicing agreement but will have liability
for its own willful misfeasance, bad faith or negligence in the performance of
its duties under the master servicing agreement. The master servicer will not be
liable for servicing errors or interruptions as a result of Year 2000 failures.
The occurrence of any of the following will constitute default by the master
servicer:
(1) failure to observe or perform in any material respect any
covenants or agreements set forth in the master servicing
agreement, which shall materially affect the rights of holders
and which continues for 60 days after written notice of the
failure; or
(2) judgment in bankruptcy, defaulting on debts, or making
creditor assignment; or
(3) appointing a custodian or similar official for the master
servicer or any substantial part of its property.
The master servicer will be entitled to receive a fee as compensation for its
services under the master servicing agreement. This fee is payable out of
available funds as part of the program operating expenses. The master servicing
agreement may be terminated by either party with at least 95 days' notice. This
summary does not purport to be complete and is qualified by reference to all
provisions of the master servicing agreement.
As provided in the master servicing agreement, the master servicer and the
issuer have entered or will enter into servicing agreements with various
approved servicers to service the financed student loans. The servicers will
have actual possession of the notes evidencing, and other documents relating to,
the financed student loans.
SERVICING PROCEDURES
Under 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 and all other applicable federal and state laws.
The duties of the servicer include, but are not limited to, collecting and
depositing all payments with respect to the financed student loans, including
any guarantee payments, interest subsidy payments and special allowance
payments; 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
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these financed student loans and collections on these loans and will furnish
monthly and annual statements to the related indenture trustee with respect to
this information, under the customary standards and as otherwise required in the
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 to
make reimbursement payments to a guarantee agency on these loans or in a
guarantee agency's refusal to honor its guarantee or make a guarantee payment on
these loans to the issuer and/or in the limitation, suspension or termination of
the servicer's eligibility to contract to service financed student loans.
SERVICER COVENANTS
In each servicing agreement, the related servicer covenants that:
(1) 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 in connection with
servicing the financed student loans; and
(2) 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
obligations with respect to any financed student loan that results in the
failure of a guarantee agency to make a guarantee payment, the servicer is
obligated to purchase that financed student loan and reimburse the issuer for
specific payments, all on the terms of the applicable servicing agreement. The
servicer's purchase and reimbursement obligations are contractual obligations
under the servicing agreement that may be enforced against the servicer, but the
breach of contractual obligations will not constitute an event of default under
the notes.
SERVICING COMPENSATION
Each servicer will be paid a servicing fee for the servicing of the financed
student loans. The servicing fee is payable out of available funds as part of
the program operating expenses.
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, including
litigation costs, accounting for collections and furnishing monthly and annual
statements to the administrator. The servicing fee also will reimburse the
servicers for taxes, accounting fees, outside auditor fees, data processing
costs and other costs incurred in connection with administering the financed
student loans.
Initially, InTuition, Inc., USA Group Loan Services, Inc., in part, through a
subservicing agreement with InTuition, Inc., Great Lakes Higher Education
Servicing Corporation and UNIPAC Service Corporation will be the servicers for
financed student loans. Initially, InTuition, Inc. (including through its
subservicing agreement with USA Group Loan Services, Inc.) is responsible for
servicing approximately 88% of the financed student loans. The financed student
loans will be serviced by servicers as may be selected by the master servicer
from time to time, subject to the approval of the rating agencies, and servicers
may be replaced or added from time to time by the master servicer.
Information relating to the particular servicers set forth herein, which is
particularly within each servicer's knowledge, has been requested of and has
been provided by the respective servicers. Such information and information
included in the reports referred to herein have not been verified or
independently
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confirmed by the issuer, the administrator, the master servicer, the initial
purchasers or their respective counsel, and comprises all information in respect
of each servicer that the issuer obtained after a reasonable request and
inquiry. With the exception of InTuition, Inc., no servicer is affiliated with
the issuer, the administrator, the master servicer or any initial purchaser. See
"The Issuer -- Relationship with InTuition Holdings, Inc. and InTuition, Inc."
INTUITION, INC.
InTuition, Inc. ("InTuition") was incorporated in 1991 as a Florida corporation.
InTuition is a wholly owned subsidiary of InTuition Holdings, Inc., a Florida
corporation, which is 50% owned by the administrator and 50% owned by parties
unrelated to the administrator and the issuer. See "The Depositor--Relationship
with InTuition Holdings, Inc. and InTuition, Inc." InTuition provides complete
student loan servicing and administration to lending institutions and secondary
markets nationwide. InTuition has approximately 182 employees, all of whom are
in its Jacksonville, Florida office.
As of September 30, 1998, InTuition serviced 481,088 student loan accounts with
an outstanding balance of $1.966 billion for 14 lenders and secondary markets
nationwide. Approximately 10% of the portfolio serviced by InTuition is made up
of loans to students at for-profit trade schools. As of September 30, 1998, 61%
of the portfolio serviced by InTuition was in repayment status, 8% was in grace
status and the remaining 31% was in interim status. InTuition is located at 6420
Southpoint Parkway, Jacksonville, Florida 32216. Telephone: (904) 281-7100.
Approximately 23% of the financed student loans serviced by InTuition are
subserviced by USA Group Loan Services, Inc. under a subservicing arrangement
between InTuition and USA Group Loan Services, Inc. Recourse by the issuer with
respect to servicing errors on the financed student loans subserviced by USA
Group Loan Services, Inc. is limited solely to InTuition under the servicing
agreement between the issuer and InTuition.
InTuition has recently received an audit report stating that InTuition was in
material compliance with the requirements specified under Compliance Audits
(Attestation Engagements) for Lenders and Lender Servicers Participating in the
Federal Family Education Loan Program. This compliance audit guide is issued,
monitored and mandated by the Department of Education, Office of Inspector
General, and is relative to InTuition's administration of the Federal Family
Education Loan Program on behalf of its lender clients for the year ended
December 31, 1998. Critical aspects of third party loan servicing are addressed
and reviewed to be compliant with Federal Family Education Loan Program
participation as a recognized servicer. The report identified one immaterial
finding relating to treatment of loans rejected by the guaranty agency. It was
noted that the findings only occurred when the date of the violation was prior
to conversion to InTuition's current servicing system. No other findings were
noted indicating InTuition's compliance with acceptable servicing standards.
InTuition understands the concerns and importance regarding the effectiveness of
computer systems beyond December 31, 1999. InTuition has developed a plan to
deal with year 2000 issues and has begun converting its computer systems to be
year 2000 compliant. It is InTuition's intent to have all systems and processes
year 2000 compliant on or before December 31, 1999 and is planning to be ready
to perform normal business functions after January 1, 2000. No representations
or warranty is made with ---- respect to whether any third parties are or will
be year 2000 compliant. InTuition is unable to give any assurance at this time
that all year 2000 related problems will be avoided.
USA GROUP LOAN SERVICES, INC.
USA Group Loan Services, Inc., now referred to as Loan Services, formerly known
as Educational Loan Servicing Center, Inc., is a private, nonprofit, non-stock
membership corporation which was organized in 1982 under and under the
provisions of the General Corporation Law of the State of Delaware. Loan
Services is an affiliate of USA Group, Inc., a nonprofit corporation which is
also affiliated with USA Funds, a student loan guarantee agency and one of the
issuer's guarantee agencies. As
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of September 30, 1998 (Loan Services' fiscal year end), Loan Services provided
loan servicing for in excess of 3,500,000 student and parent loans with
outstanding balances of over $13.4 billion for approximately 150 different
lenders and secondary market corporations. Loan Services' principal office is
located in Indianapolis, Indiana, where, as of September 30, 1998, it had nearly
800 full-time employees.
Loan Services is aware of concerns relating to the functional effectiveness and
usage of computer systems beyond December 31, 1999 known as year 2000. Loan
Services is dedicated to resolving the potential impact of the year 2000 on the
ability of Loan Services' computerized information systems to accurately process
information that may be date sensitive. Loan Services is seeking to assure
itself that both the internal systems and the systems of third parties, which
include but are not limited to the U.S Department of Education, which provide
services to Loan Services or on whose computer software and operating systems
Loan Services may rely are taking sufficient actions to avoid year 2000 related
problems. No representation or warranty is made with respect to whether third
parties are or will be year 2000 compliant. Loan Services is planning to be
ready to perform normal business functions and intends to meet its obligations
both before and after January 1, 2000. However, Loan Services is unable to give
any assurances at this time that all year 2000 related problems will be avoided.
(Source: USAGLS)
GREAT LAKES HIGHER EDUCATION SERVICING CORPORATION
As of March 31, 1999, Great Lakes Higher Education Servicing Corporation
serviced 888,491 student and parental accounts with an outstanding balance of
$6,669,502,707 for 1,146 lenders nationwide. Less than 6% of the portfolio
serviced by GLHESC is made up of loans to students at for-profit trade schools.
As of March 31, 1999, 64% of the portfolio serviced by GLHESC was in repayment
status, 4% was in grace status and the remaining 32% was in interim status.
The staff and management at GLHESC take the issue of year 2000 compliance very
seriously. GLHESC is committed to take the reasonable and necessary actions to
prepare its systems to accurately process dates from the twentieth and
twenty-first centuries. GLHESC is seeking to minimize, if not eliminate, the
risk of error, interruption or loss of functionality for the lenders, schools,
and borrowers who rely on its systems. The remedies available to the issuer or
other third parties shall be subject to the terms and limitations of its
servicing agreement with GLHESC.
GLHESC has adopted a structured management approach to ensuring its systems are
compliant. The Chief Information Officer has been assigned overall
responsibility for year 2000 compliance. GLHESC has not evaluated any computer
system, product or procedure of any third party with whom GLHESC exchanges data,
including but not limited to, the U.S. Department of Education, schools or
lenders. Accordingly, GLHESC is unable to provide any assurances regarding the
year 2000 compliance of any third parties or their effect on GLHESC's ability to
properly perform its activities.
GLHESC will provide a copy of its most recent audited financial statements on
receipt of a written request directed to 2401 International Lane, Madison,
Wisconsin 53704, Attention: Vice President and Chief Financial Officer.
(Source: GLHESC.)
UNIPAC SERVICE CORPORATION
UNIPAC Service Corporation, a Nebraska corporation, began its education loan
servicing operations on January 1, 1978, and provides education loan servicing,
time sharing, administration and other services to lenders, secondary market
purchasers and guarantee agencies throughout the United States. UNIPAC is a
privately held corporation, owned primarily by Union Bank and Trust Company,
Lincoln, Nebraska. UNIPAC offers student loan servicing to lending institutions
and secondary markets. UNIPAC's
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corporate headquarters is located in Aurora, Colorado, where UNIPAC employs
approximately 749 people. In December 1989, UNIPAC opened a second servicing
center in Lincoln, Nebraska, which as of March 31, 1999 employed approximately
273 people. In November 1997, UNIPAC opened a third servicing center in St.
Paul, Minnesota, which as of March 31, 1999, employed approximately 172 people.
As of March 31, 1999, UNIPAC's servicing volume was approximately $9.8 billion
for its full-service and secondary market clients.
The following information covers UNIPAC's year 2000 plan and provides a status
of UNIPAC's year 2000 compliance initiative to date. UNIPAC's student loan
servicing system, UNISTAR, has been modified to process dates into the next
century. UNIPAC's Private Loan System (STAR) is written in a combination of SQL
Server version 6.5 and Visual Basic version 4.0. These software programming
languages are believed to be year 2000 compliant and address year 2000 dates.
Since 1994, UNIPAC has been planning system changes for the year 2000. As a
result, UNIPAC completed major program changes for its student loan servicing
mainframe system during 1997. As of May 1997, all date fields, stored in the
files and processed in program logic, contain 8 digits for the expanded century
usage. All phases of the project were completed relative to the 8 byte dates
usage. These processes have been documented as part of UNIPAC's quality
assurance processes. Systems integration testing was completed in April 1997 and
production implementation occurred May 1997.
(Source: UNIPAC)
THE GUARANTEE AGENCIES
A guarantee agency guarantees loans made to students or parents of students by
lending institutions such as banks, credit unions, savings and loan
associations, schools, pension funds and insurance companies. A guarantee agency
generally purchases defaulted student loans which it has guaranteed from its
cash and reserves, considered 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, or 270 days for loans made on or after October 7, 1998. However,
lenders are strongly encouraged not to file a claim until a loan is at least 300
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.
Generally, the lender 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, 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 various recalls of
reserves by the Department of Education, 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; and the reduction in
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retention by a guarantee agency of collections on defaulted loans from 30% to
23%. 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 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 these 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 some
circumstances, the Secretary of Education may demand payment o amounts in the
guarantee fund.
Under the 1997 Budget Reconciliation Act (P.L. 105-33), 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 1998 Reauthorization Bill mandates additional recall of reserve
funds by the Secretary of Education amounting to $85 million in fiscal year
2002, $82.5 million in fiscal year 2006, and $82.5 million in fiscal year 2007.
However, minimum reserve levels are protected from recall. The amounts to be
demanded of each guarantee agency shall be determined by 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 the 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 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."
Under 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 this 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 these
loans under guarantee claims processing standards no more stringent than those
applied by the guarantee agency. See "Description of the FFEL Program."
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.
FEDERAL AGREEMENTS
Each guarantee agency and the Secretary of Education have entered into federal
reimbursement contracts under Section 428(c) of the Higher Education Act. These
include, for older guarantee agencies, a supplemental contract under former
Section 428A of the Higher Education Act. The reimbursement contracts provide
for the guarantee agency to receive 75% to 100% reimbursement of
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insurance payments that the guarantee agency makes to eligible lenders with
respect to loans guarantee 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 1998 Reauthorization Bill reduced the reimbursement
percentages referred to above with respect to claims on most loans made on or
after October 1, 1998. See "Effect of Annual Claims Rate." The federal
reimbursement contracts provide for termination under some circumstances and
also provide for specific 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 specific 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. These entitle the holders of
eligible loans guaranteed by the guarantee agency to receive interest subsidy
payments from the Secretary of Education on behalf of some students while the
student is in school during a six to twelve month grace period after the student
leaves school, and during some 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, 1993, 1997 and 1998,
respectively:
(1) revoked some rights of guarantee agencies under contracts with the
Secretary of Education relating to the repayment of advances from the
Secretary of Education;
(2) authorized the Secretary of Education to withhold reimbursement
payments otherwise due to specific guarantee agencies until specified
amounts of these guarantee agencies' reserves had been eliminated;
(3) 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 a termination; and
(4) expanded the Secretary of Education's authority to terminate these
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 these 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 for its guarantee program to exceed
the 5% and 9% levels described below, an 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
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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, 1998, 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
obligated to provide 98% reimbursement; if and when the claims rate exceeds 5%
and until this time, if any, as it exceeds 9% during the fiscal year, the
reimbursement rate is at 88%. If and when the claims rate exceeds 9% during the
fiscal year, the reimbursement rate for the remainder of the fiscal year is at
78%. For loans made prior to October 1, 1998, each guarantee agency is entitled
to at least 78% 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, 1998 are reduced from 98%, 88% and 78% to
95%, 85% and 75%, respectively. See "Description of the FFEL Program."
GUARANTEE AGENCY INFORMATION
Florida Department of Education, Office of Student Financial Assistance, Georgia
Higher Education Assistance Corporation, United Student Aid Funds, Inc.,
Kentucky Higher Education Assistance Authority and Great Lakes Higher Education
Guaranty Corporation are the principal guarantee agencies for the financed
student loans. Information relating to these particular guarantee agencies is
set forth below. These guarantee agencies collectively guarantee in excess of
99% of the financed student loans.
Information relating to the particular guarantee agencies set forth herein,
which is particularly within each guarantee agency's knowledge, has been
requested of and has been provided by the respective guarantee agencies. Such
information and information included in the reports referred to herein have not
been verified or independently confirmed by the issuer, the depositor, the
administrator, the master servicer, the initial purchasers or their respective
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 depositor, the administrator, the master
servicer or any initial purchaser.
FLORIDA DEPARTMENT OF EDUCATION, OSFA
The Florida Department of Education is authorized to administer or contract for
the administration of the State's student financial assistance programs. Since
1966, the Department of Education has been authorized to administer federally
guaranteed student loans under what is now known as the Federal Family Education
Loan Program, in compliance with the Higher Education Act of 1965, as amended.
Chapter 240, Florida Statutes. The Department of Education performs these
functions through its Office of Student Financial Assistance (OSFA).
The head of the Department of Education is the Commissioner of Education, who is
a member of the Cabinet. Section 20.15(2), Florida Statutes. The State Board of
Education is the chief policymaking body of public education in Florida as
provided in Chapter 229, Florida Statutes. Section 20.15(1), Florida Statutes.
The State Board is composed of the Governor and Cabinet, who are elected by a
vote of the qualified electors of the state. The members of the State Board are:
the Governor who is the chair, the Secretary of State, the Attorney General, the
Comptroller, the Treasurer, the Commissioner of Agriculture, and the
Commissioner of Education, who is the secretary and executive officer, and in
the absence of the Governor serves as chair.
The director of OSFA reports to the Director of the Division of Support
Services, Florida Department of Education. In addition to the OSFA Director's
Office, OSFA's FFEL Program has three sections, each headed by a program
director. These sections are: Institutional Oversight and Compliance; Policy,
Training, and Customer Service; and Contract Management and Program Operations.
OSFA, in its capacity as a guarantee agency, has a staff of 71 people.
OSFA has participated in FFEL Programs for over 30 years. In its capacity as a
guarantee agency, OSFA has made gross guarantees of approximately $6.06 billion
since its inception.
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Guarantee Volume. OSFA's guarantee volume for each of the following four fiscal
years ending September 30 are as follows:
<TABLE>
<CAPTION>
OSFA's
Fiscal Guarantee Volume
Year (in millions)
<S> <C>
1994 $3,734
1995 4,262
1996 4,836
1997 5,426
</TABLE>
Reserve Ratio. A student loan guarantor's reserve ratio is determined by
dividing its fund balance by the total amount of loans outstanding. OSFA's
reserve ratio for the last four federal fiscal years ending September 30 is as
follows:
<TABLE>
<CAPTION>
Fund Total Loans
Fiscal Balance Outstanding Reserve
Year (in millions) (in millions) Ratio
<S> <C> <C> <C>
1994 1,220 3,006 40.6%
1995 1,736 3,438 50.5
1996 1,766 3,895 45.3
1997 2,068 4,381 47.2
</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.
OSFA's recovery rates as of the end of each of the following four fiscal years
ending September 30 are as follows:
<TABLE>
<CAPTION>
Fiscal OSFA's
Year Recovery Rate
<S> <C>
1994 41.8%
1995 43.0
1996 45.6
1997 45.4
</TABLE>
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CLAIMS RATE. A guarantor's claims rate is used to determine the amount of
reinsurance it receives from the Department of Education on claims payments. If
the rate does not exceed 5% the maximum reinsurance will be paid. The rate is a
percentage of claims filed in a federal fiscal year, ending September 30, and
the loans in repayemnt status at the beginning of that year. For the past five
fiscal years, OSFA's claims rate has not exceeded 5% and as a result, the
maximum reinsurance has been paid on all OSFA's claims. OSFA has reported June
30 claims rate information in their audited financial statements as follows:
<TABLE>
<CAPTION>
Fiscal Year Claims Rate
<S> <C>
1994 3.16%
1995 3.05
1996 3.56
1997 2.85
1998 2.89
</TABLE>
OSFA is aware of concerns relating to the functional effectiveness and usage of
computer systems beyond December 31, 1999. OSFA is dedicated to resolving the
potential impact of the year 2000 on the ability of OSFA's computerized
information systems to accurately process information that may be date
sensitive. OSFA is seeking to assure itself that both internal systems and the
systems of third parties, which include but are not limited to the United States
Department of Education, which provide services to OSFA or on whose computer
software and operating systems OSFA may rely are taking sufficient actions to
avoid year 2000 related problems. No representation or warranty is made with
respect to whether third parties are or will be year 2000 compliant. OSFA is
planning to be ready to perform normal business functions and intends to meet
its obligations both before and after January 1, 2000. However, OSFA is unable
to give any assurances at this time that all year 2000 related problems will be
avoided.
(The above information has been obtained from OSFA or the Joseph Boyd &
Associates, Guaranty Agency Report as a public official document or statement.)
GEORGIA HIGHER EDUCATION ASSISTANCE CORPORATION
Georgia Higher Education Assistance Corporation (GHEAC) is the designated
student loan guarantor for the State of Georgia. GHEAC guarantees FFEL program
student loans for borrowers.
GUARANTEE VOLUME. GHEAC's guarantee volume for each of the following five fiscal
years ending September 30 are as follows:
<TABLE>
<CAPTION>
GHEAC's
Fiscal Guarantee Volume
Year (in Millions)
<S> <C>
1994 $ 322.1
1995 253.3
1996 179.4
1997 219.1
1998 232.8
</TABLE>
RESERVE RATIO. A student loan guarantor's reserve ratio is determined by
dividing its fund balance by the total amount of loans outstanding. GHEAC's
reserve ratio for the last five federal fiscal years ending September 30 is as
follows:
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<TABLE>
<CAPTION>
FISCAL FUND TOTAL LOANS RESERVE
YEAR BALANCE OUTSTANDING RATIO
<S> <C> <C> <C>
1994 $ 8,923,287 $1,212,609,394 0.74%
1995 12,750,548 1,366,346,215 0.93
1996 12,315,910 1,392,127,071 0.88
1997 15,147,028 1,462,775,613 1.04
1998 19,948,513 1,512,336,029 1.32
</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.
GHEAC's recovery rates as of the end of each of the following five fiscal years
ending September 30 are as follows:
<TABLE>
<CAPTION>
FISCAL GHEAC'S
YEAR RECOVERY RATE
<S> <C>
1994 52.8%
1995 50.7
1996 51.0
1997 49.3
1998 56.8
</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. GHEAC's approximate amount and percentage of
student loans guaranteed per type of school by GHEAC as of September 30, 1998 is
set forth below.
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<PAGE> 88
<TABLE>
<CAPTION>
Loans Percentage of
Type of School Outstanding Loans Outstanding
<S> <C> <C>
Two-year $ 137,622,578 9.1%
Four-year 1,286,997,555 85.1
Proprietary 87,715,896 5.8
--------------- -----
$ 1,512,336,029 100.0%
=============== =====
</TABLE>
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CLAIMS RATE. For the past five fiscal years ending September 30, GHEAC's claims
rate has not exceeded 5% and as a result, the highest allowable reinsurance has
been paid on all GHEAC's claims. The actual claims rates are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CLAIMS RATE
<S> <C>
1994 3.1%
1995 2.4
1996 3.6
1997 3.3
1998 2.7
</TABLE>
GHEAC's new guarantor system, GOALS, is provided under third party contract with
the Great Lakes Higher Education Guaranty Corporation which has been certified
Year 2000 compliant.
As of September 30, 1998, Year 2000 renovations to the GOALS front-end
(guarantee, loan record maintenance, preclaims and claims) including all
ancillary PC systems, e.g. school based software, SCHOLAR was completed. During
Renovation each module was independently tested, approved and implemented into
the production environment. Validation was completed on December 31, 1998.
For GHEAC's collections functionality, Year 2000 renovations were fully
implemented into the GOALS production environment on March 6, 1999 prior to the
conversion of GHEAC's claims portfolio to GOALS. Validation was completed on
April 28, 1999.
Unless otherwise indicated, all of the above information was provided by GHEAC.
GHEAC will provide a copy of its most recent audited financial statements on
receipt of a written request directed to Ruth T. Vincent, Chief Administrator,
Guaranteed Student Loans Division, 2082 E. Exchange Place, Suite 200, Tucker,
Georgia 30084, Telephone (770) 414-3000.
(Source: GHEAC)
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GREAT LAKES HIGHER EDUCATION GUARANTY CORPORATION
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.
GUARANTEE VOLUME. GLHEGC's guarantee volume for each of the following five
fiscal years ending September 30 is as follows:
<TABLE>
<CAPTION>
GLHEGC's Guarantee
Volume
Fiscal (in millions)
Year
<S> <C>
1994 $ 1,197.3
1995 1,070.7
1996 1,172.6
1997 1,794.6
1998 1,640.2
</TABLE>
RESERVE RATIO. Following are GLHEGC's reserve fund levels as calculated under 34
CFR 5682.410(a)(10) for the last five 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>
1994 $ 50,938,050 $4,836,782,111 1.05%
1995 62,438,430 5,441,840,211 1.15
1996 71,964,949 6,048,428,342 1.19
1997 81,625,095 6,858,162,170 1.19
1998 107,534,663 7,493,233,844 1.44
</TABLE>
* Does not include loans transferred from Higher Education Assistance
Foundation, Northstar Guarantee, Ohio Student Aid Commission or Puerto Rico
guarantee agencies.
(Source: ED Forms 1130 and 1189 Reports submitted to U.S. Department of
Education)
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 seven fiscal years
for which data
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is available, the national averages for each year and GLHEGC's recovery rate
ranking among all student loan guarantors.
<TABLE>
<CAPTION>
Fiscal Great Lakes' National Average Great Lakes'
Year Recovery Rate Recovery Rate Ranking
---- ------------- ------------- -------
<S> <C> <C> <C>
1993 36.2% 34.7% 33
1994 35.2 39.3 37
1995 35.8 40.7 36
1996 39.8 43.4 31
1997 43.9 45.0 25
</TABLE>
(Source: Joseph Boyd & Associates, Guaranty Agency Report.)
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 September 30, 1998 are set forth below.
<TABLE>
<CAPTION>
School Type Loans Percentage
- ----------- ----- ----------
(in millions)
<S> <C> <C>
Two-year $ 1,436 8.7%
Four-year 12,930 78.3
Proprietary 578 3.5
Consolidation 1,569 9.5
------- ------
$16,513 100.0%
======= ======
</TABLE>
CLAIMS RATE. For the past five fiscal years, GLHEGC's claims rate has not
exceeded 3.3% and, as a result, the highest allowable reinsurance has been paid
on all GLHEGC's claims. GLHEGC's claims rate for fiscal year 1998 was lower than
its 1997 claims rate. The actual claims rates are as follows:
<TABLE>
<CAPTION>
Fiscal Year Claims Rate
----------- -----------
<S> <C>
1994 3.3%
1995 3.0
1996 2.3
1997 2.1
1998 1.8
</TABLE>
(Source: U.S. Department of Education Guaranty Agency Activity Report except for
fiscal year 1998 which is based on unadjusted default experience data submitted
to ED.)
The staff and management at GLHEGC take the issue of year 2000 compliance very
seriously. GLHEGC is committed to take the reasonable and necessary actions to
prepare its systems to accurately process dates from the twentieth and
twenty-first centuries. GLHEGC is seeking to minimize, if not eliminate, the
risk of error, interruption or loss of functionality for the lenders, schools,
and borrowers who rely on its systems.
GLHEGC has adopted a structured management approach to ensuring its systems are
compliant. The Chief Information Officer has been assigned overall
responsibility for year 2000 compliance. GLHEGC
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has not evaluated any computer system, product or procedure of any third party
with whom GLHEGC exchanges data, including but not limited to, the U.S.
Department of Education, schools or lenders. Accordingly, GLHEGC is unable to
provide any assurances regarding the year 2000 compliance of any third parties
or their effect on GLHEGC's ability to properly perform its activities.
