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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1999
WASHINGTON, D.C. 20549
REGISTRATION NO. 333-80537
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TRANSITION AUTO FINANCE III, INC.
(Name of small business issuer in its charter)
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TEXAS 6141 75-2822804
(State or other jurisdiction of (Primary industrial (I.R.S. Employer Identification
incorporation or organization) classification code number) No.)
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TRANSITION AUTO FINANCE III, INC. KEN LOWE
5422 ALPHA ROAD, SUITE 100 5422 ALPHA ROAD, SUITE 100
DALLAS, TEXAS 75240 DALLAS, TEXAS 75240
(972) 404-0042 (972) 404-0042
(Address, including zip code, and telephone (Name, address, including zip code and
number, including telephone number,
area code, of registrant's principal executive including area code, of agent for service)
offices and
principal place of business)
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Copies to:
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VINCE MOUER GERALD MORGAN
KUPERMAN, ORR, MOUER & ALBERS, P.C. BURDETT, MORGAN & THOMAS
100 CONGRESS AVENUE, SUITE 1400 5700 S.W. 45TH STREET
AUSTIN, TEXAS 78701-4042 AMARILLO, TEXAS 79114
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF DOLLAR AMOUNT OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED UNIT PRICE REGISTRATION FEE
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Secured Promissory Notes $20,000,000 N/A $20,000,000 $6,061
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(a))
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ITEM
NO. ITEM LOCATION IN PROSPECTUS
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1. Front of Registration Statement and Outside Front Cover
Page of Prospectus................................... Front of Registration Statement;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover of Prospectus...... Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information and Risk Factors................... Prospectus Summary; Risk Factors
4. Use of Proceeds........................................ Use of Proceeds
5. Determination of Offering Plan......................... Underwriting
6. Dilution............................................... Dilution
7. Selling Security Holders............................... Not Applicable
8. Plan of Distribution................................... Underwriters
9. Legal Proceedings...................................... Not Applicable
10. Directors, Executive Officers, Promoters and Control
Persons.............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................... Principal Stockholders
12. Description of Securities To Be Registered............. Description of the Securities
13. Interests of Named Experts and Counsel................. Experts, Legal Matters
14. Disclosure of Commission's Position on Indemnification
for Securities Act Liabilities....................... Management
15. Organization Within Last Five Years.................... Prospectus Summary -- Overview;
Prospectus Summary -- Use of
Proceeds; Use of Proceeds; THE
BUSINESS, Security Ownership of
Certain Beneficial Owners and
Management; Management -- Certain
Relationships and Related
Transactions
16. Description of Business................................ Available Information; Risk Factors,
Management's Discussion and Analysis
of Plan of Operation; Security
Ownership of Certain Beneficial
Owners and Management; Management;
Description of the Notes; Index to
Financial Statements
17. Management's Discussion and Analysis of Plan of
Operation............................................ The Company; Management's Discussion
and Analysis of Plan of Operation
18. Description of Property................................ The Company
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ITEM
NO. ITEM LOCATION IN PROSPECTUS
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19. Certain Relationships and Related Transactions......... Use of Proceeds; The Company -- The
Business of the Company;
Management -- Certain Relationships
and Transactions
20. Market for Common Equity and Related Stockholder
Matters.............................................. Risk Factors; Description of
Securities; Shares Eligible for
Future Sale
21. Executive Compensation................................. Management
22. Financial Statements................................... Financial statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. Not Applicable
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TRANSITION AUTO FINANCE III, INC.
11% SECURED PROMISSORY NOTES
MAXIMUM $20,000,000
MINIMUM $250,000
Who we are: Transition Auto Finance III, Inc., a wholly-owned,
single purpose subsidiary of Transition Leasing
Management, Inc. ("TLMI")
What we do: Purchase passenger cars, light trucks, suburban utility
vehicles and minivans and lease them to customers with
damaged credit ratings; TLMI performs all services
necessary for our operations.
The terms of our notes: Interest Rate -- 11% per annum from the date of issuance
Maturity Date -- October 31, 2004
Interest Payments -- monthly
Principal Payments -- none due until maturity
Collateral for our
notes: All of our assets; Our vehicles, lease contracts and,
should we lapse into default under the notes, our funds
will be held in trust for the benefit of the noteholders
Trustee: Trust Management, Inc.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR HAS DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK INCLUDING RISKS
OF DEFAULT ON THE LEASE CONTRACTS. SEE "RISK FACTORS", BEGINNING ON PAGE 3.
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The offering proceeds will be distributed as follows:
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MINIMUM MAXIMUM
OFFERING ($250,000) OFFERING ($20,000,000)
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Underwriter's commission and fees........... 8.5% $ 21,250 $ 1,700,000
Other offering expenses..................... 1.5 3,750 300,000
Our net proceeds............................ 90 225,000 18,000,000
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This offering is being conducted on a "best efforts" basis by our
underwriter, Great Nation Investment Corporation. We may contract with other
broker/dealers who are members of the National Association of Securities
Dealers, Inc. to serve as additional underwriters of this offering. Until we
receive subscriptions totaling $250,000, all investor funds will be held in an
interest bearing escrow account. This offering will terminate on the first to
occur of:
(A) December 31, 1999, if we have not received subscriptions totaling
$250,000 by that date,
(B) our receipt of $20,000,000 in subscriptions,
(C) October 31, 2000 or
(D) such earlier date as we elect in our sole discretion.
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The date of this Prospectus is , 1999
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SUMMARY
The following summarizes the information that is discussed in more detail
in the text of this prospectus. You should read the entirety of this prospectus
before making your decision to purchase notes.
Terms of the Offering. The material terms of our offering are as follows:
Securities offered: 11% Secured Promissory Notes
Maximum offering amount: $20,000,000
Minimum subscription
amount: $5,000; if you are using your individual retirement
account (IRA), you may subscribe for as little as
$2,000 of Notes.
Minimum offering amount: $250,000; all subscriptions will be held in escrow
until we have received subscriptions totaling at
least $250,000. Your subscription funds will be
deposited in an interest bearing escrow account
until we receive subscriptions totaling $250,000 or
we terminate this offering, whichever occurs
earlier.
Offering termination date: Our offering is being conducted on a "best efforts"
basis and will terminate on December 31, 1999, if
we have not received subscriptions of at least
$250,000 by that date. If we receive subscriptions
of at least $250,000 by that date, this offering
will terminate on the earlier of:
(i) October 31, 2000,
(ii) the date we have sold all of the notes we are
offering, or
(iii) such date as we may elect, in our sole
discretion, to terminate the offering.
For a more complete discussion of the terms of the offering, please see the
section titled "PLAN OF DISTRIBUTION."
Terms of the Notes. The basic terms of the notes we are offering to you are
as follows:
Maturity Date: October 31, 2004.
Interest Rate: 11% per annum.
Interest Payments: Interest will be payable monthly in arrears,
meaning that we will pay interest for each month on
or before the fifteenth day of the next month. The
first interest payment will be due on the 15th day
of the second full month after your note is issued
(your note will be issued as of the third business
after your subscription payment is received.
Principal Payments: No principal payments will be due until maturity.
Sinking Fund: From and after the earlier of October 31, 2002, or
the date we deliver to the Trustee a contract
unavailability notice, all of our assets, and any
proceeds from the collateral securing the notes,
will be placed in a sinking fund account and we may
use such proceeds only for the repayment of the
notes and payment of the trustee's fees and
expenses.
Redemption: We may redeem the notes, in whole or in part, on
any payment date after November 30, 2000. If we
redeem less than all of the notes, the trustee will
determine which notes are to be redeemed in such
fashion as the trustee thinks appropriate.
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For a more complete discussion of the terms of the notes, please see the section
titled, "TERMS OF THE NOTES" and "ADDITIONAL INDENTURE PROVISIONS."
Collateral. The collateral for the notes consists of substantially all of
our assets, the vehicles we purchase and lease, the lease contracts, our bank
accounts and our operating agreements. For a more complete discussion of the
collateral for the notes offered pursuant to this prospectus, please see the
section titled "COLLATERAL FOR THE NOTES."
Our Business. We are permitted to engage in only those activities which
further our business purpose of leasing vehicles to customers with "sub-prime"
credit ratings and to incur only those expenses permitted by the Indenture.
We will lease only new and late model (not more than four model years old)
used vehicles -- passenger cars, light trucks, minivans, sport utility vehicles
and motorcycles.
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RISK FACTORS
An investment in the notes involves a number of risks. In considering a
purchase of these securities, you should carefully consider the risks involved,
including the following:
Limited Assets; Single Purpose Nature; No Guarantor
We were organized by TLMI as a single purpose entity. Under the indenture,
we can engage in and conduct only the vehicle leasing business. Accordingly, we
will not have any significant assets other than the vehicles, the lease
contracts and the accounts into which the net proceeds of this offering and our
operating revenues are deposited. No other party, including our sole
shareholder, TLMI, will insure or guarantee our obligations under the notes or
will be obligated to make capital contributions to us at any time. Consequently,
you can rely only on the funds we receive from leasing the vehicles and the
funds we receive from the sale of the vehicles, for the payment of interest on
and principal of the notes. If such payments and funds are insufficient to
permit payment of the sums due on the notes, we will have no other significant
assets with which to pay any portion of the deficiency.
Adequacy of Repayment Funds
Except for the obligation to deposit funds for monthly interest payments,
we are not required to satisfy any minimum schedule of payments into the sinking
fund account, and prior to the maturity date, we are not required to satisfy any
minimum schedule of payments of principal on the notes. After the sinking fund
trigger date, which is the earlier of (A) October 31, 2002 or (B) the day we
deliver a contract unavailability notice, the funds in the sinking fund account
will consist of the net collection proceeds from the lease contracts and
vehicles during the period from the sinking fund trigger date to the maturity
date and any income earned on such proceeds while they are in the sinking fund
account. There is a risk that the funds in the sinking fund account will be
insufficient to pay all principal and interest outstanding on the notes on the
maturity date.
If the funds in the sinking fund account are insufficient to pay all
principal and interest outstanding on the notes on the maturity date, we
anticipate being able to refinance or sell the remaining lease contracts and
vehicles and using the proceeds of any such refinancing or sale to repay any
principal and interest then outstanding under the notes. There is a risk,
however, that no such refinancing or sale can be consummated or that the
proceeds from any such refinancing or sale will be insufficient to repay the
principal and interest then outstanding.
Poor Credit Decisions
We will be dependent upon TLMI's judgment with respect to the subjective
and difficult process of leasing automobiles to people with prior substantial
credit problems and non-prime credit ratings and making credit decisions in
connection therewith. Poor credit decisions by TLMI could impair our ability to
repay the notes.
Sufficient Number of Lease Customers
We will depend on TLMI for purchasing and originating leases and contacts
with automobile franchise dealers, independent automobile dealers, and
independent leasing companies from whom most of the vehicles will be purchased
by us and most of our lessee-customers will be referred. Based on TLMI's recent
limited experience, we believe that an adequate supply of eligible customers and
lease contracts will be available. If we are unable to locate a sufficient
number of additional eligible customers, we could elect to deliver a contract
unavailability notice to the trustee, at which time we would cease purchasing
vehicles and creating new lease contracts, and all subsequent net collection
proceeds from the then existing lease contracts and vehicles, following
deduction for payment of interest on the notes and allowed expenses, would be
deposited into the sinking fund account for payment of the notes. Our delivery
of a contract unavailability notice prior to the time at which the sinking fund
trigger date would otherwise occur may
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have a number of adverse consequences, among them a negative impact on our
ability to repay the notes and an incentive for us to redeem the notes earlier
than we might otherwise redeem or pay them.
Redemption Risk; Yield Considerations
If future interest rates decline, our ability to redeem the notes may limit
your ability to realize enhancements in the value of the notes resulting from
the lower interest rates generally existing in the market. You may not be able
to reinvest the redemption proceeds at yields equal to or exceeding the yields
on the notes. It is possible that yields on any such reinvestments will be
lower, and may be significantly lower, than the yields that could have been
realized on the notes.
Because the interest which accrues with respect to the notes is payable in
arrears (i.e., within 15 days after the end of the month in which it accrues),
the yield will be less than the stated rate of 11% per annum.
Collection Policies
In the event that a lease payment is more than 30 days overdue, TLMI
generally will commence repossession of the leased vehicle. However, TLMI
believes that collections on the lease contracts will be maximized if it is
permitted some latitude to work with customers who may be in technical default
for late payment of a single installment, but who have been making payments on a
regular and timely basis and who otherwise are not in default. Of course, if a
substantial number of defaulting lease customers make no further payments on
their lease contracts, the delay in the repossession of their leased vehicles
could result in a decrease in our repossession proceeds and could have an
adverse impact on our ability to pay the notes.
Subjective Determination of Residual Value; Reliance on Remarketing To Satisfy
Residual Obligation
At lease inception, we must estimate what the value of the vehicle will be
at the end of the scheduled lease term, a value generally described in the
automobile leasing industry as the "residual value." Our leases are designed to
recover the depreciation in the value of each vehicle over the life of the
lease, and the projection of residual value is a key element in the way we
structure the financial terms of our leases. At the end of the lease term, the
proceeds we receive from disposition of the leased vehicle may be less than our
expected residual value for a number of reasons. Among possible reasons are a
possible inaccuracy of the initial estimate, changes in the market for the
specific model of the leased vehicle or the used vehicle market in general, and
ineffective remarketing efforts by TLMI.
At the end of the scheduled lease term, we generally will dispose of the
leased vehicle either by selling it to the lease customer (or some other party
related to the lease customer) or by selling it "wholesale" in the used
automobile market. If we realize proceeds from such disposition in an amount
less than our original estimate of the residual value, whether due to inaccuracy
of the original estimate, ineffective remarketing efforts, or adverse changes in
the market for that leased vehicle (in the used automobile market in general or
otherwise), we may realize a loss on the vehicle. Losses suffered on the
disposition of off-lease vehicles could reduce our ability to repay the notes.
Lack of Market for Notes
The notes will constitute a new issue of securities, and such securities
will have no established trading market. We do not intend to list the notes on
any national securities exchange or to seek the admission of the notes for
quotation and trading in the NASDAQ National Market System. Although certain
broker/dealers may determine to make a market in the notes, we do not anticipate
that this will occur or that a secondary market will develop at any point during
the term of the notes. You will not be able to require us to redeem your notes
and you may not be able to liquidate your investment in the notes in the event
of an emergency or for any other reason. Moreover, you may not be able to use
the notes as collateral for loans. Accordingly, you should not purchase the
notes if you have any need for liquidity in your investment.
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Lien of Trustee
Under the terms of the Indenture, the trustee is granted a lien on the
property which serves as collateral for the notes. The trustee's lien is
superior to that securing the notes and secures the payment to the trustee of
the amounts due to it under the terms of Indenture, including any amounts we owe
to the trustee pursuant to indemnification provisions within the Indenture. In
the case of a default, the trustee's lien will entitle it to be paid any sums
owed the trustee before you receive any payments.
Delays in Contract Purchases or Acquisitions
We expect to purchase or acquire lease contracts as soon as practicable
following the receipt of the net proceeds from the sale of notes. Until we use
the proceeds for that purpose, we will hold them in an interest-bearing bank
account or invest them in money market mutual funds that invest in U.S.
government obligations. We have made no provision in this offering for cessation
or suspension of the selling effort if we experience a delay in the utilization
of investor funds to purchase vehicles and create new leases. If unforeseen
delays occur in the purchase of vehicles and creation of lease contracts, our
overall profitability and ability to repay the notes could be reduced because
the yields of the short-term investment alternatives for such funds are expected
to be less than both (A) the yields we anticipate receiving from the lease
contracts and (B) the cost of such funds, i.e., the interest rate payable on the
notes.
Certain Legal Matters Relating to the Contracts
Priority of Liens in Leased Vehicles. Statutory liens for repairs, unpaid
storage charges or unpaid taxes may have priority even over a perfected security
interest in a vehicle, and certain state and federal laws permit the
confiscation of motor vehicles used in unlawful activity. Liens for repairs or
taxes, or the confiscation of a vehicle, could arise or occur at any time during
the term of a lease contract and may result in the loss or impairment of the
trustee's perfected security interest in a motor vehicle. We may not be given
any notice in the event such a lien arises or confiscation occurs.
Bankruptcy and Deficiency Judgments. Certain statutory provisions,
including federal and state bankruptcy and insolvency laws, may limit or delay
our ability to repossess, resell or re-lease vehicles or enforce a claim for
damages. In addition, we may determine that a damage claim is not an appropriate
or economically viable remedy, or we may settle at a discount any judgment that
we do obtain. In the event we do not obtain deficiency judgments, and
deficiencies are not satisfied or are satisfied at a discount or discharged, in
whole or in part, the loss will be borne by us and could adversely affect our
ability to repay the notes.
Consumer Protection Laws. Numerous federal and state consumer protection
laws impose requirements upon the origination, form, and collection of
automobile lease contracts. State laws impose finance charge ceilings and other
restrictions on consumer transactions and may require certain contact
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon creditors who fail to comply with
their provisions. A risk exists that this liability could affect our ability, as
lessor under certain of the lease contracts and as an assignee of certain lease
contracts, to enforce the lease contracts. In addition, certain of these laws
make an assignee of such contract liable to the lease customer for any violation
by the assignor. Accordingly, as holder of the lease contracts, we could be
subject to liability to a lease customer under one or more of the lease
contracts. TLMI will warrant to us that consumer protection laws have not been
violated and if a lease customer has a claim or defense under such laws that
materially and adversely affects our interest in a lease contract, TLMI will be
obligated to repurchase the lease contract.
Vicarious Tort Liability as Lessor for Liabilities of Lessees
Under the laws of certain states, we could suffer vicarious tort liability
as the owner of a vehicle involved in an accident or otherwise causing personal
injury or property damage. We will attempt to mitigate this potential liability
by requiring that all lease customers carry liability insurance in specified
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minimum amounts naming us as additional insured and loss payee. In addition, we
will maintain contingent and excess automobile liability policies to protect our
interest in the event that a lease customer's required insurance is not
available or is inadequate in any given case. If we were not adequately
protected by insurance, substantial judgment liabilities against us could reduce
and even eliminate our ability to repay the notes.
Conflicts of Interest
We are the third single-purpose vehicle leasing subsidiary formed by TLMI.
Prior to forming our Company, TLMI organized Transition Auto Finance, Inc.
("TAF-I"), and Transition Auto Finance II, Inc. ("TAF-II"). TAF-I has redeemed
all the notes it had issued and no longer conducts business. TAF-II continues in
operation, and expects that it will have fully invested the proceeds of its
offering of notes before we use any of the proceeds from our offering to buy
vehicles and create leases. If we were to begin to buy vehicles and create
leases at the same time TAF-II is engaging in that same activity, we would be
competing against TAF-II for leasing customers and vehicles. In order to avoid
such a conflict of interest, we commit that we will not commence buying vehicles
and creating new leases until TAF-II has completed investing its funds in
vehicles and leases. In addition, TLMI has committed that once TAF-II has fully
invested its funds in vehicles and leases, all vehicle lease contracts purchased
or originated by TLMI that satisfy our contract criteria will be made available
to us, to the extent that we have funds available for such purchases, subject
only to right of TAF-II to acquire vehicle lease contracts and vehicles with
proceeds from repossession of its leased vehicles or prepayments of its lease
contracts. TLMI has advised us that it probably will continue to form and obtain
financing for additional new subsidiaries to engage in the vehicle leasing
business in the future.
Ken Lowe, our President, Chief Financial Officer and sole director, is the
President and sole director of TLMI and of TAF-II. There are real and on-going
conflicts of interest between us and one or both of TAF-II and TLMI. There are
and will be conflicts of interest with respect to allocation of management time,
services, overhead expenses and functions. Management of TLMI intends to resolve
any such conflicts in a manner that is fair and equitable to the Company. You
could be subject to the risk that any particular conflict might be resolved in a
manner that adversely affects noteholders.
In addition, we anticipate having a conflict of interest with respect to
the decisions as to which lease customers and lease contracts originated by TLMI
are to be acquired by the Company or by parties other than us, including TLMI
and affiliates, which may include future subsidiaries. To minimize these
conflicts, TLMI has determined that, once TAF-II has fully invested its funds in
vehicles and leasing, any future lease contracts originated by TLMI that satisfy
our lease contract criteria will be acquired by us, subject to our having funds
available for acquisition of such lease contracts, and subject to the right of
TAF-II to acquire vehicles and lease them to customers using proceeds realized
from repossession of vehicles and prepayments of lease contracts.
We will pay certain fees to TLMI including:
- a marketing fee equal to 57.5% of the customer's down payment with
respect to each lease contract;
- a purchase administration fee and a document fee totaling $150;
- in the case of new lease contracts following the repossession of a leased
vehicle, a releasing fee;
- a monthly lease contract servicing fee of $20 for each lease contract
that has not been assigned for repossession; and
- a reimbursement amount equal to TLMI's out-of-pocket expenses in
connection with the repossession, repair, remarketing and resale of a
leased vehicle.
There has been no independent determination of the fairness and reasonableness
of the terms of these transactions nor have such terms been negotiated at arms'
length. We believe, however, that the fees to be paid to TLMI, including the
marketing fee, are reasonable based on comparable fees paid to other lease
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brokers (or facilitators) in automobile leasing transactions involving customers
with non-prime credit ratings.
Sale of Small Amount of Notes
In the event that we sell only a small amount of notes in excess of the
minimum offering amount, the performance of individual lease contracts in the
pool securing the notes will have a greater effect on our ability to pay the
notes than if a larger amount of the notes are sold. In addition, although most
of our expenses will generally vary with the amount of lease contracts or notes,
relatively small amounts of fixed fees and expenses payable to the trustee and
for on-going banking, accounting and legal services may not vary in proportion
with the amount of lease contracts and may be relatively higher if only a small
portion of the notes is sold. If the fixed expenses are higher than expected or
if we are unable to acquire the number of lease contracts on the proposed terms
projected herein, our ability to repay a small amount of notes may be materially
adversely affected.
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CAPITALIZATION
The following table sets forth our capitalization as of June 7, 1999, and
as adjusted to reflect the sale of the minimum amount of notes offered hereby.
<TABLE>
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AS OF JUNE 7, 1999
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AS ADJUSTED
MINIMUM
ACTUAL OFFERING
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LIABILITIES
11% Secured Notes Due October 31, 2004.................... $250,000(1)
SHAREHOLDERS' EQUITY
Common Stock, $0.10 par value, authorized 1,000 shares,
issued and outstanding................................. $ 100 $ 100
Paid-In Capital............................................. 900 900
Retained Earnings........................................... 0
TOTAL SHAREHOLDERS' EQUITY........................ 1,000 1,000
TOTAL LIABILITIES AND SHAREHOLDER EQUITY.......... 1,000 251,000
</TABLE>
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(1) The expenses we have incurred as a result of this offering will be
capitalized and amortized over the lives of the notes. The offering expense
to be amortized annually will vary according to the amount and timing of the
funding of the Notes. For example, if the offering is completed prior to
December 31, 1999, the percentage of the total offering expenses that would
be charged to operations in the first five years would be 20% per year.
Other organizational expenses are capitalized and amortized over a five-year
period on a straight-line basis.
Our capitalization reflects our asset-backed security structure. Our only
significant assets will be the vehicles, the lease contracts with our lease
customers, the net proceeds of this offering, the net operating proceeds
(revenues from lease contracts and sale of leased vehicles less debt service and
allowed expenses), proceeds realized from reinvestment of such net proceeds and
excess collection proceeds. See "COLLATERAL FOR THE NOTES." The costs of ongoing
operations will be borne by TLMI and will be reimbursed to TLMI through payment
of monthly servicing and administration fees. See "THE COMPANY; COLLECTION AND
SERVICING OF CONTRACTS -- Payments to TLMI."
USE OF PROCEEDS
We will use at least 90% of the gross proceeds from the sale of our notes
for the purchase of vehicles and the leasing of such vehicles to our customers.
We will use 10% of the gross proceeds as follows:
- we will pay to the Underwriter sales commissions of 6% of the principal
amount of the Notes sold by such Underwriter;
- we will reimburse the Underwriter for certain expenses incurred in
connection with its due diligence activities with regard to the offering
in an amount not to exceed 2.5% of the aggregate principal amount of the
notes sold; and
- we will use up to 1.5% of the gross proceeds from the sale of the notes
to pay offering and organization expenses, including filing and
registration fees, legal fees of our counsel, accounting fees, trustee's
fees, escrow agent's fees, "blue sky" expenses and printing expenses.
These expenses have been or will be paid by TLMI, and we will reimburse
TLMI an amount not to exceed such 1.5%. TLMI has agreed to pay expenses
of the offering in excess of 1.5% of the gross proceeds from the sale of
the notes.
We will maintain the proceeds of this offering in our operating account
until they have been fully used to acquire vehicles or lease contracts. Under
the terms of the Indenture, we may invest all of our
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<PAGE> 13
deposits in specified types of deposits or securities -- the same type of
deposits or securities as the Trustee may utilize for funds that are in the
sinking fund account.
The use of proceeds is set in the following table and in the pie charts
below the table:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
($250,000) ($20,000,000)
---------- -------------
<S> <C> <C>
Offering and Organizational Expenses(1)..................... $ 3,750 $ 300,000
Broker/Dealer Commissions(2)................................ 21,250 1,700,000
Purchase of Contracts and Leased Vehicles................... 225,000 18,000,000
Total............................................. 250,000 20,000,000
</TABLE>
- ---------------
(1) We will pay these offering and organizational expenses to our parent, TLMI,
as reimbursement for a portion of such expenses it has paid on our behalf.
(2) Assumes the maximum permitted amount of due diligence reimbursement is paid.
PIE CHARTS
Minimum - $250,000
Purchase of Contracts and Leased Vehicles ($225,000)
Broker/Dealer Commissions ($21,250)
Offering and Organizational Expenses ($3,750)
Maximum - $20,000,000
Purchase of Contracts and Leased Vehicles ($18,000,000)
Broker/Dealer Commissions ($1,700,000)
Offering and Organizational Expenses ($300,000)
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<PAGE> 14
The subscription escrow will terminate upon the receipt of subscriptions in
the aggregate amount of $250,000 and, upon such termination, we will receive
that portion of the proceeds to be used for the purchase of vehicles or lease
contracts (estimated in the above table to be $225,000). We will attempt, and
anticipate being able, to use the aggregate amount of such proceeds within 60
days of the termination of the escrow and the release of the escrowed funds to
us.
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<PAGE> 15
DESCRIPTION OF THE NOTES
The notes will be issued pursuant to an Indenture (the "Indenture") between
ourselves and Trust Management, Inc., who will serve as Trustee. TLMI is a party
to the Indenture for the purpose of making certain agreements and
representations regarding the purchasing and servicing of the lease contracts
with the Trustee for the benefit of noteholders. The Indenture is qualified
under the Trust Indenture Act of 1939. An example of the notes and a copy of the
Indenture in the form we propose to execute with the Trustee are included as
exhibits to the Registration Statement we have filed in connection with this
offering. You should review the example of the notes before deciding to
subscribe in this offering.
Our Indenture is typical of most indentures -- it is an agreement between
ourselves, TLMI and the Trustee, pursuant to which the Trustee is appointed as
the agent of the noteholders. The Indenture governs the notes, imposes the
noteholder's lien on our assets, and specifies certain obligations and rights
that bind us or accrue to our benefit or, similarly, bind you or the Trustee or
accrue to your or the Trustee's benefit. The Indenture's terms are incorporated
by reference into the notes -- this means that the obligations imposed, and the
rights conferred, by the Indenture, even though not set forth within your note,
still apply to both the note and the relationship among ourselves, the Trustee
and you. The Indenture, in turn, includes obligations and rights which are
incorporated by reference from the Trust Indenture Act. We encourage to you to
review both the Indenture and the Trust Indenture Act.
The following summaries of certain provisions of the notes and the
Indenture and the summaries included under "ADDITIONAL INDENTURE PROVISIONS" do
not purport to be complete and are subject to the full provisions of the notes
and the Indenture.
GENERAL
Interest Rate 11% per annum
Maturity Date October 31, 2004
Aggregate Principal Amount Up to $20,000,000
Recourse While the notes are our general obligations and you
will have recourse against our assets,
substantially all of our assets will be the lease
contracts, the vehicles and the revenues derived
from them. See "COLLATERAL FOR THE NOTES." You will
have no contractual recourse against TLMI for
payment of the notes.
Rating We have not sought, and are not required by the
Indenture or any other document to obtain, a rating
of the notes by a rating agency.
Paying Agent and Registrar The Trustee will initially act as the paying agent
and registrar. As paying agent, the Trustee will
disburse the funds that we submit for payment of
the notes. As registrar, the Trustee will maintain
the ledger records reflecting ownership of the
notes. We have the right to appoint some other
person or firm as paying agent or registrar.
ISSUANCE OF NOTES; TRANSFERS
Denominations Integral multiples of $1,000
Minimum Subscription Amount You must subscribe for a minimum of $5,000 unless
you are going to acquire the notes for your
individual retirement account, in which case you
may invest as little as $2,000.
Transfer We may require you to reimburse us for any
out-of-pocket costs we incur with respect to your
transfer or exchange of a note.
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<PAGE> 16
INTEREST PAYMENTS
Interest Commencement Date Interest will accrue on each note from the date
that it is issued (each note will be deemed issued
on the third business day after your subscription
payment is received).
Payments Interest payments will be due and payable monthly
on the 15th day of the month following the end of
each successive calendar month (for the interest
accruing during the prior month) and upon the
maturity date.
First Interest Payment The first interest payment will be due and payable
on the 15th day of the month following the first
full calendar month after your note is issued. If
your subscription payment is received during the
last three business days of any month, your note
will be deemed issued in the first three days of
the succeeding month and your first interest
payment will be payable at least 74 and possibly as
much as 80 days after your payment is received.
Default Interest Rate Any installment of interest that is not paid when
due will accrue interest at the lesser of (i) 18%
per annum or (ii) the highest lawful rate of
interest from the date due to the date of payment,
but only to the extent payment of such interest is
lawful and enforceable.
Effective Interest Rate The effective interest rate of the notes will be
lower than the stated interest rate because each
payment of interest will be paid 15 days after the
month over which it accrued.
Payment Source The paying agent will make monthly interest
payments out of funds in the sinking fund account.