(Source: GLHEGC)
Kentucky Higher Education Assistance Authority
The Kentucky Higher Education Assistance Authority (KHEAA) is a public
corporation and governmental agency and instrumentality of the Commonwealth of
Kentucky established in 1966 to serve the public purpose of improving
opportunities for higher education by insuring student loans for students
eligible under the Higher Education Act; providing loans, grants, and
scholarship awards to qualified Kentucky students; and offering information
relating to KHEAA programs to Kentucky residents. The powers of KHEAA with
respect to insuring student loans include:
(1) providing loan insurance within the limitations of Kentucky law and the
Higher Education Act, the loan in each case to be subject to agreements
providing for interest payments, reimbursements, reinsurance and other
benefits to the extent provided by the Higher Education Act;
(2) entering into agreements and undertakings with the Secretary in order
to constitute KHEAA as a state agency qualified to insure student loans
under the Higher Education Act and to qualify these student loans for
interest subsidies, reimbursement, reinsurance, and other benefits
available under the Higher Education Act;
(3) entering into contracts with eligible lenders and eligible education
institutions to provide for the administration of student financial
assistance programs;
(4) collecting from the borrower amounts due under a student loan on which
KHEAA has fulfilled its insurance obligations following the inability
of the holders to collect that loan;
(5) approving, limiting, suspending, or terminating the eligibility of
educational institutions or lenders to participate in the KHEAA's loan
guarantee program, subject to the provisions of the Higher Education
Act and applicable Kentucky law;
(6) if any conflict exists between applicable State law and the Higher
Education Act that would result in a loss by KHEAA of federal funds,
adopting rules, regulations, and policies consistent with the Higher
Education Act, but which are not in derogation of the Constitution and
general laws of the Commonwealth;
(7) administering federal funds allotted to the Commonwealth in respect of
student loans, administrative costs, and other matters; and
(8) receiving funds and acquiring property from any source, public or
private, except that KHEAA has no power to make its debts payable out
of any funds other than those of KHEAA.
In addition to its student loan guarantee functions, KHEAA offers origination
services to lenders, administers two state grant, a merit scholarship, one
teacher incentive loan, an osteopathic medicine scholarship and the state
work-study program in order to provide financial assistance to eligible
students. Such programs are substantially funded by the Commonwealth of Kentucky
supplemented by Federal Funds. Effective May 10, 1990, responsibilities for the
Kentucky Educational Savings Plan Trust (KHEAA Trust) were transferred to KHEAA
by Executive Order 90-433, ratified by the 1992 Kentucky General Assembly. The
Trust offers opportunities for families to save for future college costs. Trust
funds are fully segregated from all other funds managed by KHEAA.
KHEAA is governed by its Board of Directors, which may officially act by a
majority of its voting members. The Board of Directors of KHEAA consists of
seven voting members appointed by the Governor of the Commonwealth for terms of
four years each and the Executive Director of the Council on Postsecondary
Education of the Commonwealth and the Secretary of the Finance and
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Administration Cabinet of the Commonwealth, each of whom serve as non-voting, ex
officio members.
The Executive Director of KHEAA is Paul P. Borden; the Chief Operating Officer
is Londa L. Wolanin. KHEAA's office is located at 1050 U.S. 127 South,
Frankfort, Kentucky 40601, telephone number (502) 696-7200.
KHEAA's Loan Guarantee Program. In November 1978, KHEAA commenced guaranteeing
student loans as the state guarantee agency of the Commonwealth of Kentucky
under Section 428(c) of the Higher Education Act and under Kentucky law, and
KHEAA's agreements with the Secretary.
Under KHEAA's loan guarantee program, any eligible holder of a loan guaranteed
by the KHEAA, is entitled to reimbursement from KHEAA to the maximum extent
permitted by the Higher Education Act for any proven loss incurred resulting
from the default, death, permanent and total disability, or discharge in
bankruptcy of the borrower and with respect to specific other claims. At the
time KHEAA pays a claim for reimbursement of a defaulted loan, the holder must
assign to KHEAA all rights accruing to the holder under the note.
On April 18, 1995, an agreement between the Alabama Commission on Higher
Education (ACHE) and the Authority was approved by the U.S. Department of
Education for the transition of the Alabama Guarantee Student Loan Program to
KHEAA. KHEAA began to guarantee Federal Family Education Loans for lenders and
students in the state of Alabama on June 2, 1995. KHEAA was designated by the
U.S. Department of Education as the guarantor for Alabama effective July 1,
1996.
Loan Insurance Fund. Under the Kentucky Revised Statutes Sections 164.740
through 164.785, KHEAA has established a loan insurance fund used to account
for all loan guarantee functions.
Through the period ended June 30, 1998, sources of funds for the loan insurance
fund are insurance premiums for loans guaranteed, administrative expense
allowance from the Secretary, reinsurance from the Secretary for default and
other claims paid, default collections, and investment income derived from these
funds; uses of funds are default and other claims on loans guaranteed, and
operating expenses for loan guarantee functions.
Under Kentucky Revised Statutes Sections 164.740 to 164.785 as amended KHEAA is
authorized to issue loan guarantees to eligible lenders on any loans to
qualified students, provided that no additional loans may be guaranteed if the
total amount of all outstanding student loans guaranteed by KHEAA exceeds
seventy-five times the funds available in the loan insurance fund. Funds
available in the loan insurance fund are calculated on the basis of the net
assets before deducting unearned insurance premiums, which equals the fund
balance plus unearned insurance premiums. Funds available in the loan insurance
fund are restricted by federal regulations and the Higher Education Act.
Outstanding loan guarantee commitments by ACHE, on which no claims had been
filed or paid, were assumed by KHEAA on December 31, 1995. Accounts held by ACHE
on which default claims were paid prior to April 15, 1993, that remain in active
repayment status and accounts held by ACHE on which default claims were paid
after April 15, 1993, were transferred to KHEAA prior to June 30, 1996.
Following the transfer of defaulted accounts, remaining Alabama federal reserve
funds were transferred to KHEAA and credited to the loan insurance fund.
The Secretary of Education has advised KHEAA that, under the 1997 Amendments,
KHEAA must pay approximately $14 million (its proportionate share of guarantee
agency reserves to be paid for federal deficit reduction) to the Secretary of
Education on September 1, 2002, and make annual
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restricted account deposits toward payment beginning in federal fiscal year 1998
of approximately $2.8 million.
The following table summarizes the student loans guaranteed by KHEAA (and
reinsured by the Secretary) annually and the aggregate outstanding guarantee
commitment for the period ended June 30, 1998. The coverage ratio set forth
below was determined by dividing the funds available in the loan insurance fund
by the principal amount of the aggregate outstanding guarantee commitment.
<TABLE>
<CAPTION>
Fiscal Year Annual Principal Aggregate Principal
Ended Amount of Guarantee Coverage Claims
June 30 Loans Guaranteed Commitment Ratio Rate %**
<S> <C> <C> <C> <C>
1994 187,999,654 667,407,110 3.76 4.07
1995 251,724,866 847,996,181 3.33 4.28
1996 258,667,310* 1,584,863,271 2.54 4.79
1997 314,023,470 1,625,863,960 2.60 4.22
1998 330,006,170 1,637,204,817 2.35 3.88
</TABLE>
* An additional amount of $646,928,418 was transferred to KHEAA from ACHE.
** At federal fiscal year ending 9/30.
The funds and assets of KHEAA are not pledged to or available for payment of the
Notes.
RESERVE RATIO. A student loan guarantor's reserve ratio is determined by
dividing its fund balance by the total amount of loans outstanding. KHEAA'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>
1994 26,846,699 785,908,442 3.42%
1995 29,150,413 962,416,562 3.03%
1996 41,474,765 1,689,321,365 2.46%
1997 42,665,673 1,702,313,823 2.51%
1998 42,919,800 1,748,034,264 2.46%
</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.
KHEAA's recovery rates as of the end of each of the following five fiscal years
ending September 30 are as follows:
<TABLE>
<CAPTION>
Fiscal KHEAA's
Year Recovery Rate
<S> <C>
1994 50.38%
1995 48.61%
1996 41.59%
1997 41.87%
1998 37.76%
</TABLE>
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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. KHEAA's approximate amount and percentage of
student loans guaranteed per type of school by KHEAA for fiscal year ended June
30, 1998.
<TABLE>
<CAPTION>
INSTITUTION TYPE LOAN AMOUNTS PERCENTAGE
- ---------------- ------------ ----------
<S> <C> <C>
Public 4-year $178,910,800 62.7
Private 4-year 73,047,000 25.6
Public 2-year 2,802,400 1.0
Private 2-year 1,341,200 .5
Proprietary 23,807,600 8.3
Public technical college 2,014,800 .7
Medical/dental 3,347,200 1.2
Foreign 274,300 0*
*Less than .1%
Total $285,545,300
</TABLE>
NOTE: Distribution does not include Federal Consolidation Loans
KHEAA represents and warrants that the advent of the year 2000 shall not
adversely affect the performance of the systems supplying products and services
with respect to date and date dependent data (including but not limited to
calculating, comparing and sequencing) and that the systems will be capable of
creating, storing and processing records related to and including year 2000 and
afterwards without deficiencies.
(Source: KHEAA)
UNITED STUDENT AID FUNDS, INC.
United Student Aid Funds, Inc. was organized as a private, nonprofit corporation
under the General Corporation Law of the State of Delaware in 1960. Under its
Certificate of Incorporation, USA Funds:
(1) maintains facilities for the provision of guarantee services with
respect to approved education loans made to or for the benefit of
eligible students who are enrolled at or plan to attend approved
educational institutions;
(2) guarantees education loans made under loan programs under the Higher
Education Act loan programs as well as loans made under private loan
programs; and
(3) serves as the designated guarantor for education loan programs under
the Higher Education Act in Alaska, Arizona, Hawaii, Indiana, Kansas,
Maryland, Mississippi, Nevada, Wyoming, and certain Pacific Islands.
In addition to the above identified activities, USA Funds is affiliated with USA
Group Guarantee Services, Inc. (formerly known as USA Services, Inc.), a
Delaware private, nonprofit corporation, which provides varying degrees of
services to the following guarantee agencies:
(1) Student Loan Guarantee Foundation of Arkansas,
(2) Iowa College Student Aid Commission,
(3) Louisiana Office of Student Financial Assistance,
(4) Finance Authority of Maine,
(5) Michigan Guaranty Agency,
(6) Montana Guaranteed Student Loan Program,
(7) New Mexico Student Loan Guarantee Corporation,
(8) Northwest Education Loan Association,
(9) Oklahoma Guaranteed Student Loan Program,
(10) Oregon State Scholarship Commission,
(11) Rhode Island Higher Education Assistance Authority.
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Some trustees and officers of USA Funds are also directors or officers of USA
Group Guarantee Services, Inc.
USA Funds is also affiliated with USA Group Loan Services, Inc. (formerly known
as Education Servicing Center, Inc.) USA Group Loan Services, Inc. was organized
under the laws of the State of Delaware in 1982 as a private, nonprofit
corporation to provide conversion services, data processing, and other
assistance necessary in connection with the acquisition and servicing of
education loans by primary lenders and secondary markets. Some trustees and
officers of USA Funds are also trustees or officers of US Group Loan Services,
Inc.
As of September 30, 1998, USA Funds had total Federal Family Education Loan
Program assets of approximately $678 million; guarantee deposits and advance
funds, allowance for future defaults, and deferred revenue of approximately $297
million; and a fund balance of approximately $374 million. The above amounts do
not reflect USA Funds' share of federal reserve funds as required by the
Balanced Budget Act of 1997. Through September 30, 1998, the outstanding,
unpaid, aggregate amount of principal and interest on loans which had been
directly guaranteed by USA Funds under the Federal Family Education Loan Program
was approximately $36.8 billion.
GUARANTEE VOLUME. USA Funds' guarantee volume for each of the following five
fiscal years ending September 30 is as follows:
<TABLE>
<CAPTION>
Fiscal USA Funds'
Year Guarantee Volume
in millions
<S> <C>
1994 5,474
1995 6,326
1996 7,250
1997 7,254
1998 7,190
</TABLE>
RESERVE RATIO. A student loan guarantor's reserve ratio is determined by
dividing its fund balance by the total amount of loans outstanding. USA Funds'
reserve ratio for the last five federal fiscal years ending September 30 is as
follows:
<TABLE>
<CAPTION>
Fiscal Reserve
Year Ratio
---- -----
<S> <C>
1994 1.2%
1995 1.5
1996 1.4
1997 1.5
1998 1.4
</TABLE>
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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. USA
Funds' recovery rates as of the end of each of the following five fiscal years
ending September 30 are as follows:
<TABLE>
<CAPTION>
Fiscal USA Funds'
Year Recovery Rate
<S> <C>
1994 30.3%
1995 35.3
1996 39.2
1997 40.9
1998 50.3
</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. USA Funds' approximate amount and percentage of
student loans guaranteed per type of school by USA Funds as of September 30,
1998 is set forth below.
<TABLE>
<CAPTION>
Loans
Outstanding Percentage of
Type of School (in millions) Loans Outstanding
<S> <C> <C>
Two-year $ 1,306 3.55%
Four-year $ 31,231 89.93
Proprietary $ 4,236 11.52
</TABLE>
CLAIMS RATE. For the past five fiscal years ending September 30, USA Funds'
claims rate has not exceeded 5% and as a result, the highest allowable
reinsurance has been paid on all USA Funds' claims. The actual claims rates are
as follows:
<TABLE>
<CAPTION>
Fiscal Year Claims Rate
<S> <C>
1994 4.99%
1995 4.69%
1996 4.65%
1997 4.65%
1998 3.96%
</TABLE>
USA Funds is aware of concerns relating to the functional effectiveness and
usage of computer systems beyond December 31, 1999. USA Funds is dedicated to
resolving the potential impact of the year 2000 on the ability of USA Funds'
computerized information systems to accurately process information that may be
date sensitive. USA Funds is seeking to assure itself that both the internal
systems and the systems of third parties, which include but are not limited to
the U.S. Department of Education, which provide services to USA Funds or on
whose computer software and operating systems USA Funds may rely are taking
sufficient actions to avoid year 2000 related problems. No representation or
warranty is made with respect to whether third parties are or will be year 2000
compliant. USA Funds is planning to be ready to perform normal business
functions and intends to meet its obligations both before and after January 1,
2000. However, USA Funds is unable to give any assurances at this time that all
year 2000 related problems will be avoided.
(Source: USA Funds)
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The following table provides information with respect to the portion of financed
student loans guaranteed by each guarantor:
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY GUARANTEE AGENCY
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guarantee Agency Loans Balance Balance
- ---------------- ----- ------- -------
<S> <C> <C> <C>
Florida Department of Education, Office of Student 128,819 $393,724,755 61.09%
Financial Assistance
Georgia Higher Education Assistance Corporation 14,394 44,695,738 6.83
United Student Aid Funds, Inc. 31,659 139,594,151 21.34
Kentucky Higher Education Assistance Authority 18,803 41,438,957 6.34
Great Lakes Higher Education Guaranty Corporation 10,650 24,987,155 3.82
Other Guarantee Agencies 1,342 9,641,050 0.58
-------- ------------- --------
Total 205,667 $654,081,086 100.00%
</TABLE>
The most recent national default rate reported by the Department of Education
was 9.6% for the federal fiscal year 1996. As recently as federal fiscal year
1990, this national default rate was over 22%. This, coupled with the claims and
recovery information listed above, shows improvement in the repayment of student
loans by borrowers. The claims rate of each of the five guarantee agencies
described in this section for the financed student loans is lower than 5%
resulting in the maximum reimbursement for reinsurance claims. The depositor is
not aware of any circumstances which would cause the reimbursement levels for
those guarantors to be less that the maximum levels permitted.
DESCRIPTION OF THE NEW NOTES
The depositor issued the old notes under an indenture dated as of December 1,
1998 between the depositor and Firstar Bank, N.A. The eligible lender trustee,
on behalf of the depositor, used the proceeds of the old notes to acquire the
initial financed student loans. The trust purchased the financed student loans
by assuming the obligations of the depositor under the old notes and the
indenture. The trust completed the assumption of the old notes on April 20,
1999. The issuer will offer the new notes under a second amended and restated
indenture, dated as of June 1, 1999, between itself and Firstar Bank, N.A. The
terms of the new notes include those stated in the indenture and those made part
of the indenture by reference to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture. It does not restate the entire indenture. We urge you to read the
indenture because it, not this description, defines your rights as holders. We
have filed a copy of the indenture as an exhibit to the registration statement
of which this prospectus is a part.
You can find the definitions of capitalized terms under the heading "Summary of
Terms" or in Appendix A "Glossary of Terms." In this description notes means the
outstanding old notes and the new notes we will issue to you in the exchange
offer. References to a holder or holders mean you, or all holders of the notes.
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The new notes will be limited obligations of the issuer payable solely from the
assets of the trust. The following description describes the material terms of
the new notes and does not purport to be complete and is qualified by reference
to the provisions of the new notes and the indenture.
The Series A-3 Notes, the Series A-4 Notes, the Series A-5 Notes and the Series
A-6 Notes are referred to herein collectively as the Series 1998A Notes. The
Series A-4 Notes, the Series A-5 Notes and the Series A-6 Notes are referred to
herein collectively as the auction rate notes.
The Series A-3 Notes and the Series B-3 Notes will be available for purchase in
authorized denominations of $50,000 (original issue amounts) and integral
multiples of $1,000 in excess of $50,000 in book-entry form only, and the
auction rate notes will be offered in minimum authorized denominations of
$50,000 original issue amounts and any integral multiples of $50,000 in
book-entry form only. The notes will initially be represented by one or more
notes registered in the name of DTC's nominee, the security depository. The
issuer may select a successor depository to DTC. The depositor 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 under "-- Definitive Notes," no
holder will be entitled to receive a physical certificate representing a note.
All references herein to actions by holders refer to actions taken by DTC on
instructions from its participating organizations and all references herein to
distributions, notices, reports and statements to holders refer to
distributions, notices, reports and statements to DTC or its nominee, as the
registered holder of the notes, for distribution to holders under DTC's
procedures. See "-- Book-entry Registration."
INTEREST
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INTEREST ACCRUAL PERIOD
Interest will accrue during each interest accrual period on the principal
balance of each series of notes at a rate equal to the related series interest
rate calculated as described below. Interest will be payable to the applicable
holders as of the record date on the Series A-3 Notes and the Series B-3 Notes
monthly on the monthly distribution date which is the last business day of each
month. Interest will be payable to the applicable holders as of the record date
on the auction rate notes on the business day following the expiration of each
auction period, an auction period distribution date. The auction period
distribution date is subject to change as described under the heading "--
Determination of the Auction Rate."
The first interest accrual period will begin on the closing date, after which,
an interest accrual period for each series of notes with respect to any
distribution date for that series begins on the preceding distribution date for
that series and ends on the day preceding the distribution date.
RECORD DATE
The record date for the Series A-3 Notes is the second business day preceding a
monthly distribution date. The record date for the Series B-3 Notes is the
business day preceding a monthly distribution date. The record date for the
auction rate notes is the business day immediately preceding an auction period
distribution date. Interest accrued as of any distribution date for a series of
notes but not paid on the distribution date will be payable on the next
distribution date for each series, together with interest on these notes at the
applicable series interest rate. Interest will be paid pro rata to the holders
of each series of notes outstanding.
INTEREST DETERMINATION DATE
The interest determination date for the respective notes is as follows:
- Series A-3 Notes - the second London banking day prior
to the first day of the next
succeeding interest accrual period
- Series A-4 Notes - January 27, 1999 and each fourth
Wednesday after
- Series A-5 Notes - February 3, 1999 and each fourth
Wednesday after
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- Series A-6 Notes - February 10, 1999 and each fourth
Wednesday after
The interest determination date on the auction rate notes is subject to change
as described under the heading "Determination of the Auction Rate."
DETERMINATIONS OF INTEREST RATES
The series interest rate for each series of Series 1998A Notes for each interest
accrual period will equal the formula rate, subject to a cap of the net loan
rate for the interest accrual period.
The series interest rate for each interest accrual period for the Series B-3
Notes is a fixed rate of 6.25%. Interest on the Series B-3 Notes will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The formula rate for each interest accrual period for the Series A-3 Notes will
equal One-Month LIBOR as of the interest determination date for the interest
accrual period plus 0.38%, but never greater than 17%. See "--Determination of
LIBOR." Interest on the Series A-3 Notes will be calculated on the basis of the
actual number of days elapsed in each interest accrual period divided by 360.
The formula rate for each interest accrual period for the Series A-4 Notes will
equal the auction rate for the interest accrual period, but never greater than
17%. The formula rate for each interest accrual period for the Series A-5 Notes
will equal the auction rate for the interest accrual period, but never greater
than 17%. The formula rate for each interest accrual period for the Series A-6
Notes will equal the auction rate for the interest accrual period, but never
greater than 17%. Interest on each series of the auction rate notes will be
calculated on the basis of the actual number of days elapsed in each interest
accrual period divided by 360. See "--Determination of the Auction Rate."
NET LOAN RATE
The net loan rate will be calculated by the administrator. The series interest
rate for the Series A-3 Notes will be determined by the calculation agent, which
initially is Salomon Smith Barney Inc. The series interest rate for each series
of auction rate notes will be determined by the auction agent, which initially
is Bankers Trust Company, New York, New York, as described under the heading
"--Determination of the Auction Rate."
Information concerning the current series interest rates 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 that 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 360 to the actual
number of days in the interest accrual period, and (b) the ratio of (1) expected
interest collections for the applicable collection period less all items of
expense allocable to financing the financed student loans with respect to the
collection period, to (2) the pool balance as of the first day of the collection
period. In calculating the net loan rate, the applicable collection period for
the Series A-3 Notes is the collection period immediately preceding the
collection period in which the monthly distribution date occurs. The applicable
collection period for the auction rate notes is the second preceding collection
period prior to the applicable auction period distribution date.
Expected interest collections means, with respect to any collection period, the
sum of:
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(1) 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 for the collection
period (whether or not the interest is actually paid);
(2) interest subsidy payments and special allowance payments under claims
submitted for the 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, to the extent not
included in (1) above;
(3) the net of any counterparty exchange payments less any issuer exchange
payments to be made on the related distribution date; and
(4) investment earnings on the amounts on deposit allocable to the trust
with respect to the collection period prior to the related distribution
date.
CARRYOVER INTEREST
If interest at the formula rate for any series of the Series 1998A Notes for any
interest accrual period exceeds interest at the net loan rate, carryover
interest consisting of the excess interest, together with interest on the notes
at the applicable formula rate will be paid on subsequent distribution dates
only to the extent funds are available after other required payments on the
notes. See "--Collection Fund." Carryover interest will continue to be so
payable although the principal amount of the applicable series of notes is zero
until (1) no new notes remain outstanding and (2) 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 in this prospectus to
interest excludes carryover interest.
DETERMINATION OF LIBOR
For each interest accrual period after the initial interest accrual period,
Salomon Smith Barney Inc., the calculation agent, will determine the applicable
LIBOR rate for purposes of calculating the series interest rate on the Series
A-3 Notes for each given interest accrual period on the date which is two London
banking days preceding the commencement of each interest accrual period. 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 equal to the rate 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 3750 as of approximately 11:00 a.m., Greenwich
Mean Time, on the interest determination date. If the rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
Reuters Screen LIBOR Page. If at least two quotations appear, LIBOR will be the
arithmetic mean (rounded to the nearest .01%) of these offered rates. If fewer
than two quotations appear, LIBOR for the interest accrual period will be
determined at approximately 11:00 A.M., London time, on the interest
determination date. LIBOR will be based on the rate at which deposits in a
principal amount of not less than U.S. $1,000,000 in United States dollars
having this 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. Such rates will be representative for a single
transaction in the market at this time. The calculation agent will request the
principal London office of each representative bank to provide a quotation of
its rate. If at least two quotations are provided, LIBOR will be the arithmetic
mean (rounded to the nearest .01% of the offered rates). If fewer than two
quotations are provided, LIBOR for the interest accrual period will be the
arithmetic mean (rounded to the nearest .01%) of the rates quoted at
approximately 11:00 A.M., New York City time on the interest determination date
by three major banks in New York, New York selected by the
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<PAGE> 103
calculation agent for loans in United States dollars to leading European banks
having a particular maturity and in a principal amount equal to not less than
U.S. $1,000,000, this amount being representative for a single transaction in
the market at this time. If the banks selected as aforesaid are not quoting as
mentioned in the preceding sentence, LIBOR in effect for the applicable interest
accrual period will be LIBOR in effect for the previous interest accrual period.
DETERMINATION OF THE AUCTION RATE
The auction rate for each series of auction rate notes will be determined by the
auction agent under the auction procedures described under "Auction Procedures"
and in Appendix C on each interest determination date for each interest accrual
period, initially based on a 28-day auction period generally beginning:
- for the Series A-4 Notes, on January 27, 1999 and each fourth
Wednesday after,
- for the Series A-5 Notes, on February 3, 1999 and each fourth
Wednesday after, and
- for the Series A-6 Notes, on February 10, 1999 and each fourth
Wednesday after, in each case subject to adjustment as
described below.
If you are the current holder of an auction rate note, the possible results of
an auction may be:
- you submit an order to hold your note at any rate, so you will
continue to hold the note and will be notified of the interest
rate after the auction, or
- you submit any order to hold your note at a specified interest
rate, so if the rate set by the auction is equal to or higher
than the rate you specified you will continue to hold your
note at that rate and if the rate is lower you will have sold
your note in the auction, or
- you submit an order to sell your note and your note is sold at
the auction.
If there are ever insufficient buy orders and the auction is not successful,
holders may not be able to sell their notes in the auction and the interest rate
for the next auction period will be the lower on the net loan rate and the
maximum auction rate.
If you are not a current holder and wish to purchase notes in an auction, or are
a current holder and wish to purchase additional notes, the basic outcomes of an
auction are:
- you submit an order to buy at a specified rate and the
interest rate set in the auction is equal to or higher than
the rate you specified, so you will have purchased the note
and the interest rate will be the rate set by the auction, or
- you submit an order to buy at a specified rate and the
interest rate set in the auction is lower than the rate you
specified, so your bid order will be unsuccessful. --
The outcomes described might vary slightly, as described under "Auction
Procedures," in some cases, as when only part of an order can be filled from
available notes or if an auction is not successful.
AUCTION PROCEDURES
The interest rate on each series of auction rate notes will be determined
periodically (generally, for periods ranging from seven days to one year) by
means of a dutch auction. In this dutch auction,
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investors and potential investors submit orders through an eligible
broker/dealer as to the principal amount of auction rate notes the investors
wish to buy, hold or sell at various interest rates or at any rate. Initially,
Nations Banc Securities of Montgomery LLC is the sole broker/dealer. The
broker/dealers submit their clients' orders to Bankers Trust Company, 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. The indenture trustee pays the
auction agent fee of 0.01% from the program operating expenses.
In the auction procedures, the following types of orders may be submitted:
(1) 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 (which can also be an order to hold regardless
of the upcoming interest rate);
(2) 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
(3) 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.
EXAMPLE OF AUCTION
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
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> <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>
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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. In any case, the interest
rate will never exceed the lesser of the net loan rate or the maximum auction
rate.
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
some circumstances, there may be insufficient potential bid orders to purchase
all the auction rate notes of the applicable series offered for sale. In these
circumstances, the interest rate for the upcoming interest accrual period will
equal the lesser of the net loan rate and the maximum auction rate. Also, if all
the auction rate notes of the applicable series are subject to hold orders
(i.e., each holder of a series 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 series of auction
rate notes.
For a more detailed description of the auction procedures, see "Appendix C --
Auction Procedures."
SPECIFIC LIMITATIONS ON DETERMINATIONS OF AUCTION RATE
The all hold rate with respect to each series of the auction rate notes will be
85% of the applicable LIBOR rate.
The maximum auction rate with respect to each series of the auction rate notes
will be:
(1) the applicable LIBOR rate plus 1.50% (if both of the ratings
assigned by the rating agencies to the auction rate notes are
"Aa3" and "AA-," or better),
(2) the applicable LIBOR rate plus 2.50% (if any one of the
ratings assigned by the rating agencies to the auction rate
notes is less than "Aa3" or "AA-," and at least "A") or
(3) the applicable LIBOR rate plus 3.50% (if any one of the
ratings assigned by the rating agencies to the auction rate
notes is less than "A").
The non-payment rate with respect to each series of the auction rate notes will
be one-month LIBOR plus 1.50%.
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After the initial auction period, the auction rate for each series of the
auction rate notes for each auction period will be determined under auction
procedures on the following dates:
- January 27, 1999 and each fourth Wednesday after for the
Series A-4 Notes;
- February 3, 1999 and each fourth Wednesday after for the
Series A-5 Notes; and
- February 10, 1999 and each fourth Wednesday after for the
Series A-6 Notes.
Each auction period will begin on the first business day following each interest
determination date and will terminate on and include the day preceding the first
day of the next auction period, subject to adjustment as described below if
there are fewer than three business days in any week during which the auction
period would otherwise be scheduled to expire.
The calculation agent, with the consent of the issuer, may change the interest
determination date to conform with prevailing market practice. See Appendix C,
"Auction Procedures-- Changes in the Interest Determination Date."
In any event for each series of auction rate notes:
- if the ownership of the auction rate notes is no longer
maintained in book-entry form, the auction rate for any
auction period beginning after the delivery of certificates
representing the auction rate notes will equal the lesser of
the maximum auction rate and the net loan rate for the auction
rate notes on the business day immediately preceding the first
day of the subsequent auction period; or
- if a payment default has occurred, the auction rate for the
auction period beginning on or during this default and for
each auction period after, to and including the auction
period, if any, during which, or commencing less than two
business days after, the default is cured under the indenture,
will equal the non-payment rate on the first day of each
auction period;
- if a proposed auction period conversion has failed, as
described below under the heading "-- Auction Period
Conversion of and Mandatory Tender of Auction Rate Notes" the
auction rate on the auction rate notes subject to the failed
auction period conversion will be equal to the maximum auction
rate as of the date of the failed auction period conversion
for the auction period commencing on this date, and the length
of the auction period commencing on the failed auction period
conversion date will be the same as was in effect immediately
preceding the failed auction period conversion date; or
- the auction rate for an auction period that commences on an
auction period conversion date will equal the lesser of (1)
the interest rate necessary to enable the auction agent to
sell all of the auction rate notes at par plus accrued
interest to the auction period conversion date or (2) the
maximum auction rate as of the auction period conversion date,
subject to the net loan rate.
The auction agent will promptly give written notice to the indenture trustee and
the issuer of the series interest rate and either the auction rate or the net
loan rate, as the case may be, when the rate is not the series interest rate
applicable to the auction rate notes. If, however, the series interest rate is
the non-payment rate, the indenture trustee will determine the non-payment rate
and give written notice to the issuer. The indenture trustee will notify the
holders of the auction rate notes of the applicable series interest rate on
the second business day of each auction period.
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<PAGE> 107
For any auction period scheduled to end during a week that has fewer than three
business days, the calculation agent may adjust the length of that and the
following auction period as it considers appropriate. The indenture trustee will
immediately give notice of any adjustment to the holders of the affected auction
rate notes.
If the auction agent does not determine the series interest rate or the manner
of determining the rate is invalid or unenforceable, then the rate will be the
net loan rate determined by the administrator. If the administrator does not
determine the net loan rate, then a securities dealer appointed by the issuer
will determine the net loan rate.
If there are fewer than three business days in any week during which the auction
period would otherwise be scheduled to expire, the calculation agent, with the
consent of the issuer, may change the expiration date and auction period
distribution date for the auction period then in effect, and the interest
determination date and commencement date for the immediately following auction
period to dates it determines to be appropriate under any circumstances. The
calculation agent will promptly notify the indenture trustee and the auction
agent in writing of any determination. The indenture trustee, on receipt of the
notice, will immediately give written notice of that determination to the
holders of the auction rate notes.
If the auction agent no longer determines, or fails to determine, when required,
the series interest rate with respect to the auction rate notes, or, if for any
reason this manner of determination shall be held to be invalid or
unenforceable, the series interest rate for the next succeeding auction period
for the auction rate notes will be the net loan rate as determined by the
administrator for this auction period. If the administrator fails or refuses to
determine the net loan rate, the net loan rate will be determined by a
securities dealer appointed by the issuer and capable, in the reasonable
judgment of the issuer, of making this determination under the provisions of the
indenture.
AUCTION PERIOD ADJUSTMENT
With respect to each series of auction rate notes, the issuer may, subject to
the indenture, change the length of one or more auction periods in order to
conform with then current market practice or to accommodate other economic or
financial factors that may affect or be relevant to the length of the auction
period or the auction rate (as hereinafter described, an auction period
adjustment). An auction period adjustment may be made to change an auction
period to a period of between 7 and 91 days (a short auction period) or to a
period of between 92 days and the legal final maturity of the auction rate notes
(a long auction period). For auction rate notes with a short auction period, no
auction period adjustment may result in an auction period of less than 7 nor
more than 91 days. For auction rate notes with a long auction period, no auction
period adjustment may result in an auction period that is more than three months
shorter or longer than the auction period established on the issuance of a
series of auction rate notes or auction period conversion of these auction rate
notes. For any auction period adjustment, specific prescribed conditions must be
satisfied. See Appendix C, "Auction Procedures."
AUCTION PERIOD CONVERSION OF AND MANDATORY TENDER OF THE AUCTION RATE NOTES
The issuer may, from time to time, change the length of one or more auction
periods for any series of auction rate notes under an auction period conversion.
An auction period conversion means a change in the length of an auction period
for any series of the auction rate notes as follows:
- from an auction period between 7 and 91 days, inclusive, to an
auction period between 92 days and the legal final maturity
for these series, inclusive,
- from an auction period between 92 days and the legal final
maturity for these series, inclusive, to an auction period
between 7 and 91 days, inclusive, or
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- from an auction period between 92 days and the legal final
maturity for these series, inclusive, to an auction period
between 92 days and the legal final maturity for these series,
inclusive, if the latter auction period is at least 3 months
shorter or at least 3 months longer than the auction period
established on the initial issuance of these series or under
an auction period conversion.
All auction rate notes subject to auction period conversion are subject to
mandatory tender to the indenture trustee on the auction period conversion date
at the purchase price of par plus accrued interest plus accrued and unpaid
carryover interest, if any.
The holders of auction rate notes that are subject to mandatory tender do not
have the right to elect to retain the auction rate notes. If, however, any
auction rate notes of a series so tendered are not remarketed, or the indenture
trustee does not receive the purchase price for that series of auction rate
notes subject to the auction period conversion, none of the auction rate notes
of that series tendered will be converted. The series interest rate for that
series of auction rate notes will equal the lesser of the net loan rate or the
maximum auction rate, but never greater than 17%, as of the date of the failed
auction period conversion, as applicable, for the auction period commencing on
that date. The length of the auction period will remain the same. See Appendix
C, "Auction Procedures."
PRINCIPAL
UNLESS AN EVENT OF DEFAULT HAS OCCURRED, NO PRINCIPAL WILL BE PAID ON THE SERIES
A-4 NOTES UNTIL THE SERIES A-3 NOTES HAVE BEEN PAID IN FULL, NO PRINCIPAL WILL
BE PAID ON THE SERIES A-5 NOTES UNTIL THE SERIES A-3 NOTES AND SERIES A-4 NOTES
HAVE BEEN PAID IN FULL AND NO PRINCIPAL WILL BE PAID ON THE SERIES A-6 NOTES
UNTIL THE SERIES A-3 NOTES, THE SERIES A-4 NOTES AND THE SERIES A-5 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. IT IS EXPECTED THAT PRINCIPAL WILL BE PAID ON THE SERIES B-3 NOTES
FROM TIME TO TIME AND SUBJECT TO SPECIFIC CONDITIONS WHILE THE SERIES 1998A
NOTES ARE OUTSTANDING BUT ONLY FOR MONTHLY DISTRIBUTION DATES OCCURRING AFTER
JUNE 30, 2003.
Series A-3 Notes
Principal payments on the Series A-3 Notes will be made on each monthly
distribution date in an amount generally equal to the Series 1998A Holders'
Principal Distribution Amount for the monthly distribution date until the
principal balance of the notes is zero.
Series A-4 Notes
After the Series A-3 Notes have been paid in full, principal payments on the
Series A-4 Notes will be made on the first auction period distribution date of
any month in an amount generally equal to the Series 1998A Holders' Principal
Distribution Amount for the auction period distribution date until the principal
balance of the notes is zero.
Series A-5 Notes
After the Series A-3 Notes and the Series A-4 Notes have been paid in full,
principal payments on the Series A-5 Notes will be made on the first auction
period distribution date of any month in an amount generally equal to the Series
1998A Holders' Principal Distribution Amount for the auction period distribution
date until the principal balance of the notes is zero.
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<PAGE> 109
Series A-6 Notes
After the Series A-3 Notes, the Series A-4 Notes and the Series A-5 Notes have
been paid in full, principal payments on the Series A-6 Notes will be made on
the first auction period distribution date of any month in an amount generally
equal to the Series 1998A Holders' Principal Distribution Amount for the auction
period distribution date until the principal balance of the notes is zero.
Principal payments on the Series A-4 Notes, on the Series A-5 Notes and on the
Series A-6 Notes will only be made in amounts equal to $50,000 and integral
multiples in excess of $50,000. Principal payments on the Series B-3 Notes will
be made on each monthly distribution date after June 30, 2003, subject to
limitations, in an amount generally equal to the Series 1998B-3 Holders'
Principal Distribution Amount for the monthly distribution date until the
principal balance of the notes is zero. In addition, parity percentage payments
will be payable on each applicable distribution date (to the series of Series
1998A Notes then receiving principal payments and afterwards to the Series B-3
Notes) until the parity percentage equals 101%.
Final Maturities
The final payment of principal and interest will be made no later than December
1, 2006 on the Series A-3 Notes, December 1, 2019 on the Series A-4 Notes,
December 1, 2019 on the Series A-5 Notes, December 1, 2019 on the Series A-6
Notes, and December 1, 2019 on the Series B-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."
Principal Shortfall
If available funds are insufficient to pay the Series 1998A Principal
Distribution Amount or the Series 1998B-3 Principal Distribution Amount on an
applicable distribution date, this shortfall will be added to the principal
payable to these holders on subsequent distribution dates, as applicable, and
(except with respect to the legal final maturity of a series of notes) this
shortfall will not constitute an event of default. Additionally, on the legal
final maturity for a series of notes and on any date the new notes are to be
redeemed in whole, amounts in the reserve fund will be available to reduce the
principal balance of the notes to zero. See "Security for the Notes -- Reserve
Fund."
All principal payments of Series A-3 Notes and Series B-3 Notes will be made pro
rata within that Series. In connection with each principal payment of Series A-3
Notes or Series B-3 Notes, 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 Series A-3 Note
and each Series B-3 Note as of a monthly distribution date (after giving effect
to any payments made on that date) as a fraction of the original principal
amount of the new note. The principal factor for the Series A-3 Notes and for
the Series B-3 Notes was initially 1.0000000 (at the time of original issue of
the notes) and will afterwards decline to reflect the reduction in the principal
balance of the new notes of that series after any payment of principal. The
principal balance of any Series A-3 Note or Series B-3 Note can be determined by
multiplying the original principal amount of this note by the principal factor
applicable to that series of notes.
BOOK-ENTRY REGISTRATION
The notes are issuable solely in fully registered form and will initially be
registered in the name of Cede & Co., as registered owner and nominee for DTC,
as securities depository for the notes. Holders may hold notes offered through
DTC, in the United States, or Cedel or Euroclear, in Europe, if they
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are participants of these systems, or indirectly through organizations that are
participants in these systems. Purchases by beneficial owners of the notes are
to be made in book-entry form in authorized denominations. These beneficial, or
book-entry interest owners, will not receive certificates evidencing their
interests in the new notes.
The description which follows of the procedures and record keeping concerning
beneficial ownership interests in the 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 base solely on
information furnished by DTC, Cedel and Euroclear and has not been independently
verified by the issuer, the administrator, the master servicer or the initial
purchasers.
Holders may hold their certificates through DTC (in the United States) or Cedel
or Euroclear (in Europe) directly if the holders are participants of these
systems, or indirectly through organizations that are participants in these
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 which in turn will hold
these 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 under the
provisions of Section 17A of the Exchange Act. DTC holds securities for its
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 other organizations. Indirect access to the DTC system
is also available to indirect participants such as securities brokers and
dealers, banks, and trust companies that clear through or maintain a custodial
relationship with a DTC participant, either directly or indirectly. The rules
applicable to DTC and its DTC participants are on file with the SEC.
DTC management is aware that some computer applications, systems, and the like
for processing dates that are dependent on calendar dates, including dates
before, on, and after January 1, 2000, may encounter year 2000 problems. DTC has
informed the industry, which consists of its participants and other members of
the financial community, that it has developed and is implementing a program so
that its computer systems, as they relate to DTC services such as the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent on
other parties, including but not limited to issuers and their agents, as well as
third party vendors from whom DTC licenses software and hardware, and third
party vendors on whom DTC relies for information or the provision of services,
including telecommunication and electrical utility service providers, among
others. DTC has informed its participants and other members of the financial
community that it is contacting (and will continue to contact) third party
vendors from whom DTC acquires services to: (1) impress on them the importance
of these services being year 2000 compliant; and (2) determine the extent of
their efforts for year 2000 remediation (and, as appropriate, testing) of their
services. In addition, DTC is in the process of developing contingency plans as
it deems appropriate.
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According to DTC, the information set forth in the preceding two paragraphs
about DTC has been provided to its participants and other members of the
financial community by DTC for informational purposes only and is not intended
to serve as a representation, warranty or contract modification of any kind.
Transfers between DTC participants will occur under DTC rules. Transfers between
Cedel participants and Euroclear participants will occur in the ordinary way
under 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 under DTC rules on
behalf of the relevant European international clearing system by its depository.
Such cross-market transactions will, however, require delivery of instructions
to the relevant European international clearing system by the counterparty in
this system under 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 under 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. Such credits or any transactions in these securities
settled during the processing will be reported to the relevant Cedel participant
or Euroclear participant on this 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 new
notes, see Appendix B.
Day traders that use Cedel or Euroclear and that purchase the globally offered
new 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.
A buyer may purchase notes under the DTC system only by or through DTC
participants. DTC participants will receive a credit for the notes on DTC's
records. The ownership interest of each actual owner of a note 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 o 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 receive certificates representing their
ownership interest in notes, only if 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 these 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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<PAGE> 112
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 & Co.'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 to the proxy).
The indenture trustee will make principal and interest payments on the notes to
DTC. DTC's practice is to credit DTC participants' accounts on the applicable
distribution date under their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on the 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 the 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. The indenture trustee is responsible for
payment of principal and interest to DTC. DTC is responsible for disbursement of
these payments to DTC participants. DTC participants and indirect participants
are responsible for disbursement of these payments to note owners.
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 these circumstances, if 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 holders. See "--Definitive Notes."
Cedel is incorporated under the laws of Luxembourg as a professional depository.
Cedel holds securities for its participating organizations 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 regulated
by the Luxembourg Monetary Institute. Cedel participants are recognized
financial institutions around the world, including initial purchasers,
securities brokers and dealers, banks, trust companies, clearing corporations
and other organizations and may include the initial purchasers of any series of
new 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 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, under contract with Euroclear
Clearance System, and Societe Cooperative, a Belgian cooperative corporation.
All operations are conducted by the Euroclear operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear operator, not Societe Cooperative. The Societe Cooperative Board
establishes policy for the Euroclear System. Euroclear
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participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
initial purchasers 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. The Terms and Conditions together
with the Operating Procedures 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 and Operating
Procedures 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 equal to the amount of interests in securities
credited to their accounts. If the Euroclear operator becomes insolvent,
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 these interests in securities on the
Euroclear operator's records, all Euroclear participants having an amount of
interests in securities of this 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 these
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
under the relevant system's rules and procedures, to the extent received by its
depository. Such distributions will be subject to tax reporting under relevant
United States tax laws and regulations. See "Federal Income Tax Consequences."
Cedel or the Euroclear operator, as the case may be, will take any other action
permitted to be taken by a holder under the Agreement on behalf of a Cedel
participant or Euroclear participant only under its relevant rules and
procedures and subject to its depository's ability to effect the actions on its
behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to these procedures to facilitate
transfers of notes among participants of DTC, Cedel and Euroclear, they are
under no obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
Neither the issuer, the initial purchasers nor the 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 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
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direct or indirect participant of any person to receive payment in the event of
a partial distribution of principal of the new notes; or (E) any consent given
or other action taken by DTC as note owner.
In reading this Prospectus, you should understand that while the notes are in
book-entry system, references in other sections of this Prospectus to holders
includes the person for whom the participant acquires an interest in the notes,
but (1) owners of the notes must exercise all rights of ownership through DTC
and the book-entry system and (2) the issuer and the indenture trustee will give
notices that are to be given to holders only to DTC.
Definitive Notes
The notes will be issued as definitive notes in fully registered, certificated
form to note owners or their nominees rather than to DTC or its nominee, if:
(1) the issuer advises the indenture trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as
depository with respect to the notes, and the issuer is unable to
locate a qualified successor;
(2) the issuer, at its option, advises the indenture trustee in writing
that it elects to terminate the book-entry system through DTC or a
successor securities depository; or
(3) after the occurrence of an event of default under the indenture,
holders representing not less than 50% of the outstanding principal
balance of the Series 1998A Notes as long as a series of the Series
1998A Notes are outstanding, and afterwards the Series B-3 Notes,
advise the indenture trustee and DTC through DTC participants in
writing that the continuation of a book-entry system through DTC (or a
successor to DTC) is no longer in the best interest of the holders.
On the occurrence of any of the events listed above, the indenture trustee will
cause DTC to notify all DTC participants of the availability through DTC of
definitive notes. On surrender by DTC of the definitive certificate representing
the new notes and instructions for registration, the indenture trustee will
issue the notes as definitive notes, and afterwards the indenture trustee will
recognize the holders of those definitive notes as holders under the indenture.
Distribution of principal of and interest on the new notes will be made by the
indenture trustee directly to holders of definitive notes under the indenture.
Interest payments and any principal payments on each distribution date will be
made to holders 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 on presentation and surrender of that note at the
office or agency specified in the notice of final distribution to holders. The
indenture trustee will provide notice to registered holders prior to the
distribution date on which it expects the 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.
REDEMPTION
The notes will be subject to redemption prior to maturity only as described
below.
AUCTION OF THE FINANCED STUDENT LOANS
On or after May 31, 2007, if the then outstanding pool balance is 10% or less of
the initial pool balance, the indenture trustee will offer the financed student
loans in the trust for sale. The issuer, the depositor,
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their affiliates and unrelated third parties may offer bids to purchase these
financed student loans on or prior to that date. If at least two bids are
received, the indenture trustee will accept the higher bid if it will pay
transaction costs and all amounts due and payable to the holders (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 all amounts due to the holders, the indenture trustee
may, but shall be under no obligation to, solicit bids for the sale of the
financed student loans on future distribution dates. The net proceeds of any
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 indenture trustee will be successful in soliciting acceptable bids
to purchase the financed student loans on any auction date.
OPTIONAL REDEMPTION
The issuer may redeem all outstanding series of notes in whole, at a redemption
price of par plus accrued interest plus unpaid carryover interest, on any
applicable distribution date if the depositor exercises its option to repurchase
all remaining financed student loans. Such repurchase will cause the early
retirement of the notes. The notes may be so redeemed on any applicable
distribution date for the applicable series on or after the monthly distribution
date on which the pool balance is equal to 10 or less of the initial pool
balance. The financed student loans will be purchased at a price at least equal
to, for each financed student loan, the outstanding principal balance of that
financed student loan as of the end of the preceding collection period, together
with all accrued interest and unamortized premiums, if any. The purchase price
must be sufficient to pay transaction costs and all amounts due to the holders,
including carryover interest, after application of funds on deposit in the
reserve fund. Such an optional purchase of the financed student loans will
result in the prepayment of all outstanding notes. The initial pool balance was
$680,000,000.
In addition, on and after the Series A-3 Notes have been paid in full, the
issuer, at its option, may redeem the Series A-4 Notes, the Series A-5 Notes and
the Series A-6 Notes in whole or in part on any auction period distribution date
prior to their legal final maturity. The issuer may designate which series will
be redeemed. The issuer may redeem the notes from funds deposited by or on
behalf of the issuer with the indenture trustee. The indenture trustee must give
notice to the holders of the auction rate notes not less than 15 days prior to
the redemption date in the form and manner described under the heading "--
Notice of Redemption." The redemption price will equal 100% of the principal
amount to be redeemed plus accrued interest to the date of redemption. The
issuer may not exercise its option to redeem any Series A-4 Notes, Series A-5
Notes or Series A-6 Notes unless after a redemption the parity percentage is no
less than 101% and specific other conditions relating to the minimum amount of
financed student loans bearing at a fixed rate held in the student loan
portfolio fund are satisfied. See "The Indenture -- Student Loan Portfolio
Fund." If only a part of a series is redeemed, the Series A-4 Notes, Series A-5
Notes or Series A-6 Notes to be redeemed will be selected by lot by the
indenture trustee. No Series A-4 Notes, Series A-5 Notes or Series A-6 Notes
will be subject to redemption in part in an amount less than an authorized
denomination, and no portion of the Series A-4 Notes, the Series A-5 Notes or
the Series A-6 Notes is to be retained by a holder in an amount less than an
authorized denomination.
In connection with the optional redemption of any Series 1998A Notes, all unpaid
carryover interest on the series must be paid on or before the date of optional
redemption of the series.
NOTICE OF REDEMPTION
The indenture trustee must give written notice of redemption of the notes to the
holders not less than 15 days prior to the redemption date. Each note must be
surrendered to the indenture trustee in exchange for payment of the redemption
price. If the indenture trustee gives notice of redemption as provided above,
and on deposit with the indenture trustee of moneys for payment of the
redemption price, including accrued interest, to the redemption date, the notes
so called for redemption will become due and
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payable at the redemption price specified in the notice. Interest on these notes
with cease to accrue, and interest on any unpaid carryover interest will also
cease to accrue.
SECURITY FOR THE NOTES
THE TRUST
The notes, together with all interest rate exchange agreements as may be entered
into from time to time related to these notes, and carryover interest, if any,
on these notes are secured by and payable solely from the assets of the trust.
The property in the trust includes:
(1) all available funds derived from amounts in the trust;
(2) the balances of all funds and accounts established under the indenture,
whether derived from proceeds of sale of the old notes, from available
funds, or from any other source;
(3) 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;
(4) all rights of the issuer and the related eligible lender trustee under
the transfer and sale agreement;
(5) any spread guaranty agreement;
(6) the eligible investments, any interest rate exchange agreement and any
exchange counterparty guarantee, the purchase agreements, the master
servicing agreement and the servicing agreements with respect to
financed student loans serviced thereunder, including all rights of the
depositor under the warranties of each seller, master servicer or
servicer, as the case may be, under those agreements; and
(7) any proceeds from the above.
NO ASSETS OTHER THAN THE ASSETS OF THE TRUST ARE PLEDGED TO THE PAYMENT OF THE
NOTES.
To secure payment of principal, interest and carryover interest, if any, on the
notes and payment of any issuer exchange payment, the issuer and the eligible
lender trustee in the indenture, subject to the lien of the indenture trustee
and the eligible lender trustee for their expenses, each grants a first priority
perfected security interest in, and pledges and assigns to the indenture trustee
all of the issuer's and the eligible lender trustee's rights in the trust 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 interest rate
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, of the holders of any subordinate notes issued under the
indenture and the exchange counterparties under any related subordinate
interest rate exchange agreement.
Because the payment obligations of the issuer under any senior interest rate
exchange agreements would be on a parity with payment of the senior notes, an
event of default with respect to the senior interest rate 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.
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The indenture provides for the above-described pledge of and grant of a lien on
and security interest in the assets of the trust; however, a pledge, lien or
security interest will only be effective to the extent that:
(1) the trust 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 indenture trustee's possession or constructive possession
of these assets;
(2) either a filing or 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
(3) either act of filing or act of possession, as applicable, has in fact
been taken by the indenture trustee.
To create, perfect and maintain a security interest in the assets of the trust,
the indenture trustee intends, to the extent possible:
(1) to file or cause to be filed appropriate duly executed financing
statements (including continuation statements) with respect to the
assets of the trust among the appropriate records maintained by the
appropriate state and local filing officers under the applicable
Uniform Commercial Code;
(2) to possess or to constructively possess through bailees those assets of
the trust as to which a pledge, lien or security interest may be
created and perfected by possession; and
(3) to take or cause to be taken any and all other action necessary to
create or perfect a pledge of, lien on or security interest in the
assets of the trust.
SUBORDINATION OF THE SERIES B-3 NOTES
The rights of the holders of the Series B-3 Notes to receive principal (under
some circumstances) and interest payments will be subordinated to the rights of
the holders of the Series 1998A Notes and to exchange counterparties under
senior interest rate exchange agreements to the extent described herein. This
subordination is intended to enhance the likelihood of regular receipt of
principal and interest by the holders of the Series 1998A Notes and the payment
of any senior issuer exchange payments. See "The Indenture -- Collection Fund."
The rights of the holders of the Series 1998A Notes are on a parity with the
rights of any exchange counterparty under any senior interest rate exchange
agreement. The rights of the holders of all Series 1998A Notes and exchange
counterparties under any senior interest rate exchange agreements are superior
to the rights of the holders of the Series B-3 Notes and the rights of any
exchange counterparty under any subordinate exchange agreement with respect to
the trust.
The rights of the holders of the Series B-3 Notes are on a parity with the
rights of exchange counterparties under any subordinate interest rate exchange
agreements with respect to the assets of the trust.
RESERVE FUND
A reserve fund was created with respect to the old notes, and the depositor
deposited a portion of the proceeds from the old notes or eligible investments
equal to the specified reserve fund balance. To the extent necessary or
appropriate, the issuer and the indenture trustee may establish accounts in the
reserve fund and subaccounts within the accounts. The reserve fund will be
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augmented on each monthly distribution date by deposit therein of the amount, if
any, necessary to cause the balance of the reserve fund to equal the specified
reserve fund balance from the amount of available funds remaining after making
all prior distributions on this date. 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 that financed student loan
will be deposited into the reserve fund or applied as an additional principal
distribution. Amounts on deposit in the reserve fund exceeding the specified
reserve fund balance will be distributed as described under "The Indenture -
Reserve Fund."