Before each interest payment date occurring prior
to the sinking fund trigger date, we will transfer
to the sinking fund account from our operating
account an amount that, together with any funds in
the sinking fund account, is sufficient to pay the
accrued interest due on such payment date. Such
transfer must be made before we apply any remaining
funds in the operating account to any other
purpose. Interest payments will be in the form of
checks drawn on the sinking fund account.
Record Dates Interest payments prior to the maturity date will
be mailed by the paying agent to the registered
holder of a given note as of the close of business
on the first day of the month of the payment.
Payments will be sent to the holders to the
addresses shown for the holders in the note
register maintained by the registrar.
PRINCIPAL PAYMENTS
Mandatory Principal
Payments The principal amount then outstanding on each note,
plus all accrued but unpaid interest, will be due
and payable on the maturity date, October 31, 2004.
The final payment of principal and interest on each
note will be made only upon presentation and
surrender of such note at the office of the Trustee
or the paying agent. Prior to the maturity date, we
are not required to make any principal payments.
Payment Source Any amounts paid on the maturity date will be paid
from the funds accumulated in the sinking fund
account. We believe that there will be sufficient
funds in the sinking fund account to repay all
principal and interest then outstanding on the
loans, but this will be function of
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<PAGE> 17
a number of factors. See, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF PLAN OF OPERATION." If the funds in
the sinking fund account are not sufficient, we
anticipate being able to generate funds from the
sale of our vehicles and lease contracts or from
using our vehicles and the lease contracts as
collateral for a loan from an institutional lender.
We have no arrangements at this time for any such
sale or loan and our ability to generate funds from
such sources will be subject to a number of
factors, many of which may be completely beyond our
control. See, "RISK FACTORS -- Adequacy of
Repayment Funds".
Sinking Fund Account On the sinking fund trigger date, we will deposit
in the sinking fund account any remaining net
proceeds from the sale of the notes that have not
been used as of the sinking fund trigger date for
the purchase of vehicles and creation of lease
contracts. From and after the sinking fund trigger
date, all of the funds in our operating account,
less expenses that are allowed expenses under the
Indenture, will be transferred on at least a
monthly basis to the sinking fund account. While a
default continues or remains uncured, we must
transfer all funds in our operating account, less
any amounts owing to the Trustee, to the sinking
fund account, and the Trustee will have the right
to cause such transfer. See, "DEFAULT," below. The
funds which accumulate in the sinking fund account,
after payment of the Trustee's expenses, may be
used only for payment of the notes.
REDEMPTION
Timing of Redemptions The amount and timing of any redemption will be at
our sole discretion. On any interest payment date
after November 30, 2000, we may redeem one or more
of the notes, in whole or in part, in accordance
with the Indenture. To the extent that funds in the
sinking fund account exceed the aggregate amount of
interest payable on the notes on the next monthly
payment date, we may use funds in the sinking fund
account to redeem all or any portion of the notes.
Any redemption will have an effect analogous to a
principal payment.
Redemption Price The redemption price of any given note will be
equal to 100% of the outstanding principal amount
of such note, plus interest to the date of
redemption, without any premium or penalty.
Partial Redemption If less than all of the notes are to be redeemed,
the Trustee shall select the notes to be redeemed
by lot or other method selected by the Trustee. If
any note is to be redeemed in part only, a new note
in principal amount equal to the unredeemed portion
of the original note will be issued upon
cancellation of the original note.
Notice At least 10 days but not more than 60 days prior to
any redemption of your note, we will deliver to you
a notice by first class mail, postage prepaid, and
our notice will state:
- the redemption date;
- the portion of the principal amount of your note
to be redeemed;
- the redemption price;
- the name and address of the paying agent;
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<PAGE> 18
- the requirement that the notes be delivered to
the paying agent; and
- that interest on the notes ceases to accrue on
and after the redemption date.
Payment Source Before the sinking fund trigger date, we will
utilize funds generated by our operations to pay
any redemption amounts. From and after the sinking
fund trigger date, we will utilize funds in the
sinking fund account to pay any redemption amounts.
DEFAULT
Sinking Fund Account If we lapse into default regarding our obligations
under the Indenture and for so long as such default
continues or remains uncured, all funds in the
operating account, less any amounts owing to the
Trustee, must be transferred on the business day
immediately preceding each payment date to the
sinking fund account, and the Trustee will have the
right to cause such transfer. In addition, during
the continuance of a default, the Trustee will have
all of its other rights and remedies available for
collection of the proceeds on the lease contracts
for purposes of obtaining sufficient funds to
satisfy the notes. See "ADDITIONAL INDENTURE
PROVISIONS -- Rights Upon Event of Default."
COLLATERAL FOR THE NOTES
GENERAL
To collateralize the notes, the Indenture grants to the Trustee a security
interest in or lien upon all of our assets, including without limitation, all of
our right, title and interest in:
- the vehicles;
- the lease contracts, and all payments and instruments received with
respect thereto;
- the Servicing Agreement and the Master Purchasing Agreement;
- our operating account and all funds and investments therein;
- our master collections account and all funds and investments therein;
- the sinking fund account and all funds and investments therein;
- all repossessed or returned vehicles (including vehicles returned upon
termination of lease contracts); and
- all proceeds of the conversion, voluntary or involuntary, of any of the
foregoing into cash or other liquid property.
Pursuant to the Indenture, the Trustee has been granted a lien senior to
the lien of the Indenture in order to collateralize payment of its fees and
expenses as Trustee under the Indenture, except that the Trustee's lien does not
attach to money held in the sinking fund account for repayment of principal and
interest on the notes.
THE CONTRACTS
Each of the contracts will be a vehicle lease contract that is (i)
purchased from an independent third party or (ii) acquired in a transaction
originated by TLMI. Each lease contract will lease a new
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<PAGE> 19
automobile or a late model automobile that is not more than four model years old
at the time of lease (including passenger cars, minivans, sport/utility vehicles
and light trucks) and motorcycles which are not more than four model years old
at the time of lease.
We will purchase or acquire the lease contracts using the net proceeds from
the sale of notes until the sinking fund trigger date. So long as we are not in
default under the Indenture, we may use any net collection proceeds from the
lease contracts, after deduction for payments of interest and allowed expenses,
to purchase vehicles and lease them. See "THE COMPANY -- Purchase of Vehicles."
To minimize conflicts of interest among potential buyers with respect to lease
contracts originated by TLMI, TLMI has determined that, after TAF-II has fully
invested its funds in vehicles and leases, we will acquire any lease contracts
that satisfy our contract criteria to the extent that we have available the
funds necessary for such purchases, subject only to the right of TAF-II to
acquire vehicles with proceeds from repossession of its leased vehicles or
prepayment of its lease contracts. See "RISK FACTORS -- Conflicts of Interest."
We will deliver each lease contract we acquire to the Trustee and label it
with a notice indicating the Trustee's security interest. In addition, (i) a UCC
financing statement listing such lease contract, and also covering the proceeds
therefrom, will be filed in the appropriate public office to give further notice
of the Trustee's security interest, and (ii) we will have each vehicle's
certificate of title issued to reflect us as the owner and the Trustee as a
first lienholder. Together with the Trustee, we may appoint a financial
institution to retain possession of the lease contracts and related title
documents as custodian and bailee for the Trustee and us.
THE SINKING FUND ACCOUNT
We have established, in the name of the Trustee, a trust account at Texas
Community Bank which we refer to in this prospectus as the sinking fund account.
All payments of interest or principal on the notes will be made from funds in
the sinking fund account.
Funds in the sinking fund account will not be commingled with any other of
our monies or the monies of TLMI. All monies deposited from time to time in the
sinking fund account will be held for the benefit of the Trustee as part of the
collateral for the notes. Payments with respect to the notes that are to be made
from the sinking fund account will be made on our behalf by the Trustee or a
paying agent, and no funds in the sinking fund account will be paid over to us
or TLMI. The funds in the sinking fund account will be employed by the Trustee
or the paying agent to pay interest on the notes on each payment date and to
effect redemptions of the notes, in our discretion, on any payment date after
the sinking fund trigger date.
In the absence of a continuing event of default under the Indenture, we
will have investment control of the funds in the sinking fund account. During
the continuance of an event of default, the Trustee will have such investment
control. In both cases, such investment control is limited to investments which
are within the restrictions established in the Indenture.
Prior to the sinking fund trigger date, all funds designated for payment of
interest due with respect to the notes will be deposited in the sinking fund
account. After the sinking fund trigger date, all net collection proceeds
(including all portions thereof treated for tax or financial accounting purposes
as principal or interest) from the lease contracts, following deduction of
allowed expenses (including fees payable to TLMI), will no longer be available
to us for the purchase of additional lease contracts and will be deposited into
and held, along with the income earned thereon, by the Trustee in the sinking
fund account for repayment of the notes. With the exception of payments required
to pay interest due and payable with respect to the notes, no schedule of
minimum required payments into the sinking fund account will exist. See
"DESCRIPTION OF THE NOTES -- Payments of Interest."
THE CONTRACT PROCEEDS, MASTER COLLECTIONS ACCOUNT AND OPERATING ACCOUNT
We have established the master collections account, initially at Texas
Community Bank, where all remittance checks, drafts and other instruments for
the contracts will be deposited for collection by the
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<PAGE> 20
financial institution as our agent. All payments made on or with respect to the
lease contracts (including all portions thereof deemed to be principal or
interest for tax or financial accounting purposes) will be deposited in the
master collections account using code numbers assigned to individual lease
contracts and separate entities to ensure proper tracing of payments. We have
established the operating account, a commercial bank account we maintain for use
in holding our proceeds and in paying our expenditures. Prior to the sinking
fund trigger date, all funds in the master collection account will be
transferred to our operating account. We may invest any funds in the operating
account in investments deemed suitable under the Indenture. We intend to invest
such funds daily.
TLMI, as a party to the Indenture, has acknowledged that:
- any collections or other proceeds from the lease contracts in our master
collections account and operating account are our property;
- any such collections or other proceeds from the lease contracts in TLMI's
possession or control are held by TLMI pursuant to the Indenture as our
custodian and bailee and the custodian and bailee of the Trustee; and
- any such collections or other proceeds are subject to the security
interest of the Trustee.
Any funds in the our master collections account and operating account will
be subject to the Trustee's lien and will collateralize payment of the notes. So
long as the notes have not been declared due and payable as a result of an event
of default and subject to the receipt by the Trustee of any required
certificates, we will have the right to cause the funds contained in the
operating account to be withdrawn or applied for the following purposes in the
following priority:
- first, through a direct transfer to the sinking fund account, for the
payment of any interest due on the outstanding notes on each payment
date;
- second, for any amounts due the Trustee for its fees and expenses;
- third, except during an event of default, for the payment of any such
other allowed expenses as we certify to the Trustee;
- fourth, after the sinking fund trigger date or during an event of
default, for deposit to the sinking fund account for payment of the
notes; and
- fifth, prior to the sinking fund trigger date, except during an event of
default, for the purchase of such additional lease contracts, as we and
TLMI certified to the Trustee as being eligible under the lease contract
criteria specified in the Indenture. See, "THE COMPANY -- Purchase of
Vehicles."
The lease contract proceeds must be sufficient to satisfy fully any
application having higher priority before they may be applied to a use having a
lower priority. To the extent collected funds are not needed to fund the payment
on the notes, the purchase of additional lease contracts, or the payment of
allowed expenses, such funds will generally remain in our operating account.
We and TLMI will provide quarterly reports to the Trustee certifying to the
Trustee the purchasing and servicing activities that have occurred in relation
to the lease contracts, the amounts of allowed expenses paid from the operating
account and the fact that all payments from the operating account conform with
the Indenture and providing a reconciliation of deposits and withdrawals from
the operating account.
On or before the business day immediately preceding each payment date, we
will cause to be transferred directly from the operating account to the sinking
fund account an amount that, together with any funds in the sinking fund
account, is sufficient to make all interest payments on the notes outstanding on
such payment date. See "DESCRIPTION OF THE NOTES -- Interest Payments."
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<PAGE> 21
"Allowed expenses" will be limited to:
- the expenses and fees of the Trustee under the Indenture;
- fees charged by TLMI under the Servicing Agreement (including the
servicing fee and purchase administration fee) and under the Master
Purchasing Agreement;
- title transfer fees;
- federal, state and local taxes (including corporate franchise taxes but
excluding federal, state and local income taxes for which TLMI is
responsible under a tax sharing agreement);
- legal and accounting fees;
- printing expenses for reports, compliance certificates and opinions
required by the Indenture;
- premiums for vehicle residual value insurance;
- charges for vehicle warranty service contracts;
- bank service charges and account fees, including a share of such charges
and fees, if any, incurred by TLMI for the master collections account);
- expenses of repossessing, repairing, remarketing and liquidating the
vehicles (as to each vehicle, not to exceed the liquidation proceeds from
the vehicle and any insurance proceeds applied to vehicle repairs or
required to be refunded to Lessees).
TLMI will pay all other general administrative and overhead expenses
incurred by us. The following table summarizes our estimates of the anticipated
allowed expenses (see "PURCHASE, ACQUISITION AND COLLECTION OF
CONTRACTS -- Collection of Payments"):
SUMMARY OF ESTIMATED ALLOWED EXPENSES
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
---------------- ----------------
<S> <C>
Servicing Fees
Contract Servicing Fee (paid to TLMI)......... $20 per month per lease contract
Purchase Administration Fee (paid to TLMI).... $100 per lease contract purchased
License and Title Transfer Fee.................. $86.80 per lease contract
State Inspection Fee............................ $19.75 per lease contract
Documentary Fee................................. $50.00 per lease contract
Marketing Fee (paid to TLMI).................... 57.5% of customer down payment
Trustee Fees
Acceptance Fee................................ $12,000
Annual Administration......................... $15,000
Note Payments and Registrar Services.......... $5 per year per Note
Interest Checks............................... $1.00 each
Collateral Custodial Services................. $5 per year per lease contract plus $2.50 per
acceptance or release of lease contract
Bank Fees
Master Collections Account.................... $300 to $500 (varies with volume)
Operating Account............................. $2,000 per year (varies with number of
transactions)
Subscription Escrow Account................... $1,000 per year
Legal Expenses
Annual Attorneys' Opinion to Trustee.......... $2,500
</TABLE>
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<PAGE> 22
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
---------------- ----------------
<S> <C>
Accounting Expenses
Annual Audit.................................. $15,000
Annual Tax Return............................. $1,750
Printing and Mailing.......................... $3,000
Insurance Premiums
Residual Value Insurance...................... $500 per year, plus 1.68% of the residual value
of each leased vehicle (with $100 deductible for
leased vehicles)
Contingent Liability and Physical............. $2.00 per leased vehicle per month
Total Annual Servicing, Trustee, Bank, Legal,
Accounting and Insurance Fees and Premiums.... Estimated to average (i) $559,300 (or $362 per
lease contract) if the maximum amount of Notes is
sold, or (ii) $38,771 or ($775 per outstanding
lease contract) if the minimum amount of Notes
is sold
Repossession, (Remarketing, Repair and Resale)
(to reimburse TLMI for such expenses)......... Estimated to average $100 to $400 for each
repossessed Leased Vehicle, but limited to the
related liquidation or insurance proceeds
Remarketing Expenses............................ $100 to $400 for each Leased Vehicle upon
expiration of the lease, but limited to the
related resale or insurance proceeds
Releasing Fee (paid to TLMI).................... 15% of the down payment by the customer (Lessee)
with respect to a new lease contract following
repossession
Federal Income Taxes............................ Varies with taxable income (maximum 35%)
Texas Corporate Franchise Taxes................. Greater of 4.5% of taxable income and 1/4 of 1%
of taxable capital
</TABLE>
PERFECTION OF TRUSTEE'S SECURITY INTEREST IN THE COLLATERAL
Set forth below is a description of how each of the types of property which
serves as collateral for the notes is made subject to the Trustee's pledge or
security interest in favor of the note holders under applicable Texas law.
- Vehicles. The vehicles will be automobiles, trucks or motorcycles subject
to the Texas Transportation Code. Pursuant to Section 501.021 of the
Texas Transportation Code, evidence of the Trustee's security interests
against such vehicles will be evidenced by notation on a certificate of
title issued by the Texas Department of Public Safety. Pursuant to the
Indenture and the custodial agreement, the Trustee will maintain actual
possession of such certificates of title.
- Lease Contracts. The lease contracts will be leases of vehicles which we
own. Article 9.105(a)(2) of the Texas Uniform Commercial Code ("UCC")
defines such lease contracts as "chattel paper." Section 9.304(a) of the
UCC provides that a security interest in chattel paper may be perfected
by filing a financing statement, and Section 9.305 of the UCC provides
that a security interest in chattel paper may also be perfected by the
collateralized party taking possession of the chattel paper. The Trustee
will file a UCC-1 financing statement with respect to the lease contracts
and will maintain actual possession of the lease contracts pursuant to
the Indenture and the custodial agreement.
- Servicing Agreement. The Servicing Agreement and Master Purchasing
Agreement are contractual agreements and are considered "general
intangibles" under Section 9.106 of the UCC. Security
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<PAGE> 23
interests in general intangibles are perfected by filing a financing statement.
The Trustee will file a UCC-1 financing statement with respect to the Servicing
Agreement and Master Purchasing Agreement.
- Operating Account, the Master Collections Account and the Sinking Fund
Account. The operating account, the master collections account and the
sinking fund account are deposit accounts, and pledges of such accounts
are not subject to the provisions of Article 9 of the UCC as provided in
Section 9.104(12) of the UCC, except as provided with respect to proceeds
(Section 9.306) and priorities in proceeds (Section 9.312). Perfection of
a pledge of these deposit bank accounts is made pursuant to Texas common
law rules covering the pledge of personal property. Pledges are made by
the pledgor executing a pledge and assignment agreement in favor of the
pledgee and are perfected by the pledgor notifying the depositary bank in
writing of the pledge. Security interests with respect to any investments
within these accounts will be subject to applicable provisions of the
UCC, depending upon the types of investments. At present, the depository
bank is Texas Community Bank.
- Repossessed or Returned Vehicles. The repossessed or returned vehicles
will already be subject to the lien noted on the certificates of title as
described in the first point above, and the Trustee shall have actual
possession of such certificates of title.
- Proceeds. The proceeds of the items above that are subject to perfection
under the UCC are subject to the provisions of Section 9.306 of the UCC,
and the Trustee's lien in such proceeds is perfected by perfection of the
underlying property as noted above, subject to Section 9.306 of the UCC.
Prepayments by lease customers on the lease contracts will be treated in
the same manner as collection proceeds on the lease contracts. Consequently,
such prepayments may be used to purchase additional lease contracts prior to the
sinking fund trigger date and will not be passed through to noteholders as
principal payments.
The following chart illustrates the flow of lease contract proceeds from
the lease customers through the master collections account and operating account
to the applications thereof and the priority of the various applications of such
proceeds.
FLOW OF CONTRACT PROCEEDS AND PRIORITY OF APPLICATIONS
- ---------------
(1) Priority of Monthly Proceeds Applications
1. Interest is paid by Trustee from transfers to the sinking fund account.
2. Trustee's fees and expenses are paid from the operating account.
3.* Other allowed expenses are paid from the operating account.
4.* A. After the sinking fund trigger date, any remaining proceeds are
deposited into the sinking fund account and held by Trustee for
payment of notes.
B. Before the sinking fund trigger date, any remaining proceeds are
used to purchase or acquire additional eligible lease contracts.
* Applications described in 3 and 4 above are prohibited during an Event of
Default.
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<PAGE> 24
THE COMPANY
GENERAL
Formation
We were incorporated in the State of Texas on May 26, 1999 and we have no
material properties or assets and no operating history. We are a subsidiary of
TLMI. Our principal offices are located at 5422 Alpha Road, Suite 100, Dallas,
Texas 75240 and our telephone number is (972) 404-0042. As of the date of this
Prospectus, Transition Leasing has two other subsidiaries -- Transition Auto
Finance, Inc. ("TAF-I") and Transition Auto Finance II, Inc. ("TAF-II").
Although TAF-I no longer conducts operations, both TAF-II and TAF-I were formed
as single purpose auto vehicle leasing subsidiaries (we are formed as a single
purpose vehicle leasing subsidiary, as well, but we will also lease
motorcycles). TAF-I sold all of its vehicles and lease contracts to TAF-II and
repaid its noteholders entirely, prior to the maturity of their notes. Both
TAF-I and TAF-II have made all interest payments in accordance with the terms of
the notes they issued. See "THE COMPANY -- Performance of TAF-I and TAF-II."
The Business of the Company
We were established for the sole purposes of:
- purchasing vehicles from third parties and leasing them to customers
pursuant to lease contracts;
- collecting and servicing the lease contracts;
- obtaining capital through borrowings or through sale of debt or equity
securities to invest in such lease contracts;
- remarketing the vehicles upon termination of their lease contracts; and
- all related business activities.
While the notes remain outstanding, we will be prohibited from engaging in
any business inconsistent with the purposes set forth above and from incurring
any additional indebtedness other than allowed expenses and any other amounts
incurred in the ordinary course of our business.
Pursuant to the terms of the Purchasing Agreement and the Servicing
Agreement, TLMI will provide substantially all of the activities described
above, other than raising capital.
The funds necessary to purchase the lease contracts or vehicles will
initially be provided from the sale of the notes offered hereby. Subject to the
prior payment of interest as it becomes due upon the notes and payment of
allowed expenses, the collection proceeds from the lease contracts will be used,
until the sinking fund trigger date, and for so long as no event of default
exists, to purchase or acquire additional lease contracts. Upon the payment in
full of all principal and interest on the notes, the Trustee will release any
remaining lease contracts and the titles to the vehicles to us, and the
Indenture will terminate.
The lease contracts will relate primarily to vehicles in the middle range
of the new and late model automobile market, where consumer retail prices
typically range from $15,000 to $30,000 and if new Harley-Davidson motorcycles,
when consumer retail price averaging approximately $18,500. We expect that most
of the lease contracts will be originated by TLMI. TLMI originates automobile
lease contracts through new automobile franchise dealers, independent automobile
dealers, independent leasing companies, automobile auctions, and other sources,
including the internet site of its wholly-owned subsidiary, Verusauto.com. TLMI
anticipates that most motorcycle leases will be originated from sources other
than Harley-Davidson dealers, such as independent dealers and the internet, and
internally from TLMI's own efforts. TLMI seeks to lease vehicles to individuals
who do not have access to other sources of consumer credit because they do not
meet the credit standards imposed by automobile retailers or banking
institutions, generally because they have past credit problems or non-prime
credit ratings. Frequently, the
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<PAGE> 25
reason that such an individual may have a non-prime credit rating is that, at
some time in the past, he has defaulted on one or more financial obligations, or
he has filed for relief under the bankruptcy laws, or both.
In originating the lease contracts, TLMI takes a more flexible approach and
applies a more subjective analysis than those taken by traditional automobile
financing sources in determining an applicant's suitability for loan approval.
TLMI endeavors to determine whether the applicant's prior credit problems were a
result of job displacement, financial hardship beyond the applicant's control or
other circumstances that are not indicative of the applicant's current financial
condition or payment performance. In addition, TLMI seeks customers that have
stable employment providing regular income and possess a strong need to acquire
transportation. TLMI believes that by using subjective judgment and knowledge of
local conditions, it is able to profitably originate automobile lease contracts
for new and late model automobiles to many consumers who would be denied
approval for such leases from traditional sources. We will purchase or acquire
only lease contracts that satisfy the contract criteria established in the
Indenture and the Purchasing Agreement, and believe that the quality and
performance of the lease contracts will be enhanced through the consistent
application by TLMI of the purchasing, origination and collection criteria
established in the Indenture and the Purchasing Agreement.
Industry Overview
United States automobile sales are estimated to be in excess of 17 million
vehicles in 1999. Financing of these vehicles will consume more than $390
billion dollars, making it the largest grouping of consumer installment debt in
the U.S. It is estimated that over one-third of this debt will be incurred by
borrowers that have a limited credit history or past credit problems that
preclude them from securing traditional sources of financing. During 1984
approximately 14.2 million passenger cars and light trucks were sold in this
country. Of that total, 9.8% were leased. In 1996, 14.9 million vehicles were
sold and 27% of these were leased. Leasing as an alternate method of financing
vehicle purchases continues to grow and industry experts forecast that in the
year 2000 one-third to one-half of all new automobiles will be leased. In an
effort to maintain the number of cars sold in this country, automobile
manufacturers are encouraging alternative methods of financing.
The average price of new vehicles has continued to escalate over the past
two decades, forcing drivers to devote a larger portion of their income to the
purchase of automobiles. From 1975 to 1995 the average new car expenditure rose
from $4,950 per vehicle to over $20,000 -- a fourfold increase. In 1975, median
new vehicle expenditures were 36.1% of median average family incomes; however,
in 1995, median new vehicle expenditures were 53.% of median average family
incomes. Obviously, the rate of growth in consumer income is not keeping pace
with the rise in automotive pricing. TLMI's management believes that this
disparity will force more people to choose alternate means of financing an
automobile or alter the model, style and age of the automobile they drive.
Consumers have a variety of financing alternatives available to them to
acquire the use of a new or late model automobile. These alternatives include
different types of loans (including fully amortizing, balloon payment and no
money down or low down payment loans and leases). The primary benefit of leasing
over such alternatives is that leasing typically provides a consumer with the
opportunity to acquire the use of a new or late model automobile at a lower
monthly payment and initial cash outlay. On the same automobile, the monthly
lease payment may be 30-40% lower than conventional financing. This encourages
drivers to (i) operate newer and sometimes more expensive vehicles and (ii) to
trade or lease vehicles more often. According to CNW Marketing/Research, an
automobile leasing market research firm, the number of passenger automobiles and
light trucks leased has increased from approximately 912,000 units in 1984 to an
estimated 3.1 million units in 1994. Over the same period, leasing has increased
as a percentage of comparable new vehicle deliveries from approximately 9.8% to
approximately 30%.
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<PAGE> 26
The increase in new automobile prices in relation to annual median family
income has also significantly increased the popularity of leasing. The following
table shows the relationship between the average new automobile expenditure and
median family income for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF
AVERAGE NEW INCOME NEEDED TO
AUTOMOBILE MEDIAN FAMILY PURCHASE
YEAR EXPENDITURE(1) INCOME(2) AUTOMOBILES
- ---- -------------- ------------- ----------------
<S> <C> <C> <C>
1975 $ 4,950 $13,719 36.1%
1980 7,574 21,023 36.0%
1985 12,022 27,144 44.3%
1990 16,157 33,969 47.6%
1992 18,078 35,776 50.5%
1993 19,223 36,934 53.2%
1994 19,746 37,117 53.1%
1995 20,019 37,239 53.7%
</TABLE>
- ---------------
(1) Source: U.S. Department of Commerce, Bureau of Economic Analysis
(2) Source: U.S. Department of Labor Statistics.
Leasing has now been expanded to the "Previously Owned" market as the
industry deals with late model autos (i) at the end of their original lease
period, (ii) designated as "Program Cars" by dealers, and (iii) recovered from
financing institutions as a result of nonpayment and/or repossession. This
practice has the added benefit of providing a viable market for late model cars
and maintaining the residual value of such cars in the aftermarket. As the
divergence of personal income and the price of automobiles continues, the market
for alternative financing methods will continue to increase.
Government Regulations
We and TLMI are subject to regulation under federal, state and local laws
and regulations concerning many aspects of their respective businesses. See
"RISK FACTORS -- Effect of Government Regulation on Leasing." During the 1995
legislative session, the Texas Legislature passed legislation which
significantly increased Texas regulation of motor vehicle leasing, lessors, such
as us, and "lease facilitators," such as TLMI. The legislation requires lessors
and lease facilitators to obtain a license from the Texas Motor Vehicle
Commission. Licenses are granted only upon a showing of compliance with the
legislation and the rules of the Commission adopted pursuant to the legislation.
Licenses issued by the Commission are for one year, subject to renewal at the
discretion of the Commission. We have filed an application with the Texas Motor
Vehicle Commission to become licensed as a lessor. TLMI has been issued a
license as a lessor under the legislation and, as such, TLMI is deemed to be
licensed as a lease facilitator as well. We and TLMI intend to obtain any
licenses that may be required in any other state where we purchase and collect
lease contracts.
The Texas legislation and the regulations adopted by the Commission impose
requirements relative to the licensing process (application, maintenance and
revocation), and certain record keeping and reporting requirements, including
notification of changes in ownership and the closing or relocation of any
licensed business location.
The legislation prohibits or restricts the paying of fees, directly or
indirectly, among automobile dealers, lessors, and lease facilitators. For
example, a lessor may not pay a fee to any person for the solicitation of a
prospective lessee of motor vehicles unless the person receiving the fee is a
duly licensed lease facilitator. A lessor may appoint one or more duly licensed
lease facilitators as we have appointed TLMI to represent the lessor and obtain
lease customers.
The Texas legislation also requires that lease contracts procured by a
lease facilitator contain certain required disclosures, including notice of the
complaint procedure under the Code.
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<PAGE> 27
The regulations require a lessor or a lease facilitator to conduct its
business from an established and permanent place of business that meets certain
requirements. The regulations require a lessor or a lease facilitator to be
independent of financial institutions and dealerships in such location and in
business activities; however, the Texas legislation does not require a lessor to
be independent of its lease facilitators. The regulations provide that upon a
change in the majority ownership interest of a licensee, the license will be
canceled.
We must qualify for a license as a lessor, and, as mentioned above, we have
applied for such a license. In order to qualify for such a license, we have
already begun complying with the requirements of the law, including compliance
with the office requirements, sign requirements, lease requirements, and record
keeping requirements of the Texas legislation. We have received an opinion of
counsel to the effect that the our intended method of business is in compliance
with the Texas legislation. A copy of this opinion has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
While we believe that we and TLMI will be able to comply with the
requirements of the Texas legislation and the regulations, we are unable to
predict the extent to which the terms of future regulations promulgated by the
Commission under the Texas legislation and/or the administration of the Texas
legislation by the Commission will make the operation of our business and the
business of TLMI significantly more difficult and/or costly or otherwise have a
material adverse effect on us.
The Federal Reserve Board has published final revisions to Regulation M,
which implements the Consumer Leasing Act. New requirements under Regulation M
include:
- a uniform format for lease contracts that requires certain disclosures to
be segregated in the document and written in "plain English;"
- a calculation of the lease payments that itemizes, among other things,
the gross capitalized cost of the lease, the vehicle's residual value,
the rent charge and depreciation;
- disclosure of the total amount the lessee will pay by the end of the
lease; and
- certain warnings and disclosures.