The reserve fund is intended to enhance the likelihood of timely receipt by the
holders 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
holders will experience losses. In some circumstances, however, the reserve fund
could be depleted. Further, amounts otherwise required to be deposited into the
reserve fund may be applied as additional principal distributions on a 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 holders could result. This shortfall could, in turn, increase
the average life of the notes. Moreover, amounts on deposit in the 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.
INTEREST RATE EXCHANGE AGREEMENTS
Under the indenture, the issuer has the right to enter into one or more interest
rate exchange agreements with one or more exchange counterparties. Any exchange
counterparty must have a rating of its long-term debt securities of at least Aa1
(or its equivalent) from a rating agency. Payments by the issuer under the
interest rate exchange agreements may be on a parity with the Series 1998A
Notes, or on a parity with the Series B-3 Notes. If the issuer enters into an
agreement with an exchange counterparty, the exchange counterparty will agree to
pay the indenture trustee on each applicable 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 the notes. The issuer will agree
to pay on each applicable distribution date, by causing the indenture trustee to
pay to the exchange counterparty, a fixed or variable exchange rate on a
notional amount. The issuer expects that an interest rate exchange agreement
will provide that the payment obligations of the issuer and an exchange
counterparty to each other will be netted on the 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 interest rate exchange agreement
will be deposited to the collection account. Payments under these interest rate
exchange agreements may be on a parity with other senior notes issued under the
indenture or on a parity with subordinate notes issued under the indenture.
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. In addition, under some circumstances, the failure by the
issuer to make a payment under an interest rate exchange agreement may
constitute an event of default. See "Risk Factors." The indenture requires that
prior to the date that the issuer enters into an interest rate exchange
agreement, the issuer must obtain written evidence from each rating agency then
rating any of the notes that the execution and delivery of the interest rate
exchange agreement will not adversely affect the rating agency's rating on the
notes.
THE INDENTURE
The old notes were issued by the depositor under an indenture dated as of
December 1, 1998 between the depositor and Firstar Bank, N.A. and were
subsequently assigned to and assumed by
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the issuer. On the assignment and assumption of the old notes, the issuer
entered into a First Amended and Restated Indenture of Trust, and First Amended
and Restated Terms Supplement, each dated as of March 15, 1999, among the issuer
and Firstar Bank, N.A. The new notes will be issued under a Second Amended and
Restated Indenture of Trust and Second Amended and Restated Terms Supplement,
each dated as of June 1, 1999, among the issuer and Firstar Bank, N.A. 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
old notes to the indenture trustee under the indenture.
The following is a summary of specific provisions of the indenture relating to
the notes and is not to be considered as a full statement of the provisions of
the indenture. This summary is qualified by reference to and is subject to the
indenture. Copies of the indenture may be obtained on request from the indenture
trustee.
INDENTURE TRUSTEE
Firstar Bank, N.A., 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 Firstar Bank, N.A. and its affiliates from time to time.
ELIGIBLE LENDER TRUSTEE
Firstar Bank, N.A., is also the initial eligible lender trustee for the issuer
under the Eligible Lender Trust Agreement, dated as of June 1, 1998, 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. 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. The eligible lender
trustee is qualified as an eligible lender for all purposes under the Higher
Education Act and the guarantee agreements with respect to the 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."
The issuer, the depositor or their affiliates may maintain other banking
relationships with Firstar Bank, N.A. and its affiliates from time to time.
REPORTS TO HOLDERS
The indenture trustee will provide by each monthly distribution date to the
rating agencies and applicable holders of record as of the related record date,
a statement setting forth at least the following information regarding the notes
with respect to the preceding collection period or collection periods, to the
extent applicable:
(a) the Principal Factor for the Series A-3 Notes and for the
Series B-3 Notes;
(b) the amount of the payment allocable to principal of each
series of notes;
(c) the amount of the payment allocable to interest on each series
of notes together with the interest rates applicable with
respect to the notes (indicating, whether interest rates are
based on the formula rate or on the net loan rate with respect
to each series of notes,
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and specifying what each 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, together with the
outstanding amount, if any, of these notes after giving effect
to any distribution;
(e) the pool balance, the parity percentage and the senior parity
percentage, in each case 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 as of the monthly distribution date after giving effect
to distributions allocated to principal on the monthly
distribution date;
(g) the estimated amount to be allocated to program operating
expenses on the upcoming monthly 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
the collection period relating to financed student loans for
which a realized loss was previously allocated;
(i) the amount of the distribution attributable to amounts in any
reserve fund, acquisition fund or other account established
under the indenture, the amount of any other withdrawals from
the funds or accounts for the monthly distribution date, the
balance of the funds or accounts on the distribution date,
after giving effect to changes therein on the distribution
date, the then applicable parity percentage, and the amount of
the distribution, if any, attributable to parity percentage
payments;
(j) the aggregate amount, if any, paid for financed student loans
purchased from the trust during the preceding collection
period; and
(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.
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 the calendar year was a holder and
received any payment, a statement containing information for the purposes of
the holder's preparation of federal income tax returns. See "Federal Income Tax
Consequences."
ACQUISITION FUND
In connection with the issuance and sale of the old notes, the indenture trustee
established an acquisition fund and deposited $708,205,483 in cash from the net
proceeds of the sale of the old notes or eligible investments into the
acquisition fund. See "Use of Proceeds." The indenture trustee used this amount
to acquire, directly or indirectly through the eligible lender trustee, the
financed student loans described under the heading "The Financed Student Loans."
To the extent necessary or appropriate, the issuer and the indenture trustee may
establish accounts within the acquisition fund and subaccounts within these
accounts.
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The moneys to be applied from the acquisition fund for the financing of student
loans will equal:
(1) the unpaid principal amount of the student loans that have
been fully disbursed, plus
(2) the full remaining unpaid principal amount of the student
loans that have not been fully disbursed, plus
(3) the amount of accrued and unpaid interest on the student loans
payable by the borrowers,
(4) less a discount or plus a premium, and,
(5) when directed by the issuer, less any accrued but unpaid
interest on the student loans, plus
(6) reasonable transfer fees payable to or on behalf of the
sellers with respect to the student loans under the applicable
purchase agreements, plus
(7) 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 the student loans being financed, directly or
indirectly, from the date of transfer of the 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 expense account, in any case not exceeding the amount
permitted by law.
On request by the issuer, moneys in the acquisition fund may also be applied for
the financing, directly or indirectly through the eligible lender trustee, of
student loans from the indenture trustee under another indenture of trust
between the issuer and the indenture trustee or from the issuer for student
loans financed by the issuer with funds not subject to an indenture of trust. In
either case the price of the student loans shall not exceed the full remaining
unpaid principal amount of the student loans, plus the amount of accrued and
unpaid interest on the student loans payable by the borrowers, plus any
unamortized premium and plus reasonable transfer fees not exceeding the amount
permitted by law. In addition to any other requirements set forth for the use of
proceeds from the acquisition fund, the issuer may only finance student loans
serviced by servicers and guaranteed by guarantee agencies that have been
approved by each rating agency at the time of purchase.
STUDENT LOAN PORTFOLIO FUND
In connection with the issuance of the old notes, the indenture trustee
established a student loan portfolio fund. All financed student loans shall be
included in the balances of the student loan portfolio fund. Financed student
loans may also be applied:
(1) as provided in the applicable purchase agreements with respect to
rejections and repurchases of financed student loans,
(2) as provided in the applicable servicing agreements,
(3) as provided for defeasance of the indenture,
(4) as required to obtain the benefits of a guarantee in case of default on
that financed student loan, and
(5) in connection with the consolidation of that financed student loan by
the borrower.
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To the extent necessary or appropriate, the issuer and the indenture trustee may
establish accounts within the student loan portfolio fund and subaccounts within
these accounts.
The indenture trustee shall permit the sale of financed student loans selected
by the issuer only:
(1) to avoid an event of default or, if an event of default has occurred,
as may be required or appropriate under the indenture,
(2) in an exchange of financed student loans as described below,
(3) in connection with a mandatory auction of the financed student loans in
the trust as described under "Redemption," and
(4) in connection with the purchase of the financed student loans by the
issuer when the pool balance is equal to 10% or less of the initial
pool balance as described under "Redemption."
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 the same
characteristics including,
- an aggregate principal amount no less than the aggregate
principal amount of the financed student loans being
exchanged,
- the same rates of interest,
- eligible, after exchange, for the same special allowance
payments, and
- the same status, whether interim, grace or payout.
The issuer may an exchange only if the average principal amount of all of the
financed student loans included in the trust shall not be decreased, the average
maturity of all the financed student loans shall not be increased and no student
loan shall be financed which is not at the time authorized under the indenture.
The issuer must also certify that the exchange will not materially adversely
affect the sufficiency of available funds to meet the obligations of the issuer
under the indenture. Additionally, to comply with the requirements described in
the next paragraph, the issuer may also exchange financed student loans for
other student loans which bear interest at a fixed rate, if the issuer certifies
that the exchange will not materially adversely affect the sufficiency of
available funds to meet the obligations of the issuer under the indenture.
Under the indenture, the aggregate principal balances of financed student loans
bearing interest at a fixed rate must always equal or exceed the outstanding
principal amount of the Series B-3 Notes unless each rating agency then rating
the notes confirms that any failure to meet the test will not adversely affect
the existing ratings on the notes.
Any sale, exchange or other disposition of financed student 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.
COLLECTION FUND
When the issuer issued the old notes, the indenture trustee established a
collection fund and the following accounts in the collection fund: a collection
account, a note payment account, an expense account and an excess surplus
account. To the extent necessary or appropriate, the issuer and the indenture
trustee may establish other accounts within the collection fund and subaccounts
with these accounts.
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Collection Account. On the closing date, the indenture trustee deposited to the
credit of the collection account a portion of the proceeds of the old notes. See
"Use of Proceeds." The issuer will, and will cause each seller and servicer
under the applicable purchase agreement or servicing agreement, to transfer all
available funds received by it to the indenture trustee. The indenture trustee
will, on receipt of any available funds with respect to the financed student
loans held in the student loan portfolio fund, immediately deposit and credit
the available funds to the collection account.
For purposes hereof, available funds means, with respect to any collection
period, the excess of
(A) the sum, without duplication, of the following amounts with respect to
the collection period:
(1) all collections received by the indenture trustee on the
financed student loans (including any guarantee payments
received with respect to the financed student loans) during
the collection period;
(2) any payments, including without limitation interest subsidy
payments and special allowance payments, received by the
eligible lender trustee during the collection period with
respect to financed student loans;
(3) all proceeds from any sales of financed student loans during
the collection period;
(4) any payments of or with respect to interest received by the
indenture trustee during the collection period with respect to
a financed student loan for which a realized loss was
previously allocated;
(5) the aggregate purchase amounts received for those financed
students loans purchased by the indenture trustee during the
collection period;
(6) 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 the
portion of the 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;
(7) counterparty exchange payments;
(8) advances received; and
(9) investment earnings for the collection period over
(B) amounts received by the issuer in connection with balance
reconciliations required by virtue of student loan consolidations for
the collection period.
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 or interest subsidy payments applied for but not received as
of the end of the collection period immediately preceding the date the
advance is made; and
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(3) amounts which are paid to the issuer under the indenture.
The indenture trustee will also deposit to the credit of the collection account
the amount of any related counterparty exchange payment received by the
indenture trustee from an exchange counterparty under the provisions of its
respective interest rate exchange agreement.
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
of these expenses. See "--Expense Account."
On each monthly distribution date as described below, 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:
(1) to the expense account, to the extent required to increase the
balance of the account to the program expense requirement
calculated as of the monthly distribution date;
(2) to the note payment account:
(a) an amount up to (A) the Series 1998A-3 Holders'
Interest Distribution Amount for payment on the
monthly distribution date to the holders of Series
A-3 Notes, and (B) any related senior issuer exchange
payment with respect to the Series A-3 Notes for
payment to the related exchange counterparty;
(b) an amount up to (A) the Series 1998A-4 Holders'
Interest Distribution Amount for payment on each
auction period distribution date occurring in the
next succeeding calendar month to the holders of
Series A-4 Notes, and (B) any related senior issuer
exchange payment with respect to the Series A-4 Notes
for payment to the related exchange counterparty;
(c) an amount up to (A) the Series 1998A-5 Holders'
Interest Distribution Amount for payment on each
auction period distribution date occurring in the
next succeeding calendar month to the holders of
Series A-5 Notes, and (B) any related senior issuer
exchange payment with respect to the Series A-5 Notes
for payment to the related exchange counterparty; and
(d) an amount up to (A) the Series 1998A-6 Holders'
Interest Distribution Amount for payment on each
auction period distribution date occurring in the
next succeeding calendar month to the holders of
Series A-6 Notes, and (B) any related senior issuer
exchange payment with respect to the Series A-6 Notes
for payment to the related exchange counterparty;
(3) to the note payment account, an amount up to (A) the Series 1998B-3
Holders' Interest Distribution Amount for payment on the monthly
distribution date to the holders of Series B-3 Notes, and (B) any
related subordinate issuer exchange payment with respect to the Series
B-3 Notes for payment to the related exchange counterparty;
(4) to the note payment account:
(a) an amount up to the Series 1998A Holders' Principal
Distribution Amount for payment on the monthly distribution
date to the holders of Series A-3 Notes until the principal
balance of the Series 1998A-3 Notes is zero and an amount up
to the Series 1998B-3 Holders' Principal Distribution Amount
for payment on the monthly distribution date to the holders of
Series B-3 Notes, then
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(b) once the Series A-3 Notes are no longer outstanding, an amount
up to the Series 1998A Holders' Principal Distribution Amount
for payment on the next succeeding auction period distribution
date to the holders of Series A-4 Notes until the principal
balance of the Series A-4 Notes is zero and an amount up to
the Series 1998B-3 Holders' Principal Distribution Amount for
payment on the monthly distribution date to the holders of
Series B-3 Notes, then,
(c) once the Series A-3 Notes and Series A-4 Notes are no longer
outstanding, an amount up to the Series 1998A Holders'
Principal Distribution Amount for payment on the next
succeeding auction period distribution date to the holders of
Series A-5 Notes until the principal balance of the Series A-5
Notes is zero and an amount up to the Series 1998B-3 Holders'
Principal Distribution Amount for payment on the monthly
distribution date to the holders of Series B-3 Notes, and
afterwards,
(d) once the Series A-3 Notes, Series A-4 Notes and Series A-5
Notes are no longer outstanding, an amount up to the Series
1998A Holders' Principal Distribution Amount for payment on
the next succeeding auction period distribution date to the
holders of Series A-6 Notes until the principal balance of the
Series A-6 Notes is zero and an amount up to the Series
1998B-3 Holders' Principal Distribution Amount for payment on
the monthly distribution date to the holders of Series B-3
Notes;
(5) after the Series 1998A Notes are no longer outstanding, to the note
payment account, an amount up to the Series 1998B-3 Holders' Principal
Distribution Amount for payment on the monthly distribution date to the
holders of Series B-3 Notes;
(6) to the reserve fund, the amount, if any, required to increase the
balance of the reserve fund to the specified reserve fund balance as
described under the heading "-- Reserve Fund";
(7) to the note payment account, an amount up to parity percentage payments
to the extent then required:
(a) for payment to the holders of Series A-3 Notes on the monthly
distribution date until the principal balance of the Series
A-3 Notes is zero, then
(b) once the Series A-3 Notes are no longer outstanding, for
payment to the holders of Series A-4 Notes on the next
succeeding auction period distribution date until the
principal balance of the Series A-4 Notes is zero, then
(c) once the Series A-3 Notes and the Series A-4 Notes are no
longer outstanding, for payment to the holders of Series A-5
Notes on the next succeeding auction period distribution date
until the principal balance of the Series 1998A-5 Notes is
zero, then,
(d) once the Series A-3 Notes, the Series A-4 Notes and the Series
A-5 Notes are no longer outstanding, for payment to the
holders of Series A-6 Notes on the next succeeding auction
period distribution date until the principal balance of the
Series 1998A-6 Notes is zero, and afterwards,
(e) once the Series 1998A Notes are no longer outstanding, for
payment to the holders of Series B-3 Notes on the monthly
distribution date until the principal balance of the
Series 1998B-3 Notes is zero;
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(8) to the note payment account, an amount up to any carryover interest:
(a) first to the holders of Series A-3 Notes for payment on the
monthly distribution date, and on payment of all carryover
interest due to the holders of Series A-3 Notes, then
(b) to the holders of Series A-4 Notes for payment on the next
succeeding auction period distribution date, and on payment of
all carryover interest due to the holders of Series A-4 Notes,
then
(c) to the holders of Series A-5 Notes for payment on the next
succeeding auction period distribution date, and on payment of
all carryover interest due to the holders of Series A-5 Notes,
and afterwards,
(d) to the holders of Series A-6 Notes for payment on the next
succeeding auction period distribution date;
(9) to the note payment account, an amount up to 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 interest rate exchange agreement for payment to the
exchange counterparty; and
(10) any remainder, to the excess surplus account.
If on any monthly distribution date following all distributions to be made on
the monthly distribution date, either:
(a) the outstanding principal amount of the Series 1998A Notes
would exceed the sum of the pool balance plus the aggregate
balance on deposit in the funds and accounts (exclusive of the
balance of the student loan portfolio fund) under the
indenture at the end of the immediately preceding collection
period less all distributions to be made on the distribution
date, or
(b) a payment event of default 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 Holders' Interest Distribution Amount and the Series
1998B-3 Holders' Principal Distribution Amount will not be paid to the holders
of Series B-3 Notes under clauses (3) and (4) above and no subordinate issuer
exchange payments will be made. For so long as any Series 1998A Notes remain
outstanding, a deferral in the payment of the Series 1998B-3 Holders' Interest
Distribution Amount, the Series 1998B-3 Holders' Principal Distribution Amount
or subordinate issuer exchange payments (except with respect to the Legal Final
Maturity of the Series B-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 Holders' Principal Distribution
Amount will be allocated and paid pro rata among each series of Series 1998A
Notes, without preference or priority of any kind See "-- Events of Default."
Principal payments will be made to the holders of Series A-4 Notes, holders of
Series A-5 Notes and holders of Series A-6 Notes only in amounts equal to
$50,000 and integral multiples in excess of $50,000. If the amount in the note
payment account otherwise required to be applied as a payment of principal
either (1) is less than $50,000 or (2) exceeds an even multiple of $50,000,
then, in the case of (1), the entire amount or, in the case of (2), the excess
amount, will not be paid as principal on the upcoming auction period
distribution date, but will be retained in the note payment account until
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the amount therein available for payment of principal on the applicable series
of auction rate notes equals $50,000.
Concerning the series of auction rate notes entitled to receive payments of
principal, the indenture trustee will select the actual notes of the series that
will receive payments of principal on each applicable auction period
distribution date no later than five business days prior to the related auction
period distribution date. The indenture trustee will make the selection by lot
in a manner it determines and which will provide for the selection for payment
of principal in minimum denominations o $50,000, and integral multiples in
excess of $50,000.
The indenture trustee will give notice of the specific auction rate notes to
receive payments of principal by first-class mail, postage prepaid, mailed to
the address of the applicable holder appearing on the registration books not
less than five business days but no more than ten business days before the
applicable auction period distribution date. Any defect in or failure to give
the mailed notice shall not affect the validity of proceedings for the payment
of any other notes not affected by failure or defect. All notices of payment are
to state:
(1) the applicable auction period distribution date;
(2) the amount of principal to be paid, and
(3) the series of the auction rate notes to be paid.
Note Payment Account. On each applicable distribution date, following the
transfers to the note payment account described above, the indenture trustee
will distribute to the applicable holders as of the related record date and
exchange counterparties, if any, the amounts transferred to the note payment
account, together with any amounts transferred from the reserve fund and any
advances, as described under the heading "--Collection Account."
Expense Account. A portion of the proceeds from the offering of the old notes
was deposited into the expense account. See "Use of Proceeds." Funds also were
deposited into the expense account, as described herein, from the collection
account and from the reserve fund. See "--Collection Fund" and "--Reserve Fund."
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 of these expenses.
The program expense requirement is, as of any date of calculation, the amount as
may then be necessary to be accumulated in the expense account for payment,
under the indenture, of the program operating expenses due or to become due
during the month beginning on the first day of the next succeeding calendar
month as provided in the indenture.
Program operating expenses are all items of expense allocable to the operation
of the program, including:
(1) 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;
(2) the fees and expenses of and any other amounts payable to the
calculation agent, the auction agent, the broker-dealers, market agent
or other agent in connection with the notes or under the indenture;
(3) 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;
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(4) the fees and expenses incurred by or on behalf of the issuer, including
fees and expenses payable to the master servicer and the administrator,
in the administration of the program under the Higher Education Act, a
guarantee agreement 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 old notes; and
(5) 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 (4) above, any
other similar program of the issuer.
Excess Surplus Account. On each monthly distribution date, any available funds
remaining after all required distributions are made on the distribution date
will be deposited to the credit of the excess surplus account. The indenture
trustee may transfer for deposit under the trust agreement amounts on deposit in
the excess surplus account at any time on written request of the issuer to be
used for any lawful purpose if after the transfer the parity percentage is at
least 103%. Afterwards, any available funds distributed to the issuer from the
excess surplus account will not be available to make payments on the notes.
Until transfer to the issuer, the indenture trustee may transfer to the reserve
fund amounts on deposit in the excess surplus account 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 old notes, the indenture trustee
established a reserve fund for the new notes. See "Security for the Notes--
Reserve Fund." The indenture trustee deposited $10,917,000 of the proceeds of
the old notes 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 1.5% of the outstanding principal balance of the
notes on the distribution date after giving effect to payments on the
distribution date, or $1,500,000, 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 monthly distribution date from
among the following accounts in the following order of priority:
FIRST, from the collection account after making all prior
distributions on the monthly distribution date as described
under "-- Collection Fund," 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 monthly distribution date, the indenture trustee
will continue to transfer funds in the order of priority from the collection
account as they become available and under the instructions for transfers from
the account as described under the heading "-- Collection Fund" 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 that financed student loan will be deposited into
the reserve fund.
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On each monthly distribution date, the indenture trustee will transfer any
excess over the related specified reserve fund balance in the reserve fund to
the collection account. After the transfer of any 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 the account under the
indenture;
SECOND, to increase the amount in the note payment account to the
amount required to pay interest on the notes and any related
issuer exchange payment (other than carryover interest,
interest on the Series B-3 Notes or any subordinate issuer
exchange payment when the payment of the interest or
subordinate issuer exchange payment is deferred as described
under the heading "-- Collection Fund") on any distribution
date or on any other date on which interest is due on
redemption in whole or payment of the notes or on any other
date on which any related issuer exchange payment is due and
payable (other than any subordinate issuer exchange payments
when their payment is deferred as described under the heading
"-- Collection Fund"), by transfer and deposit by the
indenture trustee to the credit of the note payment account;
and
THIRD, to provide for payment of the principal of any series of notes
at the legal final maturity of any series of notes or for the
payment of the principal of the series being redeemed in whole
as described under the heading "Redemption," by transfer and
deposit by the indenture trustee to the credit of the note
payment account on the legal final maturity of the series of
notes or the date of any redemption, as the case may be. -----
ADVANCES
If the issuer or the eligible lender trustee on behalf of the issuer has applied
for a guarantee payment from a guarantee agency or an interest subsidy payment
or a special allowance payment from the Department of Education, and 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 this amount would be required to be distributed as a
payment of interest, the issuer or the depositor may, no later than the third
business day before the distribution date, deposit into the note payment account
an amount up to the amount of these payments applied for but not received
(deposits by the issuer are referred to herein as advances). These advances are
recoverable by the issuer or the depositor, as applicable, first, from the
source for which the advance was made and 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 indenture. Neither the issuer nor the depositor will have any obligation,
legal or otherwise, to make any advance, and a determination by the issuer or
the depositor to make an advance will not create any obligation of the issuer or
the depositor, legal or otherwise, to make any future advances.
INVESTMENT
Pending application of moneys in the funds and accounts under the indenture,
these 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:
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- 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+," "F-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+," "F-1+" or "P-1" by each
rating agency and which matures not more than 270 days after
the date of purchase;
(f) Investments in a money market fund rated in the highest
applicable rating category by (1) a nationally recognized
rating service acceptable to each rating agency, or (2) 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 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
(1) which are rated, based on an irrevocable escrow
account or fund (the escrow), in the highest rating
category of each rating agency; or
(2) (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 the principal of and interest and
redemption premium, if any, on the notes or other
obligations on the maturity date or dates of the
notes or the specified redemption date or dates under
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
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(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 these moneys will be required by the
indenture trustee for the purposes intended. Any earnings on or income from
these eligible investments will be treated as collections of interest on the
financed student loans and will be deposited in the collection account.
COVENANTS OF THE ISSUER
The issuer covenants under the indenture that: it will administer the issuer's
program of financing student loans under the indenture (the program) under the
Higher Education Act; 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 holders of more than 10% of the aggregate principal amount of the
notes; it will diligently cause to be collected all principal and interest
payments on each financed student loan and any grants, subsidies, donations,
guarantee payments, interest subsidy payments and special allowance payments
with respect to each financed student loan; it will diligently cause to be taken
all reasonable steps to enforce all financed student loans, the master servicing
agreement, the servicing agreements and the purchase agreements; it will not
create, or permit the creation of, any pledge, lien, charge or encumbrance on
the assets of the trust except as provided in or permitted by the indenture; and
it will not issue any obligations, notes, securities or other evidences of
indebtedness, other than the notes, secured by a pledge of the assets of the
trust creating a lien on the assets of the trust equal or superior to the lien
of the indenture, provided, however, that nothing in the indenture shall prevent
the issuer from issuing evidences of indebtedness secured by a pledge on the
assets of the trust subordinate in priority to that of the notes, or secured by
a pledge of the assets of the trust arising on or after the pledge of the assets
of the trust shall be satisfied and discharged, or from issuing other evidences
of indebtedness secured by assets and revenues of the issuer.
The issuer also covenants that it will file with the 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 a calendar quarter
except on specific conditions described in the 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 the indenture, the following constitute an event of default:
(1) Failure in the due and punctual payment of:
(a) principal or interest on any note issued under the
indenture when due, either at legal final maturity or
on redemption or otherwise, excluding, however:
(i) any shortfall on a distribution date other
than the legal final maturity of any series
of notes if available funds are insufficient
to pay the related principal distribution
amount on this date,
(ii) for so long as any Series 1998A Notes are
outstanding under the indenture, any
shortfall on a distribution date other than
the legal final maturity of any Series B-3
Notes if available funds are insufficient to
pay the Holders' Interest Distribution
Amount on the Series B-3 Notes on this date,
and
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(iii) for so long as any Series 1998A Notes are
outstanding under the indenture, any
deferral in the payment of interest or
principal on the Series B-3 Notes on a
distribution date other than the legal final
maturity of the Series B-3 Notes, or
(b) any issuer exchange payment when due, excluding,
however:
(i) payment in respect of an early termination
of the interest rate exchange agreement,
(ii) for so long as any Series 1998A Notes are
outstanding under the indenture, any
shortfall on a distribution date other than
the legal final maturity of any Series B-3
Notes if available funds are insufficient to
pay any subordinate issuer exchange payments
relating to the Series B-3 Notes on this
date, and
(iii) for so long as any Series 1998A Notes are
outstanding under the indenture, any
deferral in the payment of subordinate
issuer exchange payments;
(2) Failure by the issuer in the observance and performance of any
covenants or agreements made in the indenture and the
continuation of this failure for a period of 30 days after
written notice is given to the issuer from the indenture
trustee or from the holders of at least a majority of the
aggregate principal amount of the outstanding notes;
(3) Specific events of bankruptcy, insolvency, receivership or
liquidation of the issuer; and
(4) The entry of a final judgment against the issuer if this
judgment will not be discharged within 60 days its entry, or
if an appeal will not be taken therefrom, or from the order or
decree on which this judgment was granted or entered in a
manner as to conclusively set aside the execution under this
judgment or order or its enforcement, if this judgment
constitutes or could result in:
(a) a lien or charge on the available funds or the assets
of the trust equal or superior to the lien granted
under the indenture for the benefit of the holders of
the Series 1998A Notes,
(b) if no Series 1998A Notes are outstanding under the
indenture, a lien or charge on the available funds or
the assets of the trust equal or superior to the lien
granted under the indenture for the benefit of the
holders of the Series B-3 Notes, or
(c) which materially and adversely affects the ownership,
control or operation of the Program.
Acceleration of the Notes
If an event of default described in clause (1) above should occur and be
continuing, the indenture trustee may, and on written direction by the holders
of at least a majority of the aggregate principal amount of the outstanding
directing notes, the indenture trustee must declare all outstanding notes to be
immediately due and payable, by written notice to the issuer.
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If an event of default described in clause (2) above should occur and be
continuing, the indenture trustee may, and on written direction by all of the
holders of directing notes, the indenture trustee must declare all outstanding
notes to be immediately due and payable, by written notice to the issuer.
If an event of default described in clause (3) above should occur and be
continuing, all outstanding notes will become immediately due and payable
without notice or any action by the indenture trustee and a declaration of this
acceleration will be deemed to have been made.
If an event of default described in clause (4) above should occur and be
continuing, the indenture trustee may, and on written direction by the holders
of at least a majority of the aggregate principal amount of the outstanding
directing notes, the indenture trustee must declare all outstanding notes to be
immediately due and payable, by written notice to the issuer.
If after this 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 indenture (other than the payment of
principal and interest due and payable solely by reason of
this 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 this payment:
(a) all overdue installments of interest on:
(i) the Series 1998A Notes if any Series 1998A
Notes are outstanding, or
(ii) the Series B-3 Notes if no Series 1998A
Notes are outstanding, and
(b) the reasonable and proper charges, expenses and
liabilities of the indenture trustee, any exchange
counterparty and the holders 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 this declaration),
then, the holders of at least a majority of the aggregate principal amount of
the outstanding directing notes, by written notice to the issuer and to the
indenture trustee, may rescind a declaration and annul an event of default, or,
if the indenture trustee has acted with respect to the notes without a direction
from the holders of at least a majority in aggregate principal amount of the
outstanding directing notes and has not received written direction to the
contrary by the holders of at least a majority in aggregate principal amount of
the outstanding directing notes, then the indenture trustee may annul a
declaration and any default by written notice to the issuer. No rescission and
annulment will extend to or affect any subsequent event of default or impair or
exhaust any right or power with respect the outstanding directing notes.
On any declaration of acceleration of the notes, the indenture trustee will give
notice of a declaration and its consequences to the holders and to any related
exchange counterparty as described in the indenture. Interest and carryover
interest will cease to accrue on these notes from and after the date set forth
in this notice (which will be not more than five days from the date of a
declaration).
Prior to a declaration accelerating the maturity of the notes as provided above,
the holders of at least two-thirds in aggregate principal amount of the
outstanding directing notes and each exchange counterparty that is not in
default or their attorneys-in-fact duly authorized may on behalf of the holders
of all notes
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issued under the indenture and each exchange counterparty waive any
past failure under the 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.
Application of Moneys
If (1) an event of default has occurred and is continuing, and (2) at any time
the moneys held by the indenture trustee are insufficient for the payment of
principal and interest then due on the notes or for the payment of any issuer
exchange payment, then these moneys and all available funds received or
collected by the indenture trustee from the assets of the trust or otherwise for
the benefit or for the account of holders or an exchange counterparty (other
than moneys held for the payment or redemption of particular notes, which shall
be applied solely to the payment of principal and interest to holders other than
the issuer) will be applied first to the payment of the reasonable and proper
fees and expenses of the indenture trustee and 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 holders and/or each exchange counterparty, and
afterwards as follows:
(1) If the principal of all of the notes issued under the
indenture has not become or been declared due and payable:
FIRST, to the payment of all installments of interest then due
on the Series 1998A Notes, with interest on overdue principal
at the rates borne by the Series 1998A Notes, and to all
senior issuer exchange payments then due, in the order that
these installments and/or senior issuer exchange payments will
have become due, and, if the amounts available are not
sufficient to pay in full installments and senior issuer
exchange payments coming due on the same date, then to the
payment of these amounts ratably to the parties entitled to
the payments without discrimination or preference;
SECOND, to the payment of the unpaid Holders' Principal
Distribution Amount and/or principal due and unpaid on the
Series 1998A Notes at the time of this payment, these payments
to be made ratably to the parties entitled the payments
without discrimination or preference;
THIRD, to the payment of all installments of interest then due
on the Series B-3 Notes, with interest on overdue principal at
the rates borne by the Series B-3 Notes, and to all
subordinate issuer exchange payments then due, in the order
that installments and/or subordinate issuer exchange payments
will have become due, and, if the amounts available are not
sufficient to pay in full all installments of interest and
subordinate issuer exchange payments coming due on the same
date, then to the payment of these amounts ratably to the
parties entitled the payments without discrimination or
preference; and
FOURTH, to the payment of the unpaid Holders' Principal
Distribution Amount and/or principal due and unpaid on the
Series B-3 Notes at the time of the payment, these payments to
be made ratably to the parties entitled the payments without
discrimination or preference.
(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 all principal and interest then due
and unpaid on the Series 1998A Notes and all senior issuer
exchange payments then due, these payments to be made ratably
to the parties entitled to the payments without discrimination
or preference;
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SECOND, to the payment of all principal and interest then due
and unpaid on the Series B-3 Notes and all subordinate issuer
exchange payments then due, these payments to be made ratably
to the parties entitled to the payments without discrimination
or preference; and
THIRD, to the payment of all carryover interest due and unpaid
on the Series 1998A Notes, these payments to be made ratably
to the parties entitled to the payments without discrimination
or preference.
Remedies on Default
Whenever moneys are to be applied as above, irrespective of and whether other
authorized remedies have been pursued, the indenture trustee may sell, with or
without entry, all or part of the assets of the trust and all right, title,
interest, claim and demand to the assets of the trust and the right of
redemption of the assets of the trust, at any place or places, and at any time
or times and on notice and terms as may be required by law. On a sale, the
indenture trustee may make and deliver to the purchaser or purchasers a good and
sufficient assignment or conveyance for the same, which sale shall be a
perpetual bar both at law and in equity against the issuer and all parties
claiming these properties. No purchaser at any sale shall be bound to see to the
application of the purchase money or to inquire as to the authorization,
necessity, expediency or regularity of any sale. The issuer and the eligible
lender trustee, if so requested by the indenture trustee, shall ratify and
confirm any sale or sales by executing and delivering to the indenture trustee
or to the purchaser or purchasers all the instruments as may be necessary, or in
the judgment of the indenture trustee and/or the eligible lender trustee, proper
for the purpose which may be designated in a request. The indenture trustee
shall not sell or permit the sale or assignment of any financed student loan or
any interest therein as a part of the assets of the trust to any party who is
not an eligible lender under the Higher Education Act.
If an event of default has happened and is continuing, then the indenture
trustee, either in its own name, as trustee of an express trust, as
attorney-in-fact for the holders and/or each exchange counterparty or in any one
or more of these capacities by its agents and attorneys, is entitled and
empowered to institute proceedings at law or in equity for the collection of all
sums due in connection with the notes and any issuer exchange payment and to
protect and enforce its rights and the rights of the holders and/or each
exchange counterparty under the indenture, whether for any specific performance
of any covenant contained in the indenture, in aid of the execution of any power
therein granted, 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. The indenture trustee is entitled and empowered
either in its own name, as a trustee of an express trust, or as attorney-in-fact
for the holders and each exchange counterparty, or in any one or more of these
capacities, to file proof of debt, claim, petition or other document as may be
necessary or advisable in order to have the claims of the indenture trustee, the
holders and any related exchange counterparty allowed in any equity,
receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization
or other similar proceedings.
The indenture trustee, at the written request of holders of at least a majority
in aggregate principal amount of the outstanding directing notes and on being
furnished with reasonable security and indemnity, will take all steps and
institute all suits, actions or proceedings for the protection and enforcement
of the rights of any exchange counterparty or the holders, 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.
No holder or exchange counterparty, if any, will have the right to institute any
proceeding with respect to the indenture unless:
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(1) the holder or exchange counterparty previously shall have given to the
indenture trustee written notice of a continuing event of default,
(2) with respect to any exchange counterparty, the exchange counterparty is
not in default of its obligations under its interest rate exchange
agreement, all obligations of all of the parties to the agreement have
not been satisfied, and the agreement has not been terminated,
(3) the holders of not less than a majority in aggregate principal amount
of the outstanding Directing Notes have requested in writing that the
indenture trustee institute a proceeding in its own name as indenture
trustee,
(4) the holder or holders have offered the indenture trustee reasonable
indemnity,
(5) the indenture trustee has for a period of 30 days after notice failed
to institute a proceeding, and
(6) no direction inconsistent with a written request has been given to the
indenture trustee during the 30-day period by the holders of a majority
in aggregate principal amount of the outstanding directing notes.
Remedies Not Exclusive
The remedies conferred on or reserved to the indenture trustee, the holders or
any exchange counterparty in the indenture are not intended to be exclusive of
any other remedy, but each and every remedy will be cumulative and will be in
addition to every other remedy given under the indenture or existing at law or
in equity or by statute on or after the date of adoption of the indenture.
AMENDMENT AND SUPPLEMENTAL INDENTURES
Without Consent of Holders. The issuer, the eligible lender trustee and the
indenture trustee, and, except with respect to item (14) below, with written
confirmation from each rating agency then rating the notes that execution of the
proposed supplemental indenture will not adversely affect the rating of any
rating agency on the notes, from time to time and at any time without the
consent or concurrence of any holder, 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 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 on 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 on the holders any additional rights,
remedies, powers, authority or security that lawfully may be
granted to or conferred on them, or to grant to or to confer
on the indenture trustee for the benefit of the holders or any
exchange counterparty any additional rights, duties, remedies,
powers or authority;
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(6) To make 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
supplemental indenture, not to be contrary to the terms of the
Higher Education Act;
(7) To make 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 supplement
to the indenture in this manner as to permit the qualification
of the indenture 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 supplement to indenture, 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
holders of the notes;
(9) To authorize the establishment of agreements providing for the
pledge of specific funds to other indentures, and for the
pledge of specific 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 (A) a policy of
bond insurance or (B) 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 insurance or guaranty;
(11) To make the terms and provisions of the indenture, including
the lien and security interest granted therein, applicable to
an interest rate exchange agreement;
(12) To make 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 holders or any exchange counterparty.
The issuer, each eligible lender trustee and the indenture trustee, from time to
time and at any time without the consent or concurrence of any holder may
execute a supplemental indenture, if the issuer determines that the provisions
of a supplemental indenture are necessary or desirable to maximize available
funds.
With Consent of Holders and Exchange Counterparties. The issuer, each eligible
lender trustee and the indenture trustee from time to time and at any time may
execute a supplemental indenture, with the prior written consent of the holders
of not less than a majority in aggregate principal amount of the outstanding
directing notes under the indenture (or, with respect to any change affecting
only specific series of notes, the holders of a majority in aggregate principal
amount o the outstanding notes of this series) for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the indenture, or modifying or amending the rights and
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obligations of the issuer, or modifying or amending in any manner the rights of
an exchange counterparty or the holders of outstanding notes; provided, however,
that, without the specific consent of the holder of each note which would be
affected thereby, no supplemental indenture amending or supplementing the
provisions of the 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 on the
notes, or reduce the principal amount of any note or, except on an
interest determination date, the interest rate on the notes;
(2) reduce the aforesaid proportion of notes the holders of
which are required to consent to any supplemental indenture amending or
supplementing the provisions of the indenture;
(3) except as shall otherwise be provided in the indenture,
give to any note any preference over any other note secured thereby; or
(4) except as shall otherwise be provided in the indenture,
authorize the creation of any pledge of the assets of the trust prior,
superior or equal to, or deprive the holders or any exchange
counterparty of, the pledge, lien, security interest and assignment
created in the indenture for the payment of the notes or any issuer
exchange payment.
DEFEASANCE
The obligations of the issuer under the indenture and the liens, pledges,
security interests, charges, trusts, assignments, covenants and agreements of
the issuer and each eligible lender trustee therein made or provided for, will
be fully discharged and satisfied as to (a) any note issued under the indenture,
when either of items (1) or (2) below shall have occurred; (b) any program
operating expenses, when item (3) shall have occurred; (c) any related interest
rate exchange agreement, when item (4) shall have occurred; (d) carryover
interest, when item (5) below shall have occurred, and the note, program
operating expense, interest rate exchange agreement, or carryover interest will
no longer be deemed to be outstanding thereunder (provided, however, that the
indenture shall not be deemed to be defeased unless and until all of the
following shall have occurred):
(1) when the note has been canceled;
(2) as to any note not canceled, when payment of the principal of
this note, plus interest on the principal to the due date of
the note (whether the due date is by reason of maturity or on
redemption, or otherwise), either:
(a) has been made or caused to be made under the terms of
the note; or
(b) has been provided for by an irrevocable deposit with
the indenture trustee or the authenticating agent,
which is irrevocably appropriated and set aside
exclusively for this 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 this code, (accompanied by an opinion of
counsel experienced in bankruptcy matters to that
effect) of:
(1) moneys sufficient to make this payment,
and/or
(2) eligible investments (which for this purpose
shall include only those obligations which
are described in item (a) of the definition
of eligible investments and which are not
subject to call for redemption prior to
maturity), maturing as to principal and
interest in
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these amounts and at times as will insure
the availability of sufficient moneys to
make this payment, the sufficiency of said
moneys or eligible investments to be
verified in writing by a firm of independent
certified public accountants;
(3) all program operating expenses then owed by the issuer,
including related necessary and proper fees, compensation and
expenses of the indenture trustee, each eligible lender
trustee and the authenticating agent when they have been paid
or the payment of program operating expenses provided for to
the satisfaction of the indenture trustee;
(4) in the case of payment of any issuer exchange payment and the
applicable interest rate exchange agreement, when payment of
all issuer exchange payments due and payable to each exchange
counterparty under its respective interest rate exchange
agreement has been made or duly provided for to the
satisfaction of each exchange counterparty and each interest
rate exchange agreement has been terminated; and
(5) in the case of payment of any amount of carryover interest,
when the first of the following occurs:
(a) payment of all carryover interest that has accrued
and remains unpaid has been made or duly provided for
to the satisfaction of the indenture trustee, or
(b) all amounts held in the related funds and accounts
under the indenture which are available under the
provisions of the 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 the indenture to
make payment of carryover interest.
NONPRESENTMENT
The issuer will have no liability for payment if a holder does not present any
note for payment when the principal of the note becomes due, whether at maturity
or at the date fixed for the redemption of the note, or otherwise, if the
indenture trustee holds on the due date moneys and/or eligible investments, in
trust sufficient and available to pay the principal of the note, together with
all interest due on the principal to the due date of the note (including any
carryover interest), or to the date fixed for redemption of the note, as the
case may be. Afterwards, the indenture trustee is obligated to hold moneys
and/or eligible investments in trust for the benefit of the holder of the note
but is not liable to the holder of that note for interest. Afterwards, the
holder of the note will be restricted exclusively to the moneys and/or eligible
investments, for any claim of whatever nature on its part on or with respect to
that note, including any claim for the payment of the note. If any moneys and/or
eligible investments held by the indenture trustee are unclaimed by the holders
of these notes 4 years after the principal of the respective notes with respect
to which moneys and/or eligible investments have been so set aside, has become
due and payable (whether at maturity or on redemption or otherwise), moneys
and/or eligible investments will be paid to the issuer free from the trusts
created by the indenture, and all liabilities of the indenture trustee with
respect to moneys and/or eligible investments will cease. If this happens, the
holders will be deemed to be general unsecured creditors of the issuer for the
amounts so paid to the issuer (without interest ), subject to any applicable
statute of limitation.
REMOVAL OF THE INDENTURE TRUSTEE; RESIGNATION; SUCCESSORS
The indenture trustee may be removed at any time with or without cause by the
written direction or on affirmative vote of the holders of a majority in
aggregate principal amount of the outstanding directing notes under the
indenture or their attorneys-in-fact duly authorized.
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In case at any time any of the following occurs:
(1) the indenture trustee has or shall fail to comply with
specific obligations imposed on it under the Trust Indenture
Act of 1939 with respect to notes of any series after written
request therefor by the issuer or any holder of the series who
has been a bona fide holder of a note of this series for at
least 6 months,
(2) the indenture trustee ceases to be eligible under the
provisions of the indenture and fails to resign after written
request therefor has been given to the indenture trustee by
the issuer or by any holder, or
(3) the indenture trustee becomes incapable of acting, or is
adjudged a bankrupt or insolvent or a receiver of the
indenture trustee or of its property is appointed, or any
public officer takes charge or control of the indenture
trustee or of its property or affairs for the purpose of
reorganization, conservation or liquidation,
then, the issuer may remove the indenture trustee by an instrument in writing,
or, subject to specific provisions of the Trust Indenture Act of 1939, any
holder may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the indenture trustee. The
court may thereupon, after notice, if any, as it may deem proper and prescribe
and as may be required by law, remove the indenture trustee.
The indenture trustee may resign by giving not less than 60 days' written notice
to the issuer.
A successor trustee may be appointed by the holders of not less than a majority
in aggregate principal amount of the outstanding directing notes under the
indenture by an instrument or concurrent instruments in writing signed by the
holders or their attorneys-in-fact duly authorized. If at any time there is a
vacancy in the office of the indenture trustee, the issuer, by an instrument in
writing, will appoint a successor to fill the vacancy until a new indenture
trustee is appointed by the holders as described above. Any successor trustee
must meet the qualifications set forth in the indenture.
LIST OF HOLDERS
By written request to the indenture trustee, a holder may obtain access to the
list of all holders that is maintained by the indenture trustee for the purpose
of communicating with other holders with respect to their rights under the
indenture or the notes. The indenture trustee may elect not to afford the
requesting holders access to the list of holders if it agrees to mail the
desired communication or proxy, on behalf and at the expense of the requesting
holders, to all holders.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a summary that constitutes the opinion of Thompson Hine &
Flory LLP as to all material federal income tax consequences of the exchange of
the old notes for the new notes and the purchase, ownership and disposition of
the new notes. Thompson Hine & Flory LLP 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 material to holders. The discussion is based on the
provisions of the Internal Revenue Code of 1986, as amended, 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 Internal Revenue Service may
disagree with some of the discussion below. The statutory provisions,
regulations, and interpretations on which this discussion is based are
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subject to change, and the a change could apply retroactively. No ruling on any
of the issues discussed below will be sought from the Internal Revenue Service.
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 SPECIFIC CATEGORIES OF INVESTORS SUBJECT TO SPECIAL
TREATMENT UNDER THE FEDERAL INCOME TAX LAWS. FOR EXAMPLE, IT DOES NOT DISCUSS
THE TAX TREATMENT OF HOLDERS THAT ARE INSURANCE COMPANIES, REGULATED INVESTMENT
COMPANIES OR DEALERS IN SECURITIES. THIS DISCUSSION FOCUSES PRIMARILY ON
INVESTORS WHO WILL HOLD NEW NOTES AS " CAPITAL ASSETS" (GENERALLY HELD FOR
INVESTMENT) WITHIN THE MEANING OF SECTION 1221 OF THE INTERNAL REVENUE 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 NEW NOTES. CONSEQUENTLY, IT IS
SUGGESTED THAT POTENTIAL PURCHASERS OF NEW NOTES CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE OR LOCAL TAX CONSEQUENCES TO THEM OF THE PURCHASE,
HOLDING, AND DISPOSITION OF THE NEW NOTES.
PAYMENTS RECEIVED ON NEW NOTES
Payments received by holders on new notes will be accorded the same tax
treatment under the code as payments received on other taxable debt instruments.
Except as described below for new notes issued with original issue discount,
acquired with market discount, or issued or acquired at a premium, interest paid
or accrued on a new note will be treated as ordinary income to the holder and a
principal payment on a new note will be treated as a return of capital. Interest
paid to holders who report their income on the cash receipts and disbursements
method should be taxable to them when received. Interest earned by holders 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 Internal Revenue Service and to holders of record with respect
to interest paid or accrued, and original issue discount and market discount, if
any, accrued, on the new notes.
SUBORDINATION OF SERIES B-3 NOTES
The Series B-3 Notes are subordinated to the Series 1998A Notes. This
subordination will not affect the federal income tax treatment of either the
Series B-3 Notes or the Series 1998A Notes.
IT IS SUGGESTED THAT EMPLOYEE BENEFIT PLANS SUBJECT TO THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), CONSULT THEIR TAX ADVISORS
BEFORE PURCHASING ANY SUBORDINATED NEW NOTE. SEE "ERISA CONSIDERATIONS" AND
"SUMMARY OF TERMS--ERISA CONSIDERATIONS."
EXCHANGE OFFER
In the opinion of Thompson Hine & Flory LLP, the exchange of an old note for a
new note under the exchange offer will not constitute a "significant
modification" of the old note for federal income tax purposes. Accordingly, the
exchange will be disregarded and the new note received will be treated as a
continuation of the old note in the hands of each holder of a new note. As a
result, there will be no federal income tax consequences to a holder who
exchanges an old note for a new note under the exchange offer. Each holder will
have the same adjusted tax basis and holding period in the new note as that
holder had in the old note immediately before the exchange.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the assumptions and representations of the issuer and the depositor set
forth in the following sentence, in the opinion of Thompson Hine & Flory LLP,
the new notes will be characterized as debt of the depositor for federal income
tax purposes. The assumptions and representations on which the above opinion is
based are:
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(1) the pertinent provisions of the Internal Revenue Code, the Treasury
Regulations promulgated thereunder, and the judicial and administrative
rulings and decisions now in effect remain in effect and are not
otherwise amended, revised, reversed, or overruled;
(2) the eligible lender trust agreement, the indenture, the new notes, and
the servicing agreements are executed and delivered in substantially
the form attached as Exhibits hereto;
(3) there are no changes to the terms of the new notes; and
(4) the issuer, the depositor and the holders treat the new notes as
indebtedness of the depositor for federal income tax purposes.
This opinion will not be binding on the courts or the Internal Revenue Service.
The trust, the depositor and the holders, by accepting the new notes have agreed
to treat the new notes as indebtedness of the depositor for federal income tax
purposes. Both the trust and the depositor intend to treat this transaction as a
financing reflecting the new notes as its indebtedness for tax and financial
accounting purposes.
Tax Consequences If New Notes Are Characterized As Equity. Contrary to the
opinion of Thompson Hine & Flory LLP, the Internal Revenue Service might assert
that the new notes do not represent debt for federal income tax purposes, but
rather the new notes should be treated as equity interests in the trust. Even if
the Internal Revenue Service were to assert successfully that the new notes
should not be characterized as debt for federal income tax purposes, in the
opinion of Thompson Hine & Flory LLP based on the representation of both the
trust and the depositor, described in the following sentence, although the trust
might be treated as a publicly traded partnership, it would not be taxable as a
corporation. Both the trust and the depositor have represented that for 1999 and
for any subsequent taxable year 90% or more of the gross income of the
depositor, and the trust, if it were treated as a separate entity, will be
interest income attributable to loans acquired by either the depositor or the
trust and not attributable to loans originated by either the depositor or the
trust.
If the new notes were treated as equity interest in a publicly traded
partnership, some holders could suffer adverse tax consequences. For example,
income to tax-exempt entities (including pension funds) would be "unrelated
business taxable income," income to foreign holders would be subject to U.S. tax
and U.S. tax return filing and withholding requirements, and individual holders
might be subject to limitations on their ability to deduct their share of trust
expenses. Furthermore, this 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
In the opinion of Thompson Hine & Flory LLP, for federal income tax purposes,
the trust will not be treated as an entity separate from the depositor and thus
will not be classified as a separate entity that is an association (or publicly
traded partnership) taxable as a corporation. However, the Internal Revenue
Service might assert that the trust is a separate entity from the depositor for
federal income tax purposes. If for federal income tax purposes the trust were
instead treated as an entity separate from the depositor, the trust would be
treated as a partnership among the holders, and, possibly, the depositor as
well. In the opinion of Thompson Hine & Flory LLP based on the representation of
both the trust and the depositor described above in "Tax Consequences If New
Notes Are Characterized As Equity," the resulting partnership would not be
subject to federal income tax as a publicly traded partnership taxable as a
corporation. Rather, each holder would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deduction of the holders
may differ if the new notes were held to constitute partnership interests,
rather than indebtedness.
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The Internal Revenue Service, however, might assert that one or more of the
activities of the trust constitutes a financial business so that the qualifying
income tests are not met. If the qualifying income tests are not met, the trust
would constitute a publicly traded partnership taxable as a corporation. If it
were determined that the transaction results in the trust being classified as a
corporation or a publicly traded partnership treated as an association taxable
as a corporation, the trust would be subject to federal income tax at corporate
income tax rates on the income it derives from the financed student loans and
other assets, which would reduce the amounts available for payment to the
holders. Cash payments to these holders would be treated as dividends for tax
purposes to the extent of the publicly traded partnership's or corporation's
earnings and profits.
ORIGINAL ISSUE DISCOUNT
New notes issued at a price less than their stated principal amount, i.e.,
discount notes, and other series of notes will be issued with "original issue
discount" within the meaning of Section 1273(a) of the Internal Revenue Code.
Such original issue discount will equal the difference between the "stated
redemption price at maturity" of the new note (generally, its principal amount)
and its issue price. Original issue discount is treated as ordinary interest
income, and holders 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 holder's
income in any taxable year will be computed under Section 1272(a)(6) of the
Internal Revenue Code, which provides rules for the accrual of original issue
discount for 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 U.S.
Treasury Department issues guidance to the contrary, the issuer or other person
responsible for computing the amount of original issue discount to be reported
to a holder each taxable year, i.e. the tax administrator, except as otherwise
provided in this prospectus, expects to base its computations on Internal
Revenue Code Section 1272(a)(6) and, final Treasury Regulations governing the
accrual of original issue discount on debt instruments, i.e., 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
- - a single constant yield to maturity and
- - the prepayment rate of the financed student loans and the reinvestment
rate on amounts held pending distribution that were assumed in pricing
the note, i.e., 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 Internal Revenue Code
Section 1272(a)(6), and, accordingly, there can be no assurance that this
methodology, which is described below, represents the correct manner of
calculating original issue discount on the notes.