Our management does not believe that these requirements will materially and
adversely impact our or TLMI's leasing activities.
As the Texas legislation and revised Regulation M reflect, the business of
automobile leasing recently has been the subject of legislative and regulatory
scrutiny, and numerous proposals are under consideration that, if enacted, would
impose greater regulation and requirements on our and TLMI's activities. See
"RISK FACTORS -- Effect of Governmental Regulations on Leasing." Certain of
these proposals have been prompted by consumers allegedly being charged unfair
prices in leasing transactions, with inadequate disclosure of the leased vehicle
prices, imputed interest rates and other charges. These proposals would require
greater disclosure in leasing contracts with respect to such matters. Our
management is not in a position to predict the effect of any such legislation or
regulation on our activities or TLMI's activities.
PERFORMANCE OF TAF-I AND TAF-II
Prior to our commencing this offering, TLMI organized two subsidiaries
which have issued promissory notes and engaged in the same business in which we
propose to engage. The first of these subsidiaries, TAF-I, was organized in
1994, and in 1996 sold variable rate promissory notes in an aggregate principal
amount of $2,883,000. TAF-II, TLMI's second finance subsidiary, was organized in
1997 and, in June 1999, completed its offering of 11% promissory notes in an
aggregate principal amount of $10,000,000. All payments on the notes issued by
TAF-I and TAF-II have been timely paid by those entities. TAF-I's portfolio,
which consisted of 151 leases and vehicles, included 35 leases which resulted in
early terminations (early payoffs or lease defaults resulting in repossession
and lease terminations). TAF-II's portfolio, which through August 2, 1999,
consisted of 235 leases and vehicles and included 13 leases which
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<PAGE> 28
resulted in early terminations. TAF-I's and TAF-II's experience with respect to
early terminations is set forth below:
EARLY TERMINATION RESULTS -- TAF-I AND TAF-II
JUNE 1, 1997-AUGUST 2, 1999
<TABLE>
<CAPTION>
TAF-I TAF-II
---------------------------------- ----------------------------------
NO. OF PERCENTAGE PROFIT(1) NO. OF PERCENTAGE PROFIT(1)
CONTRACTS OF TOTAL (LOSS) CONTRACTS OF TOTAL (LOSS)
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Contracts Created......... 151 100% 235 100%
Contracts Terminated by
Repossession.................. 23 15.2% $(75,000) 9 3.8% $(12,373)
Contracts Terminated by Early
Payoff........................ 12 8.0% $ 39,625 4 1.7% $ 25,860
Total Early
Terminations........ 35 23.2% $(35,435) 13 5.5% $ 13,487
</TABLE>
- ---------------
(1) We calculate profit or loss on a given lease by subtracting the gross cost
of acquiring the vehicle and originating the lease from gross receipts
realized from that vehicle. Gross cost consists of:
- actual acquisition and origination costs;
- expenses of repossession and liquidation; and
- marketing fee paid to Transition Leasing Management, Inc..
Gross receipts consist of:
- down payment by the customer;
- lease payments by the customer up to the early termination date; and
- amounts realized upon the subsequent sale of the vehicle.
- ---------------
We note that the number of early terminations and repossessions, as a
percentage of all leases, decreased dramatically in TAF-II, as compared to
TAF-I. We believe that this decrease is attributable to two primary factors
- -Transition Leasing Management, Inc. has improved its credit assessment
techniques and a significant portion of TAF-II's lease portfolio consists of
"seasoned" leases purchased from TAF-I. Seasoned leases can be expected to
perform better than newly generated leases because the customer under a seasoned
lease has, by definition, established a credit history under the lease.
Moreover, that customer has invested not only a down payment but a number of
lease payments, thereby establishing a greater disincentive to default.
In March and April of 1999, TAF-II purchased from TAF-I all of the vehicles
and lease contracts which TAF-I then held. TAF-I then used the proceeds from
this sale to redeem all of its outstanding notes. Substantially all of the
noteholders whose notes were redeemed used the redemption proceeds to buy notes
issued by TAF-II. TLMI, which is the parent company of both TAF-I and TAF-II,
determined to cause TAF-II's purchase of TAF-I's leased vehicles and the
redemption of TAF-I's notes for a number of reasons, the most significant of
which were:
- A desire on the part of TLMI to reduce the interest rate risk associated
with TAF-I's notes (the variable rate could have risen to as much as 15%
per annum) by replacing those notes with the 11% notes issued by TAF-II.
- Eliminate the duplication of fees associated with two different portfolio
programs. This problem exists whenever a sponsor mas more than one
finance subsidiary but was exacerbated by the relatively small size of
TAF-I's offering. The smaller offering size made the annual fees a much
larger percent of TAF-I's income and assets than might otherwise have
been the case.
We do not contemplate that we will purchase assets from TAF-II.
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<PAGE> 29
PURCHASE/LEASING OF VEHICLES
General
Our lease contracts will be originated by TLMI under a Master Purchasing
Agreement, (the "Purchasing Agreement"), between us and TLMI. A copy of the
Purchasing Agreement in the form we propose to execute with TLMI has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
We have granted a security interest in the Purchasing Agreement to the Trustee
as collateral for the notes and for our obligations under the Indenture. The
discussion of the Purchasing Agreement which follows is not, and does not
purport to be, complete. We encourage you to review the Purchasing Agreement.
Pursuant to the Purchasing Agreement, we may require TLMI to use reasonable
efforts to originate customers and such lease contracts or vehicles as represent
a lesser amount of funds than we specify to TLMI from time to time. We will be
obligated to purchase all lease contracts or vehicles originated by TLMI which
satisfy the lease contract and customer criteria set forth in the Purchasing
Agreement, subject only to the funds limit that we specify to TLMI. TLMI will
originate customers and lease contracts, will purchase vehicles from new
automobile franchise dealers, independent automobile dealers and independent
leasing companies, will purchase Harley Davidson motorcycles from new motorcycle
franchise dealers and independent motorcycle dealers and will manage the lease
contracts through their termination. No more than 10% of the net proceeds of
this offering will be used to acquire motorcycles.
Lease Contract and Credit Criteria
We have developed criteria as to the price, down payment, and length of
lease term for the lease contracts and make of the vehicles to qualify for
purchase or acquisition. We believe that the most significant of these criteria,
in general, are as follows:
- The lease contracts generally should have original terms that are
typically 36 months but may not be more than 48 months;
- The customers will be required to make a down payment of not less than
15% of the purchase price of the vehicle and if the vehicle is four model
years old, the required down payment will be at least 25% of the
vehicle's purchase price;
- The customers must have supplied certain credit information, and credit
verification procedures must have been performed by TLMI in a manner
commensurate with standard industry practice;
- The customer's monthly lease payments must have been determined using an
implicit annual interest ranging from 16% to 18% of the net capitalized
cost of the vehicle less the customer's down payment.
We have established certain credit information and criteria to be satisfied
by each customer. We believe that the most significant of these criteria, in
general, are as follows:
- Verifiable home telephone number in customer's residence;
- Residence: (1) Evidence of purchase, lease, or rental agreement in
customer's name; or
(2) Stability -- review time at last two addresses, as well
as time in area;
- Employment: At least one year with last two employers;
- Verifiable income (check stub, W-2, 1099, tax return, or bank
statements);
- Customer's net disposable income generally at least 2.5 times total
monthly debt service (home, car, etc.);
- References: (1) Five relatives; and
(2) Five personal;
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<PAGE> 30
- Valid driver's license;
- Any previous bankruptcy must have been discharged, or if open, need
letter of permission from bankruptcy Trustee; and
- Certain exceptions for first time automobile "buyers" are permitted.
To verify the foregoing information, TLMI will obtain a copy of the credit
application executed by the customer, which application should contain the
necessary information to verify by telephone or otherwise the customer's
addresses, employment and personal references and authorization to obtain a
credit report from a credit reporting agency.
The Purchasing Agreement and the Indenture mandate that contracts and lease
customers meet the criteria specified above. If TLMI fails to comply with these
criteria, we have the right to terminate the Purchasing Agreement and we could
appoint another agent to provide the purchasing services; however, as we are a
wholly-owned subsidiary of TLMI, it is not likely that we would terminate the
Purchasing Agreement. If we suffer a default under the Indenture, the Trustee
may, or at the direction of the holders of notes representing 25% of the
aggregate principal amount of the outstanding notes will require us to terminate
the Purchasing Agreement. The Purchasing Agreement allows TLMI to contract with
industry-qualified third parties to perform its obligations thereunder. The
performance by any third party will not relieve TLMI from liability for its
obligations under the Purchasing Agreement.
The Purchasing Agreement and the Indenture require us and TLMI to make
certain representations, warranties and covenants with respect to any lease
contracts to be purchased or acquired, including, the following:
- the conformity of each lease contract with federal, state and local laws;
- our compliance in all material respects with federal, state and local
laws;
- the validity and enforceability of the lease contract and the security
interest created thereby in the vehicle.
If any of such representations or warranties is discovered to have been
incorrect in any material respect with regard to a given lease contract, TLMI is
required to cure the defect or purchase the impaired lease contract from us. At
the time of any such purchase TLMI will certify to the Trustee that such
repurchase has been effected in compliance with all of the provisions of the
Indenture and this Prospectus.
Vehicle Purchase Price
The purchase price which we will pay for any vehicle acquired from
independent parties will vary generally with the method by which the lease
customer is introduced to TLMI. If dealers or leasing companies introduce the
lease customer to TLMI, the purchase price will generally be equal to 95% of
manufacturer's suggested retail price ("MSRP"). If the customer is generated by
TLMI's in-house marketing staff, the purchase price will generally be less than
95% of MSRP. We will pay to TLMI a marketing fee, a purchase administration fee
and a documentary fee with respect to each lease contract. See, "PAYMENTS TO
TLMI," below.
Down Payment and Monthly Lease Payment
We will require the customer to make a down payment to us of not less than
15% of the purchase price of the vehicle. If the vehicle is four model years
old, we will require the customer to make a down payment of not less than 25% of
the vehicle's purchase price. The customer's monthly lease payment will be
computed by applying an implicit interest rate factor of 16% to 18% per annum to
an adjusted purchase price equal to 120% of the purchase price for the vehicle,
less the amount of the customer's down payment. The lease payment is designed,
among other things, to recover the vehicle's depreciation in value
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<PAGE> 31
over the term of the lease. We calculate this depreciation by amortizing over
the term of the lease, the difference between the estimated residual value of
the vehicle at the expiration of the lease term, see "THE COMPANY; REMARKETING,"
and the vehicle's adjusted purchase price.
Warranty and Vehicle Insurance
To insure that all our vehicles are maintained to factory specifications,
we will require that all vehicles be covered by a warranty for the complete
duration of the vehicle's lease contract. In the event that the manufacturer's
warranty is insufficient to cover both the term and anticipated mileage, the
customer is required to purchase an extended warranty to protect the vehicle.
Although most state laws, including Texas law, mandate that owners maintain
liability insurance for damages arising from their use of a motor vehicle, the
owners of the vehicles may not be required to maintain physical damage
insurance. We will require lessees under our lease contracts to purchase both
liability coverage and physical damage coverage. However, we also will maintain
vehicle single interest insurance that will insure the Company against liability
and physical insurance for damages arising from a customer's use of a vehicle in
the event that the customer's coverage lapses or is inadequate. The making of
significant claims against the Company's policy could result in the non-renewal
of such policy, which could have a material adverse effect on the Company. In
addition, the Company will be named as a loss payee under the lessee's
automobile insurance policy.
Residual Value and Residual Value Insurance
A residual value is the value of a given vehicle upon expiration of its
lease contract. When we lease a vehicle, we review appropriate industry guides
to determine the estimated value for the specific vehicle upon expiration of the
lease contract (typically 36 months). This figure represents the residual value,
and the amount of the premium for the residual value insurance coverage we buy
is the residual value multiplied by .0168. For example, the residual value
premium for a vehicle with a residual value of $10,000 is $10,000 X .0168, or a
one-time premium of $168. If the vehicle does not have a wholesale value (as
determined by industry guides) at the end of the lease contract equal to or more
than the residual value (in this example, $10,000), the insurance company will
pay to us the difference between the residual value and the wholesale value,
(less a $100 deductible) UNLESS such difference is the result of excessive
mileage, excess wear and tear, damage, and/or lease termination expenses.
Coverage for each vehicle will continue until TLMI disposes of it.
We estimate the residual value of a vehicle at the inception of its lease
contract and incorporate it into our lease payment calculations so as to recover
the diminution in value from lease inception until expiration. Put another way,
the lease terms are intended to amortize the vehicle's depreciation expected to
occur over the term of the lease contract. Because we calculate this
depreciation using an initial value which is 120% of the actual purchase price
of the vehicle less the customer's down payment, we expect that, upon the
expiration of a lease contract, the actual residual value of such vehicle will
be more than our cost basis, even after adjustment for capital costs. If our
expectation is correct, we believe that upon expiration of the contract, we can
sell the vehicle for a profit equivalent to the difference between the actual
market value and our cost basis. It has been TLMI's experience that profitable
resales are possible even when a contract is terminated prior to its expiration.
TLMI's experience in such matters is, of course, limited.
Our analysis has shown that mileage is the primary factor in determining a
vehicle's residual value. By imposing mileage limitations and monitoring the
customer's compliance, we can establish accurate residual value estimates. The
process of establishing mileage limits begins during the personal interview with
the candidate. The goal is to establish an understanding of the candidate's
driving needs, distance to work, personal use, and other factors for determining
estimated annual mileage.
If this estimate exceeds the standard 15,000 miles per year limitation, the
customer usually will make a cash payment designed to offset the extra
depreciation occasioned by the extra mileage. In some cases, TLMI might agree to
modify the terms of the contract and increase the payments to accommodate
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<PAGE> 32
additional use. To monitor the customer's compliance with the terms of the
customer's contract, we require the customer to bring the vehicle to a TLMI
office for an annual inspection and to receive the current year registration
sticker. If the inspection discloses excess mileage, the customer must then pay
15 cents per excess mile to offset the decline in the vehicle's value. In
addition, TLMI may elect to revise the terms of the contract (and thereby
increase the customer's payment) to avoid reoccurrence. TLMI will also review
the vehicle for damage and, if any damage is found, will take the actions
necessary, including an additional monetary charge or repossession.
An accurate prediction of residual value is important. If overstated, the
scheduled lease payments may not fully recompense us for the vehicle's
depreciation over the life of the lease contract and, if understated, may put us
at a competitive disadvantage with other sources of vehicle leasing or
financing. Moreover, inaccurate estimates may impact dramatically upon the
decision of a customer to exercise his option to acquire the leased vehicle at
the residual value upon expiration of the contract. See, "REMARKETING." In
determining the expected residual value of a vehicle, we use guides and
estimates of residual values that are widely accepted in the car leasing
industry but there can be no assurances that such guides and estimates will be
accurate predictors of the actual residual value we might realize upon our
regaining possession of the vehicle. We attempt to reduce this risk by basing
lease payments on a residual which is 90% of the residual value we expect.
To date, TLMI's experience with respect to its estimation of residual
values has been limited largely to repossession and early termination.
Generally, vehicles returned upon expiration of their lease have been
re-marketed in transactions which have produced net cash gains to the subsidiary
which owned the vehicles. The number of such lease contracts has been limited,
however, and there can be no assurances that our experience will be similar to
that of TLMI or its other subsidiaries. With respect to early termination of
lease contracts and repossessions of vehicles, TLMI's experience, generally, has
validated the inputs we anticipate using to estimate residual values. Our
experience indicates that much of the actual vehicle depreciation occurs in the
early periods of the contracts. Termination or repossession which occurs
relatively early in the term of a contract will subject us to a greater
possibility that the payments under the defaulted contract will not have fully
amortized the depreciation, and that the vehicle will be remarketed at a loss.
Remarketing losses have the immediate effect of diminishing the collateral
securing the repayment of the notes (although the remarketing losses would have
to increase significantly over those experienced to date to cause a default on
the notes) and the longer term effect of diminishing the aggregate residual
value we might realize.
We intend to purchase and maintain a residual value insurance policy issued
by an insurer rated A by A.M. Best, offering certain limited protection against
the possibility that the remarketing of off-lease vehicles will not yield
proceeds at least equal to the residual value of the remarketed vehicles. The
purpose of the policy is to protect us if there is a dramatic downturn in the
market value of a specific vehicle model. An example of such a market
development for a specific vehicle is the Audi 5000, which precipitously lost
value when information of its perceived "sudden acceleration" problems was
widely disseminated. Other examples are the VW diesel Rabbit and the Cadillac
diesel. The residual insurance policy will not protect us against loss due to
excessive mileage, excessive wear and tear, damage, and lease termination
expenses on any specific vehicle or contract.
Payments to TLMI
In connection with each vehicle whose lease contract is originated by TLMI,
without regard to the means by which the lease customer came to TLMI, we will
pay TLMI (A) a marketing fee of 57.5% of a customer's down payment to us, (B) a
purchase administration fee equal to $100 and (C) a documentary fee equal to
$50. We will use that portion of the customer's down payment remaining after
payment of the marketing fee, the purchase administration fee and the
documentary fee to pay a portion of the vehicle's purchase price.
Each marketing fee is payable at inception of the lease contract. The
purchase administration fees and the documentary fees generally will be
accumulated by us and paid in a single payment each month to
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<PAGE> 33
TLMI; they are intended to compensate and reimburse TLMI for administering the
purchase of the lease contracts, including receipt and approval of dealer drafts
and lease contract transfer documents, monitoring compliance with purchase
criteria, preparing, organizing and delivering certificates, UCC financing
statements and other documents to the Trustee, creation of lease contract files,
communications with dealers and independent leasing companies, and other related
activities.
Under the Indenture, our payment to TLMI of the purchase administration fee
is subject to the prior payment of any amounts owing on the notes or to the
Trustee.
COLLECTION AND SERVICING OF CONTRACTS
Our lease contracts will serviced by TLMI under the Servicing Agreement,
dated as of , 1999 (the "Servicing Agreement"), between us and TLMI.
A copy of the Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. We have granted a
security interest in the Servicing Agreement to the Trustee as collateral for
the notes and for our obligations under the Indenture. The discussions of the
Servicing Agreement which follows are not, and do not purport to be, complete.
We encourage you to review the Servicing Agreement.
Under the Servicing Agreement, TLMI is obligated to use its own discretion,
subject to the requirement that it use the same care and apply the same policies
that it would exercise if it owned the lease contracts, in the management,
administration and collection of the lease contracts and to bear all costs and
expenses incurred in connection therewith.
Collections. TLMI will be responsible for administering the collection of
the lease contracts, including collecting and posting all payments. All lease
customers will be requested, through correspondence and delivery of payment
books or monthly statements, to remit payments under their lease contracts
directly to the master collection account. TLMI has also agreed to deposit in
the master collections account any payment proceeds received directly by TLMI
with respect to the lease contracts, including any proceeds from resales of
returned or repossessed vehicles and any recoveries from insurance claims on
vehicles. The Indenture requires us to transfer at least weekly, from the master
collections account to the operating account, all of the funds in the master
collections account.
TLMI generally will contact any customer on a past due lease contract
within fifteen (15) days after the payment due date. Any material extensions,
modifications or acceptances of partial payments by customers, and any related
necessary lease contract amendments or default waivers must be approved by the
Chief Credit Officer or President of TLMI. TLMI is also required to document the
reasons for each charge off of any material unpaid amount from a customer under
any lease contract. See, "-- Lease Defaults and Repossession," below.
Servicing. Among its obligations under the terms of the Servicing
Agreement, TLMI will be responsible for:
- responding to inquiries of customers on the lease contracts,
- investigating delinquencies,
- sending payment coupons to customers,
- reporting any required tax information to customers,
- paying costs of collections
- policing the vehicles
- furnishing monthly and annual statements to us and the Trustee with
respect to collections and proceeds
- generating certain information necessary to permit the Company to prepare
its required federal and state income tax returns
- coordinating the repossession, remarketing, repair and sale of any
vehicle.
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TLMI will instruct the appropriate vehicle licensing authorities to remit
vehicle license renewal stickers to TLMI, as opposed to the lease customers.
TLMI will require a customer to appear at TLMI's offices to collect the licence
renewal sticker, at which time a representative of TLMI will inspect the vehicle
for damage or excess mileage and collect any reimbursement for such damage or
excess mileage, as well as the license renewal fees. See "PURCHASE OF
VEHICLES -- Residual Value and Residual Value Insurance."
Lease Defaults and Repossession. We anticipate that we will maximize our
return by continuing to collect installments on the lease contract, despite a
missed installment by the customer, in lieu of repossessing the vehicle. A
customer's failure to make any payments for more than 30 days will, however,
generally cause us to commence a repossession action. By paying his current
payment and his past due payment plus repossession charges, the customer may be
allowed to retain his vehicle pursuant to the lease contract. If default occurs
a second time, the vehicle will be repossessed without further opportunity for
the customer to cure the default under the lease contract and retain possession
of the vehicle, unless otherwise required by applicable law.
Upon repossession, TLMI will either re-lease the vehicle or sell the
vehicle at wholesale at an automobile auction and use the proceeds thereof to
arrange for the purchase and lease of another vehicle. See "THE COMPANY;
REMARKETING." If a vehicle is re-leased, we will pay to TLMI a marketing fee.
See. "PURCHASE, ACQUISITION AND COLLECTION OF CONTRACTS; ACQUISITION; Payments
to TLMI."
TLMI has agreed to repurchase from us any vehicle which is the subject of a
lease contract in default if the vehicle has not been re-leased or wholesaled
within two months following the default. The purchase price for any such vehicle
will be the purchase price we originally paid for the vehicle (plus applicable
sales tax and title transfer and license plate fees) minus (i) 42.5% of the down
payment made by the customer (which is that portion of the down payment not paid
to TLMI as the marketing fee) and (ii) any monthly lease payments we have
received under such defaulted lease contract. We do not expect TLMI to have to
purchase a significant number of vehicles under this repurchase obligation but
we can offer you no assurances that TLMI will have the financial resources to
honor this repurchase obligation if a substantial number of our lease contracts
should come into default. At the time of any repurchase by TLMI, it must certify
to the Trustee that the repurchase complies with the requirements of the
Indenture and this prospectus.
TLMI is required to deliver us a report certifying that all lease contracts
managed by TLMI were serviced in material accordance with the servicing
agreement and that TLMI is not in default under the Servicing Agreement. The
report also will contain collection information on each lease contract since the
date of the last such report and a reconciliation of the deposits into and
withdrawals from our operating account. If TLMI fails to service and collect
amounts due from the customers in accordance with the servicing criteria
established by the servicing agreement or if certain bankruptcy or insolvency
proceedings occur, we have the right to terminate all rights and obligations of
TLMI under the Servicing Agreement and to transfer servicing rights to a
successor servicer. As we are a wholly-owned subsidiary of the TLMI and we have
common management, it is unlikely that we will exercise our right to terminate
TLMI's rights and obligations under the Servicing Agreement. See
"MANAGEMENT -- Certain Relationship and Related Transactions." Under the
Indenture, during the continuance of a default by TLMI of any of its material
obligations under the servicing agreement or the Indenture, the Trustee or
holders of at least 25% of the aggregate principal amount of the outstanding
notes have the right to compel us to terminate the rights and obligations of
TLMI under the Servicing Agreement.
Payments to TLMI.
TLMI is entitled under the Servicing Agreement to receive a fee of $20 per
month per outstanding lease contract that has not been assigned for
repossession. (Servicing Agreement, Section 3.) The servicing fee is intended to
compensate and reimburse TLMI for providing the services required of it
thereunder.
Under the Indenture, TLMI will also be entitled to reimbursement, as an
allowed expense, of the expenses it incurs in the repossession, remarketing,
repair and sale of any vehicle to the extent of the
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related proceeds from its sale or from any recovery on a related insurance
policy. (Servicing Agreement, Section 5.J.)
Under the Indenture, our payment to TLMI of the servicing fee is subject to
the prior payment of any amounts owing on the notes or to the Trustee.
(Indenture, Section 4.2.)
REMARKETING
TLMI will remarket for us each vehicle at the end of its scheduled lease
term or in connection with early termination of any lease contract. These
remarketing efforts may produce income to us to the extent that vehicle
disposition proceeds exceed, in the aggregate, our cost basis in the remarketed
vehicles.
TLMI will first remarket the vehicles to the original customers or to other
related parties brought to the attention of TLMI by the lease customer (e.g.,
family members, friends, etc.). TLMI will commence its remarketing efforts
approximately four months prior to the end of the scheduled contract term. At
that time, the lease customer will be contacted by a member of the remarketing
department to explain the customer's options upon termination. The lease
customer's options will be to buy the vehicle, extend the lease contract or
return the vehicle to us. Generally, under the lease contracts, the lease
customer will have an option to purchase the vehicle at the end of the scheduled
lease term for a purchase price determined at inception of the lease contract. A
lease customer generally will purchase the vehicle it has leased if the fixed
purchase price is less than its actual fair market value and will return the
vehicle to us if the fixed purchase price is in excess of the actual fair market
value. Thus, it is unlikely that we will ever be able to effect a sale of a
vehicle, either to the current lessee or to a third party, for any amount
substantially in excess of the fixed price in the lease contract.
If a vehicle is returned to us at the end of the scheduled lease contract
term, the vehicle will be inspected for excessive wear and mileage over that
permitted under the lease contract and the customer will be billed accordingly.
TLMI then will generally sell the vehicle on our behalf at wholesale through
regional auctions.
TLMI
We expect that substantially all of the lease contracts that we will
purchase or acquire will be originated by TLMI, our sole shareholder. TLMI was
founded on October 17, 1994, to lease new and late model automobiles with
factory warranties or extended warranty service contracts that extend to the
termination of their respective lease contracts.
TLMI has formed two subsidiaries to further its lease origination efforts.
The first of these subsidiaries is a Louisiana limited liability company, which
will originate lease customers and leases in Louisiana. The Louisiana subsidiary
will provide the same origination, leasing and servicing services in Louisiana
as TLMI provides in Texas. As with TLMI, we will purchase the vehicles and enter
into leases with the customers in our name. The second subsidiary, named
Verusauto.com, Inc., is to be a Texas corporation and will be organized to
originate customers and lease opportunities via the Internet. This subsidiary,
which will originate lease customers only via the Internet, will purchase cars
and execute leases in its own name and then, if the customer and lease fit our
lease contract and purchasing criteria, we will purchase the vehicle and the
lease contract from Verusauto.com, Inc. We will pay Verusauto.com, Inc., a price
equal to the vehicle purchase price paid by Verusauto.com, Inc. to the vehicle
dealer, less 42.5 % of the lease customer's down payment to Verusauto.com, Inc.,
plus a purchase administration fee and documentary fee totaling $150. In this
fashion, we will pay, on a net basis, exactly what we would have paid to TLMI
had TLMI originated the lease customer for us and had we paid the vehicle
purchase price directly to the vehicle dealer and the marketing fee to TLMI.
TLMI is engaged in the business of leasing such automobiles to individuals who
do not have access to other sources because they do not meet the credit
standards imposed by automobile retailers or banking institutions, generally
because these individuals have past credit problems or non-prime credit ratings.
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In leasing automobiles to its customers, TLMI first determines the dollar
amount that the customer is able to pay on a monthly basis, and then assists the
customer in selecting an automobile within his price range. After an automobile
has been selected by the customer, TLMI arranges for the purchase of the
automobile and the entering into of a lease with the customer (i.e., the lessee)
with respect to the automobile.
TLMI has determined that, once TLMI has fully invested its funds in
vehicles and leases, any lease contracts originated by TLMI that satisfy our
purchase criteria will be made available to the us, to the extent that funds are
available for such purchases and subject to the right of TAF-II to acquire
vehicles and lease contracts with proceeds that TAF-II realizes from
repossessions and prepayments. See "RISK FACTORS -- Conflicts of Interest" and
"MANAGEMENT -- Certain Relationships and Related Transactions."
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of May 31, 1999, relating to
the beneficial ownership of our Common Stock by any person or "group," within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act"), whom we know to own beneficially 5% or more of our outstanding
shares of Common Stock, (B) each of our officers or directors and (C) all of our
officers and directors as a group. Except as otherwise indicated, we believe
that each of the persons named below possesses sole voting and investment power
with respect to the shares of Common Stock beneficially owned by such person.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
<TABLE>
<CAPTION>
NAME OF DIRECTOR OR EXECUTIVE NUMBER OF SHARES
OFFICER OR NAME OF BENEFICIAL OWNER OUTSTANDING PERCENTAGE OF CLASS
- ----------------------------------- ---------------- -------------------
<S> <C> <C>
TLMI Management, Inc........................................ 1,000(2) 100%
5422 Alpha Road, Suite 100
Dallas, Texas 75240
Kenneth C. Lowe............................................. 0(2) 0
Terry Scharig............................................... 0 0
Randall K. Lowe............................................. 0 0
William H. Dreger........................................... 0 0
Kevin Kane.................................................. 0 0
All current officers and directors as a group (5 persons)... 0(2) 0
</TABLE>
- ---------------
(1) The information as to beneficial ownership of Common Stock has been
furnished by the respective shareholders, directors and officers of the
Company.
(2) The directors of TLMI could be deemed to share voting and investment powers
over the shares of Common Stock owned of record by TLMI. The sole director
of TLMI is Kenneth C. Lowe. The sole owners of the common stock of TLMI are
Kenneth C. Lowe and Randall K. Lowe. TLMI has a number of preferred
shareholders, who have limited voting rights and who may convert their
preferred shares into shares of TLMI common stock. The preferred
shareholders, on a fully diluted basis, will not own more than 20% of TLMI's
voting securities.
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MANAGEMENT
BUSINESS BACKGROUND AND EXPERIENCE
The names, ages, backgrounds and principal occupations of our directors and
executive officers are set forth below:
Kenneth C. "Ken" Lowe, age 63, has served as our sole director, President
and Secretary since our inception. Mr. Lowe has served as a director, Vice
President and Secretary of TLMI from October 1994 until July 1996 and as a
director, President and Secretary of TLMI since July 1996. Since 1993, Mr. Lowe
has been Vice President of Young & Lowe, Inc., a private investment banking
firm. From 1990 to 1992, Mr. Lowe was President of Custom Data Services, a
company that specialized in financial data processing and from 1988 to 1990, Mr.
Lowe was President of Westside Communications, which provided telephone
equipment service to commercial customers. Mr. Lowe has a Master's of Business
Administration from Southern Methodist University and over 20 years of
experience in investment banking.
Terry Scharig, age 43, has served as our Vice President since inception and
as Vice President of TLMI since April 1998. From 1994 to 1997 Mr. Scharig was
employed by CKS Securities as a wholesaler of syndicated public offerings. From
1985 to 1994 Mr. Scharig was employed by A.B. Culbertson Company as a licensed
representative specializing in the sale of fixed income securities. Mr. Scharig
holds a Bachelors Degree of Science from Kansas State University.
Randall K. Lowe, age 30, has served as our Vice President since our
inception and Vice President of TLMI since July 1998. Prior to joining the
Company and since 1994, Mr. Lowe served as a credit analyst for Bank One in New
Orleans, Louisiana and Dallas, Texas. From 1991 to 1994 Mr. Lowe was a credit
analyst and branch office manager for Whitney National Bank, N.A. in New
Orleans. Mr. Lowe holds a Bachelor of Science degree from Tulane University.
Randall Lowe is the son of Ken Lowe.
William H. Dreger, age 55, joined our Company in September 1999 and serves
as Controller and Chief Accounting Officer. Prior to joining the Company, Mr.
Dreger was Chief Financial Officer and Chief Information Officer for Down to
Earth, Inc. in Garland, Texas from 1994 to 1999. From 1985 to 1992, Mr. Dreger
was President of Stephenson Financial Services, Inc. in North Hollywood,
California. Mr. Dreger has a Bachelor of Business Administration from the
University of North Texas at Denton, is a Certified Public Accountant and has
over 25 years of experience in accounting and systems.
Kevin Kane, age 31, joined our Company in May 1999 as a Vice President and
branch office manager in New Orleans, Louisiana which will open in July 1999.
From 1993 to 1997, Mr. Kane was with Merrill Lynch and Company in New York in
their Litigation and Compliance Department. Mr. Kane is a graduate of Tulane
University and Loyola Law School and is a member of the New York State Bar.
Except as disclosed above, there are no family relationships among our
directors and any of our executive officers. Except as disclosed above, none of
our directors hold any directorship in any company with a class of securities
registered pursuant to Section 12 of the Exchange Act or subject to the
requirements of Section 15(d) of the Exchange Act or any company registered as
an investment company under the Investment Company Act of 1940.
INDEMNIFICATION
Our Articles of Incorporation provide that, to the fullest extent permitted
by Texas law, our directors and former directors shall not be liable to us or
our shareholders for monetary damages occurring in their capacity as a director.
Texas law does not currently authorize the elimination or limitation of the
liability of a director to the extent the director is found liable (i) for any
breach of the director's duty of loyalty to us or our shareholders, (ii) for
acts or omissions not in good faith that constitute a breach of duty of our
director or which involve intentional misconduct or a knowing violation of law,
(iii) for transactions from which the director received an improper benefit,
regardless of whether the benefit resulted from an action taken within the scope
of the director's office or (iv) for acts or omissions for which the liability
of a director is expressly provided by law.
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Our Articles of Incorporation and Bylaws grant mandatory indemnification to
directors and officers to the fullest extent authorized under the Texas Business
Corporation Act. In general, a Texas corporation may indemnify a director or
officer who was, is or is threatened to be, made a named defendant or respondent
in a proceeding by virtue of his position in the corporation if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in the case of criminal proceedings, had no
reasonable cause to believe his conduct was unlawful. A Texas corporation may
indemnify an officer or director in an action brought by or in the right of the
corporation only if such director or officer was not found liable to the
corporation, unless or only to the extent that a court finds him to be fairly
and reasonably entitled to indemnity for such expenses as the court deems
proper.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
our payment of expenses incurred or paid by a director, officer or controlling
person 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, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TLMI owns 100% of our Common Stock. Our officers are also officers of TLMI.
Mr. Kenneth Lowe is President and Secretary and a director of TLMI and a
director, the President, Chief Financial Officer and Secretary of our company
and TAF-II. These officers will devote as much of their time to our business as,
in their judgment, is reasonably required. We have real and ongoing conflicts of
interest with TAF-II and TLMI in allocating management time, services, overhead
and functions among ourselves, TAF-II and TLMI. Management of TAF-II and TLMI
intends to resolve any such conflicts in a manner that is fair and equitable to
us. However, there can be no assurance that TLMI will not form additional
subsidiaries engaged in the same business as us or that any particular conflict
may be resolved in a manner that does not adversely affect you. Neither TAF-II
nor TLMI has guaranteed or is otherwise liable for our debts and liabilities.
Under the terms of the Servicing Agreement and the Purchasing Agreement,
TLMI will be paid various fees and be entitled to reimbursement for its expenses
incurred in connection with the repossession, remarketing, repair and resale of
vehicles out of the proceeds from such resales. The terms of the Servicing
Agreement and the Purchasing Agreement were not negotiated at arm's-length but
were determined unilaterally by the management of TLMI. Thus, there are real and
ongoing conflicts of interest with respect to these agreements. We did not and
do not intend to seek competitive bids from other providers of lease purchasing,
administration and collection services. There has been no independent
determination of the fairness and reasonableness of the terms of these
transactions and relationships. Thus, there is no assurance that such services
could not have been obtained from an unaffiliated third party in arm's-length
negotiations on terms more favorable to us.
In addition, the terms of the new lease contracts to be originated by TLMI
will not have been negotiated at arm's-length but will be determined
unilaterally by TLMI. TLMI will receive 57.5% of each customer's down payment as
a marketing fee.
TLMI currently provides purchase and collection services for TAF-II, but
does not provide such services to any other party, including affiliates. TLMI,
however, may agree in the future, to purchase and service lease contracts for
itself, its affiliates and other unrelated parties. We have the right to
purchase additional lease contracts originated by TLMI from the net collection
proceeds on our existing lease contracts until the earlier of the sinking fund
trigger date or an event of default under the Indenture.
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<PAGE> 39
Management of TLMI will have real and ongoing conflicts of interest in deciding
whether to make available to us any automobile lease contracts that it
originates or to retain or acquire the contracts for its own benefit or for the
benefit of affiliated parties, including future subsidiaries to be engaged in
the vehicle leasing business. TLMI has determined that, once TAF-II has fully
invested its funds in vehicles and leases, all vehicle lease contracts purchased
or originated by TLMI that satisfy our contract criteria will be made available
to us, to the extent that we have funds available for such purchases, subject
only to right of TAF-II to acquire vehicle lease contracts and vehicles with
proceeds from repossession of its leased vehicles or prepayments of its lease
contracts. See "RISK FACTORS -- Potential Conflicts of Interest."
We will use up to 1.5% of the gross proceeds from the sale of the notes to
reimburse TLMI, our parent, for offering and organizational expenses paid by it.
The maximum reimbursement will range from $3,750 for the minimum offering of
$250,000 to $300,000 for the maximum offering of $20,000,000. TLMI has agreed to
pay such expenses to the extent they exceed 1.5% of the gross proceeds from the
sale of the notes. It is expected that such expenses will exceed 1.5% of the
gross proceeds from the sale of the notes, only if the aggregate gross proceeds
from sale of the notes are less than $10,000,000.
We believe that the transactions between us and TLMI, including the
marketing fee and other fees to be paid to TLMI, are reasonable, based on
comparable fees paid to lease brokers (or facilitators) in automobile leasing
transactions involving customers with non-prime credit ratings. The amount of
fees payable to TLMI may not be increased without the consent of holders of at
least 75% of the aggregate principal amount of the notes (excluding notes we
hold or that are held by our affiliates). See "ADDITIONAL INDENTURE
PROVISIONS -- Modification of Indenture" and "RISK FACTORS -- Potential
Conflicts of Interest" for additional information.
We have joined in a tax sharing agreement with TLMI. In general, under the
terms of this agreement, TLMI is responsible for making all payments of federal
income taxes due with respect to itself and its subsidiaries to the Internal
Revenue Service and all payments of state and local consolidated, combined and
unitary income taxes to the applicable state and local authorities. "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS -- Federal Income Tax Liabilities of the
Company and TLMI." Under applicable federal tax laws, however, if TLMI fails to
make such payments of tax, the subsidiaries, including us, would be responsible
for making such payments. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Uncertain Federal Income Tax Liability of the Company and
TLMI."
We have adopted a policy pursuant to which we will not make loans to
officers, directors, stockholders or affiliates of such persons.
All ongoing and future transactions with our affiliates will be entered
into on terms that are no less favorable to us than those that can be obtained
from unaffiliated third parties and must be approved by a majority of our
directors.
LITIGATION
Neither we nor TLMI is the subject of any pending litigation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
GENERAL
As of the date hereof, we have had no operating history. The net proceeds
of the sale of the notes will be employed to purchase vehicles and lease
contracts. See "USE OF PROCEEDS." While the notes remain outstanding, we will be
prohibited from engaging in any business other than the purchase or other
acquisition of vehicles and lease contracts, collection and servicing of the
lease contracts (including possession and resale of the vehicles) and the
remarketing of the vehicles upon termination of the lease contracts, and from
incurring any additional indebtedness other than allowed expenses and any other
amounts incurred in the ordinary course of our business. See, "THE
COMPANY -- General; The Business of the Company."
Our use of the net collection proceeds from the lease contracts will be
restricted to payments on the notes and, so long as we are not in default under
the Indenture, to payments of allowed expenses and, until the sinking fund
trigger date, to the purchase or acquisition of additional eligible lease
contracts. See "COLLATERAL FOR THE NOTES -- The Lease Contract Proceeds and
Operating Account."
CAPITAL RESOURCES AND LIQUIDITY
Our primary sources of funds for repayment of the notes will be proceeds
from the lease contracts, any income on the reinvestment of such proceeds, and
any proceeds from sale or refinancing of the remaining lease contracts at the
maturity of the notes. We do not have, nor are we expected to have in the
future, any significant source of capital for payment of the notes and our
expenses other than such sources. Payment of the principal or interest on the
notes is not guaranteed by any other person or entity. See "RISK
FACTORS -- Limited Assets; Single Purpose Nature." Although our management
believes that we will realize sufficient proceeds from the foregoing sources to
pay all installments of interest when due on the notes and to satisfy the
principal amount of the notes in full prior to or at maturity, there can be no
assurance that such sources will be sufficient to repay the notes in full.
Moreover, management's belief is based on a number of assumptions, believed by
management to be reasonable. Should any of such assumptions prove to be
inaccurate, it could have a material adverse effect on our ability to pay the
notes in accordance with their terms.
We intend to use at least 90% of the gross proceeds from the sale of notes
to purchase or acquire vehicles or lease contracts, which may include the
purchase from time to time of certain of the vehicles and related lease
contracts from TAF-II, one of our affiliates. We expect that substantially all
lease contracts and vehicles will be acquired in transactions originated by
TLMI. None of the offering proceeds will be used to pay interest on the notes.
Any cash proceeds from existing lease contracts in excess of interest payments
and payments of allowed expenses will be reinvested in the purchase of
additional vehicles and the entering into of related lease contracts prior to
the sinking fund trigger date, thereby causing the total amount of funds
invested in the lease contracts to exceed the amount of the proceeds from the
sale of notes. We believe that by purchasing and acquiring lease contracts that
meet the lease contract criteria, the total future installments required to be
paid under the lease contracts should be greater than the outstanding principal
of the notes. All of the vehicles and lease contracts purchased or acquired with
proceeds from the sale of the notes or with the collection proceeds from
previously purchased or acquired lease contracts will serve as collateral for
the notes.
We believe that the amount of the collateral for the notes will increase
until the sinking fund trigger date. As a result of our reinvestment of the net
collection proceeds from existing lease contracts, after deduction for payments
of interest and allowed expenses, in additional lease contracts, we believe that
the ratio of the total unpaid installments of the lease contracts securing the
notes to the aggregate principal of the outstanding notes will generally
increase until the sinking fund trigger date.
The foregoing paragraph contains forward-looking information that is based
on a number of assumptions and these assumptions include certain risks and
uncertainties. A principal risk is that we have had no operations to date, and
TLMI, our parent, which is responsible for the acquisition and servicing of
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our lease contracts, has limited operating history to date upon which to base
these assumptions. Other risks and uncertainties are set forth under the caption
"RISK FACTORS" elsewhere in this Prospectus. A variation in any single
assumption could materially alter our ability to cover the allowed expenses and
pay all principal and interest due on the notes. There is no assurance that
these assumptions, including, without limitation, the expected implicit interest
rate of 18% per annum with respect to the lease contracts, will be achieved.
Accordingly, our ability to cover the allowed expenses and pay all principal and
interest on the notes may differ materially from this forward-looking
information.
ADDITIONAL INDENTURE PROVISIONS
The following material describes certain provisions of the Indenture.
Certain provisions of the Indenture are also described under "DESCRIPTION OF THE
NOTES" and "COLLATERAL FOR THE NOTES." The descriptions are not complete. We
strongly recommend that you review the Indenture. See, "WHERE YOU CAN GET MORE
INFORMATION."
MODIFICATION OF INDENTURE
With the consent of the holders of at least a majority of the aggregate
principal amount of the outstanding notes, the Trustee can agree with us to
amend or supplement the Indenture or the notes, except as provided below. We
will mail notice of any such amendment of the Indenture or the notes to all
holders of the notes promptly after the effectiveness thereof. Without the
consent of the holder of each outstanding note affected, however, no amendment
to the Indenture or supplemental indenture will, among other things:
- reduce the amount of notes whose holders must consent to an amendment,
supplement or waiver;
- reduce the rate of or extend the time for payment of interest on any
note;
- reduce or extend the maturity of the principal of any note;
- permit the creation of any lien ranking prior to or on a parity with the
lien of the Indenture or terminate the lien of the Indenture on any
property at any time subject thereto or deprive the holder of any note of
the collateral afforded by the lien of the Indenture; or
- make any note payable in money other than that stated in the note.
Without the consent of the holders of at least 75% of the aggregate principal
amount of the outstanding notes, no supplemental indenture may increase the
amount of fees payable to TLMI. For the purpose of consents of noteholders, the
term "outstanding" excludes notes which we hold or which are held by our
affiliates. (Indenture, Section 1.1.)
We may amend or supplement the Indenture or the notes, without obtaining
the consent of noteholders, to cure ambiguities or make minor corrections and,
among other things, to make any change that does not adversely affect the
interests of the noteholders. (Indenture, Section 9.1.)
EVENTS OF DEFAULT
An event of default with respect to the notes is defined in the Indenture
as being:
- our failure to make any interest payment on the notes within 30 days
after it becomes due;
- our failure to pay when due the principal of any notes;
- the impairment of the validity or effectiveness of the Indenture or of
the security interest granted thereby;
- the improper amendment or termination of the Indenture;
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- the continuance of any of the following events for a period of 30 days
after we are delivered notice of such event by the Trustee or after we
and the Trustee are delivered notice of such event by the holders of
notes representing at least 25% of the aggregate principal amount of the
outstanding notes;
- the creation of a lien on any of the assets other than the lien of the
trust or the Trustee;
- the failure of the Indenture to create a valid first priority security
interest in assets which are held in the trust; or
- our failure to comply with any of our covenants in the Indenture;
- TLMI's failure to purchase lease contracts which are in default or which
it otherwise is required to purchase from us;
- the incorrectness in any material respect of any of our representations
or warranties in the Indenture (exclusive of representations and
warranties as to individual lease contracts that TLMI is obligated to,
and does, repurchase from us) and the failure to cure such circumstances
or condition within 30 days after we receive notice thereof from the
Trustee or the holders of notes representing at least 25% of the
aggregate principal amount of the outstanding notes; and
- the Company enters into bankruptcy, or is put into bankruptcy, or becomes
subject to certain other actions relating to insolvency or other
financial incapacity.
RIGHTS UPON EVENT OF DEFAULT
If an event of default should occur and continue, the Trustee may, or at
the direction of the holders of notes representing at least 25% of the principal
amount of the notes will, declare the notes due and payable. Upon such
declaration, the notes will immediately become due and payable in an amount
equal to their remaining principal amount plus accrued interest at such time.
Under such circumstances, such declaration may be rescinded by the holders of a
majority of the aggregate principal amount of the outstanding notes. (Indenture,
Section 6.2.)
If, following an event of default, the notes have been declared due and
payable, the Trustee may exercise one or more of its remedies including:
- the right to retain the assets held as collateral in the trust and apply
all amounts received with respect to such assets, first, to payment of
its fees and expenses and then, to the payment of the principal of and
interest on the notes, ratably with respect to the noteholders
(Indenture, Sections 6.3, 6.10 and 6.13);
- the right to sell the assets held as collateral in the trust and apply
the proceeds, first, to payment of its fees and expenses and then, to the
amounts due on the notes (Indenture, Sections 6.3, 6.10 and 6.14); or
- the right to cause a transfer of all funds in our operating account
directly to the sinking fund account.
In the event of a continuing default by TLMI with respect to its obligations
under the Servicing Agreement or the Purchasing Agreement, the Trustee will also
have the right to direct us to terminate the duties and rights of TLMI under
such agreements and to cause TLMI to turn over to the Trustee all records and
data pertaining to the lease contracts in its possession. (Indenture, Section
5.10; Servicing Agreement, Section 9; Purchasing Agreement.)
The holders of a majority of the aggregate principal amount of the
outstanding notes will have the right to direct the time, method and place of
conduct of any proceedings for any remedy available to the Trustee to exercise
any trust or power conferred on the Trustee. The Trustee may refuse, however, to
follow any such direction that conflicts with law or the Indenture, that is
unduly prejudicial to the rights of noteholders not joining in such direction or
that would subject the Trustee to personal liability. (Indenture,
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Section 6.5.) The holders of a majority of the aggregate principal amount of the
outstanding notes may also waive any default, except a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of each holder of notes affected. (Indenture, Section 6.4.)
No holder of notes will have the right to pursue any remedy with respect to
the Indenture or the notes, unless:
- such holder gives to the Trustee written notice of a continuing event of
default;
- the holders of at least 25% of the aggregate principal amount of the
outstanding notes have made a written request to the Trustee to pursue
such remedy, and have offered indemnity satisfactory to the Trustee
against loss, liability or expense
- the Trustee does not comply with the request within sixty (60) days; and
- the Trustee has received no contrary direction during such 60-day period
from the holders of a majority of the principal amount of the outstanding
notes. (Indenture, Section 6.6.)
Notwithstanding the foregoing, the Indenture prohibits the Trustee from
reselling any portion of the assets held in trust as collateral upon the
occurrence of an event of default to us or any of our officers or directors,
TLMI or any of its shareholders, officers or directors, or any other of our
affiliates.
RESTRICTIONS ON BUSINESS ACTIVITIES AND ADDITIONAL INDEBTEDNESS
We have made certain covenants in the Indenture that restrict our business
activities and prohibit certain transactions. We have agreed, among other
things, that, without the consent of the holders of a majority of the aggregate
principal amount of the notes, we will not (i) engage in any business or
activity other than or in connection with the purchase or other acquisition of
vehicles and lease contracts, collection and servicing of the lease contracts,
the repossession and resale of the vehicles, the remarketing of vehicles upon
termination of the lease contracts and the raising of equity capital, and any
other incidental businesses or activities, or (ii) create, incur, assume or in
any manner become liable in respect of any indebtedness other than the notes,
any allowed expenses and any other amounts incurred in the ordinary course of
our business. In addition, we have agreed not to dissolve or liquidate in whole
or in part or to merge or to consolidate with any corporation, partnership or
entity other than a subsidiary of which we are, directly or indirectly, the sole
owner or any affiliate thereof whose business is restricted in the same manner
as our business under clause (i) above. (Indenture, Section 5.11.)
COMPLIANCE STATEMENTS AND ANNUAL ACCOUNTANTS' REPORTS
We and TLMI are required to certify, quarterly, to the Trustee that we have
fulfilled our obligations under the Indenture. (Indenture, Section 5.7.) In
addition, we and TLMI annually must file with the Trustee a report of a firm of
independent public accountants as to their examination of our financial
statements and those of TLMI and the documents and records relating to the lease
contracts and deliver a certificate with respect to our compliance and that of
TLMI, in all material respects, with our respective obligations arising under
the Indenture. (Indenture, Section 5.6.)
TRUSTEE'S ANNUAL REPORT
The Trust Indenture Act requires the Trustee to mail annually to all
holders of notes a brief report if any of certain events occur. These events
include:
- any change in the Trustee's eligibility and qualifications to continue as
the Trustee under the Indenture;
- any amounts advanced by the Trustee under the Indenture;
- the amount, interest rate and maturity date of certain indebtedness, if
any, owing by us to the Trustee in our individual capacity;
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- any change to the property and funds, if any, physically held by the
Trustee as such;
- any change in or any release, or release and substitution, of property
subject to the lien of the Indenture; and
- any action taken by it that materially affects the notes and that has not
been previously reported. (Indenture, Section 7.6.)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will be discharged, with certain limitations, upon deposit
with the Trustee of funds sufficient for the payment or redemption of all of the
notes. Our duties to you will cease upon such deposit. (Indenture, Section 8.1.)
DUTIES OF TRUSTEE
The Trustee is obligated, under the Indenture, to use the same degree of
care and skill in the exercise of its rights and powers under the Indenture as a
prudent man would exercise or use under the circumstances in his own affairs.
Except during an event of default, the Trustee may rely, in the absence of bad
faith, on certificates and opinions furnished to it. Generally, the Trustee is
not relieved from liability for its own negligence or willful misconduct except
that it is not liable (i) if it acted in good faith in accordance with a
direction from the holders of not less than a majority in principal amount of
the notes, or (ii) for any error in judgment made in good faith and without
negligence in ascertaining the pertinent facts. The Trustee may refuse to
perform any duty or exercise any right or power unless it receives indemnity
satisfactory to it against any loss, liability or expense. (Indenture, Section
7.1.)
THE TRUSTEE
Trust Management, Inc. will be the Trustee under the Indenture for the
notes. We are obligated to pay the fees and expenses of the Trustee relating to
the notes. To provide security for our obligation to pay such fees and expenses,
the Trustee has a lien on the same assets as secure the notes. The Trustee's
lien is prior to that of the notes, prior to the assets in the trust, except as
to any money held in trust to pay principal and interest on the notes.
(Indenture, Section 7.7.)
CERTAIN LEGAL ASPECTS OF THE LEASE CONTRACTS
THE LEASES AS TRUE LEASES
The lease contracts are leases of personal property. Under the Texas
Uniform Commercial Code (the "UCC"), a transaction involving the lease of
personal property may create either a lease or a security interest. If the
transaction creates a lease, the lessor remains the owner of the personal
property subject to the lease and the lessee has the right to possess and use
the leased property during the term of the lease. The rights and remedies of the
lessor and lessee under a true lease of personal property are determined
primarily under Article 2A of the UCC (Leases). If the transaction creates a
security interest, (a) the transaction is in effect a credit sale under which
the lessor has in effect sold the personal property to the lessee on an
installment payment basis and holds a security interest in the subject personal
property to secure payment of the purchase price, (b) the lessee is the
purchaser and owner of the personal property, and (c) the lease payments are in
effect payments of the purchase price for the subject personal property. The
rights and remedies of the parties to a lease which is actually a sale coupled
with a security interest are determined primarily under Article 2 of the UCC
(Sales) and Article 9 of the UCC (Secured Transactions).
The determination of whether of a lease transaction creates a true lease or
a sale coupled with a security interest is very important and will determine the
respective rights, obligations and duties of the lessor, in this case us, and
the customer and will have particular impact on the remedies available upon a
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default by the customer. The following are some of the significant differences
between a true lease and a lease which is in effect a sale coupled with a
security interest:
- A true lease is exempt from Texas usury laws; a credit sale is not.
- A lessor under a true lease generally has a better chance than a secured
creditor of obtaining current payments, as well as repossession of the
goods, when the lessee is in bankruptcy.
- In the case of default, a true lessor has different and often more
favorable remedies than those available to a secured creditor.
- A security interest, unlike a lease, is subject to priority rules with
respect to the claims of competing secured creditors. If a lessor, not
contemplating that this transaction will be characterized as creating a
security interest, takes no steps to perfect the security interest
created in the transaction, a Trustee in bankruptcy or some other third
party may claim that the lessor is actually an unperfected secured
creditor and may be able to void, or otherwise take priority over, the
security interest, leaving the lessor/seller with an unsecured obligation
to pay the lease payments.
- A transaction that is truly a security interest, and not a lease, may
result in exclusion of the leased goods from insurance coverage under
some policies.
Whether a transaction creates a lease or a security interest depends on the
particular terms and facts on which the transaction is based. If the
transaction, however labeled, is actually a transaction under which the lessee
is acquiring ownership, or the equivalent of ownership, of the leased goods, the
transaction is a sale coupled with a security interest. The transaction will be
considered a security interest if the lessee's obligation to pay the
consideration under the lease (the rent payments) is not subject to termination
by the lessee, and one or more of the following factors are also present:
- The original lease term is equal to or greater than the remaining
economic life of the goods.
- The lessee is required to renew the lease for the remaining economic life
of the goods or is required to become the owner of the goods.
- The lessee has an option to renew the lease for the remaining economic
life of the goods for no additional consideration or for nominal
additional consideration upon compliance with the terms of the lease
agreement.
- The lessee has an option to become the owner of the goods for no
additional consideration or nominal additional consideration upon
compliance with the terms of the lease agreement.
Additional consideration is nominal if it is less than the lessee's
"reasonably predictable" cost of performing under the lease agreement if the
option is not exercised. Additional consideration given for an option to renew
or an option to purchase is not nominal if:
- When the option to renew the lease is granted, the rent is stated to be
the fair market rent for the use of the goods for the term of the renewal
determined at the time the option is to be performed.
- When the option to become the owner of the goods is granted, the price is
stated to be the fair market value of the goods determined at the time
the option is to be performed.
A transaction does not create a security interest merely because it
provides for any of the following:
- The "present value" of the consideration to be paid for the right to
possession and use of the goods is substantially equal to or greater than
the fair market value of goods at the time the lease agreement is made.
In this context, present value means the amount, as of a date certain, of
one or more sums payable in the future, discounted to the date certain.
The discount is determined by the interest rate specified by the parties,
if that rate is not manifestly unreasonable at the time the
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transaction is consummated. Otherwise, the discount is determined by a
reasonable rate that takes into account the facts and circumstances of
each case.
- The lessee assumes the risk of loss of the goods or agrees to pay taxes,
insurance, filing, recording, or registration fees or service or
maintenance costs with respect to the goods.
- The lessee has an option to renew the lease or become the owner of the
goods.
- The lessee has an option to renew the lease for a fixed rent that is
equal to or greater than the reasonably predictable fair market rent for
the use of the goods for the term of the renewal at the time the option
is to be performed.
- The lessee has an option to become the owner of the goods for a fixed
price that is equal to or greater than the reasonably predictable fair
market value of the goods at the time the option is to be performed.
Because (i) each of our lease contracts will provide for the lease of a
vehicle for a term which is considerably shorter than the expected useful life
of the vehicle, (ii) the lease payments required under each lease contract are
in an aggregate amount less than the payments which would be made if the
transaction was in essence a sale of the vehicle, and (iii) at the expiration of
the lease term, the customer can either return the vehicle to us with no further
payment obligations or purchase the vehicle at a fixed purchase price which,
based on the our policies, should be equal to or greater than the reasonably
predictable fair market value of the vehicle, we believe that the lease
contracts create true leases and will be governed by the laws and regulations
applicable to the lease of personal property rather than the laws and
regulations applicable to credit sales of motor vehicles. In documenting and
servicing the lease contracts, we will follow the rules and procedures required
for true lease transactions.
SECURITY INTEREST IN LEASE CONTRACTS
To secure payment of the notes, we will grant to the Trustee a security
interest in and to each of the lease contracts. Pursuant to the provisions of
Article 9 of the UCC governing security interests, a lease is designated as
chattel paper. A security interest in chattel paper may be perfected either by
taking possession of the lease contract or by the filing of a UCC financing
statement with the Secretary of State of the state in which a corporate debtor's
principal place of business is located. Our principal place of business is
located in the State of Texas and a security interest in one of our lease
contracts may be perfected by filing a UCC financing statement with the
Secretary of State of the State of Texas. In the event TLMI forms a subsidiary
to carry out a vehicle leasing business in one or more others states,
appropriate filings will be made in such other states.
Upon any purchase of lease contracts by us, the original lease contracts
and related title documents for the vehicles will be delivered to the Trustee.
Possession of such lease contracts and related title documents will be retained
by the Trustee or other financial institution appointed by the Trustee and us to
act as custodian and bailee of the lease contracts and related title documents
for the benefit of the Trustee and us. Upon its purchase, each lease contract
will be physically labeled to indicate the security interest therein of the
Trustee. In addition, a UCC financing statement will be filed in the appropriate
public office to perfect by filing and give notice of the Trustee's security
interest in the lease contracts and all proceeds therefrom. See "COLLATERAL FOR
THE NOTES -- The Lease Contracts."
SECURITY INTERESTS IN VEHICLES
We will own the vehicles subject to the lease contracts. To secure payment
of the notes, we will grant to the Trustee a security interest in and to each of
the vehicles subject to a lease contract. Perfection of security interests in
vehicles is generally governed by the motor vehicle registration laws of the
state in which a corporate debtor's principal place of business is located. As
stated above, as our principal place of business is located in the State of
Texas, a security interest in a vehicle will be perfected according to the
requirements of Article 9 of the UCC and the motor vehicle registration laws of
the State of Texas. In
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Texas, a security interest in a motor vehicle is perfected by notation of the
secured party's lien on the vehicle's certificate of title.
With respect to lease contracts we purchased, the originating entities will
sell and assign the lease contracts and the vehicles to us upon purchase of the
lease contracts. The originating entities will also provide evidence that proper
applications for certificates of title have been made to ensure that we will be
named as the owner and the Trustee as the first lienholder on the certificates
of title relating to the vehicles. We will deliver possession of the lease
contracts (originated or purchased) and related title documents to the Trustee
or other financial institution appointed by us and the Trustee to act as
custodian and bailee for us and the Trustee. We will supplement the description
in the Indenture of the lease contracts and confirm our grant to the Trustee of
a security interest in all lease contracts that we purchase.