Computation of Original Issue Discount. 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 is the sum of all payments provided by the
instrument other than "qualified stated interest", i.e., 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 (1) a single fixed rate or (2) a variable rate that
meets specific requirements set out in the OID Regulations. Thus, in the case of
any note providing for this stated interest, the stated redemption price at
maturity generally will equal the total amount of all deemed principal payments
due on that note. The issue price of a series of notes generally will equal the
initial price at which the series is sold to the public.
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DeMinimis Rule. 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 weighted average maturity of the note. No Treasury
Regulations have been issued with respect to computing the weighted average
maturity of instruments like an old or new note. The tax administrator will
compute the weighted average maturity 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 holder 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, on disposition of the note,
unless the holder makes the election described below in "All Original Issue
Discount Election."
Example. Series 1998B-3 Notes were issued in the December 1998 private placement
with a de minimis amount of original issue discount. A Series 1998B-3 Note with
a stated redemption price at maturity of $100,000 was issued for $99,261.62 in
the private placement. Unless the holder of the note makes the election
described below in "All Original Issue Discount Election," the holder will
include the de minimis original issue discount amount of $738.38 ($100,000.00 -
$99,621.62) into income on a pro rata basis as stated principal payments on the
note are received or, if earlier, on disposition of the note. If, for example,
the holder were to receive a stated principal payment of $10,000 during a
taxable year, the holder would include $73.84 in income as shown by the
following computation:
Stated Principal Amount Received $ 10,000
------------------------------------- = -------- = 10%
Total Stated Principal Amount of Note $100,000
De Minimis Original Issue Discount Amount $738.38
X 10%
-------
Portion of De Minimis Original
Issue Discount Amount Included in Income $73.84
========
Computation of Daily Portions of Original Issue Discount. 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 the 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
(1) the sum of (a) the present value of all payments under the note yet to
be received as of the close of this period and (b) the amount of any
deemed principal payments received on the note during this period over
(2) the note's "adjusted issue price" at the beginning of this period.
The present value of payments yet to be received on a note will be computed by
using 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
respect to a note will be accompanied by a correspondingly increased (or
decreased) rate of recognition of original issue discount by the holder of the
note.
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The yield to maturity of a note will be calculated based on
(1) the pricing prepayment assumptions and
(2) 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.
Optional Redemption. The notes of an 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 these 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 the 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
Internal Revenue Service will agree with the tax administrator's position.
All Original Issue Discount Election. The OID Regulations provide that a holder
may make an election to include in gross income all stated interest, acquisition
discount, original issue discount, de minimis original issue discount, market
discount (see "-- Market Discount" below), de minimis market discount that
accrues on the note, and unstated interest (as reduced by any amortizable
premium, see "Amortizable Premium" below or acquisition premium, as described
below) under the constant yield method used to account for original issue
discount. To make this 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 election is irrevocable unless the holder obtains the
consent of the Internal Revenue Service.
If an 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. See
"-- Market Discount" below. In addition, if an 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" below.
Subsequent Holder. 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
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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
recognized on the note by the amount of amortizable premium. See "--Amortizable
Premium" below.
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 the election described above
in "All Original Issue Discount Election" with respect to the note.
IN VIEW OF THE COMPLEXITIES AND CURRENT UNCERTAINTIES AS TO THE MANNER OF
INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT ON THE NOTES, IT IS SUGGESTED
THAT POTENTIAL INVESTORS 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.
ANTI-ABUSE RULE
The U.S. Treasury Department issued Treasury Regulations containing an
anti-abuse rule because it was 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. 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 Internal
Revenue Service can apply or depart from the OID Regulations as necessary or
appropriate to achieve a reasonable result. A result is not considered
unreasonable under Treasury 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 the 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 the
market discount is de minimis, i.e., less than the product of (1) 0.25% of the
remaining principal amount (or, in the case of a note having original issue
discount, the adjusted issue price of the note), multiplied by (2) the weighted
average maturity 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, equal to the lesser of
- - the amount of the principal payment received or
- - the amount of market discount that has "accrued", but that has not yet
been included in income.
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Elections. The purchaser of a note with market discount may make a special
election, which applies to all market discount instruments held or acquired by
the purchaser in the taxable year of election or afterwards, to recognize market
discount currently on an uncapped accrual basis. In addition, the purchaser may
make the election described above in "All Original Issue Discount Election,"
with respect to a note purchased with market discount.
Until the U.S. Treasury Department promulgates applicable Treasury Regulations,
the purchaser of a note with market discount may elect to accrue the market
discount either:
(1) on the basis of a constant interest rate;
(2) 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 this period;
or
(3) 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 this period.
Regardless of which computation method is elected, the pricing prepayment
assumptions must be used to calculate the accrual of market discount.
Sale or Exchange of a Note with Market Discount. A holder 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 these methods,
less any accrued market discount previously reported as ordinary income as
partial principal payments were received. Moreover, the holder 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
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 holder
makes the election to recognize market discount currently on an uncapped accrual
basis or the election described above in "All Original Issue Discount Election,"
the interest deferral rule will not apply.
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 this 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. Therefore, it is suggested that prospective investors consult
their own tax advisors regarding the application of the market discount rules to
the notes.
Clinton Administration Revenue Proposals. In February 1999, the Clinton
Administration issued revenue proposals including one that would require
taxpayers that use an accrual method of accounting to include market discount in
income as it accrues. The taxpayer's yield for purposes of determining and
accruing market discount would be limited to the greater of
- - the original yield-to-maturity of the debt instrument plus 5 percentage
points, or
- - the applicable federal rate at the time the taxpayer acquired the debt
instrument plus 5 percentage points.
This proposal would be effective for debt instruments acquired on or after the
date of enactment.
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AMORTIZABLE PREMIUM
A subsequent purchaser of a note who purchases the note at a premium over the
total of its deemed principal payments may elect to amortize the 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 holder takes the
qualified stated interest into account under the holder's regular accounting
method. Moreover, the Treasury Regulations generally provide that in the case of
notes subject to optional redemption, the holder is deemed to exercise or not
exercise the option in the manner that maximizes the holder's yield on the note
and the issuer is deemed to exercise or not exercise a call option or a
combination of call options in the manner that maximizes the holder's yield on
the note. The Treasury Regulations are effective for notes acquired on or after
March 2, 1998. However, if a holder elects to amortize bond premium for the
taxable year containing March 2, 1998, or any subsequent taxable year, the
Treasury Regulations would apply to all of the holder's notes held on or after
the first day of that taxable year.
GAIN OR LOSS ON DISPOSITION
If a note is sold, the holder 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 will equal the cost of the note to the
holder, increased by any original issue discount or market discount previously
includable in the holder'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 holder and by any
amortized premium. Similarly, a holder 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. This 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.
Special Rules for Banks, Thrifts, and Similar Institutions. If the holder of a
note is a bank, thrift, or similar institution described in Section 582 of the
Internal Revenue 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 this note is held as part of a "conversion
transaction" within the meaning of Section 1258 of the Internal Revenue 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 the 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 Internal Revenue Service)
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.
Federal Income Tax Rates. 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 limitations.
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BACKUP WITHHOLDING, FOREIGN HOLDERS, AND OTHER TAX MATTERS
Backup Withholding. A note may, under some 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 of accrued
original issue discount as well as distributions of proceeds from a sale of
notes. This withholding generally applies if the holder of a note:
- fails to furnish the indenture trustee with its taxpayer identification
number;
- furnishes the indenture trustee or the issuer an incorrect taxpayer
identification number;
- fails to report properly interest, dividends or other "reportable
payments" as defined in the Internal Revenue Code; or
- under some circumstances, fails to provide the indenture trustee or the
issuer or the holder's securities broker with a certified statement,
signed under penalty of perjury, that the taxpayer identification number
is its correct number and that the holder is not subject to backup
withholding.
Backup withholding will not apply, however, with respect to some payments made
to holders, including payments to specific exempt recipients (such as exempt
organizations) and to specific nonresident alien individuals, foreign
corporations, foreign partnerships, or specific foreign estates and trusts
complying with requisite certification procedures. Holders should consult their
tax advisors as to their qualification for exemption from backup withholding and
the procedure for obtaining the exemption.
The indenture trustee will report to the holders and to the Internal Revenue
Service each calendar year the amount of any "reportable payments" during this
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 Holders. Under the Internal Revenue 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
holders who are nonresident alien individuals, foreign corporations, foreign
partnerships or specific foreign estates and trusts or holders holding on behalf
of foreign persons generally will be treated as "portfolio interest" and
therefore will not be subject to any United States tax provided that:
- the interest is not effectively connected with a trade or business in
the United States of the holder and
- the issuer (or other person who would otherwise be required to withhold
tax from these payments) is provided with an appropriate statement that
the beneficial owner of a note is a foreign person.
Interest (including original issue discount) paid on notes to holders who are
foreign persons will not be subject to withholding if the interest is
effectively connected with a United States business conducted by the holder.
Such interest (including original issue discount) will, however, be subject to
the regular United States income tax.
New Withholding Tax Regulations. In 1997, Treasury Regulations were issued which
alter the rules described above in some respects. These Treasury Regulations
will be effective with respect to payments made after December 31, 1999,
regardless of the issue date of the instrument with respect to which these
payments are made. It is suggested that prospective investors consult their tax
advisors concerning the requirements imposed by these Treasury Regulations and
their effect on the holding of the notes.
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Due to the complexity of the federal income tax rules applicable to holders and
the considerable uncertainty that exists with respect to many aspects of those
rules, it is suggested that potential investors 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.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and other retirement plans and
arrangements that are subject to the Employee Retirement Income Security Act of
1974 or corresponding provisions of the Internal Revenue Code, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds in which these plans, accounts, annuities or arrangements are
invested persons acting on behalf of a plan, or persons using the assets of a
plan, should review carefully with their legal advisors whether the purchase or
holding of any series of notes could either give rise to a transaction that is
prohibited under ERISA or the Internal Revenue Code or cause the assets of the
trust 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. Prospective investors should be
aware that, although exceptions from the application of the prohibited
transaction rules and the those regulations exist, there can be no assurance
that any 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 the plan. However,
one or more exemptions may be available with respect to prohibited transaction
rules of ERISA and might apply in connection with the initial purchase, holding
and resale of the notes, depending in part on the type of plan fiduciary making
the decision to acquire notes and the circumstances under which a decision is
made. Those exemptions include, but are not limited to: (i) Prohibited
Transaction Class Exemption (PTCE) 95-60, regarding investments by insurance
company general 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 Internal
Revenue 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.
LEGAL MATTERS
Legal matters relating to the issuer, the depositor, the notes and federal
income tax matters will be passed on by Thompson Hine & Flory LLP. Legal matters
relating to the notes will be passed on for the depositor by Calfee, Halter &
Griswold LLP. Legal matters will be passed on for the dealer manager by Squire,
Sanders & Dempsey
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L.L.P. Each of these firms has performed legal services for the depositor and
its affiliates in the past, and it is expected that they will continue to
perform these services in the future.
RATING
Each series of the Series 1998A Notes has been rated "Aaa" by Moody's and "AAA"
by Fitch. The Series B-3 Notes have been rated "A2" by Moody's and "A" by Fitch.
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 under 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.
The issuer has furnished and will furnish to the rating agencies information and
materials, some of which have not been included in this prospectus. Generally, a
rating agency bases its rating on this information and materials and
investigations, studies and assumptions furnished to and obtained and made by
the rating agency. There is no assurance that any rating will apply for any
given period of time or that it will not be lowered or withdrawn entirely if, in
the judgment of the rating agency, circumstances so warrant.
A rating is not a recommendation to buy, sell or hold the notes and any rating
should be evaluated independently. Each rating is subject to change or
withdrawal at any time and any change or withdrawal may affect the market price
or marketability of the notes. The initial purchasers have undertaken no
responsibility either to bring to the attention of the holders any proposed
change in or withdrawal of any rating of the notes or to oppose any change or
withdrawal.
PLAN OF DISTRIBUTION
Based on an interpretation by the staff of the SEC set forth in no-action
letters issued to third parties in similar transactions, we believe that the new
notes issued in the exchange offer in exchange for the old notes may be offered
for resale, resold and otherwise transferred by holders (other than any holder
which is our "affiliate" within the meaning of Rule 405 under the 1933
securities act) without compliance with the registration and prospectus delivery
provisions of the 1933 securities act However, this applies only if the new
notes are acquired in the ordinary course of the holders' business and the
holders have no arrangement with any person to participate in the distribution
of the new notes. We refer you to the "Morgan Stanley & Co. Inc." SEC No-Action
Letter (available June 5, 1991), "Exxon Capital Holdings Corporation" SEC
No-Action Letter (available May 13, 1988) and "Shearman & Sterling" SEC
No-Action Letter (available July 2, 1993).
Each broker-dealer that receives new notes for its own account in the exchange
offer must acknowledge that it will deliver a prospectus with any resale of the
new notes. This prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of new notes
received in exchange for old notes where the old notes were acquired as a result
of market-making activities or other trading activities. We have agreed that
starting on the expiration date of the exchange offer and ending on the close of
business 120 days after the expiration date of the exchange offer, we will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any resale.
We will not receive any proceeds from any sale of new notes by broker-dealers or
any other persons. New notes received by broker-dealers for their own account in
the exchange offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of these methods of resale, at market
prices prevailing at the time of resale, at prices related to prevailing market
prices or negotiated prices.
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Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer and/or the purchasers of any new notes. Any broker-dealer
that resells new notes that were received by it for its own account under the
exchange offer and any broker or dealer that participates in a distribution of
the new notes may be deemed to be an underwriter within the meaning of the 1933
securities act, and any profit on any resale of new notes and any commissions or
concessions received by any persons may be underwriting compensation under the
1933 securities act. The letter of transmittal states that by acknowledging that
it will deliver and by delivering a prospectus meeting the requirements of the
1933 securities act, a broker-dealer will not be admitting that it is an
underwriter within the meaning of the 1933 securities act.
For a period of 120 days after the expiration date of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer (including the expenses of one counsel for the holders of the old
notes), other than commissions or concessions of any brokers or dealers. We have
agreed to indemnify holders of the notes (including any broker-dealers) against
liabilities, including liabilities under the 1933 securities act.
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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.
"APPLICABLE LIBOR RATE" means,
(1) for auction periods of 35 days or less, one-month LIBOR,
(2) for auction periods of more than 35 days but less than 91 days,
three-month LIBOR,
(3) for auction periods of more than 90 days but less than 181 days,
six-month LIBOR, and
(4) for auction periods of more than 180 days, one-year LIBOR. As used in
this definition and otherwise herein, the terms "one-month LIBOR,"
"three-month LIBOR," "six-month LIBOR" or "one-year LIBOR," means the
rate equal to the rate with respect to United States dollar deposits
in the London interbank market having a maturity of one month, three
months, six months or one year.
"PROGRAM OPERATING EXPENSES" means all items of expense allocable to the
operation of the program, including
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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.
"APPLICABLE LIBOR RATE" means,
(1) for auction periods of 35 days or less, one-month LIBOR,
(2) for auction periods of more than 35 days but less than 91 days,
three-month LIBOR,
(3) for auction periods of more than 90 days but less than 181 days,
six-month LIBOR, and
(4) for auction periods of more than 180 days, one-year LIBOR. As used in
this definition and otherwise herein, the terms "one-month LIBOR,"
"three-month LIBOR," "six-month LIBOR" or "one-year LIBOR," means the
rate equal to the rate with respect to United States dollar deposits
in the London interbank market having a maturity of one month, three
months, six months or one year.
"PROGRAM OPERATING EXPENSES" means all items of expense allocable to the
operation of the program, including
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(1) fees and expenses and any other amounts payable to the indenture
trustee and any authenticating agent and any fees charged by a
depository,
(2) the fees and expenses and any other amounts payable to the
calculation agent, the auction agent, broker-dealers, any market
agent or other agent in connection with the notes,
(3) fees and expenses 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,
(4) the fees and expenses incurred by or on behalf of the issuer,
including fees and expenses payable to the master servicer and the
administrator, in the administration of the program under the Higher
Education Act, 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
(5) 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
(4) above, any other similar program of the issuer.
"SERIES 1998A HOLDERS' PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to
any distribution date for a Series of Series 1998A Notes, the Series 1998A
Principal Distribution Amount for the distribution date plus the Series 1998A
Principal Shortfall as of the close of the preceding distribution date; provided
that the Series 1998A Holders' Principal Distribution Amount will not exceed the
outstanding principal balance of the Series 1998A Notes. In addition,
(1) on the legal final maturity of the Series A-3 Notes, the principal
required to be distributed will include the amount required to reduce
the outstanding principal balance of the Series A-3 Notes to zero,
(2) on the legal final maturity of the Series A-4 Notes, the principal
required to be distributed to will include the amount required to
reduce the outstanding principal balance on the Series A-4 Notes to
zero,
(3) on the legal final maturity of the Series A-5 Notes, the principal
required to be distributed will include the amount required to reduce
the outstanding principal balance on the Series A-5 Notes to zero,
and
(4) on the legal final maturity of the Series A-6 Notes, the principal
required to be distributed will include the amount required to reduce
the outstanding principal balance on the Series A-6 Notes to zero.
"SERIES 1998A PRINCIPAL DISTRIBUTION AMOUNT" means
(1) with respect to the Series A-3 Notes, an amount equal to the decline
in the pool balance between the end of the second collection period
preceding a monthly distribution date and the end of the immediately
preceding collection period, less, for each monthly distribution date
occurring after June 30, 2003, the amount of any principal to be paid
on the monthly distribution date on the Series B-3 Notes,
(2) with respect to the Series A-4 Notes on and after the principal
balance of the Series A-3 Notes has been paid in full, an amount
equal to the decline in the pool balance between the end of the third
collection period preceding an auction period distribution date and
the end of the second preceding collection period, less, for each
monthly distribution date occurring after June 30, 2003, the amount
of any principal paid on the immediately preceding monthly
distribution date on the Series B-3 Notes,
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(3) with respect to the Series A-5 Notes on and after the principal
balance of the Series A-3 Notes and the Series A-4 Notes has been
paid in full, an amount equal to the decline in the pool balance
between the end of the third collection period preceding an auction
period distribution date and the end of the second preceding
collection period, less, for each monthly distribution date occurring
after June 30, 2003, the amount of any principal paid on the
immediately preceding monthly distribution date on the Series B-3
Notes, and
(4) with respect to the Series A-6 Notes on and after the principal
balance of the Series A-3 Notes, the Series A-4 Notes and the Series
A-5 Notes has been paid in full, an amount equal to the decline in
the pool balance between the end of the third collection period
preceding an auction period distribution date and the end of the
second preceding collection period, less, for each monthly
distribution date occurring after June 30, 2003, the amount of any
principal paid on the immediately preceding monthly distribution date
on the Series B-3 Notes.
"SERIES 1998A PRINCIPAL SHORTFALL" means, as of the close of any distribution
date for a series of Series 1998A Notes, the excess of the Series 1998A
Principal Distribution Amount on the distribution date over the amount of
principal actually distributed to the holders of Series 1998A Notes on the
distribution date.
"SERIES 1998A NOTES" means the Series A-3 Notes, the Series A-4 Notes, the
Series A-5 Notes and the Series A-6 Notes.
"SERIES 1998A-3 INTEREST SHORTFALL" means, with respect to any monthly
distribution date, the excess of the Series 1998A-3 Holders' Interest
Distribution Amount on the preceding monthly distribution date over the amount
of interest actually distributed to the holders of Series A-3 Notes on the
preceding monthly distribution date ; plus interest on the amount of the excess
interest due to the holders of Series A-3 Notes, to the extent permitted by law,
at the series interest rate borne by the Series A-3 Notes from the preceding
monthly distribution date to the current monthly distribution date.
"SERIES 1998A-3 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with respect to
any monthly distribution date, the sum of
(1) the amount of interest accrued at the series interest rates for the
related interest accrual period on the aggregate outstanding
principal balance of the Series A-3 Notes on the immediately
preceding monthly distribution date after giving effect to all
principal distributions to holders of Series A-3 Notes on the
preceding monthly distribution date (or, in the case of the first
monthly distribution date, on the closing date) plus
(2) the Series 1998A Interest Shortfall for the monthly distribution
date; provided that the Series 1998A-3 Holders' Interest Distribution
Amount will not include any carryover interest on the Series A-3
Notes.
"SERIES 1998A-3 NOTES" means the Student Loan Senior Asset-Backed Notes, Series
1998A-3 issued and outstanding as unregistered notes.
"SERIES 1998A1-3 NOTES" means the Student Loan Senior Asset-Backed Notes, Series
1998A1-3 of the issuer issued and outstanding as registered notes.
"SERIES A-3 NOTES" means the Series 1998A-3 Notes together with the Series
1998A1-3 Notes.
"SERIES 1998A-4 INTEREST SHORTFALL" means, with respect to any auction period
distribution date, the excess of the Series 1998A-4 Holders' Interest
Distribution Amount on the preceding auction period distribution date over the
amount of interest actually distributed to the holders of Series A-4 Notes on
the preceding auction period distribution date ; plus interest on the amount of
the excess interest due to the holders of Series A-4 Notes, to the extent
permitted by law, at the related series interest rate from the preceding auction
period distribution date to the current auction period distribution date.
"SERIES 1998A-4 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with respect to
any auction period distribution date, the sum of
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(1) 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 A-4 Notes on the immediately
preceding auction period distribution date after giving effect to all
principal distributions to Series A-4 holders on the preceding
auction period distribution date (or, in the case of the first
auction period distribution date, on the closing date) plus
(2) the Series 1998A-4 Interest Shortfall for the auction period
distribution date; provided that the Series 1998A-4 Holders' Interest
Distribution Amount will not include any carryover interest on the
Series A-4 Notes.
"SERIES 1998A-4 NOTES" means the Student Loan Senior Asset-Backed Callable
Notes, Series 1998A-4 issued and outstanding as unregistered notes.
"SERIES 1998A1-4 NOTES" means the Student Loan Senior Asset-Backed Callable
Notes, Series 1998A1-4 of the issuer, issued and outstanding as registered
notes.
"SERIES A-4 NOTES" means the Series 1998A-4 Notes together with the Series
1998A1-4 Notes.
"SERIES 1998A-5 INTEREST SHORTFALL" means, with respect to any auction period
distribution date, the excess of the Series 1998A-5 Holders' Interest
Distribution Amount on the preceding auction period distribution date over the
amount of interest actually distributed to the holders of the Series A-5 Notes
on the preceding auction period distribution date ; plus interest on the amount
of the excess interest due to the holders of Series A-5 Notes, to the extent
permitted by law at the related series interest rate from the preceding auction
period distribution date to the current auction period distribution date.
"SERIES 1998A-5 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with respect to
any auction period distribution date, the sum of
(1) 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 A-5 Notes on the immediately
preceding auction period distribution date after giving effect to all
principal distributions to holders of Series A-5 Notes on the
preceding auction period distribution date (or, in the case of the
first auction period distribution date, on the Closing Date) plus
(2) the Series 1998A-5 Interest Shortfall for the auction period
distribution date; provided that the Series 1998A-5 Holders' Interest
Distribution Amount will not include any carryover interest on the
Series A-5 Notes.
"SERIES 1998A-5 NOTES" means the Student Loan Senior Asset-Backed Callable
Notes, Series 1998A-5 issued and outstanding as unregistered notes.
"SERIES 1998A1-5 NOTES" means the Student Loan Senior Asset-Backed Callable
Notes, Series 1998A1-5 of the issuer, issued and outstanding as registered
notes.
"SERIES A-5 NOTES" means the Series 1998A-5 Notes together with the Series
1998A1-5 Notes.
"SERIES 1998A-6 INTEREST SHORTFALL" means, with respect to any auction period
distribution date, the excess of the Series 1998A-6 Holders' Interest
Distribution Amount on the preceding auction period distribution date over the
amount of interest actually distributed to the holders of Series A-6 Notes on
the preceding auction period distribution date ; plus interest on the amount of
the excess interest due to the holders of Series A-6 Notes, to the extent
permitted by law, at the related series interest rate from the preceding auction
period distribution date to the current auction period distribution date.
"SERIES 1998A-6 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with respect to
any auction period distribution date, the sum of
(1) 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 A-6 Notes on the immediately
preceding
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auction period distribution date after giving effect to all principal
redemptions to holders of Series A-6 Notes on the preceding auction
period distribution date (or, in the case of the first auction period
distribution date, on the Closing Date) plus
(2) the Series 1998A-6 Interest Shortfall for the auction period
distribution date; provided that the Series 1998A-6 Holders' Interest
Distribution Amount will not include any carryover interest on the
Series A-6 Notes.
"SERIES 1998A-6 NOTES" means the Student Loan Senior Asset-Backed Callable
Notes, Series 1998A-6 issued and outstanding as unregistered notes.
"SERIES 1998A1-6 NOTES" means the Student Loan Senior Asset-Backed Callable
Notes, Series 1998A1-6 of the issuer issued and outstanding as registered notes.
"SERIES A-6 NOTES" means the Series 1998A-6 Notes together with the Series
1998A1-6 Notes.
"SERIES 1998B-3 INTEREST SHORTFALL" means, with respect to any monthly
distribution date, the excess of the Series 1998B-3 Holders' Interest
Distribution Amount on the preceding monthly distribution date over the amount
of interest actually distributed to the holders of Series B-3 Notes on the
preceding monthly distribution date ; plus interest on the amount of the excess
interest due to the holders of Series B-3 Notes, to the extent permitted by law,
at the related series interest rate from the preceding monthly distribution date
to the current monthly distribution date.
"SERIES 1998B-3 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with respect to
any monthly distribution date, the sum of
(1) 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 B-3 Notes on the immediately
preceding monthly distribution date after giving effect to all
principal distributions to Series B-3 Notes on the preceding monthly
distribution date (or, in the case of the first monthly distribution
date, on the closing date) plus
(2) the Series 1998B-3 Interest Shortfall for the monthly distribution
date.
"SERIES 1998B-3 HOLDERS' PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to
any monthly distribution date, the Series 1998B-3 Principal Distribution Amount
for the monthly distribution date plus the Series 1998B-3 Principal Shortfall as
of the close of the preceding monthly distribution date; provided that the
Series 1998B-3 Holders' Principal Distribution Amount will not exceed the
outstanding principal balance of the Series B-3 Notes. In addition, on the legal
final maturity of the Series B-3 Notes, the principal required to be distributed
to the holders of Series B-3 Notes will include the amount required to reduce
the outstanding principal balance on the Series B-3 Notes to zero.
"SERIES 1998B-3 PRINCIPAL DISTRIBUTION AMOUNT" means,
(1) on each monthly distribution date occurring after June 30, 2003, an
amount equal to the lesser of (a) an amount equal to the decline in
the pool balance between the end of the second collection period
preceding a monthly distribution date and the end of the immediately
preceding collection period and (b) the greatest amount which would
result in a senior parity percentage of no less than 109% and a
parity percentage of no less than 101% following the payment of
principal o the Series B-3 Notes and
(2) on each monthly distribution date on and after which the principal
balance of the Series 1998A Notes has been paid in full, an amount
equal to the decline in the pool balance between the end of the
second collection period preceding a monthly distribution date and
the end of the immediately preceding collection period (reduced with
respect to the first monthly distribution date on which principal is
to be paid on the Series B-3 Notes by the Series 1998A Holders'
Principal Distribution Amount on the monthly distribution date).