OTHER MATTERS AFFECTING MOTOR VEHICLES AND LEASE CONTRACTS
Under the laws of Texas, liens for repairs performed on a motor vehicle and
liens for certain unpaid taxes take priority over even a perfected security
interest in a vehicle. The Uniform Commercial Code also grants priority to
certain federal tax liens over the lien of a secured party. Certain state and
federal laws permit the confiscation of motor vehicles under certain
circumstances if used in unlawful activities that may result in the loss of a
collateralized party's perfected security interest in the confiscated motor
vehicle. Upon our purchase of each lease contract or vehicle, we will receive a
warranty from TLMI that the lease contract creates a valid, subsisting and
enforceable first priority security interest in the vehicle. However, liens for
repairs or taxes or the confiscation of a vehicle could arise or occur at any
time during the term of a lease contract. Notice will not necessarily be given
to us in the event such a lien arises or confiscation occurs.
If a lien customer of ours relocates to another state, under the laws of
most states, the perfected security interest in the vehicle would continue for
four months after such relocation and thereafter, in most instances, until the
customer re-registers the vehicle in such state. Almost all states generally
require surrender of a certificate of title to re-register a titled vehicle.
Therefore, the Trustee or other appointed custodian must surrender possession,
if it holds the certificate of title to such vehicle, before the vehicle owner
may effect the re-registration. In addition, we should receive, absent clerical
errors or fraud, notice of surrender of the certificate of title because we will
be listed as the owner on the face of the title, and the Trustee will be shown
as the first lienholder thereon. Accordingly, we should have notice and the
opportunity to re-perfect out security interest in the vehicle in the state of
relocation. If a customer moves to one of the few states that does not require
surrender of a certificate of title for registration of a motor vehicle,
re-registration could defeat perfection or loss of the Trustee's security
interest in such vehicle. The loss of the Trustee's security interest in a
number of vehicles under these circumstances could have a material adverse
effect on the collateral for the notes. In the ordinary course of servicing the
lease contracts, we will take steps to effect such re-perfection upon receipt of
notice of re-registration or other information from the customer as to
relocation. Under the servicing agreement and the Indenture, we are obligated to
maintain the continuous perfection of the security interest represented by each
lease contract in the related vehicle.
REPOSSESSION
In the event of default by a customer on a lease contract, we, as lessor,
have all the remedies of a lessor under Article 2A of the UCC. The UCC remedies
of a lessor include the right to repossession by self-help means, unless such
means would constitute a breach of the peace. Unless the customer under a lease
contract voluntarily surrenders a vehicle, self-help repossession, by an
individual independent repossession specialist engaged by TLMI, will be the
method usually employed by TLMI when an customer defaults. Self-help
repossession is accomplished by retaking possession of the vehicle. If a breach
of peace is likely to occur, or if applicable state law so requires, TLMI must
obtain a court order from the appropriate state court and repossess the vehicle
in accordance with that order. Most of the states in which the Company intends
to purchase lease contracts have state laws that would not require TLMI, in the
absence of a probable breach of the peace, to obtain a court order before it
attempts to repossess a vehicle.
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DISPOSAL OF VEHICLES AND DAMAGES AGAINST DEFAULTING CUSTOMERS
Upon default by a lessee, the UCC permits the lessor to take possession of
the leased goods, either by self-help methods or by judicial process. Upon
repossession of leased goods, a lessor may dispose of the leased goods (either
by releasing the leased goods or selling the leased goods) and seek recovery of
damages from the lessee. Damages of a lessor upon default by a lessee include
payment of all unpaid lease payments due and owing on the date of disposition of
the leased goods, recovery of the expenses incurred by the lessor in pursuing
its remedies against the lessee, and damages for the unpaid installments of rent
due under the lease. The damages to which a lessor is entitled for the unpaid
installments of rent due under a lease after default by a lessee will be
determined by whether the disposition of the leased goods is by releasing or by
sale. If the leased goods are re-leased, damages are based on the present value
of the remaining lease payments under the lease which is in default, less the
present value of lease payments due under the new lease created when the goods
are re-leased. If the leased goods are resold, damages will be based on the
difference between (a) the sum of estimated value of the leased goods at the
expiration of the lease which is in default plus the present value (or other
similar adjustment) of the remaining lease payments, less (b) the amount
realized upon the sale of the leased goods. Vehicles we repossess will generally
be re-leased to a new lessee or sold by TLMI through wholesale automobile
networks or auctions that are attended principally by dealers.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws, may limit or delay our ability to repossess and re-lease or
sell a vehicle subject to a lease contract under which the lessee has defaulted
or enforce a judgment for the damages to which we are entitled upon repossession
and release or sale of the Motor Vehicle. In the event that damages are not
obtained, are not satisfied, are satisfied at a discount or are discharged, in
whole or in party, in bankruptcy proceedings, including bankruptcy proceedings
under Title 11 United States Code (the Federal bankruptcy law), we may suffer a
loss and diminish our ability to repay the notes.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lessors and servicers involved in consumer
leases. These laws include, but are not limited to, the Consumer Leasing Act,
the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair
Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's
Regulations B and M, state adaptations of the National Consumer Act and of the
Uniform Consumer Credit Code, and other similar laws. These laws require us to
provide certain disclosures to prospective lessees, prohibit misleading
advertising and protect against discriminating financing or unfair credit
practices. The Federal Reserve Board has published final revisions to Regulation
M under the Consumer Leasing Act that are applicable to automobile lease
contracts. See "THE COMPANY -- Government Regulations." The Equal Credit
Opportunity Act prohibits creditors from discriminating against lease applicants
on the bases of race, color, sex, age or marital status. Under the Equal Credit
Opportunity Act, creditors are required to make certain disclosures regarding
consumer rights and advise consumers whose credit applications are not approved
of the reasons for the rejection. The Fair Credit Reporting Act requires the
Company to provide certain information to consumers whose credit applications
are not approved on the basis of a report obtained from a consumer reporting
agency. In addition to the foregoing, state laws impose finance charge ceilings
and other restrictions on consumer transactions and require contract disclosures
in addition to those required under federal law. These requirements impose
specific statutory liabilities upon creditors who fail to comply with their
provisions. In some cases, this liability could affect an assignee's ability to
enforce consumer finance contracts such as the lease contracts. The so-called
"Holder-in-Due-Course" Rule of the Federal Trade Commission (the "FTC Rule"),
the provisions of which are generally duplicated by the Uniform Consumer Credit
Code, other state statutes, or the common law in certain states, is intended to
defeat the ability of the transferor of a consumer credit contract (such as the
lease contracts), which transferor is the lessor of the goods that gave rise to
the transaction, to transfer such contract free of notice of claims by the
debtor thereunder. The effect of the FTC Rule is to subject the assignee of such
a
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contract to all claims and defenses that the lessee under the contract could
assert against the lessor of the goods. Most of the lease contracts will be
subject to the requirements of the FTC Rule. Accordingly, as holder of the lease
contracts, we may be subject to any claims or defenses that the lease customer
may assert against us, as lessor. Such claims are limited to a maximum liability
equal to the amounts paid by the customer on the lease contract. The customer,
however, may also assert the FTC Rule to offset remaining amounts due on the
lease contract as a defense against any claim we bring against such customer.
Several states and the federal government have enacted "lemon laws" and
similar statutes containing warranty protections for consumers who purchase or
lease new or used motor vehicles. The application of these statutes may give
rise to a claim or defense by a consumer against the manufacturer of a purchased
vehicle or the dealer from or through whom such consumer purchased or leased
such vehicle. We may be required to cancel a lease with a consumer who
successfully asserts such a claim or defense, and while we would have a claim
against the manufacturer or such dealer, there can be assurance that we will be
made whole in every case in which the consumer successfully asserts such rights.
Under most state motor vehicle dealer licensing laws, sellers of motor
vehicles are required to be licensed to sell motor vehicles at retail sale.
Furthermore, federal odometer regulations promulgated under the Motor Vehicle
Information and Cost Savings Act require that all sellers of new and used
vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if an
odometer disclosure statement was not provided to the lessee of a vehicle, the
lessee may be able to assert a defense against the seller of the vehicle.
OTHER LIMITATIONS
In addition to the limitations discussed above, numerous other statutory
provisions, including federal bankruptcy laws and related state laws, may
interfere with or affect the ability of a lessor to realize upon leased goods or
collect all damages to which the lessor is entitled upon default by the lessee.
For example, in a proceeding under the federal bankruptcy law, a claim for
damages may be treated as an unsecured claim and may not be paid in full if the
particular bankruptcy proceeding does not result in payment in full of other
similar unsecured claims. The federal bankruptcy laws, however, do require the
debtor or trustee in a bankruptcy proceeding to perform all obligations of the
lessee under the lease (including payment of the installments of rent due under
the lease) and to cure any outstanding defaults if the leased goods are to
remain in the possession of the debtor or trustee subject to the provisions of
the lease.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
SCOPE AND LIMITATIONS
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the notes
by the holders acquiring the notes on their original issuance for cash. The
discussion is based upon the current provisions of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority as of the date hereof,
all of which may be repealed, revoked or modified retroactively in a manner that
could adversely affect a holder of the notes.
The discussion deals only with the notes held as capital assets (generally
property held for investments and not for sale to customers in the ordinary
course of a trade or business) by holders who or which are (i) citizens or
residents of the United States, (ii) domestic corporations, partnerships or
other entities or (iii) otherwise subject to U.S. federal income taxation on a
net income basis in respect of income or gain from the notes. The discussion
does not purport to deal with federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Moreover, the Internal Revenue Service may disagree with all or a part of the
discussion below. This summary does not address tax consequences of holding
notes under state, local or foreign tax laws.
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No ruling on any of the issues discussed below will be sought from the
Internal Revenue Service.
EACH PURCHASER SHOULD CONSULT WITH HIS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OF PURCHASING, OWNING OR DISPOSING
OF THE NOTES, INCLUDING THE EFFECT OF STATE, LOCAL OR FOREIGN LAWS.
TAX CONSEQUENCES TO NOTEHOLDERS
Treatment of the Notes as Indebtedness. We will agree, and you will agree
by your purchase of notes, to treat the notes as debt for federal income tax
purposes, unless an adverse determination dictates otherwise. If, however, it is
determined for tax purposes that the notes represent an equity investment, a
substantial portion of the discussion set forth below will be inapplicable and
the tax consequences to the holders of the notes will change, possibly with
adverse tax consequences. The discussion below assumes the characterization of
the notes as debt is correct. We have not received an opinion of counsel with
respect to the classification of the notes as debt for federal income tax
purposes.
Interest Income on the Notes. As a general rule, interest paid or accrued
on the notes will be treated as ordinary income to the holders of the notes. If
you use the accrual method of accounting for federal income tax purposes, you
will be required to include stated interest earned on the notes in ordinary
income as it accrues. If you use the cash receipts and disbursements method of
accounting for federal income tax purposes, you must include such interest in
ordinary income when payments are received (or made available for receipt) by
you.
Market Discount. The resale of notes may be affected by the market discount
provisions of the Internal Revenue Code. These provisions generally provide that
if subsequent to the original issuance of the notes you purchase a note at a
market discount that exceeds a DE MINIMIS amount, any gain recognized by you
upon the sale, redemption at maturity or other disposition of the note will be
taxable as ordinary income to the extent of the portion of market discount that
accrued on the note while held by you. Market discount will be treated as
accruing ratably over the term of such note or, at your election (which election
may not be revoked without the consent of the IRS), under a constant yield
method. Also, you may elect to include market discount into income as it accrues
in which case gain realized on the sale, exchange or retirement of a note will
not be treated as ordinary income under the market discount rules. If you so
elect (which election may not be revoked without the consent of the IRS), the
election will apply to all debt instruments with market discount you acquire on
or after the first day of the first taxable year to which such election applies.
Market discount is defined generally as the excess, if any, of the stated
redemption price of the note at maturity over the basis of the note in your
hands immediately after its acquisition.
Limitations imposed by the Internal Revenue Code which are intended to
match deductions with the taxation of income may defer deductions for interest
on indebtedness incurred or continued, or short-sale expenses incurred, to
purchase or carry a note with accrued market discount. As noted above, a
noteholder may elect to include market discount in gross income on a current
basis and, if you so elect, you would be exempt from this rule. The adjusted
basis of a note subject to such election will be increased to reflect market
discount included in gross income, thereby reducing any gain or increasing any
loss on a sale or taxable disposition.
Amortization Bond Premium. The resale of notes may be affected by the bond
premium rules of the Internal Revenue Code. In general, if you purchase a note
at a premium (i.e., an amount in excess of the amount payable upon the maturity
thereof), you will be considered to have purchased such note with "amortized
bond premium" equal to the amount of such excess. You may elect to deduct the
amortizable [amortized] bond premium as it accrues under a constant-yield method
over the remaining term of the note. Amortizable bond premium is treated as an
offset to interest income rather than as a separate interest deduction. Your tax
basis in the note will be reduced by the amount of the amortizable bond premium
deduction. Any such election shall apply to all debt instruments (other than
instruments the
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<PAGE> 51
interest on which is excludable from gross income) you held at the beginning of
the first taxable year to which the election applies or thereafter acquire and
is irrevocable without the consent of the Service. If you do not elect to deduct
the bond premiums, the premium will decrease the gain or increase the loss
otherwise recognized on the disposition of the note.
Sale or Other Disposition. In general, you will recognize gain or loss upon
the sale, redemption, retirement or other disposition of a note in an amount
equal to the difference between the amount realized on the sale and your
adjusted tax basis in the note. Your adjusted tax basis of a note generally will
equal your cost for the note, increased by market discount, if any, you
previously included in income with respect to the note and decreased by
principal payments previously received by you and the amount of bond premium, if
any, you previously amortized with respect to the note. Any such gain or loss
will be capital gain or loss if the note was held as a capital asset, except for
gain representing accrued interest and accrued market discount not previously
included in income, and will be long-term capital gain or loss if the note was
held for more than one year. Capital losses generally may be used only to offset
capital gains.
Tax Administration and Reporting. The Trustee will furnish you a statement
with each distribution setting forth the amount of such distribution allocable
to principal and to interest. Such payment of principal or interest reports will
be made annually to the Internal Revenue Service and to holders of record that
are not excepted from the reporting requirements regarding such information as
may be required with respect to interest with respect to the notes.
Backup Withholding. Under certain circumstances, you may be subject to
"backup withholding" at a 31% rate. Backup withholding may apply to you if you
are a United States person and if you, among other circumstances, fail to
furnish your Social Security number or other taxpayer identification number to
the Trustee. You should consult your tax advisors for additional information
concerning the potential application of backup withholding to payments received
by you with respect to a note.
CERTAIN FEDERAL INCOME TAX LIABILITIES OF THE COMPANY AND TLMI
TLMI will file a consolidated federal income tax return with us. Because of
the consolidated filing and the closely-held corporation status of TLMI,
additional federal income tax consequences may arise. Certain of these are
summarized below.
We and TLMI constitute an "affiliated group" and, as such, intend to file
consolidated federal income tax returns. As a result, each of us will be
severally liable for the federal income tax liability of the affiliated group.
We believe that there will be sufficient assets available to timely pay the
affiliated group's federal income tax liability as it becomes due and payable.
Also, under a tax allocation agreement signed by us and TLMI, TLMI has agreed to
pay all federal income tax liability of the affiliated group as it becomes due
and payable, although there can be no assurance that TLMI will have the ability
to pay such obligations. Under applicable federal tax laws, if TLMI fails to
make such payments of tax, the other members of the affiliated group, including
us, would be responsible for making such payments.
Also, the affiliated group will be subject to the passive loss rules under
Section 469 of the Internal Revenue Code. As a result, any portfolio-type income
earned by the affiliated group (e.g., interest and dividends) may not be able to
be offset by passive losses of the affiliated group. We do not anticipate that
either we or TLMI will have significant amounts of portfolio-type income during
the period the notes are outstanding. If portfolio-type income is realized,
however, federal income tax may be owed with respect to such income even though
the affiliated group otherwise has incurred passive losses. In addition, the
affiliated group may be subject to the personal holding company rules of the
Internal Revenue Code which may, in certain circumstances, impose an additional
tax liability on the affiliated group.
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<PAGE> 52
PLAN OF DISTRIBUTION
UNDERWRITING
We are offering up to $20,000,000 in aggregate principal amount of the
notes. The notes will be sold on a "best efforts" basis by Great Nation
Investment Corporation ("Great Nation"), and Great Nation is not obligated to
purchase the notes. Great Nation may, but is not obligated to, select and engage
participating soliciting broker/dealers that are qualified to offer and sell the
notes in one or more states and that are members of the NASD. As of the date of
this Prospectus, Great Nation has not engaged any soliciting broker/dealers to
participate in the offering. Great Nation anticipates that Great Nation and any
broker/dealers engaged to participate in the offering will solicit those
investors and customers for whom this investment would be suitable. Great Nation
and such other broker/dealer selling notes will be responsible for determining
the suitability of the notes as an investment for any given investor.
We shall pay to Great Nation in consideration for its services, a sales
commission of 6% of the principal amount of notes sold to investors. In
addition, we will reimburse Great Nation for certain expenses incurred in
connection with its due diligence activities with regard to the offering in an
amount not to exceed 2 1/2% of the aggregate principal amount of the notes sold.
We may terminate our underwriting agreement with Great Nation if the
underwriting group is unable to sell at least $750,000 of the notes within 45
days after the date of this prospectus and at least $250,000 of the notes each
calendar month after the month in which the 45th day after the date of this
prospectus occurs. Great Nation may terminate the underwriting agreement in the
event of a material breach of the underwriting agreement by us or if Great
Nation reasonably determines that the notes are not marketable. Generally, Great
Nation will bear all of its expenses; provided, however, that if Great Nation
terminates the underwriting agreement because of a material breach of this
Agreement by us, we shall be obligated to pay to Great Nation an amount equal to
all of Great Nation's accountable out-of-pocket expenses. TLMI and we have
agreed, jointly and severally, to indemnify Great Nation against certain
liabilities, including liabilities under applicable securities laws. The
underwriting agreement provides that the obligations of Great Nation pursuant to
the underwriting agreement are subject to the approval of certain legal matters
by Great Nation's counsel and various other conditions.
We may contract with other broker/dealers who are members of the National
Association of Securities Dealers, Inc. to serve as additional underwriters of
this offering. If we do, we expect the terms of our agreements with such other
underwriters will not be materially different than our agreement with Great
Nation.
We will pay TLMI up to 1.5% of the gross offering proceeds to reimburse
TLMI for offering and organizational expenses paid by TLMI on our behalf. No
part of these payments will be paid by TLMI to brokers to engage in sales
efforts for us (sometimes called "wholesale fees").
SUITABILITY STANDARDS
You may invest in our offering only if you meet our minimum suitability
standard or the applicable state suitability standard, whichever is more
stringent. In order to meet our minimum suitability standard, you must:
- have a gross annual income of at least $45,000, and a net worth
(exclusive of personal residence, furnishings and automobiles) of at
least $45,000, or
- have a net worth (exclusive of personal residence, furnishings and
automobiles) of at least $150,000, without reference to income and
- have a net worth (exclusive of personal residence, furnishings and
automobiles) at least ten times the amount of your subscription. You will
be required to represent, in writing, that you satisfy the applicable
standard.
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<PAGE> 53
ESCROW
Investor funds will be held in a subscription escrow account with Texas
Community Bank, N.A., as escrow agent, until a minimum of $250,000 in principal
amount of the notes are sold. In the event that the minimum amount of notes is
not subscribed before November 30, 1999 (or any earlier termination of the
offering), we will terminate this offering and the escrowed funds, plus interest
at the rate payable by the escrow agent bank, will be promptly returned to the
subscribing investors by the escrow agent. Upon the subscription of the minimum
amount of notes, the escrowed funds will be released to us and the interest
earned as of the release date will be remitted to the investors who tendered
funds into the escrow. Any subsequent subscription funds with respect to the
sale of additional notes will be immediately released to us and available for
our use upon our request. All subscriptions are subject to our right to reject
any subscription in whole or in part.
The offering will terminate on October 31, 2000, unless we sooner terminate
it (i) upon the failure to achieve the minimum subscription amount, or (ii) upon
our determination, in our discretion, for any reason that it should be
terminated. Early termination of the offering may result in our selling less
than $20,000,000 in aggregate principal amount of the notes and may expose prior
purchasers of notes to certain risks. See "RISK FACTORS -- Sale of Small Amount
of Notes."
We intend to accept in the order received properly completed subscriptions
and payments for subscription amounts from qualified investors meeting the
applicable suitability standards. We may elect to treat certain subscriptions as
accepted for purposes of any monthly limit on subscriptions from certain
otherwise qualified investors (for example, IRA's) whose subscription funds are
being paid by a Trustee or other institution that has confirmed to us that the
funds will be paid. Upon the achievement of the maximum subscription amount
($20,000,000) for the notes, any subsequently received subscriptions will not be
accepted by us and will be promptly returned.
To allow us to make an orderly investment of all proceeds from the sale of
the notes in the purchase of vehicles and the execution of lease contracts, we
may limit the dollar amount of subscriptions for notes that we are willing to
accept during any month of the offering period. To attempt to minimize the
effects of the delay in the purchase of vehicles and acquisition of lease
contracts, we will monitor the receipt of subscriptions.
EXPERTS
Our financial statements included in this Prospectus have been audited by
Sprouse & Winn, L.L.P., independent certified public accountants, whose report
thereon appears elsewhere herein, and have been so included in reliance upon the
report and authority of such firm as experts in auditing and accounting.
LEGAL MATTERS
Certain matters with respect to the validity of the notes have been passed
upon for us by Kuperman, Orr, Mouer & Albers, a Professional Corporation,
Austin, Texas. Brown McCarroll & Oaks Hartline, a Professional Corporation, has
also delivered its opinion to us as to certain compliance matters relating to
the Texas Motor Vehicle Commission Code discussed under "THE
COMPANY -- Government Regulations" and as to certain matters relative to
perfection of the Trustee's security interest in our assets. Drenner & Stuart,
L.L.P. a Texas limited liability partnership, has also delivered to us its
opinion as to the federal income tax matters discussed under "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS."
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<PAGE> 54
WHERE YOU CAN GET MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 (including
the exhibits, schedules and amendments thereto) under the Securities Act with
respect to the shares of common stock to be sold in this offering. As permitted
by the SEC's rules and regulations, this prospectus does not contain all the
information set forth in the registration statement. For further information
regarding our company and the shares of common stock to be sold in this
offering, please refer to the registration statement and the contracts,
agreements and other documents filed as exhibits to the registration statement.
You may read and copy all or any portion of the registration statement or any
other information that we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the SEC's website (http://www.sec.gov). As a result of this offering,
we will become subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, will
file periodic reports and other information with the Securities and Exchange
Commission. Finally, you may obtain a copy of any of the documents filed as an
exhibit to our registration statement, at no cost by writing or calling:
Kenneth C. Lowe
5422 Alpha Road
Suite 100
Dallas, Texas 75240
(972) 404-0042
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<PAGE> 55
TRANSITION AUTO FINANCE III, INC.
FINANCIAL STATEMENT
AND
INDEPENDENT AUDITORS' REPORT
JUNE 8, 1999
F-1
<PAGE> 56
TRANSITION AUTO FINANCE III, INC.
AUSTIN, TEXAS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-3
FINANCIAL STATEMENT
Balance Sheet............................................. F-5
Notes to Financial Statement.............................. F-6
</TABLE>
F-2
<PAGE> 57
To the Board of Directors and Stockholder
of Transition Auto Finance III, Inc.
Dallas, Texas
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Transition Auto Finance
III, Inc., a Texas corporation, as of June 8, 1999. This financial statement is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Transition Auto Finance III, Inc.
as of June 8, 1999, in conformity with generally accepted accounting principles.
SPROUSE & WINN, L.L.P.
Austin, Texas
June 9, 1999
F-3
<PAGE> 58
FINANCIAL STATEMENT
F-4
<PAGE> 59
TRANSITION AUTO FINANCE III, INC.
BALANCE SHEET
JUNE 8, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash...................................................... $1,000
------
TOTAL ASSETS................................................ $1,000
======
LIABILITIES AND STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY
Common stock $.10 par value: 1,000 shares authorized,
issued, and outstanding................................ $ 100
Additional paid-in capital................................ 900
------
Total Stockholder's Equity........................ 1,000
------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $1,000
======
</TABLE>
See accompanying notes to this financial statement
F-5
<PAGE> 60
TRANSITION AUTO FINANCE III, INC.
NOTES TO FINANCIAL STATEMENT
JUNE 8, 1999
NOTE 1: GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Transition Auto Finance III, Inc. (the Company) is a Texas corporation
organized on May 26, 1999. The Company was established to purchase motor
vehicles and automobile lease contracts, collecting and servicing automobile
lease contracts and remarketing motor vehicles upon termination of their leases.
Transition Leasing Management, Inc. (Transition Leasing) owns 100% of the
Company's common stock. Through June 8, 1999, the Company has had no activity.
The Company has adopted a December 31 year-end.
INCOME TAXES
The Company is a corporation subject to federal and state income taxes. The
Company and its parent intend to file a consolidated tax return. Each company in
the consolidated group determines its taxable income or loss, on a separate
company basis, and the consolidated tax liability is allocated to each company
with taxable income in proportion to the total of the taxable income amounts.
Through June 8, 1999, the Company has had no federal taxable income.
NOTE 2: NOTES OFFERING
The Company is intending to offer (the "Notes Offering") on a "best efforts
basis" up to $20,000,000 of 11% Redeemable Secured Notes (the "Notes"). The
Notes will have a term of sixty months and will bear interest at a fixed rate of
11%. The Notes will mature on August 31, 2004. The Notes are to be sold through
an underwriter. The Company will be required to make monthly payments of
interest, paid in arrears, on the outstanding principal balance. The Notes will
bear interest from the date of issuance at a fixed rate set at 11% fixed per
annum.
The underwriter will receive fees totaling 8.5% of the gross offering
proceeds of the Notes Offering. The Company will reimburse Transition Leasing
for organizational and offering expenses up to a maximum amount equal to 1.5% of
the gross offering proceeds.
The remainder of the Notes Offering proceeds will be used to acquire automobile
lease contracts backed by new automobiles and automobiles with remaining factory
warranties or extended service contracts that extend to the termination of their
lease contracts (the "Contracts"). The Contracts and the leased vehicles will be
the asset-backed security for the Notes. A minimum of $250,000 of Notes must be
sold before any funds will be released for use by the Company.
The Company intends to enter into a Servicing Agreement with Transition
Leasing. Transition Leasing will be entitled to a servicing fee of $20 per month
per Contract and a payment of $150 per Contract purchased. Transition Leasing
will receive, as a marketing fee, 57.5% of the down payment made the customers
with respect to contracts it originates. The Company intends to enter into an
Indenture between the Company and a trust company, as trustee, which will govern
collection of the Contract proceeds and repayment of the Notes.
F-6
<PAGE> 61
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................ 1
Risk Factors........................... 3
Capitalization......................... 8
Use of Proceeds........................ 8
Description of the Notes............... 11
Collateral for the Notes............... 14
The Company............................ 20
Security Ownership of Certain
Beneficial Owners and Management..... 32
Management............................. 33
Litigation............................. 35
Management's Discussion and Analysis of
Plan of Operation.................... 36
Additional Indenture Provisions........ 37
Certain Legal Aspects of the Lease
Contracts............................ 40
Certain Federal Income Tax
Considerations....................... 45
Plan of Distribution................... 48
Experts................................ 49
Legal Matters.......................... 49
Where You Can Get More Information..... 50
Financial Statements................... F-1
</TABLE>
---------------------
You should rely only on the information contained in this Prospectus. We
have not authorized anyone to provide you with information different from that
contained in this Prospectus. We are not making an offer of notes in any state
in which such an offer would be unlawful.
---------------------
Until (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$20,000,000
SECURED NOTES
DUE OCTOBER 31, 2004
TRANSITION AUTO FINANCE III, INC.
--------------------
PROSPECTUS
--------------------
GREAT NATION
INVESTMENT CORPORATION
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that, to the fullest extent
permitted by Texas law, directors and former directors of the Company shall not
be liable to the Company or its shareholders for monetary damages which may have
been caused by them acting in their capacity as a director. Texas law does not
currently authorize the elimination or limitation of the liability of a director
to the extent the director is found liable (i) for any breach of the director's
duty of loyalty to the Company or its shareholders, (ii) for acts or omissions
not in good faith that constitute a breach of duty of the director of the
Company or which involve intentional misconduct or a knowing violation of law,
(iii) for transactions from which the director received an improper benefit,
regardless of whether the benefit resulted from an action taken within the scope
of the director's office or (iv) for acts or omissions for which the liability
of a director is expressly provided by law.
The Company's Articles of Incorporation and its Bylaws grant mandatory
indemnification to directors and officers of the Company to the fullest extent
authorized under the Texas Business Corporation Act. In general, a Texas
corporation may indemnify a director or officer who was or is threatened to be
made a named defendant or respondent in a proceeding by virtue of his position
in the corporation if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
in the case of criminal proceedings, had no reasonable cause to believe his
conduct was unlawful. A Texas corporation may indemnify an officer or director
in an action brought by or in the right of the corporation only if such director
or officer was not found liable to the corporation, unless or only to the extent
that a court finds him to be fairly and reasonably entitled to indemnity for
such expenses as the court deems proper.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred in connection with the issuance and
distribution of the Notes covered by this Registration Statement, all of which
will be paid by the Company, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 6,061
NASD Fee.................................................... *
Printing and Engraving...................................... *
Legal Fees and Expenses..................................... 65,000+
Accounting Fees and Expenses................................ 5,000+
Blue Sky Fees and Expenses.................................. 20,000+
Miscellaneous............................................... 10,000+
TOTAL............................................. *
</TABLE>
- ---------------
* To be furnished by amendment.
+ estimates
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Other than the issuance of 1,000 shares of its common stock to Transition
Leasing Management, Inc. upon its formation, the Company has not issued any
securities.
II-1
<PAGE> 63
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits.
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 -- Best Efforts Underwriting Agreement by and between
Transition Auto Finance III, Inc., and Great Nation
Investment Corporation**
3.1 -- Articles of Incorporation of Transition Auto Finance III,
Inc.**
3.2 -- Bylaws of Transition Auto Finance III, Inc.**
4.1 -- Form of Indenture between Transition Auto Finance, Inc.,
and Trust Management, Inc., as Trustee*
4.2 -- Form of Secured Note Due June 30, 2002 (included in
Article Two of Indenture filed as Exhibit 4.1)
5.1 -- Opinion of Kuperman, Orr, Mouer & Albers, a Professional
Corporation, regarding validity of Notes*
8.1 -- Opinion of Drenner & Stuart, L.L.P., a limited liability
partnership, regarding tax matters*
8.2 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P., re
8.3 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P.,
regulatory matters re perfection of security interests
10.1 -- Form of Master Purchasing Agreement between Transition
Auto Finance III, Inc. and Transition Leasing Management,
Inc.**
10.2 -- Form of Servicing Agreement between Transition Leasing
Management, Inc. and Transition Auto Finance III, Inc.**
10.3 -- Proceeds Escrow Agreement*
10.4 -- Form of Broker-Dealer Selling Agreement*
10.5 -- Form of Subscription Agreement**
10.6 -- Form of Tax Sharing Agreement by and between Transition
Leasing Management, Inc., Transition Auto Finance, Inc.,
Transition Auto Finance II, Inc. and Transition Auto
Finance III, Inc.*
10.7 -- Form of Custodial Agreement between Transition Auto
Finance III, Inc. and Trust Management, Inc.**
24.1 -- Consent of Drenner & Stuart, L.L.P., a limited liability
partnership*
24.2 -- Consent of Kuperman, Orr, Mouer & Albers, a Professional
Corporation*
24.3 -- Consent of Sprouse & Winn, L.L.P.*
24.4 -- Consent of Brown, Maroney & Oaks Hartline, L.L.P.
26.1 -- Form T-1: Statement of eligibility of Trust Management,
Inc.*
</TABLE>
- ---------------
* filed electronically herewith
** previously filed
*** to be filed by amendment
Financial Statement Schedules.
None.
II-2
<PAGE> 64
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(A) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-3
<PAGE> 65
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant hereby certifies that it has reasonable grounds to believe that it
meets the requirements for filing on Form SB-2 and has authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on September 24, 1999.
TRANSITION AUTO FINANCE II, INC.
By: /s/ KENNETH C. LOWE
----------------------------------
Kenneth C. Lowe,
President and Chief
Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below hereby designates and
appoints Terry Scharig and Ken Lowe, and each of them, as such person's true and
lawful attorney-in-fact and agent (the "Attorney-in-Fact") with full power of
substitution and re-substitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, which
amendments may make such changes in this registration statement as the
Attorney-in-Fact deems appropriate and requests to accelerate the effectiveness
of this registration statement, and to file each such amendment with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto such Attorney-in-Fact 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
such person might or could do in person, hereby ratifying and confirming all
that such Attorney-in-Fact, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KENNETH C. LOWE Director, President September 24, 1999
- ----------------------------------------------------- (Principal Executive
Kenneth C. Lowe Officer) and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
II-4
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 -- Best Efforts Underwriting Agreement by and between
Transition Auto Finance III, Inc., and Great Nation
Investment Corporation**
3.1 -- Articles of Incorporation of Transition Auto Finance III,
Inc.**
3.2 -- Bylaws of Transition Auto Finance III, Inc.**
4.1 -- Form of Indenture between Transition Auto Finance, Inc.,
and Trust Management, Inc., as Trustee*
4.2 -- Form of Secured Note Due June 30, 2002 (included in
Article Two of Indenture filed as Exhibit 4.1)
5.1 -- Opinion of Kuperman, Orr, Mouer & Albers, a Professional
Corporation, regarding validity of Notes*
8.1 -- Opinion of Drenner & Stuart, L.L.P., a limited liability
partnership, regarding tax matters*
8.2 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P., re
regulatory matters
8.3 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P., re
perfection of security interests
10.1 -- Form of Master Purchasing Agreement between Transition
Auto Finance III, Inc. and Transition Leasing Management,
Inc.**
10.2 -- Form of Servicing Agreement between Transition Leasing
Management, Inc. and Transition Auto Finance III, Inc.**
10.3 -- Proceeds Escrow Agreement*
10.4 -- Form of Broker-Dealer Selling Agreement*
10.5 -- Form of Subscription Agreement**
10.6 -- Form of Tax Sharing Agreement by and between Transition
Leasing Management, Inc., Transition Auto Finance, Inc.,
Transition Auto Finance II, Inc. and Transition Auto
Finance III, Inc.*
10.7 -- Form of Custodial Agreement between Transition Auto
Finance III, Inc. and Trust Management, Inc.**
24.1 -- Consent of Drenner & Stuart, L.L.P., a limited liability
partnership*
24.2 -- Consent of Kuperman, Orr, Mouer & Albers, a Professional
Corporation*
24.3 -- Consent of Sprouse & Winn, L.L.P.*
24.4 -- Consent of Brown, Maroney & Oaks Hartline, L.L.P.*
26.1 -- Form T-1: Statement of eligibility of Trust Management,
Inc.*
</TABLE>
- ---------------
* filed electronically herewith
** previously filed
*** to be filed by amendment
<PAGE> 1
EXHIBIT 4.1
TRANSITION AUTO FINANCE III, INC.
AND
TRUST MANAGEMENT, INC., AS TRUSTEE
11% SECURED NOTES
DUE OCTOBER 31, 2004
--------------------
INDENTURE
--------------------
DATED AS OF ,
-------------------- ------
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TRUST INDENTURE ACT
SECTION INDENTURE SECTION
- ------------------------------ --------------------------------
<S> <C>
310 (a) (1) 7.10
(a) (2) 7.10
(a) (3) N/A
(a) (4) N/A
(a) (5) 7.10
(b) 7.8, 7.10, 11.2
(c) N/A
311 (a) 7.11
(b) 7.11
(c) N/A
312 (a) 2.6
(b) 11.3
(c) 11.3
313 (a) 7.6
(b) 7.6
(c) 11.2
(d) 7.6
314 (a) 5.7, 5.8, 11.2
(b) 5.9
(c) (1) 11.4
(c) (2) 11.4
(c) (3) N/A
(d) 5.12
(e) 11.4
(f) N/A
315 (a) 7.1(b)
(b) 7.5, 11.2
(c) 7.1(a)
(d) 7.1(c)
(e) 6.11
316 (a) (1) (A) 6.5
(a) (1) (B) 6.4
(a) (last sentence) 1.1 (Def. of "Outstanding")
(b) 6.7
(c) N/A
317 (a) (1) 6.8
(a) (2) 6.9
(b) 5.2
318 (a) 11.1
</TABLE>
"N/A" = Not Applicable
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
ARTICLE 1 - DEFINITIONS AND INCORPORATION BY REFERENCE.........................................................2
SECTION 1.1 DEFINITIONS.............................................................................2
SECTION 1.2 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT......................................12
SECTION 1.3 RULES OF CONSTRUCTION..................................................................12
ARTICLE 2 - THE SECURITIES...................................................................................12
SECTION 2.1 FORMS GENERALLY........................................................................12
SECTION 2.2 FORMS OF SECURITY......................................................................13
SECTION 2.3 DENOMINATIONS..........................................................................17
SECTION 2.4 EXECUTION AND AUTHENTICATION...........................................................17
SECTION 2.5 REGISTRAR AND PAYING AGENT.............................................................18
SECTION 2.6 SECURITYHOLDER LISTS...................................................................18
SECTION 2.7 TRANSFER AND EXCHANGE..................................................................18
SECTION 2.8 REPLACEMENT SECURITIES.................................................................18
SECTION 2.9 TEMPORARY SECURITIES...................................................................19
SECTION 2.10 CANCELLATION...........................................................................19
SECTION 2.11 DEFAULTED INTEREST.....................................................................19
SECTION 2.12 PERSONS DEEMED OWNERS..................................................................19
ARTICLE 3 - REDEMPTION........................................................................................20
SECTION 3.1 REDEMPTION AFTER SINKING FUND TRIGGER DATE.............................................20
SECTION 3.2 SECURITIES NOT PREVIOUSLY DELIVERED TO TRUSTEE.........................................20
SECTION 3.3 SELECTION OF SECURITIES TO BE PURCHASED OR REDEEMED....................................20
SECTION 3.4 NOTICE OF REDEMPTION...................................................................20
SECTION 3.5 EFFECT OF NOTICE OF REDEMPTION.........................................................21
SECTION 3.6 DEPOSIT OF REDEMPTION AMOUNT...........................................................21
SECTION 3.7 SECURITIES REDEEMED IN PART............................................................21
ARTICLE 4 - ACCOUNTS, DISBURSEMENTS AND RELEASES..............................................................22
SECTION 4.1 COLLECTION OF MONEYS...................................................................22
SECTION 4.2 SINKING FUND ACCOUNT; OPERATING ACCOUNT; MASTER COLLECTIONS ACCOUNT....................22
SECTION 4.3 PURCHASE OF LEASED VEHICLES AND ELIGIBLE ADDITIONAL CONTRACTS..........................25
SECTION 4.4 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS.....................................26
SECTION 4.5 GENERAL PROVISIONS REGARDING SINKING FUND ACCOUNT......................................28
SECTION 4.6 RELEASES...............................................................................29
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
SECTION 4.7 REPORTS BY TRUSTEE.....................................................................30
SECTION 4.8 TRUST ESTATE; CONTRACT DOCUMENTS.......................................................30
ARTICLE 5 - COVENANTS........................................................................................30
SECTION 5.1 PAYMENT OF PRINCIPAL AND INTEREST......................................................30
SECTION 5.2 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST........................................32
SECTION 5.3 PAYMENT OF TAXES AND OTHER CLAIMS......................................................32
SECTION 5.4 MAINTENANCE OF PROPERTIES..............................................................33
SECTION 5.5 LIMITATION ON INVESTMENT ACTIVITIES....................................................33
SECTION 5.6 COMPLIANCE CERTIFICATES................................................................33
SECTION 5.7 REPORTING..............................................................................34
SECTION 5.8 PROTECTION OF TRUST ESTATE.............................................................34
SECTION 5.9 OPINIONS AS TO TRUST ESTATE............................................................35
SECTION 5.10 PERFORMANCE OF OBLIGATIONS; SERVICING AGREEMENT........................................35
SECTION 5.11 NEGATIVE COVENANTS.....................................................................36
SECTION 5.12 SUBSTITUTION OR RELEASE OF COLLATERAL OR WITHDRAWAL OF CASH IN TRUST ESTATE............38
ARTICLE 6 - DEFAULTS AND REMEDIES.............................................................................39
SECTION 6.1 EVENTS OF DEFAULT......................................................................39
SECTION 6.2 ACCELERATION...........................................................................40
SECTION 6.3 REMEDIES...............................................................................41
SECTION 6.4 WAIVER OF PAST DEFAULTS................................................................41
SECTION 6.5 CONTROL BY MAJORITY....................................................................41
SECTION 6.6 LIMITATION ON SUITS....................................................................42
SECTION 6.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT...................................................42
SECTION 6.8 COLLECTION SUIT BY TRUSTEE.............................................................42
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM.......................................................42
SECTION 6.10 PRIORITIES.............................................................................43
SECTION 6.11 UNDERTAKING FOR COSTS..................................................................43
SECTION 6.12 STAY, EXTENSION OR USURY LAWS..........................................................43
SECTION 6.13 OPTIONAL PRESERVATION OF TRUST ESTATE..................................................44
SECTION 6.14 SALE OF TRUST ESTATE...................................................................44
ARTICLE 7 - TRUSTEE...........................................................................................45
SECTION 7.1 DUTIES OF TRUSTEE......................................................................45
SECTION 7.2 RIGHTS OF TRUSTEE......................................................................47
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE...........................................................47
SECTION 7.4 TRUSTEE'S DISCLAIMER...................................................................47
SECTION 7.5 NOTICE OF DEFAULTS.....................................................................47
SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS..........................................................48
SECTION 7.7 COMPENSATION AND INDEMNITY.............................................................48
SECTION 7.8 REPLACEMENT OF TRUSTEE.................................................................49
</TABLE>
ii
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.......................................................50
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION..........................................................50
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY......................................50
SECTION 7.12 WITHHOLDING TAXES......................................................................50
ARTICLE 8 - DISCHARGE OF INDENTURE............................................................................50
SECTION 8.1 SATISFACTION AND DISCHARGE OF INDENTURE................................................50
SECTION 8.2 APPLICATION OF TRUST MONEY.............................................................51
SECTION 8.3 REPAYMENT TO COMPANY...................................................................51
ARTICLE 9 - AMENDMENTS, SUPPLEMENTS AND WAIVERS...............................................................52
SECTION 9.1 WITHOUT CONSENT OF HOLDERS.............................................................52
SECTION 9.2 WITH CONSENT OF HOLDERS................................................................52
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT....................................................53
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS......................................................53
SECTION 9.5 NOTATION ON OR EXCHANGE OF SECURITIES..................................................53
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC........................................................53
ARTICLE 10 - MEETINGS OF SECURITYHOLDERS......................................................................54
SECTION 10.1 PURPOSES FOR WHICH MEETINGS MAY BE CALLED.............................................54
SECTION 10.2 MANNER OF CALLING MEETINGS............................................................54
SECTION 10.3 CALL OF MEETINGS BY COMPANY OR SECURITYHOLDERS........................................54
SECTION 10.4 WHO MAY ATTEND AND VOTE AT MEETINGS...................................................55
SECTION 10.5 REGULATIONS MAY BE MADE BY TRUSTEE; CONDUCT OF THE MEETING; VOTING RIGHTS.............55
SECTION 10.6 EXERCISE OF RIGHTS OF TRUSTEE OR SECURITYHOLDERS MAY NOT BE HINDERED OR DELAYED
BY CALL OF MEETING..................................................................55
SECTION 10.7 EVIDENCE OF ACTIONS BY SECURITYHOLDERS................................................55
ARTICLE 11 - MISCELLANEOUS....................................................................................56
SECTION 11.1 TRUST INDENTURE ACT CONTROLS..........................................................56
SECTION 11.2 NOTICES...............................................................................56
SECTION 11.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS...........................................57
SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT....................................57
SECTION 11.5 RULES BY PAYING AGENT AND REGISTRAR...................................................57
SECTION 11.6 LEGAL HOLIDAYS........................................................................57
SECTION 11.7 GOVERNING LAW.........................................................................57
SECTION 11.8 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.........................................58
SECTION 11.9 NO RECOURSE AGAINST OTHERS............................................................58
SECTION 11.10 SUCCESSORS............................................................................58
</TABLE>
iii
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
SECTION 11.11 DUPLICATE ORIGINALS...................................................................58
ARTICLE 12 - AGREEMENTS OF SERVICER...........................................................................58
SECTION 12.1 GENERAL...............................................................................58
SECTION 12.2 SERVICER ACTING AS CUSTODIAN..........................................................58
SECTION 12.3 REPRESENTATIONS AND WARRANTIES CONCERNING THE SERVICER................................59
SECTION 12.4 CORPORATE EXISTENCE; STATUS AS SERVICER; MERGER.......................................59
SECTION 12.5 PERFORMANCE OF OBLIGATIONS............................................................60
SECTION 12.6 THE SERVICER NOT TO RESIGN; ASSIGNMENT................................................60
SECTION 12.7 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS....................................61
SECTION 12.8 PURCHASE OF CERTAIN CONTRACTS.........................................................62
SECTION 12.9 INDEMNIFICATION.......................................................................63
SECTION 12.10 TERMINATION...........................................................................63
SECTION 12.11 AMENDMENT.............................................................................63
SECTION 12.12 INSPECTION AND AUDIT RIGHTS...........................................................64
</TABLE>
iv
<PAGE> 7
THIS INDENTURE, dated as of ______________, 1999, is between TRANSITION
AUTO FINANCE III, INC., a Texas corporation (the "Company"), having its
principal office at 5422 Alpha Road, Suite 100, Dallas, Texas 75240 and TRUST
MANAGEMENT, INC., a Texas Trust Company, 210 West Sixth Street, Suite 605, Fort
Worth, Texas 76102, as Trustee (the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture and the issuance of its 11% Secured Notes due October 31, 2004 in the
maximum aggregate principal amount of $20,000,000 (the "Securities").
All acts necessary to make the Securities, when executed by the Company
and authenticated and delivered hereunder and duly issued by the Company, the
valid obligations of the Company and to make this Indenture a valid agreement of
the Company, in accordance with their and its terms, have been accomplished.
THEREFORE, for and in consideration of the premises and the purchase or
acceptance of the Securities by the Holders (as herein defined) thereof, it is
mutually covenanted and agreed, for the equal and proportionate benefit of all
Holders of the Securities, as follows:
GRANTING CLAUSES
The Company hereby Grants to the Trustee, for the exclusive benefit of
the Holders of the Securities, all of the Company's right, title and interest in
and to (a) all Contracts (as herein defined) hereafter acquired by the Company,
together with all related Contract Documents, and all payments or instruments
paid on account of such Contracts whenever received, and all other proceeds
(cash or non-cash) received in respect of such Contracts, (b) the Servicing
Agreements, (c) the Operating Account, (d) the Master Collections Account, (e)
the Sinking Fund Account, including all Eligible Investments therein and all
income from the investment of funds therein, (f) all Leased Vehicles, together
with any repossessed or returned Leased Vehicles (including any Leased Vehicle
returned upon termination of its Contract), and (g) all proceeds of the
conversion, voluntary or involuntary, of any of the foregoing into cash or other
liquid property, including, without limitation, all Net Liquidation Proceeds and
Insurance Proceeds (collectively, the "Trust Estate").
The foregoing Grants are made, however, in trust, to secure the
Securities equally and ratably without prejudice, priority or distinction,
except as expressly provided in the Indenture, between any Security and any
other Securities by reason of difference in time of issuance or otherwise, and
to secure (i) the payment of all amounts due on the Securities in accordance
with their terms, (ii) the payment of all other sums payable under this
Indenture, and (iii) compliance with the provisions of this Indenture, all as
provided in this Indenture.
1
<PAGE> 8
The Trustee acknowledges the foregoing Grants, accepts the trusts
hereunder in accordance with the provisions hereof and agrees to perform the
duties herein required to the best of its ability.
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS.
"Accounts" means the Sinking Fund Account, the Master Collections
Account and the Operating Account established by the Company under the
provisions of Section 4.2.
"Affiliate" means, as to any Person, any other Person that directly or
indirectly controls, or is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") means possession,
directly or indirectly, of power to direct or cause the direction of management
or policies (whether through ownership of capital stock, partnership interests,
by contract or otherwise), provided that, in any event, any Person that owns
directly or indirectly 20% or more of the securities having ordinary voting
power for the election of directors or other governing body of a corporation or
20% or more of the partnership or other ownership interests of any other Person
(other than as a limited partner of such other Person) will be deemed to control
such other Person for the purposes of this definition; and provided further that
no individual shall be an Affiliate of a corporation or partnership solely by
reason of his being an officer, director or partner of such entity.
"Allowed Expenses" means any amounts due the Trustee under Section 7.7,
any Servicing Fees, any fees payable for the transfer of the lien reflected in
the Title Documents into and out of the Trustee's name, any fees payable for the
transfer of the ownership reflected in the Title Documents into and out of the
Company's name, any federal, state and local taxes and assessments incurred by
the Company (including corporate franchise taxes), any bank service charges and
account fees relating to the Accounts, the Company's pro rata share (based on
the relative amounts of funds attributable to the Contracts as compared to the
lease Contracts of all other Persons serviced by the Servicer) of the lockbox
fees, account fees and bank service charges relating to the Master Collections
Account, any legal and accounting fees for reports, certificates and opinions of
attorneys and independent accountants required under this Indenture, and any
Liquidation Expenses.
"Assignment" means the original instrument of assignment of a Contract
and all other documents securing such Contract made by the Servicer to the
Company (or in the case of any Contract acquired by the Company from another
Person, from such other Person to the Company), which is in a form sufficient
under the laws of the jurisdiction under which the ownership interest in the
Leased Vehicle is governed such that the ownership interest and a first priority
security interest in the Leased Vehicle may be transferred to the Company and a
second priority security interest in the related Leased Vehicle may be granted
in favor of the Trustee to permit the assignee to exercise all rights granted by
the Obligor under such Contract and such other documents and all rights
available under applicable law to the obligee under such Contract and that may,
to the extent
2
<PAGE> 9
permitted by the laws of such jurisdiction, be an assignment constituting a part
of the form of the Contract itself or a blanket instrument of assignment
covering other Contracts as well.
"Bankruptcy Law" shall have the meaning provided in Section 6.1.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a Legal Holiday.
"Collection Period" means with respect to any Payment Date, the
calendar month immediately preceding the Payment Date.
"Common Stock" means the common stock issued or issuable by the
Company.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person replaces it pursuant to
the applicable provisions of this Indenture, and thereafter "Company" means such
successor Person.
"Company Order" or "Company Request" means a written order or request
signed in the name of the Company by its Chairman, President or a Vice
President, and by its Treasurer, Assistant Treasurer, Controller, Assistant
Controller, Secretary or an Assistant Secretary, and delivered to the Trustee.
"Contract" means each lease contract that has been executed by an
Obligor and pursuant to which such Obligor leased the Leased Vehicle described
therein, agreed to pay the lease payments as therein provided in connection with
such lease, and undertook to perform certain other obligations as specified in
such contract and that is Granted to the Trustee pursuant to this Indenture as
security for the Securities. The term "outstanding Contracts" as of any date
means all Contracts other than Liquidated Contracts.
"Contract Documents" means with respect to each Contract, (i) the
original Contract; (ii) either the original Title Document for the related
Leased Vehicle showing the Company as the owner and first lienholder and the
Trustee as second lienholder or an official receipt from the responsible state
or local government authority showing that an application has been made (and the
required fees have been paid) for registration of the Title Documents for such
Leased Vehicle in the names of the Company as owner and first lienholder and the
Trustee as second lienholder (or such other evidence of ownership of the Leased
Vehicle by the Company and perfection of the security interest in the related
Leased Vehicle, as determined by the Trustee to be permitted or required to
transfer ownership of the Leased Vehicle to the Company and to perfect such
security interests under the laws of the applicable jurisdiction, or a guarantee
from the dealer conveying such Leased Vehicle that the Title Document for such
Leased Vehicle showing the Company as owner and first lienholder and the Trustee
as second lienholder has been applied for); (iii) the related Assignment; and
(iv) any agreement(s) modifying the Contract (including, without limitation, any
extension agreement(s)).
3
<PAGE> 10
"Contract Number" means with respect to any Contract included in the
Trust Estate, the number assigned to such Contract by the Servicer, which number
is set forth in the related Monthly Report.
"Contract Unavailability Notice" shall have the following meaning: in
the event that the Company determines, in its discretion, that it is unable, for
any reason outside its control, to purchase additional Leased Vehicles and
Contracts that conform with the purchasing criteria set forth in the Servicing
Agreements or in Exhibit A hereto, the Company may elect to provide notice of
such determination to the Trustee, such notice to be referred to herein as a
"Contract Unavailability Notice."
"Corporation" includes corporations, associations, companies and
business trusts.
"Default" means any event that is, or after notice or passage of time
would be, an Event of Default.
"Defaulted Contract" means with respect to any Collection Period, a
Contract (a) whose Obligor, at the end of such Collection Period is past due
with respect to at least one scheduled lease payment, or (b) with respect to
which the related Leased Vehicle has been repossessed and, in the case of either
(a) or (b), in respect of which Liquidation Proceeds, which, in the Servicer's
judgment, would constitute the final amounts recoverable in respect of such
Contracts, have not yet been collected as of the end of such Collection Period.
"Disbursement Certificate" means an Officers' Certificate of the
Company setting forth the individual items of Allowed Expenses to be paid by the
Company from funds in the Operating Account, agreeing that such items will be
promptly paid with such funds and certifying that such withdrawal of funds and
the payment of such Allowed Expenses conforms to the requirements of this
Indenture.
"Due Date" means as to any lease payment by an Obligor on a Contract,
the date upon which such lease payment is due.
"Eligible Account" means an account that is either (i) maintained with
a depository institution subject to supervision or examination by federal or
state authority and having a combined capital and surplus of at least
$3,000,000, or (ii) an account or accounts the deposits in which are fully
insured by the Federal Deposit Insurance Corporation.
"Eligible Additional Contract" means a Contract hereafter acquired by
the Company that, as of the date of such acquisition, satisfies the
representations and warranties contained in Section 4.4 of this Indenture.
"Eligible Investments" means any one or more of the following
obligations or securities:
(i) United States Obligations;
4
<PAGE> 11
(ii) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by, or federal funds sold by any depository
institution or trust company incorporated under the laws of the United
States of America or any State thereof and subject to supervision and
examination by federal and/or state banking authorities, so long as
such institution or company has a combined capital and surplus of at
least $3,000,000;
(iii) repurchase obligations with respect to any security
described in clause (i) entered into with a depository institution or
trust company, acting as principal, whose obligations have the same
maturity as that of the repurchase agreement and would be Eligible
Investments under clause (ii) above;
(iv) securities bearing interest or sold at a discount issued
by any corporation incorporated under the laws of the United States of
America or any state thereof that at the time of such investment has
long-term, unsecured debt rated by Standard & Poor's as "AA-" or
better; provided, however, that securities issued by any particular
corporation will not be Eligible Investments to the extent that
investment therein will cause the then outstanding principal amount of
securities issued by such corporation and held as part of the Trust
Estate to exceed 10% of the aggregate outstanding balances and amounts
of all Contracts and Eligible Investments held as part of the Trust
Estate;
(v) commercial paper given the highest rating by Standard &
Poor's at the time of such investment; and
(vi) any publicly traded money market mutual fund that is
invested in the above-mentioned Eligible Investments.
"Event of Default" shall have the meaning provided in Section 6.1.
"Full Prepayment" with respect to a Contract means either of the
following: (i) payment to the Servicer of 100% of the outstanding lease payments
of a Contract plus early termination fees and/or other charges properly payable
under the Contract (exclusive of any Contract referred to in clause (ii) or
(iii) of the definition of the term "Liquidated Contract"), less any discount of
such lease payments to which the Obligor shall be entitled under the terms of
such Contract and applicable law by virtue of early payment of any lease
payment, or (ii) payment by the Servicer into the Master Collections Account of
the purchase price of a Contract in connection with the repurchase by Servicer
of the Contract.
"Grant" means to mortgage, pledge, assign and grant a security interest
in. A Grant of a Contract and the related Contract Documents, the related Leased
Vehicle, an Eligible Investment, the Servicing Agreements or any other
instrument shall include all rights, powers and options (but none of the
obligations, except to the extent required by law) of the Granting party
thereunder, including without limitation, the immediate and continuing right to
claim, collect, receive and give receipt for payments in respect of the Contract
and principal and interest payments in respect of the Eligible Investment,
Insurance Proceeds, Liquidation Proceeds, purchase prices and all other moneys
payable thereunder and all proceeds thereof, to give and receive notices and
other communications,
5
<PAGE> 12
to make waivers or other agreements, to exercise all rights and options, to
bring suit or other legal proceedings in the name of the Granting party or
otherwise, and generally to do and receive anything that the Granting party is
or may be entitled to do or receive thereunder or with respect thereto.
"Holder," "Securityholder" or "Noteholder" means a Person in whose name
a Security is registered on the Registrar's books.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Independent" means with respect to any specified Person, such a Person
who (i) is in fact independent, (ii) does not have any direct financial interest
or any material indirect financial interest in the Company or in any other
obligor upon the Notes or in any Affiliate of the Company or of such other
obligor, and (iii) is not connected with the Company or such other obligor as an
officer, employee, promoter, underwriter, trustee, partner, director or person
performing similar functions. Whenever it is herein provided that any
Independent Person's opinion or certificate shall be furnished to the Trustee,
such Person shall be appointed by a Company Order in the exercise of reasonable
care and such opinion or certificate shall state that the signer is Independent
within the meaning hereof.
"Insurance Proceeds" means the proceeds paid pursuant to any Physical
Damage Insurance Policy and amounts paid by any insurer under any other
insurance policy for damage or repair of a Leased Vehicle.
"Investment Company Act" means the Investment Company Act of 1940 (15
U.S.C. 90a-1 et seq.), as amended.
"Leased Vehicle" means, as to any Contract, the automobile (which may
be a passenger car, minivan, sport/utility vehicle or light truck) or Harley
Davidson motorcycle that constitutes the subject of such Contract.
"Legal Holiday" shall have the meaning provided in Section 11.6 of this
Indenture.
"Liquidated Contract" means a Contract that (i) has been the subject of
a Full Prepayment, (ii) was a Defaulted Contract and with respect to which
Liquidation Proceeds that, in the Servicer's judgment, constitute the final
amounts recoverable in respect of such Contract have been realized and deposited
in the Master Collections Account, or (iii) has been paid in full on or after
its Maturity Date.
"Liquidation Expenses" means the reasonable out-of-pocket expenses
incurred by the Servicer in connection with the liquidation of any Contract
(including the attempted liquidation of a Contract that is brought current and
is no longer in default during such attempted liquidation) and the sale of any
property acquired in respect thereof, which expenses are not recoverable under
any insurance policy.
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<PAGE> 13
"Liquidation Proceeds" means the amounts received by the Servicer
(before reimbursement for Liquidation Expenses) in connection with the
liquidation of any Defaulted Contract and the sale of any property acquired in
respect thereof, whether through receipt of Insurance Proceeds, repossession,
sale or otherwise.
"Master Collections Account" means the lockbox account established and
maintained by the Servicer.
"Master Purchasing Agreement" means the agreement between the
Company and Transition Leasing Management, Inc. pursuant to which Transition
Leasing (i) will acquire on behalf of the Company vehicles that are to become
Leased Vehicles and prepare and execute Contracts on the Company's behalf with
Obligors, and (ii) will prepare and execute on behalf of the Company the
necessary documents by which the Company may acquire existing Contracts from
Transition Auto Finance II, Inc.
"Maturity Date" means with respect to any Contract, the date on which
the last scheduled lease payment of such Contract shall be due and payable
(after giving effect to all prepayments received prior to the date of
determination).
"Monthly Report" means an Officer's Certificate of the Company relating
to interest payments on the Notes required to be delivered to the Trustee under
this Indenture. The Monthly Report shall be substantially in the form of Exhibit
B attached hereto, as amended from time to time, and shall have attached or
included all lists, data and information required to be attached or included
hereunder.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"Net Capitalized Cost," with respect to a Leased Vehicle, means an
amount equal to 120% of the actual purchase price of the vehicle, less the
amount of the Lessee's down payment.