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"SERIES 1998B-3 PRINCIPAL SHORTFALL" means, as of the close of any monthly
distribution date, the excess of the Series 1998B-3 Principal Distribution
Amount on the monthly distribution date over the amount of principal actually
distributed to the holders of Series B-3 Notes on the monthly distribution date.
"SERIES 1998B-3 NOTES" means the Student Loan Subordinate Asset-Backed Notes
Series 1998B-3 issued and outstanding as unregistered notes.
"SERIES 1998B1-3 NOTES" means the Student Loan Subordinate Asset-Backed Notes
Series 1998B1-3 of the issuer issued and outstanding as registered notes.
"SERIES B-3 NOTES" means the Series 1998B-3 Notes together with the Series
1998B1-3 Notes.
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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. Subject to compliance with the transfer restrictions
applicable to the Notes, cross-market transfers between participants in DTC, on
the one hand, and Euroclear or Cedel participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel, as the case may be, by its respective depository.
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 "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the 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.
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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 Ne 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 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,
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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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APPENDIX C
AUCTION PROCEDURES
GENERAL
The following description of the Auction Procedures applies separately to each
series of auction rate notes. The term "Note," as used in this Appendix C,
refers to each series of auction rate notes, and the term "Holder" refers to
holders holding auction rate notes.
AUCTION PARTICIPANTS
EXISTING HOLDERS AND POTENTIAL HOLDERS. Participants in each Auction
will include: (i) "Existing Holders," which will mean, for purposes of dealing
with the auction agent in connection with an Auction, a Person who is a
broker-dealer listed in the Existing Holder Registry at the close of business on
the business day preceding such Auction, and, for purposes of dealing with the
broker-dealer in connection with an Auction, a Person who is a beneficial owner
of auction rate notes (the term auction rate notes shall apply separately to
each series of Series A-4 Notes, Series A-5 Notes and Series A-6 Notes) and (ii)
"Potential Holders," which will mean any Person (including an Existing Holder)
that is a broker-dealer for purposes of dealing with the auction agent, and a
potential beneficial owner for purposes of dealing with a broker-dealer, who may
be interested in acquiring auction rate notes.
By purchasing the auction rate notes, whether in an Auction or
otherwise, each prospective purchaser of the auction rate notes or its
broker-dealer must agree and will be deemed to have agreed: (i) to participate
in Auctions on the terms described in the indenture; (ii) so long as the
beneficial ownership of the auction rate notes is maintained in book-entry form
to sell, transfer or otherwise dispose of auction rate 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 Holder of auction rate notes so
transferred, its Participant or broker-dealer advises the auction agent of such
transfer; (iii) to have its beneficial ownership of auction rate 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 Holder will constitute an irrevocable
offer to sell the principal amount of auction rate notes specified in such Sell
Order; (v) that a Bid placed by an Existing Holder will constitute an
irrevocable offer to sell the principal amount of auction rate notes specified
in such Bid if the rate specified in such Bid is greater than, or in some cases
equal to, the Interest Rate, determined as described in this Appendix C; (vi)
that a Bid placed by a Potential Holder will constitute an irrevocable offer to
purchase the principal amount, or a lesser principal amount, of the auction rate
notes specified in such Bid if the rate specified in such Bid is, respectively,
less than or equal to the auction rate, determined as described in this Appendix
C; and (vii) to tender its auction rate notes for purchase at 100% of the
principal amount of the note, plus accrued but unpaid interest and unpaid
carryover interest, if any, and interest accrued , on an auction period
conversion date.
The principal amount of the auction rate notes purchased or sold may be
subject to proration procedures on the interest determination date. Each
purchase or sale of the auction rate notes on the interest determination date
will be made for settlement on the first day of the interest accrual period
immediately following such interest determination date at a price equal to 100%
of the principal amount thereof plus accrued interest, if any. The auction agent
is entitled to rely upon the terms of any Order submitted to it by a
broker-dealer.
AUCTION AGENT. Bankers Trust Company is appointed in the indenture as
initial auction agent to serve as agent for the issuer in connection with
Auctions. The indenture trustee was directed by the depositor to enter into the
initial Auction Agent Agreement with Bankers Trust Company, as the initial
auction agent. Any 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 calculation 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 Securities 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 calculation
agent. The auction agent may be removed at any time by the indenture trustee
upon the written direction of the issuer, or the holders of
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at least 66-2/3 % of the aggregate principal amount of the auction rate notes
then outstanding, by an instrument signed by such holders or their attorneys and
filed with the auction agent, the issuer, the indenture trustee and the
calculation 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 the calculation agent, a
substitute Auction Agent Agreement will be entered into with a substitute
auction agent. Notwithstanding the foregoing, the auction agent may terminate
the Auction Agent Agreement if, within 15 days after notifying the indenture
trustee, the issuer and the calculation 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 will 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 calculation agent confirming
that any proposed substitute auction agent meets the requirements described in
the 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 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 each auction period distribution date for the auction rate notes 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). Such amounts are payable as provided
in the indenture. 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 duties under the indenture, the Auction Agent
Agreement and the Broker-Dealer Agreement 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 Holders and Potential Holders may participate
in Auctions only by submitting orders (in the manner described below) through a
"broker-dealer," including NationsBanc Securities of Montgomery LLC as the sole
initial broker-dealer or any other broker or dealer (each as defined in the
Securities 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 moneys received from the indenture trustee, on
each auction period distribution date. Such Broker-Dealer Fee is payable as
provided in the indenture and the Broker-Dealer Agreement. Broker-dealers may
submit Orders in Auctions for their own accounts. Any broker-dealer submitting
an Order for its own account in any Auction might have an advantage over other
Bidders in that it would have knowledge of other Orders placed through it in
that Auction, but it would not have knowledge of Orders submitted by other
broker-dealers. The Broker-Dealer Agreements provide that a broker-dealer shall
handle its customers' Orders in accordance with their respective duties under
applicable securities laws and rules. Any entity that is an affiliate of the
issuer and becomes a broker-dealer must submit a Sell Order covering any auction
rate notes held for its own account.
CALCULATION AGENT. Under the Calculation Agent Agreement, and in
connection with the auction rate notes, the "calculation agent," initially
Salomon Smith Barney Inc., 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
holders or book-entry interest owners
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of the auction rate notes. The calculation agent will receive nominal
compensation for the performance of its duties under the Calculation Agent
Agreement.
AUCTION PROCEDURES
GENERAL. Pursuant to the indenture, Auctions to establish the auction
rate for the auction rate notes will be held on each interest determination
date, except as described under the heading "Description of the New Notes--
Determination of the Auction Rate" in this Prospectus, by application of the
Auction Procedures described herein and in the indenture.
The auction agent will calculate the maximum auction rate, the all hold
rate and the Applicable LIBOR Rate on each interest determination date. The
administrator will calculate and, no later than the business day preceding each
interest determination date, will report to the auction agent in writing, the
net loan rate. Upon receipt of notice from the indenture trustee of a failed
auction period conversion as described in the indenture, the auction agent will
calculate the maximum auction rate, and the administrator will report to the
auction agent in writing the net loan rate, for the auction rate notes as of
such failed auction period conversion date and give notice thereof as provided
and to the parties specified in the Auction Agent Agreement. If the ownership of
the auction rate notes is no longer maintained in book-entry form, the indenture
trustee will calculate the maximum auction rate, and the administrator will
report to the indenture trustee in writing the net loan rate, for the auction
rate notes on the business day immediately preceding the first day of each
interest accrual period commencing after delivery of the Note certificates. If a
payment default has occurred, the indenture trustee will calculate the
non-payment rate on the interest determination date for (i) each interest
accrual period commencing on or 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 an payment default. The auction agent
will determine the Applicable LIBOR Rate for each interest accrual period other
than the Initial Period; provided, that if the ownership of the auction rate
notes is no longer maintained in book-entry form, or if a payment default has
occurred, then the indenture trustee will determine the Applicable LIBOR Rate
for each such interest accrual period. The determination by the indenture
trustee or the auction agent, as the case may be, of the Applicable LIBOR Rate
will (i the absence of manifest error) be final and binding upon the holders and
all other parties. If calculated or determined by the auction agent, the auction
agent will promptly advise the indenture trustee of the Applicable LIBOR Rate.
SUBMISSION OF ORDERS. So long as the ownership of the auction rate
notes is maintained in book-entry form, an Existing Holder may sell, transfer or
otherwise dispose of auction rate 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 Holder, its broker-dealer or its Participant advises the auction agent
of such transfer. Except with respect to the interest determination date
immediately preceding an auction period conversion date, Auctions will be
conducted on each interest determination date, if there is an auction agent on
such interest determination date, in the following manner (such procedures will
apply to separately to each series of auction rate notes).
Prior to the Submission Deadline (defined as 12:30 P.M., eastern time,
on any interest determination date or such other time on any interest
determination 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
interest determination date:
(a) each Existing Holder of auction rate notes may submit to a
broker-dealer by telephone or otherwise information as to: (i) the principal
amount of outstanding auction rate notes, if any, held by such Existing Holder
which such Existing Holder desires to continue to hold without regard to the
series interest rate for the next succeeding auction period (a "Hold Order");
(ii) the principal amount of outstanding auction rate notes, if any, which such
Existing Holder offers to sell if the series interest rate for the next
succeeding auction period will be less than the rate per annum specified by such
Existing Holder (a "Bid"); and/or (iii) the principal amount of outstanding
auction rate notes, if any, held by such Existing Holder which such Existing
Holder offers to sell without regard to the series interest rate for the next
succeeding auction period (a "Sell Order"); and
(b) one or more broker-dealers may contact Potential Holders to
determine the principal amount of auction rate notes which each such Potential
Holder offers to purchase, if the series interest rate for the next succeeding
auction period will not be less than the rate per annum specified by such
Potential Holder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Holder and each Potential Holder placing an Order is referred to as a "Bidder."
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Subject to the provisions described below under "Validity of Orders," a
Bid by an Existing Holder will constitute an irrevocable offer to sell: (i) the
principal amount of outstanding auction rate notes specified in such Bid if the
series interest rate will be less than the rate specified in such Bid, (ii) such
principal amount or a lesser principal amount of outstanding auction rate notes
to be determined as described below in "Acceptance and Rejection of Orders," if
the series interest rate will be equal to the rate specified in such Bid or
(iii) such principal amount or a lesser principal amount of outstanding auction
rate 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 and Sufficient Clearing Bids (as defined below) have not been
made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Holder will constitute an irrevocable offer to sell:
(i) the principal amount of outstanding auction rate notes specified in such
Sell Order or (ii) such principal amount or a lesser principal amount of
outstanding auction rate notes as described below under "Acceptance and
Rejection of Orders," if Sufficient Clearing Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a
Bid by a Potential Holder will constitute an irrevocable offer to purchase: (i)
the principal amount of outstanding auction rate notes specified in such Bid if
the series interest rate will be higher than the rate specified in such Bid or
(ii) such principal amount or a lesser principal amount of outstanding auction
rate 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 interest determination 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 of
auction rate notes that are the subject of such Order; (iii) to the extent that
such Bidder is an Existing Holder: (a) the principal amount of auction rate
notes, if any, subject to any Hold Order placed by such Existing Holder; (b) the
principal amount of auction rate notes, if any, subject to any Bid placed by
such Existing Holder and the rate specified in such Bid; and (c) the principal
amount of auction rate notes, if any, subject to any Sell Order placed by such
Existing Holder; and (iv) to the extent such Bidder is a Potential Holder, the
rate specified in such Potential Holder'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 outstanding auction rate notes held
by any Existing Holder 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 Holder covering the principal amount of
outstanding auction rate notes held by such Existing Holder 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 Holder or Potential Holder.
An Existing Holder may submit multiple Orders, of different types and
specifying different rates, in an Auction with respect to auction rate notes
then held by such Existing Holder. An Existing Holder that offers to purchase
additional auction rate notes is, for purposes of such offer, treated as a
Potential Holder.
Any Bid specifying a rate higher than the maximum auction rate will (i)
be treated as a Sell Order if submitted by a Existing Holder and (ii) not be
accepted if submitted by a Potential Holder.
VALIDITY OF ORDERS. If any Existing Holder submits through a
broker-dealer to the auction agent one or more Orders covering in the aggregate
more than the principal amount of outstanding auction rate notes held by such
Existing Holder, 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 outstanding auction rate notes held by such
Existing Holder, and if the aggregate principal amount of auction rate notes
subject to such Hold Orders exceeds the aggregate principal amount of auction
rate notes held by such Existing Holder, the aggregate principal amount of
auction rate notes subject to each such Hold Order will be reduced pro rata so
that the aggregate principal amount of auction rate notes subject to all such
Hold Orders equals the aggregate principal amount of outstanding auction rate
notes held by such Existing Holder.
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BIDS. Any Bid will be considered valid up to the amount of the excess
of the principal amount of outstanding auction rate notes held by such Existing
Holder over the aggregate principal amount of auction rate notes 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 Holder and the
aggregate principal amount of outstanding auction rate notes subject to such
Bids is greater than such excess, such Bids will be considered valid up to the
amount of such excess. Subject to the two preceding sentences, if more than one
Bid with different rates are submitted on behalf of such Existing Holder, 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 outstanding auction rate notes, if any, subject to Bid not valid under
the provisions described above will be treated as the subject of a Bid by a
Potential Holder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to the amount
of the excess of the principal amount of outstanding auction rate notes held by
such Existing Holder over the aggregate principal amount of auction rate notes
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for auction rate notes is submitted on behalf of
any Potential Holder, 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 Holder covering an aggregate principal amount of auction rate notes not
equal to an Authorized Denomination will be rejected and will be deemed a Hold
Order. Any Bid submitted by a Potential Holder covering an aggregate principal
amount of auction rate notes not equal to an Authorized Denomination will be
rejected. Any Order submitted in an Auction by a broker-dealer to the auction
agent prior to the Submission Deadline on any interest determination date will
be irrevocable.
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 CLEARING BIDS AND BID AUCTION RATE. Not
earlier than the Submission Deadline on each interest determination date, the
auction agent will assemble all valid Submitted Orders and will determine:
(a) the excess of the total principal amount of outstanding auction
rate notes over the sum of the aggregate principal amount of outstanding auction
rate notes subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available auction rate notes"); and
(b) from such Submitted Orders whether the aggregate principal amount
of outstanding auction rate notes subject to Submitted Bids by Potential Holders
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
outstanding auction rate notes subject to Submitted Bids by Existing Holders
specifying one or more rates higher than the maximum auction rate and (ii) the
aggregate principal amount of outstanding auction rate notes subject to
Submitted Sell Orders (in the event such excess or such equality exists other
than because all of the outstanding auction rate notes are subject to Submitted
Hold Orders, such Submitted Bids by Potential Holders above will be hereinafter
referred to collectively as "Sufficient Clearing Bids"); and
(c) if Sufficient Clearing Bids exist, the "Bid Auction Rate" which
will be the lowest rate specified in such Submitted Clearing Bids such that if:
(i) each such Submitted Bid from Existing Holders specifying such
lowest rate and all other Submitted Bids from Existing Holders
specifying lower rates were rejected (thus entitling such Existing
Holders to continue to hold the principal amount of auction rate notes
subject to such Submitted Bids); and
(ii) each such Submitted Bid from Potential Holders specifying such
lowest rate and all other Submitted Bids from Potential Holders
specifying lower rates, were accepted,
the result would be that such Existing Holders described in subparagraph (i)
above would continue to hold an aggregate principal amount of outstanding
auction rate notes which, when added to the aggregate principal amount of
outstanding auction rate notes to be purchased by such Potential Holders
described in subparagraph (ii) above, would equal not less than the Available
auction rate notes.
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NOTICE OF AUCTION RATE AND SERIES INTEREST RATE. Promptly after the
auction agent has made the determinations described above, the auction agent
will advise the indenture trustee of the net loan rate for the auction rate
notes, the maximum auction rate, the all hold rate and the components thereof on
the interest determination date, and based on such determinations, the auction
rate for the next succeeding interest accrual period as follows:
(a) if Sufficient Clearing 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 Clearing Bids do not exist (other than because all of
the outstanding auction rate notes 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 outstanding auction rate notes 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, which rate will be the lesser of (a) the formula rate and (b) the
net loan rate for the auction rate notes. In no event shall the series interest
rate exceed 17%.
ACCEPTANCE AND REJECTION OF ORDERS. Existing Holders will continue to
hold the principal amount of auction rate notes that are subject to Submitted
Hold Orders. If the net loan rate for the auction rate notes is equal to or
greater than the Bid Auction Rate and if Sufficient Clearing Bids, as described
above under "Determination of Sufficient Clearing Bids and Bid Auction Rate,"
have been received by the auction agent, the Bid Auction Rate will be the
auction rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the auction agent will take such other action as set forth below.
If the net loan rate for the auction rate notes is greater than the
auction rate, the series interest rate shall be the auction rate. If the net
loan rate for the auction rate notes is less than the auction rate, the series
interest rate will be the net loan rate for the auction rate notes. If the
auction rate and the net loan rate for the auction rate notes are both greater
than 17%, the series interest rate shall be equal to 17%. If the auction agent
has not received Sufficient Clearing Bids as described above under
"Determination of Sufficient Clearing Bids and Bid Auction Rate" (other than
because all of the outstanding auction rate 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 for the auction rate notes, but in no event greater than
17%. 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 describe below under "Insufficient Bids."
SUFFICIENT CLEARING BIDS. If Sufficient Clearing Bids have been made
and the net loan rate for the auction rate notes is equal to or greater than the
Bid Auction Rate (in which case the series interest rate will 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 Holders' Submitted Bids specifying any rate that is higher
than the series interest rate will be accepted, thus requiring each such
Existing Holder to sell the aggregate principal amount of auction rate notes
subject to such Submitted Bids;
(b) Existing Holders' Submitted Bids specifying any rate that is lower
than the series interest rate will be rejected, thus entitling each such
Existing Holder to continue to hold the aggregate principal amount of auction
rate notes subject to such Submitted Bids;
(c) Potential Holders' Submitted Bids specifying any rate that is lower
than the series interest rate will be accepted;
(d) Each Existing Holder's Submitted Bid specifying a rate that is
equal to the series interest rate will be rejected, thus entitling such Existing
Holder to continue to hold the aggregate principal amount of auction rate notes
subject to such Submitted Bid, unless the aggregate principal amount of auction
rate notes subject to such Submitted Bids will be greater than the principal
amount of auction rate notes (the "remaining principal amount")
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equal to the excess of the Available auction rate notes over the aggregate
principal amount of auction rate notes subject to Submitted Bids described in
subparagraphs (b) and (c) above, in which event such Submitted Bid of such
Existing Holder will be rejected in part and such Existing Holder will be
entitled to continue to hold the principal amount of auction rate notes subject
to such Submitted Bid, but only in an amount equal to the aggregate principal
amount of auction rate notes obtained by multiplying the remaining principal
amount by a fraction, the numerator of which will be the principal amount of
outstanding auction rate notes held by such Existing Holder subject to such
Submitted Bid and the denominator of which will be the sum of the principal
amount of outstanding auction rate notes subject to such Submitted Bids made by
all such Existing Holders that specified a rate equal to the series interest
rate;
(e) Each Potential Holder'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 auction rate notes obtained by multiplying the excess
of the aggregate principal amount of Available auction rate notes over the
aggregate principal amount of auction rate 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 outstanding auction rate
notes subject to such Submitted Bid and the denominator of which will be the sum
of the principal amount of outstanding auction rate notes subject to Submitted
Bids made by all such Potential Holders that specified a rate equal to the
series interest rate; and
(f) Each Potential Holder's Bid specifying a rate that is higher than
the series interest rate will be rejected.
INSUFFICIENT BIDS. If Sufficient Clearing Bids have not been made
(other than because all of the outstanding auction rate notes are subject to
Submitted Hold Orders) or if the net loan rate for the auction rate notes is
less than the Bid Auction Rate (in which case the series interest rate shall be
the net loan rate for the auction rate notes) or if the series interest rate
would be greater than 17%, subject to the denomination requirements described
below, Submitted Orders will be accepted or rejected as follows in the following
order of priority:
(a) Existing Holders' Submitted Bids specifying any rate that is equal
to or lower than the series interest rate will be rejected, thus entitling such
Existing Holders to continue to hold the aggregate principal amount of auction
rate notes subject to such Submitted Bids;
(b) Potential Holders' Submitted Bids specifying (i) a rate that is
equal to or lower than the series interest rate will be accepted, and (ii) a
rate that is higher than the series interest rate will be rejected; and
(c) Each Existing Holder's Submitted Bid specifying any rate that is
higher than the series interest rate and the Submitted Sell Order of each
Existing Holder will be accepted, thus entitling each Existing Holder that
submitted any such Submitted Bid or Submitted Sell Order to sell the auction
rate notes subject to such Submitted Bid or Submitted Sell Order, but in both
cases only in an amount equal to the aggregate principal amount of auction rate
notes obtained by multiplying the aggregate principal amount of auction rate
notes subject to Submitted Bids described in subparagraph (b) above by a
fraction, the numerator of which will be the aggregate principal amount of
outstanding auction rate notes held by such Existing Holder subject to such
Submitted Bid or Submitted Sell Order and the denominator of which will be the
aggregate principal amount of outstanding auction rate notes subject to all such
Submitted Bids and Submitted Sell Orders.
ALL HOLD ORDERS. If all outstanding auction rate notes 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 Clearing Bids and Insufficient Bids, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a principal amount of auction rate
notes that is not equal to an Authorized Denomination, the auction agent will,
in such manner as in its sole discretion it will determine, round up or down the
principal amount of auction rate notes to be purchased or sold by any Existing
Holder or Potential Holder so that the principal amount of auction rate notes
purchased or sold by each Existing Holder or Potential Holder will be equal to
an Authorized Denomination. If, as a result of the procedures described above
regarding Insufficient Bids, any Potential Holder would be entitled or required
to purchase less than a principal amount of auction rate 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
auction rate notes for purchase among Potential Holders so that only auction
rate notes in an Authorized Denomination are purchased by any Potential
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Holder, even if such allocation results in one or more of such Potential Holders
not purchasing any auction rate notes.
Based on the results of each Auction, the auction agent will determine
the aggregate principal amount of auction rate notes to be purchased and the
aggregate principal amount of auction rate notes to be sold by Potential Holders
and Existing Holders 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 auction rate notes to be sold differs from such
aggregate principal amount of auction rate 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, auction rate
notes.
Neither the issuer nor any affiliate of the issuer may submit an Order
in any Auction.
Any calculation by the auction agent (or the administrator or the
indenture trustee, if applicable) of the series interest rate, the Applicable
LIBOR Rate, the maximum auction rate, the all hold rate, the net loan rate for
the auction rate notes and the non-payment rate will, in the absence of manifest
error, be binding on all other parties.
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 the next interest accrual period and, if such Order was a Bid or Sell Order,
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 interest determination
date, if the series interest rate is the auction rate, or 4:00 p.m., eastern
time, on the interest determination date, if the series interest rate is the net
loan rate for the auction rate notes. Each broker-dealer that submitted an Order
on behalf of a Bidder is required to then advise such Bidder of the 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 auction rate notes as a result of the Auction and advise each Bidder
purchasing or selling auction rate notes as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such auction rate notes or to deliver such auction rate notes against payment
therefor, as appropriate. Pursuant to the Auction Agent Agreement, the auction
agent will record each transfer of auction rate notes on the Existing Holders
Registry to be maintained by the auction agent.
In accordance with DTC's normal procedures, on the business day after
the interest determination 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 auction rate
notes delivered as necessary to effect the purchases and sales of auction rate
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 Holder selling auction rate notes in an Auction fails
to deliver such auction rate notes, the broker-dealer of any person that was to
have purchased auction rate notes in such Auction may deliver to such person a
principal amount of auction rate notes that is less than the principal amount of
auction rate notes that otherwise was to be purchased by such person but in any
event equal to an Authorized Denomination. In such event, the principal amount
of auction rate notes to be delivered will be determined by such broker-dealer.
Delivery of such lesser principal amount of auction rate 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 Holder,
Existing Holder or their respective broker-dealer or Participant to deliver the
principal amount of auction rate notes or to pay for the auction rate notes
purchased or sold pursuant to an Auction or otherwise. For a further description
of the settlement procedures, see Appendix D, "Settlement Procedures."
INDENTURE TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, CALCULATION AGENT AND
BROKER-DEALERS
The indenture trustee will not be liable or responsible for the actions
of or failure to act by the auction agent, calculation agent or any
broker-dealer under the indenture or under the Auction Agent Agreement, the
Calculation 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 calculation agent or any broker-dealer without
undertaking any independent review or investigation of the truth or accuracy of
such information.
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CHANGES IN AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS. The issuer may change, from time
to time, the length of the one or more auction periods in order to conform with
then current market practice with respect to similar securities 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 auction rate
notes (an "auction period adjustment"). The issuer will not initiate such change
in the length of the auction period unless it has received the written consent
of the calculation agent, which consent shall not be unreasonably withheld, not
less than fifteen days nor more than 20 days prior to the effective date of an
auction period adjustment. The issuer will initiate an auction period adjustment
by giving written notice to the indenture trustee, the auction agent, the
calculation agent, the Depository and each rating agency then rating the auction
rate notes subject to such auction period adjustment, in substantially the form
of, or containing substantially the information contained in, the indenture at
least 10 days prior to the interest determination date for such auction period.
No auction period adjustment may result in an auction period of less
than 7 nor more than 91 days, with respect to auction rate notes with a short
auction period, or in an auction period that is more than three months shorter
or longer than the auction period established upon the issuance or auction
period conversion of such auction rate notes, with respect to auction rate notes
with a long auction period. An auction period adjustment will not be allowed
unless Sufficient Clearing Bids existed a both the Auction preceding the date on
which the notice of the proposed change was given as described above and the
Auction preceding the proposed change.
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 interest determination date for the first such auction
period, a certificate from the issuer authorizing an auction period adjustment
specified in such certificate and the written consent of the calculation agent
described above and (B) Sufficient Clearing Bids exist at the Auction on the
interest determination date for such first auction period. If the condition
referred to in (A) is not met, the auction rate applicable for the next auction
period will be determined pursuant to the Auction Procedures and the length of
the auction period will remain the same. 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 for the auction rate notes, but in no event
greater than 17%, and the length of the auction period will remain the same.
The issuer, with the written consent of the Rating Agencies then rating
the outstanding Notes, may, from time to time, change the length of one or more
auction periods pursuant to an auction period conversion. In the event of a
failed auction period conversion, the series interest rate for the auction
period for which the proposed auction period conversion was to have been
effective will be the lesser of the maximum auction rate and the net loan rate
for the auction rate notes, but in no event greater than 17%, and the length of
the auction period will remain the same.