"Net Liquidation Proceeds" means the amount derived by subtracting from
the Liquidation Proceeds of a Contract the related Liquidation Expenses.
"Note Register" means the register for the Securities maintained by the
Registrar pursuant to Section 2.5.
"Obligor" means each Person who is indebted under a Contract or who has
acquired the Leased Vehicle subject to a Contract.
"Offering Amount" shall mean the $20,000,000 in aggregate principal
amount of 11% Secured Notes due October 31, 2004 that may be issued under this
Indenture.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary or the Controller of any Person.
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"Officers' Certificate" when used with respect to any Person, means a
certificate signed by the Chairman of the Board, President, any Vice President,
the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary
of such Person, or any other officer of such Person customarily performing
functions similar to those performed by any of the above designated officers.
"Operating Account" means the commercial bank account created and
maintained by the Company and denominated as such pursuant to Section 4.2.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Outstanding" means, with respect to the Securities, as of the date of
determination, all the Securities theretofore authenticated and delivered under
this Indenture except:
(i) the Securities theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation;
(ii) the Securities or portions thereof for whose payment or
redemption money in the necessary amount has been theretofore deposited
with the Trustee or any Paying Agent in trust for the Holders of such
Securities; provided that, if such Securities or portions thereof are
to be redeemed, notice of such redemption has been duly given pursuant
to this Indenture or provision therefor satisfactory to the Trustee has
been made; and
(iii) Securities in exchange for or in lieu of which other
Securities have been authenticated and delivered pursuant to this
Indenture unless proof satisfactory to the Trustee is presented that
any such Securities are held by a holder in due course; provided,
however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request,
demand, authorization, direction, notice, consent or waiver hereunder,
Securities owned by the Company or any Affiliates of the Company shall
be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or
waiver, only Securities with respect to which the Trustee has received
written notice of such ownership or otherwise has actual knowledge of
such ownership shall be so disregarded. Securities so owned that have
been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Trustee the pledgee's
right so to act with respect to such Securities and that the pledgee is
not the Company or any other obligor upon the Securities or any
Affiliate of the Company or such other obligor.
"Overdue Interest Rate" means the lesser of (i) an interest rate of 18%
per annum, or (ii) the highest lawful rate of interest.
"Paying Agent" means the Trustee or any other Person that meets the
eligibility standards for the Trustee specified in Section 7.10 and is
authorized by the Company to pay the principal or any interest that may become
payable on any Securities on behalf of the Company.
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"Payment Date" with respect to any Security, means the (i) fifteenth
day of each calendar month (unless such day is a Legal Holiday, in which event
the next succeeding Business Day) commencing with the second calendar month
following the month in which the Security is issued, and (ii) the Stated
Maturity.
"Payment Date Statement" shall have the meaning provided in Section
5.1.
"Person" means any individual, corporation, partnership, joint venture,
joint adventure, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Physical Damage Insurance Policy" means with respect to a Leased
Vehicle, any policy of physical damage, comprehensive or collision insurance
covering the Leased Vehicle pursuant to which the Servicer may obtain recoveries
for loss or damage to the Leased Vehicle.
"Purchase Date" means the date on which the Company remits funds from
the Operating Account to pay the purchase price for a Leased Vehicle or for an
Eligible Additional Contract.
"Purchased Contracts Certificate" means the Officer's Certificate of
the Company and the Servicer required to be delivered to the Trustee in
connection with the purchase of any Eligible Additional Contracts and designated
as such pursuant to Section 4.3.
"Record Date" for the interest payable on any Payment Date means the
first Business Day of the month in which such Payment Date occurs.
"Redemption Date" means any Payment Date which is subsequent to the
November 30, 2000 and which is designated by the Company as the date upon which
the Company will redeem some or all of the Securities.
"Redemption Price" means with respect to any Security to be redeemed,
100% of the unpaid principal amount of such Security together with accrued and
unpaid interest on the unpaid principal amount thereof to the applicable
Redemption Date.
"Registrar" means the registrar for the Securities appointed by the
Company pursuant to Section 2.5 hereof, and any successor registrar appointed by
the Company hereunder.
"Registrar of Titles" means the agency, department or office having the
responsibility for maintaining records of titles to motor vehicles and issuing
documents evidencing such titles in the jurisdiction in which a particular
Leased Vehicle is registered.
"Responsible Officer" when used with respect to the Trustee means the
Chairman or Vice Chairman of the Board of Directors or Trustees, the Chairman or
Vice Chairman of the Executive Committee of the Board of Directors or Trustees,
the President, any Vice President, any Assistant Trust Officer, the Secretary,
any Assistant Secretary, the Treasurer, any Assistant Treasurer, or any other
officer of the Trustee customarily performing functions similar to those
performed by any of
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the above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Sale" has the meaning set forth in Section 6.14.
"Schedule of Contracts" means the list of Contracts attached hereto as
Schedule A, as such list may be supplemented from time to time hereafter
pursuant to Section 4.3, as being Granted to the Trustee as part of the Trust
Estate, which list or lists shall set forth, with respect to each Contract, the
Contract Number, the aggregate unpaid lease payments as of the date acquired by
the Company and as of the date of origination, the name of the Obligor, the
Maturity Date, the name of the originating person, and the vehicle
identification number for the Leased Vehicle, and the date on which the Contract
was originated.
"SEC" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, or if at
any time after the execution of this Indenture such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties on such date.
"Securities" or "Notes" means the 11% Secured Notes due August 31,
2004, that are issued under this Indenture, as amended from time to time.
"Securities Act of 1933" means the Securities Act of 1933, as amended.
"Securities Exchange Act of 1934" means the Securities Exchange Act of
1934, as amended.
"Servicer" means Transition Leasing Management, Inc., as servicer under
the Servicing Agreement, and its permitted successors and assigns, including any
successor servicer appointed pursuant to Section 5.10.
"Servicer Report Date" means the 10th day (or the Business Day next
following such day if such day is not a Business Day) of each month during the
existence of this Indenture.
"Servicing Agreements" means the Master Purchasing Agreement and the
Servicing Agreement, each dated as of ______________, 1999, between the Company
and the Servicer, providing, among other things, for the purchasing of Leased
Vehicles and Contracts and the collecting and servicing of the Contracts, as
said agreements may be amended or supplemented from time to time as permitted
hereby and thereby. Such term shall also include any servicing agreement entered
into with a successor servicer pursuant to Section 5.10 and any separate
servicing agreement for the servicing of Contracts.
"Servicing Fees" means the compensation payable by the Company to the
Servicer under the Servicing Agreement.
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"Servicing Officer" means any officer of the Servicer involved in, or
responsible for, the administration and servicing of the Contracts whose name
appears on a list of servicing officers furnished to the Company and the Trustee
by the Servicer, as such list may be amended or supplemented from time to time.
"Sinking Fund Account" means the trust account established and
maintained by the Company and designated as such pursuant to Section 4.2.
"Sinking Fund Trigger Date" means the earlier to occur of October 31,
2002 or the receipt by the Trustee of a Contract Unavailability Notice.
"Special Record Date" means the date determined pursuant to Section
2.11.
"Stated Maturity" means October 31, 2004.
"Subsidiary" means, with respect to the Company, any corporation,
partnership, joint venture or joint adventure whether now existing or hereafter
organized or acquired: (i) in the case of a corporation, of which a majority of
the securities having ordinary voting power for the election of directors or
other governing body of such corporation (other than securities having such
power only by reason of the happening of a contingency) are at the time owned by
the Company or one of more other Subsidiaries of the Company, or (ii) in the
case of a partnership, joint venture or joint adventure, in which the Company is
a general partner or joint venturer or joint adventurer.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code
77aaa-77bbbb), as amended from time to time.
"Title Document" means, with respect to any Leased Vehicle, the
certificate of title for, or other evidence of ownership of, such Leased Vehicle
issued by the Registrar of Titles in the jurisdiction in which such Leased
Vehicle is registered.
"Trust Estate" shall have the meaning provided in the Granting Clauses
of this Indenture.
"Trustee" means the party named as such in this Indenture until a
successor replaces it, and thereafter means the successor.
"Trust Officer" means any Responsible Officer assigned by the Trustee
to administer its corporate trust matters.
"UCC" means the Uniform Commercial Code as in effect in the relevant
jurisdiction.
"United States Obligations" means direct obligations of the United
States of America or any agency or instrumentality of the United States of
America, or other obligations the principal of and interest on which are
unconditionally guaranteed or insured by the United States of America.
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SECTION 1.2 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, such
provision is incorporated by reference in and made a part of this Indenture. If
this Indenture is qualified under the TIA, any provision that is required by the
TIA to be incorporated herein shall be so incorporated and shall supersede any
conflicting provision hereof. The following TIA terms have the following
meanings in this Indenture:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture securityholder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company (or any other
obligor on the Securities).
All other TIA terms used in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule have the meanings so
assigned to them.
SECTION 1.3 RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting
principles as of the date of this Indenture;
(3) "or" is not exclusive; and
(4) words in the singular include the plural, and in the
plural include the singular.
ARTICLE 2
THE SECURITIES
SECTION 2.1 FORMS GENERALLY.
The Securities and the Trustee's certificate of authentication shall be
in substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other
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variations as are required by this Indenture, and may have such letters, numbers
or other marks of identification and such legends or endorsements placed thereon
as may be required to comply with the rules of any securities exchange on which
the Securities may be listed, or as may consistently herewith be determined by
the officers executing such Securities, as evidenced by their execution thereof.
Any portion of the text of any Security may be set forth on the reverse thereof,
in which case the following reference to the portion of the text appearing on
the reverse of the Securities shall be inserted on the face of the Securities,
immediately prior to the paragraph stating that the certificate of
authentication on the Security must be executed by manual signature of the
Trustee as a condition to the validity of such Security:
"Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which provisions shall for all
purposes have the same effect as if set forth at this place."
The definitive Securities shall be printed, lithographed or engraved or produced
by any commercially reasonable manner, all as determined by the officers
executing such Securities, as evidenced by their execution thereof.
SECTION 2.2 FORM OF SECURITY.
(a) The form of Security is as follows:
TRANSITION AUTO FINANCE III, INC.
11% SECURED PROMISSORY NOTE DUE OCTOBER 31, 2004
No. _________ CUSIP NO. _______ $__________
Transition Auto Finance III, Inc., a corporation duly organized and
existing under the laws of the State of Texas (herein referred to as the
"Company"), for value received, hereby promises to pay to _____________________
or registered assigns, the principal sum of ____________________________ dollars
on October 31, 2004 (the "Stated Maturity" of such principal), and to pay
interest (computed on the basis of a 360-day year consisting of 12 months of 30
days each) on the unpaid portion of said principal sum outstanding from time to
time from the date of issue, until the principal amount of this Note is paid in
full at the rate of 11% per annum, which interest shall be due and payable on
the fifteenth day of each calendar month (for such interest accruing during the
preceding month or months) commencing with the second calendar month after the
issuance hereof and upon the Stated Maturity (each a "Payment Date").
The principal of and interest on this Note are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts. All payments made by the Company
with respect to this Note shall be applied first to interest due and payable on
this Note as provided above and then to the unpaid principal of this Note. Any
installment of interest that is not paid when and as due shall bear interest at
the Overdue Interest Rate from the date due to the date of payment thereof, but
only to the extent payment of such interest shall be lawful and enforceable.
This Note represents a general obligation of the Company.
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This Note is one of a duly authorized issue of Notes of the Company,
designated as its 11% Secured Notes Due October 31, 2004 (herein called the
"Notes"), all issued and to be issued under the Indenture dated as of
_______________, 1999 (herein called the "Indenture"), between the Company and
Trust Management, Inc. (the "Trustee," which term includes any successor Trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights thereunder of
the Company, the Trustee and the Holders of the Notes, and the terms upon which
the Notes are, and are to be, authenticated and delivered. All terms used in
this Note that are capitalized, if not defined herein, are defined in the
Indenture and shall have the meanings assigned to them in the Indenture.
Payment of the outstanding principal of and accrued interest on this
Note at the Stated Maturity or of the Redemption Price payable on any Redemption
Date as of which this Note has been called for redemption shall be made upon
presentation of this Note to the Paying Agent appointed by the Company for such
purpose. Payments of all installments of interest due and payable on any Payment
Date (other than the Stated Maturity) shall be made by check mailed to the
Person whose name appears as the Holder of this Note on the Note Register as of
the first business day of the month in which such Payment Date occurs (the
"Record Date") without requiring that this Note be submitted for notation of
payment. Checks returned undelivered will be held for payment to the Person
entitled thereto, subject to the terms of the Indenture, at the office or agency
in the United States of America designated by the Company for such purpose
pursuant to the Indenture.
The payment of principal and accrued interest on the Notes, when due,
is secured by the Trust Estate, which consists of, among other things, a first
priority security interest in specific motor vehicle lease Contracts, the Leased
Vehicles described therein and the funds in the Sinking Fund Account.
If an Event of Default shall occur and be continuing with respect to
the Notes, the Notes, and all principal and unpaid accrued interest, may be
declared due and payable in the manner and with the effect provided in the
Indenture.
The Company and each surety, endorser, guarantor, and other party, if
any, now or hereafter liable for payment of any sums of money payable on this
Note, jointly and severally, waive presentment and demand for payment, notice of
intent to accelerate and notice of acceleration, protest and notice of protest
and nonpayment, and diligence in collecting or bringing suit against any party
hereon, and agree that their liability on this Note shall not be affected by any
renewal or extension in time of payment hereof, by any indulgence, or by any
release, modification, or substitution of any security for the payment of this
Note, and hereby consent to any and all extensions, renewals, replacements,
waivers, releases, or exchanges affecting this Note and the taking, release,
modification, or substitution of any security, with or without notice and before
or after maturity.
The Notes are redeemable at the option of the Company on any Payment
Date following the Sinking Fund Trigger Date, in whole or in part, at 100% of
the unpaid principal amount thereof, together with accrued and unpaid interest
thereon to the Redemption Date; provided, however, that the Paying Agent shall
be required to redeem the Notes at such time only to the extent that the Company
has theretofore deposited with the Paying Agent money sufficient to effect such
redemption. At least 10 but not more than 60 days prior to the Redemption Date,
the Company is required to mail a notice of redemption by first class mall to
the registered owner of this Note specifying the Redemption Date, the Redemption
Price, the name and address of the Paying Agent, that this Note must be
delivered to the Paying Agent and that interest on this Note ceases to accrue on
and after the Redemption Date.
If provision is made for the redemption and payment of this Note in
accordance with the Indenture, this Note shall thereupon cease to bear interest
from and after the Redemption Date.
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As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Note may be registered on the Note Register of
the Company, upon surrender of this Note for registration of transfer at the
office or agency designated by the Company pursuant to the Indenture, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder hereof
or his attorney duly authorized in writing, and thereupon one or more new Notes
of authorized denominations and for the same aggregate principal amount will be
issued to the designated transferee or transferees.
Prior to the due presentment for registration of transfer of this Note,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note is overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Notes under the Indenture at any
time by the Company with the consent of the Holders of Notes representing more
than 50% of the principal amount of all Notes at the time outstanding.
The Indenture also contains provisions permitting the Holders of Notes
representing specified percentages of the principal amount of the Notes at the
time outstanding, on behalf of the Holders of all the Notes, to waive compliance
by the Company with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences. Any such consent or waiver
by the Holder of this Note shall be conclusive and binding upon such Holder and
upon all future holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange hereof or in lieu hereof whether
or not notation of such consent or waiver is made upon this Note. The Indenture
also permits the Trustee to amend or waive certain terms and conditions set
forth in the Indenture without the consent of Holders of the Note issued
thereunder.
The term "Company" as used in this Note includes any successor to the
Company under the Indenture.
The Notes are issuable only in registered form in denominations as
provided in the Indenture and subject to certain limitations therein set forth.
The Notes are exchangeable for a like aggregate principal amount of a different
authorized denomination, as requested by the Holder surrendering same.
This Note and the Indenture shall be construed in accordance with, and
governed by, the laws of the State of Texas applicable to agreements made and to
be performed therein.
The Indenture and this Note are hereby expressly limited so that in no
contingency or event, whether by reason of acceleration of the maturity of this
Note or otherwise, shall the amount paid, or agreed to be paid by the Company
for the use, forbearance, or detention of the money loaned under this Note or
otherwise or for the payment or performance of any covenant or obligation
contained herein or the Indenture or in any other document evidencing, securing
or pertaining hereto, exceed the maximum amount permissible under applicable
law, as now or as hereafter amended. If
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from any circumstances whatsoever fulfillment of any provision hereof or any of
such other documents, at the time performance of such provision shall be due,
shall involve transcending the limit of validity, and if from any such
circumstances the registered owner of this Note shall ever receive interest or
anything that might be deemed interest under applicable law that should exceed
the highest lawful rate, such amount that would be excessive interest shall be
applied to the reduction of the principal of this Note and not to the payment of
interest, or if such excessive interest exceeds the unpaid balance of principal
of this Note such excess shall be refunded to the Company. All sums paid or
agreed to be paid to the registered owner of this Note for the use, forbearance
or detention of the indebtedness of the Company to the registered owner of this
Note shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of such indebtedness until payment
in full so that the actual rate of interest on account of such indebtedness is
uniform, or does not exceed the maximum rate permitted by applicable law as now
or hereafter amended, throughout the term thereof. The terms and provisions of
this paragraph shall control and supersede every other provision of this Note
and the Indenture. The Company hereby waives, to the extent permitted by
applicable law, all of its rights or protections afforded by any applicable
usury or interest limitation law.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall impair or affect the right of the registered owner of
this Note to receive payment of principal and interest on this Note, on or after
the respective due dates, or the right of the Trustee to bring suit for the
enforcement of any such payment on or after such respective dates, without the
consent of the registered owner.
Unless the certificate of authentication hereon has been executed by
the Trustee by manual signature, this Note shall not be entitled to any benefit
under the Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, Transition Auto Finance III, Inc. has caused this
instrument to be duly executed under its corporate seal.
Dated: ___________________________
TRANSITION AUTO FINANCE III, INC.
By:
---------------------------------------
(Authorized Officer)
[SEAL]
Attest:
- ------------------------------
(Authorized Officer)
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(b) The form of the Trustee's certificate of authentication is as
follows:
This is one of the Notes referred to in the within-mentioned Indenture.
TRUST MANAGEMENT, INC.
as Trustee, Paying Agent and Registrar
By:
-----------------------------------
Authorized Signatory
SECTION 2.3 DENOMINATIONS.
The Securities shall be issuable only as registered securities in
authorized denominations with a minimum denomination of $1,000 and larger
denominations of integral multiples of $1,000 (in each case expressed in terms
of the principal amount thereof on the date of issuance).
SECTION 2.4 EXECUTION AND AUTHENTICATION.
(a) The Securities shall be executed on behalf of the Company by its
Chairman of the Board, President or any Vice President of the Company and
attested to by an Officer of the Company other than an Officer who has executed
the Securities. The signature of any such Persons on the Securities may be
manual or facsimile.
(b) Securities bearing the manual or facsimile signatures of
individuals who were at any time the Officers of the Company shall bind the
Company, notwithstanding that such individuals or any of them have ceased to be
such prior to the authentication and delivery of such Securities.
(c) A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security on
behalf of the Trustee. The signature shall be conclusive evidence that the
Security has been authenticated under this Indenture.
(d) The Trustee shall authenticate Securities from time to time for
original issue in the aggregate Offering Amount upon a Company Order; provided,
however, the Trustee shall not be required to so authenticate more often than
once a week. The aggregate principal amount of Securities outstanding at any
time may not exceed that amount except as provided in Section 2.8.
(e) Notwithstanding anything contained herein to the contrary, each of
the Notes issued hereunder, with the consent of the Company and Trustee, may be
issued in book entry form as an uncertificated security in accordance with the
provisions of Article 8 of the Uniform Commercial Code as adopted in the state
of organization of the Company.
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SECTION 2.5 REGISTRAR AND PAYING AGENT.
(a) The Company shall appoint a registrar for the Securities (the
"Registrar") who shall maintain or cause to be maintained an office or agency
where Securities may be presented for registration or transfer or for exchange.
The Registrar shall keep a register of the Securities and of their transfer and
exchange (the "Note Register"). The Company may have one or more co-registrars.
(b) Subject to the provisions of Section 5.2, the Company may designate
one or more Paying Agents (the "Paying Agents") who shall maintain or cause to
be maintained an office within the United States of America, at which the
Securities may be presented or surrendered for payment or at which the Paying
Agent may make payments of accrued interest on the Securities on behalf of the
Company with funds withdrawn from the Sinking Fund Account.
(c) The Company shall notify the Trustee of the name and address of any
such Registrar or Paying Agent and may appoint successors thereof.
(d) The Company initially appoints the Trustee as Registrar and as
Paying Agent.
SECTION 2.6 SECURITYHOLDER LISTS.
The Trustee shall preserve a list of the names and addresses of
Securityholders in as current a form as is reasonably practicable. If the
Trustee is not the Registrar, the Company shall cause the Registrar to furnish
to the Trustee five Business Days before each Payment Date and at such other
times as the Trustee may request in writing a list in such form and as of such
date as the Trustee may reasonably require of the names and addresses of
Securityholders.
SECTION 2.7 TRANSFER AND EXCHANGE.
Where a Security is presented to the Company or the Registrar with a
request to register a transfer of Securities, the Company shall cause the
Registrar to register the transfer as requested if the requirements for a
transfer pursuant to the Uniform Commercial Code, as enacted in the State of
Texas, are met. Where Securities are presented to the Company or the Registrar
with a request to exchange them for an equal principal amount of Securities of
other denominations, the Company shall cause the Registrar to make the exchange
as requested if the same requirements are met. To permit transfers and
exchanges, the Trustee shall authenticate Securities upon Company Request or
upon request of the Registrar. The Company may charge a reasonable fee to the
Holder for any transfer or exchange other than an exchange pursuant to Section
2.9, 3.7 or 9.5.
SECTION 2.8 REPLACEMENT SECURITIES.
If the Holder of a Security claims that the Security has been lost,
destroyed or wrongfully taken, the Company shall issue and the Trustee shall
authenticate a replacement Security if the requirements for the issuance of
replacements securities pursuant to the Uniform Commercial Code, as enacted in
the State of Texas, are met. An indemnity bond must be sufficient in the
judgment of the Company and the Trustee to protect the Company, the Trustee, the
Paying Agent and the
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Registrar from any loss that any of them may suffer if a Security is replaced.
The Company may charge for its expenses in replacing a Security.
SECTION 2.9 TEMPORARY SECURITIES.
Until definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but may
have variations that the Company considers appropriate for temporary Securities.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate definitive Securities in exchange for temporary Securities.
SECTION 2.10 CANCELLATION.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar, the Paying Agent and the Company shall forward to
the Trustee any Securities surrendered to them for transfer, exchange, payment
or cancellation and shall dispose of cancelled Securities as the Company directs
in accordance with applicable law. The Company may not issue new Securities to
replace Securities it has paid or delivered to the Trustee for cancellation.
SECTION 2.11 DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Securities, it
shall pay the defaulted interest and, to the extent permitted by law, interest
on defaulted interest at the Overdue Interest Rate to the persons who are
Securityholders of record as of a subsequent date designated as a "Special
Record Date" for such payment. The Trustee shall establish the Special Record
Date if and when funds for the payment of such interest have been received by
the Paying Agent from the Company. At least 15 days before the subsequent
Special Record Date, the Trustee shall mail to each Securityholder a notice that
states the subsequent Special Record Date, the payment date for the defaulted
interest, and the amount of defaulted interest (plus any permitted interest
thereon) to be paid.
SECTION 2.12 PERSONS DEEMED OWNERS.
Prior to the due presentment for registration of transfer of any
Security, the Company, the Trustee, the Paying Agent, the Registrar and any
agent of the Company or of the Trustee may treat the Person whose name and
Security is registered on the Note Register as the owner of such Security for
the purpose of receiving payments of the principal of and interest on such
Security and for all other purposes whatsoever, whether or not such Security be
overdue, and neither the Company, the Trustee, nor any agent of the Company
shall be affected by notice to the contrary.
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ARTICLE 3
REDEMPTION
SECTION 3.1 REDEMPTION AFTER SINKING FUND TRIGGER DATE.
At any time on any Payment Date on or after November 30, 2000, the
Securities may be redeemed, in whole or in part, at the option of the Company at
the Redemption Price for such Securities. If the Company elects to redeem the
Securities, it shall, not later than 45 days prior to the Payment Date selected
for redemption, deliver notice of such election to the Trustee, together with a
Company Order directing the Trustee to effect such redemption.
SECTION 3.2 SECURITIES NOT PREVIOUSLY DELIVERED TO TRUSTEE.
If the Company wishes to credit Securities it has not previously
delivered to the Trustee for cancellation against the principal amount of
Securities to be redeemed, it shall so notify the Trustee and it shall deliver
the Securities duly endorsed with the notice.
SECTION 3.3 SELECTION OF SECURITIES TO BE PURCHASED OR REDEEMED.
If less than all of the Securities are to be called for redemption, the
particular Securities to be redeemed shall be selected by the Trustee by lot or
by such other method as the Trustee deems appropriate.
The Trustee shall promptly notify the Company in writing of the
Securities selected for redemption and, in the case of any Security selected for
partial redemption, the principal amount thereof to be redeemed.
Securities and portions of Securities selected shall be in amounts of $1,000
or whole multiples of $1,000; except that if all of the Securities of a Holder
are to be redeemed, the entire outstanding amount of Securities held by such
Holder, even if not a multiple of $1,000, shall be purchased or redeemed. Except
as provided in the preceding sentence, provisions of this Indenture that apply
to Securities called for redemption also apply to portions of Securities called
for redemption.
SECTION 3.4 NOTICE OF REDEMPTION.
(a) At least 10 days but not more than 60 days before the Redemption
Date, the Company shall mall a notice of redemption by first-class mail to each
Holder of Securities, with a copy thereof to Trustee.
(b) The notice shall identify the Securities to be redeemed by CUSIP
No. and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
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(iii) if any Security is being redeemed in part, the portion
of the principal amount of such Security to be redeemed and that, after
the redemption date upon surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion shall be
issued upon cancellation of the original Security;
(iv) the name and address of the Paying Agent;
(v) that the Securities must be delivered to Paying Agent at
the address stated in the notice for the Holder to receive the
Redemption Price; and
(vi) that interest on the Securities ceases to accrue on and
after the Redemption Date.
(c) At the Company's request, the Trustee shall give notice of
redemption in the Company's name and at the Company's expense. Failure to give
notice of redemption, or any defect therein, to any Holder of any Security shall
not impair or affect the validity of the redemption of any Security.
SECTION 3.5 EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption under Section 3.4 has been given, the
Securities called for redemption must be redeemed on the designated Redemption
Date. Upon surrender to the Paying Agent, such Securities shall be paid at the
Redemption Price.
A notice of redemption under Section 3.4 may not be conditional. Unless
the Company shall default in the payment of the Redemption Price, no interest
shall accrue on the Securities for any period after the Redemption Date.
SECTION 3.6 DEPOSIT OF REDEMPTION AMOUNT.
Prior to the Redemption Date, the Company shall deposit with the Paying
Agent money sufficient to pay the Redemption Price on Securities on that date.
Such moneys shall be segregated by the Paying Agent for the purpose of
application to such redemption on the Redemption Date. If such deposit shall be
made, the amount payable on the Securities shall be limited to the Redemption
Price therefore, without any premium or penalty, and no interest shall accrue on
such Redemption Price for any period after the Redemption Date. If any Security
called for redemption shall not be so paid upon surrender for redemption because
of the failure of the Company to comply with the provisions of this Section 3.6,
interest shall be paid on the unpaid principal from the Redemption Date until
such principal is paid, and, to the extent lawful, on any interest not paid on
such unpaid principal, in each case at the rate provided in the Securities.
SECTION 3.7 SECURITIES REDEEMED IN PART.
Upon surrender of a Security that is redeemed in part, the Company
shall issue and, upon the Company's written request, the Trustee shall
authenticate for the Holder at the expense of the
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Company a new Security equal in principal amount to the unredeemed portion of
the Security surrendered.
ARTICLE 4
ACCOUNTS, DISBURSEMENTS AND RELEASES
SECTION 4.1 COLLECTION OF MONEYS.
Except as otherwise expressly provided herein, the Trustee may demand
payment or delivery of, and may receive and collect, directly and without
intervention or assistance of any fiscal agent or other intermediary, all money
and other property payable to or receivable by the Trustee pursuant to this
Indenture. The Trustee shall hold all such money and property received by it as
part of the Trust Estate, and shall apply it as provided in this Indenture.
Except as otherwise expressly provided in this Indenture, if any default occurs
in the making of any payment or performance under the Servicing Agreements, the
Trustee may, and upon the request of the Holders of Securities representing more
than 50% of the principal amount of the Outstanding Securities shall, take such
action as may be appropriate to enforce such payment or performance including
the institution and prosecution of appropriate judicial proceedings. Any such
action shall be without prejudice to any right to claim a Default or Event of
Default under this Indenture and to proceed thereafter as provided in Article 7.
SECTION 4.2 SINKING FUND ACCOUNT; OPERATING ACCOUNT; MASTER COLLECTIONS ACCOUNT.
(a) Prior to the initial authentication and delivery of any Securities,
the Company shall open, at one or more depository institutions (which may be the
Trustee) (the "Custodians"), a trust account denominated "Sinking Fund
Account--Trust Management, Inc., as trustee in respect of the 11% Redeemable
Secured Notes Due October 31, 2004," (the "Sinking Fund Account"). The Sinking
Fund Account shall be an Eligible Account. Deposits to and withdrawals from the
Sinking Fund Account shall be made solely in accordance herewith, and the funds
in the Sinking Fund Account shall not be commingled with any other moneys,
except as expressly provided for herein. The Company shall also open a
commercial bank account in its own name for use in holding the Company's funds
and in paying the Company's expenditures (the "Operating Account"). The Sinking
Fund Account, the Master Collections Account and the Operating Account are
sometimes collectively referred to as the "Accounts" or individually as an
"Account." The Company shall give the Trustee at least five Business Days'
written notice of any change in the location of any Operating Account and any
related account identification information.