CHANGES IN THE INTEREST DETERMINATION DATE. The calculation agent may
specify an earlier interest determination date than the interest determination
date that would otherwise be determined in accordance with the definition of
"interest determination date" with respect to one or more specified auction
periods in order to conform with then current market practice with respect to
similar securities or to accommodate economic and financial factors that may
affect or be relevant to the day of the wee constituting an interest
determination date and the interest rate borne on the auction rate notes. The
Authorized Officer of the issuer will not consent to such change in the interest
determination date unless the issuer shall have received from the calculation
agent not less than 15 days nor more than 20 days prior to the effective date of
such change a written request for consent. The calculation agent will provide
notice of its determination to specify an earlier interest determination date
for one o more auction periods by means of a written notice delivered at least
10 days prior to the proposed changed interest determination date to the
indenture trustee, the auction agent, the issuer and the Depository. Such notice
will be substantially in the form of, or contain substantially the information
contained in, the indenture.
The changes in Auction terms described above may be made with respect
to any of the series of auction rate notes (but in such latter case separate
notices will be prepared and delivered as provided above and, with respect to
changes in the length of auction periods, the conditions specified above will be
applied to each series separately). In connection with any change in Auction
terms described above, the auction agent will provide such further notice to
such parties as is specified in the Auction Agent Agreement.
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APPENDIX D
SETTLEMENT PROCEDURES
If not otherwise defined below, capitalized terms used below will have
the meanings given such terms in the indenture. These Settlement procedures
apply separately to each series of auction rate notes.
(a) Not later than (1) 3:00 P.M., eastern time, if the series
interest rate is the auction rate or (2) 4:00 P.M., eastern time, if the series
interest rate is the net loan rate for the auction rate notes, on each interest
determination date, the auction agent will notify by telephone each
broker-dealer that participated in the Auction held on such interest
determination date and submitted an Order on behalf of an Existing Holder or
Potential Holder of:
(i) the series interest rate fixed for the next interest
accrual period;
(ii) whether there were Sufficient Clearing Bids in such
Auction;
(iii) if such broker-dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an Existing Holder, whether
such Bid or Sell Order was accepted or rejected, in whole or in part,
and the principal amount of auction rate notes, if any, to be purchased
or sold by such Existing Holder;
(iv) if such broker-dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Holder, whether such Bid was
accepted or rejected, in whole or in part, and the principal amount of
auction rate notes, if any, to be purchased by such Potential Holder;
(v) if the aggregate amount of auction rate notes to be
sold by all Existing Holders on whose behalf such Seller's
Broker-Dealer submitted Bids or Sell Orders exceeds the aggregate
principal amount of auction rate notes to be purchased by all Potential
Holders 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) acting for
one or more purchaser of such excess principal amount of auction rate
notes and the principal amount of auction rate notes to be purchased
from one or more Existing Holders on whose behalf such Seller's
Broker-Dealer acted by one or more Potential Holders on whose behalf
each of such Buyer's Broker-Dealers acted;
(vi) if the principal amount of auction rate notes to be
purchased by all Potential Holders on whose behalf such Buyer's
Broker-Dealer submitted a Bid exceeds the amount of auction rate notes
to be sold by all Existing Holders 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 Seller's Broker-Dealer) acting for one or more
sellers of such excess principal amount of auction rate notes and the
principal amount of auction rate notes to be sold to one or more
Potential Holders on whose behalf such Buyer's Broker-Dealer acted by
one or more Existing Holders on whose behalf each of such Seller's
Broker-Dealers acted; and
(vii) the interest determination date for the next
succeeding Auction.
(b) On each interest determination date, each broker-dealer that
submitted an Order on behalf of any Existing Holder or Potential Holder will:
(i) advise each Existing Holder and Potential Holder on
whose behalf such broker-dealer submitted a Bid or Sell Order in the
Auction on such interest determination 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 Holder on whose behalf such
Buyer's Broker-Dealer submitted a Bid that was accepted, in whole or in
part, to instruct such Potential Holder'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 auction rate
notes to be purchased pursuant to such Bid against receipt of such
auction rate notes;
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(iii) in the case of a broker-dealer that is a Seller's
Broker-Dealer, instruct each Existing Holder 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 Holder's Participant to deliver to such Seller's
Broker-Dealer (or its Participant) through the Depository the principal
amount of auction rate notes to be sold pursuant to such Order against
payment therefor;
(iv) advise each Existing Holder on whose behalf such
broker-dealer submitted an Order and each Potential Holder on whose
behalf such broker-dealer submitted a Bid of the series interest rate
for the next interest accrual period;
(v) advise each Existing Holder on whose behalf such
broker-dealer submitted an Order of the next interest determination
date; and
(vi) advise each Potential Holder on whose behalf such
broker-dealer submitted a Bid that was accepted, in whole or in part,
of the next interest determination 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 auction rate notes received
by it in connection with such Auction pursuant to paragraph (b)(iii) above,
among the Potential Holders, if any, on whose behalf such broker-dealer
submitted Bids, the Existing Holders, 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.
(d) On each interest determination date:
(i) each Potential Holder and Existing Holder with an
Order in the Auction on such interest determination 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 (A) pay through the
Depository to the Participant of the Existing Holder delivering auction
rate notes to such broker-dealer following such Auction pursuant to
paragraph (b)(ii) above the amount necessary to purchase such auction
rate notes against receipt of such auction rate notes and (B) deliver
such auction rate 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 auction rate notes to be purchased pursuant to (b)(ii)
above against receipt of such auction rate notes.
(e) On the business day following each interest determination date:
(i) each Participant for a Bidder in the Auction on such
interest determination 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 Holder selling auction rate notes in an Auction
fails to deliver such auction rate notes (by authorized book-entry), a
broker-dealer may deliver to the Potential Holder on behalf of which it
submitted a Bid that was accepted a principal amount of auction rate notes that
is less than the principal amount of auction rate notes that otherwise was to be
purchased by such Potential Holder. In such event, the principal amount of
auction rate notes to be so delivered will
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be determined solely by such broker-dealer. Delivery of such lesser principal
amount of auction rate notes will constitute good delivery. Notwithstanding the
foregoing terms of this paragraph (f), any delivery or nondelivery of auction
rate 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
shall have any responsibility or liability with respect to the failure of a
Potential Holder, Existing Holder or their respective broker-dealer or
Participant to take delivery of or deliver, as the case may be, the principal
amount of the auction rate notes or to pay for the auction rate notes purchased
or sold pursuant to an Auction or otherwise.
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APPENDIX E
FORM OF MASTER PURCHASER'S LETTER
TO BE SUBMITTED TO YOUR BROKER-DEALER
Relating to Securities Involving Rate Settings
Through Auctions or Remarketings
To: The Corporation
Remarketing Agent
The Trust Company
A Broker-Dealer
An Agent Member
Other Persons
Ladies and Gentlemen:
1. This letter is designed to apply to auctions for publicly or
privately offered debt or equity securities ("Securities") of any issuer
("Corporation") which are described in any final prospectus or other offering
materials relating to such Securities as the same may be amended or supplemented
(collectively, with respect to the particular Securities concerned, the
"Prospectus"), and which involve periodic rate settings through auctions
("Auctions"). This letter shall be for the benefit of any Corporation and of any
trust company or auction agent (collectively, "trust company"), broker-dealer,
agent member, securities depository or other interest person in connection with
any Securities and related Auctions (it being understood that such persons may
be required to execute specified agreements and nothing herein shall alter such
requirements). The terminology used herein is intended to be general in its
application and not to exclude any Securities in respect of which (in the
Prospectus or otherwise) alternative terminology is used.
2. We may from time to time offer to purchase, offer to sell and/or
sell Securities of any Corporation as described in the Prospectus relating
thereto. We agree that this letter shall apply to all such purchases, sales and
offers and to Securities owned by us. We understand that the dividend/interest
rate on Securities may be based from time to time on the result of Auctions as
set forth in the Prospectus.
3. We agree that any bid or sell order placed by us shall constitute an
irrevocable offer by us to purchase or sell the Securities subject to such bid
or sell order, or such lesser amount of Securities as we shall be required to
sell or purchase as a result of such Auction, at the applicable price, all as
set forth in the Prospectus, and that if we fail to place a bid or sell order
with respect to Securities owned by us with a broker-dealer on any auction date,
or a broker-dealer to which w communicate a bid or sell order fails to submit
such bid or sell order to the trust company concerned, we shall be deemed to
have placed a hold order with respect to such Securities as described in the
Prospectus. We authorize any broker-dealer that submits a bid or sell order as
our agent in Auctions to execute contracts for the sale of Securities covered by
such bid or sell order. We recognize that the payment by such broker-dealer for
Securities purchased on our behalf shall not relieve us of any liability to such
broker-dealer for payment for such Securities.
4. We agree that, during the applicable period as described in the
Prospectus, dispositions of Securities can be made only in the denominations set
forth in the Prospectus and we will sell, transfer or otherwise dispose of any
Securities held by us from time to time only pursuant to a bid or sell order
placed in an Auction, to or through a broker-dealer or, when permitted in the
Prospectus, to a person that has signed and delivered, or caused to be delivered
on its behalf, to the applicable trust company a letter substantially in the
form of this letter (or other applicable purchasers' letter), provided that in
case of all transfers other than pursuant to Auctions we or our broker-dealer or
our agent member shall advise such trust company of such transfer. We understand
that a restrictive legend will be placed on certificates representing the
Securities and stop-transfer instructions will be issued to the transfer agent
and/or registrar, all as set forth in the Prospectus. We agree to comply with
any other transfer restrictions or other related procedures as described in the
Prospectus.
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5. We agree that, during the applicable period as described in the
Prospectus, ownership of Securities shall be represented by a global certificate
registered in the name of the applicable securities depository or its nominee,
that we will not be entitled to receive any certificate representing the
Securities and that our ownership of any Securities will be maintained in
book-entry form by the securities depository for the account of our agent
member, which in turn will maintain records of our beneficial ownership. We
authorize and instruct our agent member to disclose to the applicable trust
company such information concerning our beneficial ownership of securities as
such trust company shall request.
6. We acknowledge that partial deliveries of Securities purchased in
Auctions may be made to us and such deliveries shall constitute good delivery as
set forth in the Prospectus.
7. This letter is not a commitment by us to purchase any Securities.
8. This letter supersedes any prior-dated version of this master
purchaser's letter, and supplements any prior or post-dated purchaser's letter
specific to particular Securities; any recipient of this letter may rely upon it
until such recipient has received a signed writing amending or revoking this
letter.
9. The descriptions of Auction procedures set forth in each
applicable Prospectus are incorporated by reference herein and, in case of any
conflict between this letter and any such description, such description shall
control.
10. Any photocopy or other reproduction of this letter, if signed,
shall be deemed of equal effect as a signed original.
11. Our agent member of the Securities Depository currently is
____________________________________________.
12. Our personnel authorized to place orders with broker-dealers for
the purposes set forth in the Prospectus in Auctions is/are ___________________,
telephone number (___) ________.
13. Our taxpayer identification number is _____________________.
14. In the case of each offer to purchase, offer to sell or sale by us
of Securities not registered under the Securities Act of 1933, as amended (the
"Act"), we represent and agree as follows:
We understand and expressly acknowledge that the Securities have
not been and will not be registered under the Act and, accordingly, that the
Securities may not be reoffered, resold or otherwise pledged, hypothecated or
transferred unless an applicable exemption for the registration requirements of
the Act is available.
14.1 We hereby confirm that any purchase of Securities by us will be
for our own account, or for the account of one or more parties for which we are
acting as trustee or agent with complete investment discretion and with
authority to bind such parties, and not with a view to any public resale or
distribution thereof. We and each other party for which we are acting which will
acquire Securities will be "qualified institutional buyers" within the meaning
of Rule 144A under the Act or "accredit investors" within the meaning of
Regulation D under the Act with respect to the Securities to be purchased by us
or such party, as the case may be, will have previously invested in similar
types of instruments and will be able and prepared to bear the economic risk of
investing in and holding such Securities.
14.2 We acknowledge that prior to purchasing any Securities we shall
have received a prospectus (private placement memorandum) with respect thereto
and acknowledge that we will have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Corporation and receive answers thereto, as we deem
necessary in connection with our decision to purchase Securities.
14.3 We recognize that the Corporation and broker-dealers will rely
upon the truth and accuracy of the foregoing investment representations and
agreements, and we agree that each of our purchases of Securities now or in the
future shall be deemed to constitute our concurrence in all of the foregoing
which shall be binding on us and each party for which we are acting as set forth
in Subparagraph 14.1 above.
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Dated:
---------------------------------------------
(Name of Purchaser)
By:
-----------------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------------
Mailing Address of Purchaser:
---------------------------------------------
---------------------------------------------
---------------------------------------------
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The trust has not authorized anyone to provide any information in connection
with this offering other than the information contained in this prospectus. You
should rely only on the information contained in this prospectus in deciding
whether to make an investment in the new notes. This prospectus is not an offer
to sell or the solicitation of an offer to buy any security other than the new
notes. This prospectus is not an offer to sell nor the solicitation of an offer
to buy to any person in a jurisdiction where the offer or solicitation is not
permitted or in which the person making such offer or solicitation is not
qualified, or to any person to whom it is not lawful to make such offer or
solicitation. The delivery of and any sale made under this prospectus does not
imply that there has been no change in the affairs of the trust since the date
of this prospectus.
TABLE OF CONTENTS
Prospectus Summary
Risk Factors
Where You Can Find More Information
The Issuer
The Depositor
Use of Proceeds
The Exchange Offer
The Financed Student Loans
Transfer and Sale Agreement
Maturity and Prepayment Considerations
Description of the FFEL Program
Servicing
The Guarantee Agencies
Description of the New Notes
Redemption
Security for the Notes
The Indenture
Federal Income Tax Consequences
State Tax Considerations
ERISA Considerations
Legal Matters
Rating
Plan of Distribution
Until August 25, 1999 (90) days after the date of this prospectus), all
dealers that effect transactions in the new notes, whether or not participating
in this exchange offer, may be required to deliver a prospectus. This is in
addition to the dealer's obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
EXCHANGE OFFER FOR
SENIOR ASSET-BACKED NOTES,
SERIES 1998A1-3 (LIBOR FLOATING RATE),
SENIOR ASSET-BACKED CALLABLE NOTES,
SERIES 1998A1-4 (AUCTION RATE),
SENIOR ASSET-BACKED CALLABLE NOTES,
SERIES 1998A1-5 (AUCTION RATE),
SENIOR ASSET-BACKED CALLABLE NOTES,
SERIES 1998A1-6 (AUCTION RATE),
AND
SUBORDINATE ASSET-BACKED NOTES,
SERIES 1998B1-3 (FIXED RATE)
STUDENT LOAN FUNDING 1998-A/B
TRUST
PROSPECTUS
May 26, 1999
<PAGE> 179
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The issuer was organized as a common law trust under the laws of the State of
Delaware and has no officers or directors. The trust agreement provides,
however, that the depositor will, subject to certain exceptions, indemnify each
of the Delaware trustee, the co-owner trustee and the co-owner eligible lender
trustee and their respective agents and servants from and against any
liabilities, losses, damages, actions, suits, costs and expenses arising out of
its service to the issuer as the Delaware trustee, co-owner trustee or co-owner
eligible lender trustee, as applicable. The trust agreement further provides
that such indemnification claims shall be recourse to the trust property only
and not to the individual assets of the depositor.
The depositor's Limited Liability Company Agreement (the "LLC Agreement")
implements the provisions of the Delaware Limited Liability Company Act (the
"Act"), that provide for the limitation of liability of the depositor's members,
manager and member of its management committee. The depositor's LLC Agreement
limits the liability of its members, manager and members of its management
committee to the fullest extent permitted under the Act.
The depositor's LLC Agreement provides for the mandatory indemnification, to the
fullest extent permitted under the Act and to the extent of the depositor's
assets, subject to certain exceptions, of each of the depositor's present and
former management committee members against any liabilities, including
liabilities under the Securities Act, incurred by reason of the fact that such
person is or was a management committee member of the depositor. The depositor's
LLC Agreement also provides for the mandatory indemnification, to the fullest
extent permitted under the Act, subject to certain exceptions, of each of the
depositor's present and former managers against any liabilities, including
liabilities under the Securities Act, incurred by reason of the fact that such
person is or was a manager of the depositor. The depositor's LLC Agreement
provides for the discretionary indemnification to the same extent as the
manager, of any other officer or agent of the depositor.
The depositor has entered into an agreement with respect to its two independent
management committee members in which the depositor 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 and negligence, in connection with
any transaction of the depositor. Furthermore, pursuant to such agreement, the
depositor has agreed to indemnify and hold harmless such management committee
members and their affiliates for any liabilities, including liabilities under
the Securities Act, incurred in good faith and without negligence in connection
with any of the transactions of the depositor.
Student Loan Funding Resources, Inc. maintains an insurance policy providing
liability insurance for any liability that the members, management committee
members, managers or officers of the depositor may incur in their capacities as
such.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
1.1 Form of Dealer Manager Agreement+
3.1 Certificate of Formation for Student Loan Funding LLC+
3.2 Limited Liability Company Agreement for Student Loan Funding LLC+
3.3 Form of Trust Agreement between Student Loan Funding LLC and the
eligible lender trustee+
4.1 Second Amended and Restated Indenture of Trust, dated as of June 1,
1999, by and Firstar Bank, N.A., as co-owner trustee, Firstar Bank,
N.A., as initial eligible lender trustee and Firstar Bank, N.A., as
indenture trustee+
4.2 Second Amended and Restated Terms Supplement to the Second Amended and
Restated Indenture of Trust, dated as of June 1, 1999, by and Firstar
Bank, N.A., as co-owner trustee, Firstar Bank, N.A., as initial
eligible lender trustee and Firstar Bank, N.A., as indenture trustee+
4.3 Registration Rights Agreement, dated as of December 1, 1998, by and
between Student Loan Funding LLC and Salomon Smith Barney, Inc.+
4.4 Form of old Senior Asset-Backed Note, Series 1998A-3 (LIBOR Rate)+
4.5 Form of old Senior Asset-Backed Callable Note, Series 1998A-4 (Auction
Rate)+
4.6 Form of old Senior Asset-Backed Callable Note, Series 1998A-5
(Auction Rate)+
4.7 Form of old Senior Asset-Backed Callable Note, Series 1998A-6
(Auction Rate)+
4.8 Form of old Subordinate Asset-Backed Note, Series 1998B-3
(Fixed Rate)+
4.9 Form of new Senior Asset-Backed Note, Series 1998A1-3 (LIBOR
Rate)+
4.10 Form of new Senior Asset-Backed Callable Note, Series 1998A1-4
(Auction Rate)+
4.11 Form of new Senior Asset-Backed Callable Note, Series 1998A1-5 (Auction
Rate)+
4.12 Form of new Senior Asset-Backed Callable Note, Series 1998A1-6 (Auction
Rate)+
4.13 Form of new Subordinate Asset-Backed Note, Series 1998B1-3 (Fixed
Rate)+
5.1 Opinion of Thompson Hine & Flory LLP with respect to legality+
8.1 Opinion of Thompson Hine & Flory LLP with respect to federal tax
matters+
10.1 Master Servicing Agreement, dated as of March 15, 1999, by and between
Firstar Bank, N.A., as Co-owner Trustee, and Student Loan Funding
Resources, Inc.+
10.2 Administration Agreement, dated as of March 15, 1999, by and between
Firstar Bank, N.A., as Co-owner Trustee, and Student Loan Funding
Resources, Inc.+
10.3 Transfer and Sale Agreement, dated as of March 15, 1999, by and between
Student Loan Funding LLC, Firstar Bank, N.A., as eligible lender
trustee and Firstar Bank, N.A. as co-owner trustee for the trust+
10.4 Eligible Lender Trustee Agreement, dated as of March 15, 1999, by and
between Firstar Bank, N.A. as eligible lender trustee and Firstar Bank,
N.A. as co-owner trustee+
10.5 Guarantee Agreement between the eligible lender trustee on behalf of the
issuer and Florida Department of Education, Office of Student Financial
Assistance+
10.6 Guarantee Agreement between the eligible lender trustee on behalf of the
issuer and Georgia Higher Education Assistance Corporation+
10.7 Guarantee Agreement between the eligible lender trustee on behalf of the
issuer and United Student Aid Funds, Inc.+
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<PAGE> 180
10.8 Guarantee Agreement between the eligible lender trustee on behalf of the
issuer and Kentucky Higher Education Assistance Authority+
10.9 Guarantee Agreement between the eligible lender trustee on behalf of
the issuer and Great Lakes Higher Education Guaranty Corporation+
10.10 Consent of Georgia Higher Education Assistance Corporation+
10.11 Consent of United Student Aid Funds, Inc.+
10.12 Consent of Kentucky Higher Education Assistance Authority+
10.13 Consent of Great Lakes Higher Education Guaranty Corporation+
23.1 Consent of Thompson Hine & Flory LLP (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 Statement of eligibility and qualification of Firstar Bank, N.A., as the
trustee under the indenture filed as Exhibit 4.1 (Form T-1)+
99.1 Form of Letter of Transmittal+
99.2 Form of Notice of Guaranteed Delivery+
+Previously filed
(b) Financial Statement Schedules:
All financial statements, schedules and historical financial information have
been omitted as they are not applicable.
ITEM 22. 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 (the "Securities Act");
(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; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, 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 the time shall be deemed to be the initial bona
fide offering thereof; and
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<PAGE> 181
(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) Insofar as indemnification for liabilities arising under the Securities
Act 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 Securities Act
and is, therefore, unenforceable. If 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 of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant 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 May 26, 1999.
FIRSTAR BANK, N.A., not in its individual capacity
but solely in its capacity as co-owner trustee for
STUDENT LOAN FUNDING 1998-A/B TRUST
By: /s/ Brian J. Gardner
------------------------------------------
Brian J. Gardner,
Vice President & Trust Officer
STUDENT LOAN FUNDING LLC
By: /s/ Perry D. Moore
------------------------------------------
Perry D. Moore,
Vice President and Manager
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<PAGE> 183
POWER OF ATTORNEY
Each person whose signature appears below constitutes and Thomas L.
Conlan, Jr. and Perry D. Moore as that person's true and lawful
attorneys-in-fact and agents, each acting alone, with full power 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 pre-effective amendment to the registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the SEC, 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, as amended,
pre-effective amendment to the registration statement has been signed by the
following persons in the capacities for Student Loan Funding LLC and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Thomas L. Conlan, Jr. Management Committee member and April 26, 1999
- ------------------------------ Chief Executive Officer
Thomas L. Conlan, Jr. And President
(Principal Executive Officer)
/s/ Perry D. Moore Management Committee Member and April 26, 1999
- ------------------------------ Vice President
Perry D. Moore
/s/ Christopher P. Chapman Management Committee Member April 26, 1999
- ------------------------------
Christopher P. Chapman
/s/ Mark A Ferrucci Management Committee Member April 26, 1999
- ------------------------------
Mark A Ferrucci
/s/ Kimberly E. Lutthans Management Committee Member April 26, 1999
- ------------------------------
Kimberly E. Lutthans
</TABLE>
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<PAGE> 184
EXHIBIT INDEX
1.1 Form of Dealer Manager Agreement+
3.1 Certificate of Formation for Student Loan Funding LLC+
3.2 Limited Liability Company Agreement for Student Loan Funding LLC+
3.3 Form of Trust Agreement between Student Loan Funding LLC and the
eligible lender trustee+
4.1 Second Amended and Restated Indenture of Trust, dated as of June 1,
1999, by and Firstar Bank, N.A., as co-owner trustee, Firstar Bank,
N.A., as initial eligible lender trustee and Firstar Bank, N.A., as
indenture trustee+
4.2 Second Amended and Restated Terms Supplement to the Second Amended and
Restated Indenture of Trust, dated as of June 1, 1999, by and Firstar
Bank, N.A., as co-owner trustee, Firstar Bank, N.A., as initial
eligible lender trustee and Firstar Bank, N.A., as indenture trustee+
4.3 Registration Rights Agreement, dated as of December 1, 1998, by and
between Student Loan Funding LLC and Salomon Smith Barney, Inc.+
4.4 Form of old Senior Asset-Backed Note, Series 1998A-3 (LIBOR Rate)+
4.5 Form of old Senior Asset-Backed Callable Note, Series 1998A-4 (Auction
Rate)+
4.6 Form of old Senior Asset-Backed Callable Note, Series 1998A-5 (Auction
Rate)+
4.7 Form of old Senior Asset-Backed Callable Note, Series 1998A-6 (Auction
Rate)+
4.8 Form of old Subordinate Asset-Backed Note, Series 1998B-3 (Fixed Rate)+
4.9 Form of new Senior Asset-Backed Note, Series 1998A1-3 (LIBOR Rate)+
4.10 Form of new Senior Asset-Backed Callable Note, Series 1998A1-4 (Auction
Rate)+
4.11 Form of new Senior Asset-Backed Callable Note, Series 1998A1-5 (Auction
Rate)+
4.12 Form of new Senior Asset-Backed Callable Note, Series 1998A1-6 (Auction
Rate)+
4.13 Form of new Subordinate Asset-Backed Note, Series 1998B1-3 (Fixed
Rate)+
5.1 Opinion of Thompson Hine & Flory LLP with respect to legality+
8.1 Opinion of Thompson Hine & Flory LLP with respect to federal tax
matters+
10.1 Master Servicing Agreement, dated as of March 15, 1999, by and between
Firstar Bank, N.A., as co-owner trustee, and Student Loan Funding
Resources, Inc.+
10.2 Administration Agreement, dated as of March 15, 1999, by and between
Firstar Bank, N.A., as co-owner trustee, and Student Loan Funding
Resources, Inc.+
10.3 Transfer and Sale Agreement, dated as of March 15, 1999, by and between
Student Loan Funding LLC, Firstar Bank, N.A., as eligible lender
trustee and Firstar Bank, N.A. as Co-owner Trustee for the trust+
10.4 Eligible Lender Trustee Agreement, dated as of March 15, 1999, by and
between Firstar Bank, N.A. as eligible lender trustee and Firstar Bank,
N.A. as Co-owner Trustee+
10.5 Guarantee Agreement between the eligible lender trustee on behalf of
the issuer and Florida Department of Education, Office of Student
Financial Assistance+
10.6 Guarantee Agreement between the eligible lender trustee on behalf of
the issuer and Georgia Higher Education Assistance Corporation+
10.7 Guarantee Agreement between the eligible lender trustee on behalf of
the issuer and United Student Aid Funds, Inc.+
10.8 Guarantee Agreement between the eligible lender trustee on behalf of
the issuer and Kentucky Higher Education Assistance Authority+
10.9 Guarantee Agreement between the eligible lender trustee on behalf of
the issuer and Great Lakes Higher Education Guaranty Corporation+
10.10 Consent of Georgia Higher Education Assistance Corporation+
10.11 Consent of United Student Aid Funds, Inc.+
10.12 Consent of Kentucky Higher Education Assistance Authority+
10.13 Consent of Great Lakes Higher Education Guaranty Corporation+
23.1 Consent of Thompson Hine & Flory LLP (contained in their opinions filed
as Exhibits 5.1 and 8.1)+
24.1 Power of Attorney (contained on the signature page hereof)
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<PAGE> 185
25.1 Statement of eligibility and qualification of Firstar Bank, N.A., as
the trustee under the indenture filed as Exhibit 4.1 (Form T-1)+
99.1 Form of Letter of Transmittal+
99.2 Form of Notice of Guaranteed Delivery+
+Previously filed
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