(b) The Company shall direct or cause to be directed all Obligors to
remit all collections and payments on the Contracts directly to the Master
Collections Account maintained by the Servicer. The Company agrees to provide or
cause to be provided payment books or will mail or cause to be mailed monthly
statements to all Obligors with remittance instructions directing all payments
to be remitted directly to the Master Collections Account. The Company agrees
that all cash, money orders, checks, notes, drafts and other items that it
otherwise receives and that are
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attributable to the Contracts shall be promptly deposited into the Master
Collections Account. The Company shall likewise deposit or cause to be deposited
in the Master Collections Account within two Business Days of receipt all Net
Liquidation Proceeds and Insurance Proceeds (net of any portion thereof applied
to the repair of any Leased Vehicle, released to an Obligor in accordance with
the normal servicing procedures of the Servicer). The Company shall cause the
Servicer to transfer to the Operating Account, at least weekly and more
frequently if deemed reasonable by the Company under the circumstances, all
funds (except any minimum sum necessary to avoid bank service charges) in the
Master Collections Account that are attributable to the Contracts.
(c) The Company shall cause the Servicer to maintain detailed
accounting books and records adequate to determine the respective share of the
funds (including all income earned thereon as determined by any allocation
method deemed reasonable by the Servicer) deposited or contained in the Master
Collections Account attributable to each motor vehicle lease contract, including
the Contracts, owned by the Company or serviced by the Servicer.
(d) The Company agrees that it shall not withdraw any funds in the
Operating Account except for an investment, transfer or payment of such funds in
accordance with the provisions of this Section 4.2 and Section 4.3.
(e) The Company may invest the funds in the Operating Account but only
in Eligible Investments that mature on or prior to the Business Day next
preceding the next Payment Date following the making of such investment.
(f) So long as the Securities have not been declared due and payable
pursuant to Section 6.2 and subject to the receipt by the Trustee of any
required certificates, the Company shall have the right to cause the funds in
the Operating Account to be withdrawn or applied, to the extent necessary and in
the amounts required, for the following purposes in the following order of
priority:
FIRST to the transfer to the Sinking Fund Account of the amount that,
together with any amounts held in the Sinking Fund Account, is
sufficient for the payment, PRO RATA, of all interest due on the
Outstanding Securities on each Payment Date;
SECOND, to the payment to the Trustee of any unpaid amount due the
Trustee pursuant to Section 7.7;
THIRD, to the payment of any other unpaid Allowed Expenses, except that
during the continuance of an Event of Default, no such payments of
unpaid Allowed Expenses shall be made (except for payments of amounts
due to the Trustee under Section 7.7);
FOURTH, after the Sinking Fund Trigger Date or during the continuance
of an Event of Default, to the transfer to the Sinking Fund Account for
the PRO RATA payment of amounts owing on the Notes when due; and
FIFTH except during the continuance of an Event of Default, until the
Sinking Fund Trigger Date, to the purchase of Eligible Additional
Contracts in accordance with Section 4.3.
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All of the foregoing applications of funds in the Operating Account that have
higher priority must be fully satisfied before any of the foregoing applications
having lower priority may be satisfied with such funds.
(g) On or prior to the Business Day next preceding each Payment Date
occurring prior to the Sinking Fund Trigger Date, the Company shall cause to be
transferred from the Operating Account to the Sinking Fund Account an amount
that, together with any funds then held in the Sinking Fund Account, is
sufficient to pay the accrued interest due on the Outstanding Notes on such
Payment Date. After the Sinking Fund Trigger Date, upon the written request of a
Trust Officer from time to time or as otherwise determined by the Company but in
any event not less often than the Business Day next preceding each Payment Date,
the Company shall cause to be transferred from the Operating Account to the
Sinking Fund Account the funds in the Operating Account (except any minimum
balance necessary to avoid bank service charges), less any Allowed Expenses for
which funds have not been previously withdrawn from the Operating Account.
(h) During the continuance of an Event of Default, upon the written
request of a Trust Officer from time to time but in any event not less often
than the Business Day next preceding each Payment Date, the Company shall cause
to be transferred from the Operating Account to the Sinking Fund Account all of
the funds in the Operating Account, less any amounts due the Trustee under
Section 7.7.
(i) If the funds in the Operating Account exceed $250,000 for a period
of 60 consecutive days or longer, the Company shall promptly transfer from the
Operating Account to the Sinking Fund Account that portion of such funds
exceeding $250,000 at the end of such 60 day period. This provision shall not
apply to any proceeds from the sale of the Notes by the Company if the Company
elects to deposit such proceeds in the Operating Account, and for this purpose,
any proceeds from the sale of Notes shall be deemed to be the first funds used
by the Company for the purchase of Eligible Additional Contracts.
(j) Upon the Sinking Fund Trigger Date, the Company shall deposit in
the Sinking Fund Account any remaining net proceeds from the sale of the
Securities that have not been used for the purchase of Contracts.
(k) All payments of principal or accrued interest with respect to the
Securities shall be made from amounts held in the Sinking Fund Account. All
payments to be made from time to time to the holders of Securities out of funds
in the Sinking Fund Account pursuant to this Indenture shall be made by the
Trustee as the Paying Agent appointed by the Company, subject to Section 5.2.
All moneys deposited from time to time in the Sinking Fund Account, and all
investments made with such moneys, shall be held by the Trustee as part of the
Trust Estate as herein provided. No amounts contained in the Sinking Fund
Account shall be paid over to or at the direction of the Company, except as
provided in a Payment Date Statement delivered by the Company, that is in
compliance with provisions of Section 5.1 or as otherwise provided by the
provisions of this Indenture.
(l) So long as no Event of Default shall have occurred and be
continuing, any funds in the Sinking Fund Account shall be invested and
reinvested by the Trustee at the Company's direction
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in one or more Eligible Investments. All income or other gain from investment of
moneys deposited in the Sinking Fund Account shall be deposited therein
immediately upon receipt, and any loss resulting from such investment shall be
charged to such Account.
(m) Notwithstanding any other provision of this Indenture, the Company
may elect, in its sole discretion, to deposit the proceeds from the sale of
Notes into the Operating Account. In that event, the Company may, without the
consent of the Trustee or any Noteholder, withdraw from the Operating Account
the funds necessary to pay the offering expenses incurred in connection with the
sale of the Notes, but not to exceed the limits set forth in the Company's final
prospectus filed with the SEC pursuant to which the Securities are offered and
sold on behalf of the Company.
SECTION 4.3 PURCHASE OF LEASED VEHICLES AND ELIGIBLE ADDITIONAL CONTRACTS.
(a) Leased Vehicles and Eligible Additional Contracts shall be
originated by the Servicer (or its contractors) for purchase by the Company
pursuant to the terms of the Servicing Agreements and this Indenture. In
carrying out its purchase obligations, the Servicer shall use its customary and
usual procedures in evaluating the purchase of motor vehicles and motor vehicle
lease Contracts and, to the extent more exacting, the procedures used by the
Servicer in respect to such motor vehicles and Contracts purchased by it for its
own account. The Company and the Servicer shall agree from time to time as to
which Leased Vehicles and Eligible Additional Contracts are to be purchased by
the Company through Servicer. The purchase prices for any such purchases shall
be payable from the funds in the Operating Account, notwithstanding the
provisions of Section 5.12. On or prior to each Servicer Report Date, the
Company shall deliver to the Trustee (or any duly appointed custodian for the
Contract Documents) the Contract Documents relating to such Contracts, with the
Contracts containing the notice required by Section 4.3(e). Also, on or prior to
each Servicer Report Date, the Company shall deliver to the Trustee a
supplemental Schedule A to this Indenture, reflecting all Contracts acquired by
or for the Company during the report period. If no Contracts were acquired
during the report period, it will not be necessary to file a supplemental
Schedule A for that period.
(b) Servicer agrees that any motor vehicle lease Contracts originated
by it that satisfy the criteria established in Section 4.4 of this Indenture
will be offered for sale to the Company, to the extent that the Company has
sufficient funds to purchase such Contracts, subject only to the right of
Transition Auto Finance II, Inc., an affiliate of the Company, to acquire
vehicles with proceeds from repossession of its leased vehicles or prepayments
of its lease contracts.
(c) The purchase price payable by the Company for each Leased Vehicle
originated by the Servicer on the Company's behalf shall equal the original
purchase price of the Leased Vehicle, plus a fee to the Servicer equal to $150
per purchased Contract, less 42.5% of the Obligor's down payment to the Company.
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(d) Servicer and the Company may amend the purchasing criteria set
forth in the Servicing Agreements with the exception of the purchasing criteria
set forth on Exhibit A to this Indenture, for which the prior written consent of
the Trustee or the Holders of 50% of the aggregate principal amount of the
Outstanding Securities must be obtained.
(e) Each Eligible Additional Contract purchased by the Company pursuant
to this Section 4.3 shall be marked on its face with the following notice:
"NOTICE: THIS MOTOR VEHICLE LEASE CONTRACT HAS BEEN SOLD TO TRANSITION
AUTO FINANCE III, INC., AND IS SUBJECT TO A PERFECTED SECURITY INTEREST
OF TRUST MANAGEMENT, INC., AS TRUSTEE, UNDER AN INDENTURE DATED AS OF
______________, 1999 BETWEEN TRANSITION AUTO FINANCE III, INC. AND SAID
TRUSTEE."
A UCC-l financing statement properly describing each Eligible
Additional Contract and naming the Trustee as secured party shall be duly filed
in the appropriate filing office to perfect the Trustee's security interest in
such Contract.
(f) Without the prior consent of the Trustee, neither the Servicer nor
the Company shall make any payments or withdrawals from funds in the Operating
Account for the purchase of any Contracts (i) following the Sinking Fund Trigger
Date, or (ii) during the continuance of an Event of Default.
SECTION 4.4 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS.
With respect to each Contract, the Company covenants and agrees that,
effective as of the Purchase Date for such Contract, the following
representations and warranties shall be true and shall be reaffirmed by delivery
of the Purchased Contracts Certificate signed by the Servicer:
(a) Each Contract conforms with all applicable Federal, state
and local laws, regulations and official rulings.
(b) Each Contract (i) shall have been originated in the United
States of America and shall cover a Leased Vehicle purchased from a
dealer in the retail sale of the Leased Vehicle in the ordinary course
of such dealer's business, shall have been fully and properly executed
by the parties thereto and the full and complete title to such Leased
Vehicle shall have been validly assigned by such dealer to the Company
in accordance with its terms, (ii) shall have created or shall create
ownership of the Leased Vehicle in the name of the Company and a valid,
subsisting and enforceable first priority security interest in favor of
the Trustee in the Leased Vehicle, (iii) shall contain customary and
enforceable provisions such that the rights and remedies of the holder
thereof shall be adequate for realization
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against the collateral of the benefits of the Leased Vehicle, (iv)
shall provide for, in the event that such Contract is prepaid, a
prepayment that fully satisfies all required payments pursuant to the
Contract, (v) meets in all material respects all purchasing criteria
set forth on Exhibit A attached hereto, and (vi) shall not be a
Defaulted Contract.
(c) (i) The Title Document for the related Leased Vehicle
shows (or if a new or replacement Title Document is applied for with
respect to such Leased Vehicle, the official receipt from the
responsible state or local governmental authority indicating that an
application has been made and that the Title Document, when issued,
will show) the Servicer or the Company as the owner of the Leased
Vehicle and the Trustee as the holder of a first priority security
interest in such Leased Vehicle, (ii) within 30 days after the Purchase
Date for the Contract relating to the Leased Vehicle, the Title
Document for such Leased Vehicle will show the Company as owner of the
Leased Vehicle and the Trustee as the holder of a first priority
security interest in such Leased Vehicle, and (iii) the Company, upon
delivery of the Assignment, will have a valid and enforceable ownership
interest in the Leased Vehicle and the Trustee will have a first
priority security interest in the Leased Vehicle.
(d) Each Contract and the lease of the Leased Vehicle shall
have complied at the time it was originated or made in all material
respects with all requirements of applicable federal, state, and local
laws, and regulations thereunder, including, without limitation, usury
laws, the Federal Truth-In-Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Federal Trade Commission Act, the Federal Reserve Board's
Regulations B, M and Z, and state adaptations of the National Consumer
Act and of the Uniform Consumer Credit Code, and other consumer laws
and equal credit opportunity and disclosure laws.
(e) Each Contract shall represent the genuine, legal, valid
and binding payment obligation in writing of the Obligor, enforceable
by the holder thereof in accordance with its terms subject to the
effects of bankruptcy, insolvency, reorganization or other similar laws
affecting the enforceability of creditors' rights generally.
(f) No provision of a Contract shall have been waived, amended
or modified, except as disclosed in writing by Servicer.
(g) No right of rescission, setoff, counterclaims or defense
shall have been asserted or threatened with respect to any Contract.
(h) The Assignment constitutes an enforceable sale and
transfer of the Leased Vehicle and the Contract from the Person from
whom they are purchased to the Company and it is the intention of the
Servicer that the beneficial interest in and title to the Leased
Vehicles and the Contracts not be part of Servicer's estate in the
event of the filing of a bankruptcy petition by or against Servicer
under bankruptcy law.
(i) Immediately prior to the Assignment herein contemplated,
the Person from whom such Leased Vehicle or Contract is purchased by
the Company had good and
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marketable title to each Leased Vehicle or Contract free and clear of
all liens, encumbrances, security interests, and rights of others and,
immediately upon the transfer thereof pursuant to the Assignment, the
Company shall have good and marketable title to each Leased Vehicle and
Contract, free and clear of all liens, encumbrances, security interests
and rights of others.
(j) No Contract shall have been originated in, or shall be
subject to the laws of, any jurisdiction under which the sale, transfer
and assignment of such Contract to the Company or the Trustee would be
unlawful, void or voidable.
SECTION 4.5 GENERAL PROVISIONS REGARDING SINKING FUND ACCOUNT.
(a) The Company shall not direct the Trustee to make any investment of
any funds in the Sinking Fund Account or to sell any investment held in the
Sinking Fund Account except under the following terms and conditions: (i) (A)
each such investment shall be made in the name of the Trustee (in its capacity
as such) or its nominee (or, if applicable law provides for perfection of
pledges of an investment not evidenced by a certificate or other instrument
through registration of such pledge on books maintained by or on behalf of such
issuer of such investment, such pledge may be so registered), (B)any instrument
evidencing such investment shall be delivered directly to the Trustee or its
agent; and (ii) the proceeds of each such sale of an investment shall be
remitted by the purchaser thereof directly to the Trustee for deposit into the
Sinking Fund Account.
(b) If any amounts are needed for disbursement from the Sinking Fund
Account and sufficient uninvested funds are not available to make such
disbursement, in the absence of a Company Order for the liquidation of the
investments in an amount sufficient to provide the required funds, the Trustee
may cause to be sold or otherwise converted to cash a sufficient amount of the
investments in the Sinking Fund Account.
(c) The Trustee shall not in any way be held liable by reason of any
insufficiency in the Sinking Fund Account resulting from any loss on any
Eligible Investment included therein except that the Trustee shall remain liable
on Eligible Investments that are obligations of the Trustee in its commercial
capacity.
(d) All investments of funds in the Sinking Fund Account and all sales
of Eligible Investments held in the Sinking Fund Account shall, except as
otherwise expressly provided in this Indenture, be made by the Trustee in
accordance with a Company Order. Such Company Order may specify actions
(including, without limitation, that such funds not be invested, in which case
such funds shall remain deposited in the Sinking Fund Account) or may be a
general, standing order authorizing the Trustee to act on written instructions
of specified personnel or agents of the Company. In order to insure that the
Trustee can invest funds in the Sinking Fund Account or sell any investment in
the Sinking Fund Account, the Company Order with respect thereto must be
received by the Trustee no later than 9:00 a.m. on the date specified in the
Company Order for effecting such transaction.
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(e) In the event that:
(i) the Company shall have failed to give investment
directions to the Trustee by 9:00 a.m. Dallas, Texas time on any
Business Day authorizing the Trustee to invest the funds then in the
Sinking Funds Account,
(ii) a Default or Event of Default shall have occurred and be
continuing but the Securities shall not have been declared due and
payable pursuant to Section 6.2, or if the Securities shall have been
declared due and payable following an Event of Default, amounts
collected or receivable from the related Trust Estate are being applied
in accordance with Section 6.13, or
(iii) an Event of Default shall have occurred and be
continuing, the Securities shall have been declared due and payable
pursuant to Section 6.2, and amounts collected or receivable from the
related Trust Estate are being applied in accordance with Section 6.10,
the Trustee shall invest and reinvest the funds then in the Sinking Fund Account
to the fullest extent practicable in Eligible Investments. All investments made
pursuant to clause (i) above shall mature on the next Business Day following the
date of such investment, all such investments made pursuant to clause (ii) above
shall mature no later than the next Payment Date, and all investments made
pursuant to clause (iii) above shall mature no later than the first date
following the date of such investment on which the Trustee proposes to make a
distribution to Noteholders pursuant to Section 6.10.
SECTION 4.6 RELEASES.
(a) The lien of this Indenture shall be released from a Liquidated
Contract (including any related Contract Documents and Leased Vehicle),
notwithstanding the provisions of Section 5.12, if:
(i) in the event that such Liquidated Contract has been paid
in full, the Trustee receives the certificate of a Servicing Officer
identifying such Contract and certifying that such Contract has been
fully paid and all proceeds received in respect of such Contract have
been deposited in the Master Collections Account;
(ii) in the event that such Liquidated Contract is required to
be purchased by the Servicer pursuant to the Servicing Agreements, the
Trustee receives a certificate of a Servicing Officer (A) identifying
the Contract to be released, (B) requesting the release thereof, and
(C) certifying that the correct repurchase price therefor has been
deposited in the Master Collections Account; and
(iii) in the event that such Liquidated Contract is a
"Liquidated Contract" by virtue of clause (ii) of the definition
thereof, the Trustee receives the certificate of a Servicing Officer to
the effect that such Contract is a Defaulted Contract that became a
Liquidated Contract during the related Collection Period, and there has
been deposited in the Master
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Collections Account any related Net Liquidation Proceeds that, in the
Servicer's judgment, constitute the final amounts recoverable in
respect of such Contract.
(b) Each certificate of a Servicing Officer required by subsection (a)
above, shall contain a statement to the effect that the release of the
Liquidated Contract from the lien for this Indenture will not impair the
security under this Indenture in contravention of its provisions, after taking
into account the amounts deposited in the Master Collections Account on the
account of such Liquidated Contract.
SECTION 4.7 REPORTS BY TRUSTEE.
The Trustee shall report and account to the Company in writing (using
such form as the Trustee shall choose in its sole discretion) with respect to
the Sinking Fund Account and the identity of the investments included therein,
on a monthly basis and more frequently as the Company may from time to time
reasonably request, including accounting of deposits into and payments from the
Sinking Fund Account.
SECTION 4.8 TRUST ESTATE; CONTRACT DOCUMENTS.
(a) Subject to the payment of its fees and expenses the Trustee may,
and when required by the provisions of this Indenture shall, execute instruments
to release property from the lien of this Indenture, or convey the Trustee's
interest in the same, in a manner and under circumstances that are not
inconsistent with the provisions of this Indenture. No party relying upon an
instrument executed by the Trustee as provided in this Article 4 shall be bound
to ascertain the Trustee's authority, inquire into the satisfaction of any
conditions precedent or see to the application of any moneys.
(b) In order to facilitate the servicing of the Contracts by the
Servicer, the Trustee hereby acknowledges that the Servicer is authorized in the
name and on behalf of the Company, to execute instruments of satisfaction or
cancellation, or of partial or full release or discharge, and other comparable
instruments with respect to the Contracts and with respect to the Leased
Vehicles.
(c) Upon Company Order, the Trustee shall, at such time as there are no
Securities Outstanding, release and transfer, without recourse, all of the Trust
Estate that secured the Securities (other than any cash held for the payment of
the Securities pursuant to Sections 4.2(b) or 8.2).
ARTICLE 5
COVENANTS
SECTION 5.1 PAYMENT OF PRINCIPAL AND INTEREST.
(a) Interest payable on any Security shall be paid to the Person in
whose name such Security (or one or more predecessor Securities) is registered
at the close of business on the Record
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Date for such Payment Date by check mailed to such Person's address as it
appears in the Note Register on such Record Date, except for the final payment
of principal of a Security, which shall be payable only upon presentation and
surrender as provided in subsection (b) of this Section 5.1.
Checks for interest shall be mailed without requiring that
such Security be submitted for notation of payment. Checks returned undelivered
will be held by the Paying Agent for payment to the Person entitled thereto,
subject to the terms of Section 5.2. Payments made on any Payment Date shall be
binding upon all future Holders of such Securities and of any Securities issued
upon the registration of transfer thereof or in exchange therefor or in lieu
thereof, whether or not noted thereon.
(b) Each installment of interest on the Securities is payable as
specified in the form of Security set forth in Section 2.2. Any installment of
interest that is not paid when and as due shall bear interest at the Overdue
Interest Rate from the date due to the date of payment thereof, but only to the
extent payment of such interest shall be lawful and enforceable. The principal
of each Security shall be payable at the Stated Maturity thereof unless such
Security becomes due and payable at an earlier date by declaration of
acceleration, call for redemption or otherwise. The final payment of principal
of each Security (or the Redemption Price thereof of the Securities called for
redemption) shall be payable upon presentation and surrender thereof on or after
its Stated Maturity to the Paying Agent. The Trustee upon Company Order shall
notify the Person in whose name a Security is registered at the Record Date for
the Payment Date next preceding the Payment Date on which the Company expects
that the final payment of principal and interest on such Security will be paid.
Such notice shall be mailed no earlier than the sixtieth (60th) day, and no
later than the twentieth (20th) day, prior to such Payment Date and shall
specify that such final payment will be payable only upon presentation and
surrender of such Securities and shall specify the name and address of the
Paying Agent where such Securities may be presented and surrendered for payment
of such installment. Notices in connection with redemptions of Securities shall
be mailed to Securityholders as provided in Section 3.2.
(c) All computations of interest due with respect to any Securities
shall be based on a 360-day year consisting of 12 months of 30 days each and on
the amount of principal outstanding on the Securities from time to time.
(d) On each Servicer Report Date, the Company shall transmit to the
Trustee the Monthly Report (a "Payment Date Statement"), which shall set forth,
with respect to the next succeeding Payment Date, the amount of interest payable
on such Payment Date on each Outstanding Security. On the last Servicer Report
Date prior to the Stated Maturity, the Company shall transmit to the Trustee a
final Payment Date Statement setting forth, with respect to the Stated Maturity,
the amount of accrued interest and principal payable on the Stated Maturity on
each Outstanding Security. Each Payment Date Statement shall state that the
computations of interest were made in conformity with the requirements of this
Indenture. Notwithstanding the foregoing, the Trustee may rely on its own
calculations for purposes of paying interest on the Securities.
(e) The Company at any time may terminate its obligation to pay an
installment of interest if it deposits with the Trustee, or the Trustee holds in
the Sinking Fund Account as of the
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related Payment Date, money sufficient to pay the installment when due. The
Company shall designate the installment.
(f) Subject to the foregoing provisions of this Section 5.1, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to unpaid
principal and interest, if any, that were carried by such other Security.
SECTION 5.2 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.
(a) Whenever the Company shall have a Paying Agent other than the
Trustee, it will, by Company Order delivered on or before the Business Day next
preceding each Payment Date, direct the Trustee to deposit with such Paying
Agent on or before such Payment Date a sum sufficient to pay the amounts then
becoming due, and the Trustee shall, to the extent it has received such amount
from the Company, deposit such amount with the Paying Agent as directed. Such
sum shall be held in trust for the benefit of the Persons entitled to such
payments.
(b) The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent, in acting as Paying Agent, will:
(i) hold all sums held by it for the payment of amounts due
with respect to the Securities in trust for the benefit of the persons
entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and pay such sums to such
Persons as herein provided;
(ii) give the Trustee notice of any default by the Company (or
any other obligor upon the Securities) in the making of any payment
required to be made with respect to the Securities; and
(iii) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.
(c) For the purpose of obtaining the satisfaction and discharge of this
Indenture or for any other purpose, the Company may at any time direct by
Company Order any Paying Agent to pay to the Trustee all sums held in trust by
such Paying Agent, such sums to be held by the Trustee upon the same trusts as
those upon which such sums were held by such Paying Agent; and, upon such
payment by any Paying Agent to the Trustee, such Paying Agent shall be released
from all further liability with respect to such money.
SECTION 5.3 PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge or cause to be paid or discharged
before the same shall become delinquent (1) all taxes, assessments and
governmental charges levied or imposed upon the Company or the Leased Vehicles,
and (2) all lawful claims for labor, materials and supplies that, if
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unpaid, might by law become a lien upon the property of the Company; provided,
however, that the Company shall not be required to pay or discharge or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings; and provided further, that the Company shall not be required to
cause to be paid or discharged any such tax, assessment, charge or claim if the
Company's Board of Directors shall determine such payment is not advantageous to
the conduct of the business of the Company and that the failure so to pay or
discharge is not disadvantageous in any material respect to the Holders.
SECTION 5.4 MAINTENANCE OF PROPERTIES.
The Company will cause all properties used or useful in the conduct of
its business to be maintained and kept in good condition, repair and working
order and will cause to be made all necessary repairs, renewals, replacements,
betterment and improvements thereof, all as in the judgment of the Company may
be necessary, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section shall prevent the Company from discontinuing the
operation or maintenance of any of such properties, or disposing of any of them,
if such discontinuance or disposal is, in the judgment of the Company's Board of
Directors, desirable in the conduct of the business of the Company and not
disadvantageous in any material respect to the Holders.
SECTION 5.5 LIMITATION ON INVESTMENT ACTIVITIES.
The Company will not register as, or conduct its business or take any
action that shall cause it to become, or to be deemed to be, an "investment
Company" as defined under the provisions of the Investment Company Act.
SECTION 5.6 COMPLIANCE CERTIFICATES.
(a) Commencing with the fiscal year ending December 31, 1999, the
Company shall deliver to the Trustee within 120 days after the end of each
fiscal year of the Company a certificate of a firm of independent accountants
with respect to the compliance by the Company and the Servicer, in all material
respects, with their respective obligations arising under this Indenture. If
such accountant knows of such a default, the certificate shall describe the
default.
(b) Commencing with the fiscal quarter ending December 31, 1999, on or
before 45 days after the end of each fiscal quarter of the Company, the Company
shall deliver an Officers' Certificate to the Trustee to the effect that a
review of the activities of the Company during the Company's preceding fiscal
quarter has been made under the supervision of the officers executing such
Officers' Certificate with a view to determining whether during such period the
Company and the Servicer have performed and observed all of their obligations
under this Indenture, and either (A) stating that to the best of their knowledge
no Default by the Company or the Servicer under this Indenture has occurred and
is continuing, or (B) if such a Default has occurred and is continuing,
specifying such Default and the nature and status thereof.
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(c) The Company will deliver to the Trustee an Officers' Certificate
stating whether or not the signee knows of any default by the Company in
performing its covenants under this Indenture within 15 days of a written
request by the Trustee. The Company will perform, execute, acknowledge and
deliver, all such further acts, instruments, and assurances as may reasonably be
requested by the Trustee. The certificates required under this Section 5.6 need
not comply with Section 11.4.
(d) The Company will deliver to the Trustee within 15 days after the
occurrence thereof written notice of any Default.
SECTION 5.7 REPORTING.
(a) Commencing with the fiscal year ending December 31, 1999, the
Company shall file with the Trustee copies of any annual reports and other
information, documents, and statements (or copies of such portions of any of the
foregoing as the SEC may by rules and regulations prescribe) that the Company
may be required to file with the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, within 15 days after it files them with the
SEC. The Company also shall comply with the other provisions of TIA Section
314(a).
(b) Until the Company has a class of equity securities registered under
the Securities Exchange Act of 1934, the Company will prepare, for the first
three quarters of each fiscal year, commencing with the fiscal quarter ending
December 31, 1999, summary reports containing unaudited cash basis financial
statements of the Company. In addition, the Company will prepare, for each
fiscal year, an annual report containing complete audited financial statements
of the Company including, but not limited to, a balance sheet, a statement of
income and shareholders' equity, a statement of changes in financial position
and all appropriate notes. The annual financial statements will be prepared in
accordance with generally accepted accounting principles consistently applied,
except for changes with which the Company's independent public accountants
concur. Quarterly statements may be subject to year-end adjustments. The Company
will cause a copy of the respective quarterly or annual report to be mailed to
the Trustee and to each of the Holders of the Securities within 45 days after
the close of each of the first three quarters of each fiscal year and within 120
days after the close of each fiscal year, at such Holder's address appearing on
the Note Register.
SECTION 5.8 PROTECTION OF TRUST ESTATE.
The Company will from time to time execute and deliver all such
supplements and amendments hereto and all such financing statements,
continuation statements, instruments of further assurance, and other
instruments, and will take such other action as is necessary or advisable to:
(i) grant more effectively all or any portion of the Trust
Estate,
(ii) maintain or preserve the lien of this Indenture or carry
out more effectively the purposes hereof,
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(iii) perfect, publish notice of, or protect the validity of,
any Grant made or to be made by this Indenture,
(iv) enforce any of the Contract Documents, or
(v) preserve and defend title to the Trust Estate and the
rights of the Trustee and the Securityholders in such Trust Estate
against the claims of all persons and parties.
SECTION 5.9 OPINIONS AS TO TRUST ESTATE.
(a) Upon the initial Company Order to the Trustee for the
authentication of Notes under this Indenture, the Company shall deliver to the
Trustee an Opinion of Counsel (i) that this Indenture, together with the filing
referred to in the next sentence, creates as security for the Notes a security
interest in the Contracts, and identifiable cash proceeds thereof in the
Operating Account and the Sinking Fund Account; (ii) that a financing statement
with respect to the Contracts has been filed with the Texas Secretary of State
pursuant to the Texas Uniform Commercial Code, as amended, or with the
appropriate government official of the state(s) in which title(s) to the Leased
Vehicle(s) may be registered; (iii) that the security interest in the Trust
Estate has been perfected and is a valid first priority security interest; and
(iv) that no other filings in any jurisdiction or any other actions are
necessary to perfect the security interest of the Trustee in the Trust Estate,
as constituted as of the date of such opinion, as against any third parties.
(b) On or before December 15, in each calendar year commencing with
1999, the Company shall furnish to the Trustee an Opinion of Counsel either
stating that, in the opinion of such counsel, such action has been taken with
respect to the recording, filing, re-recording and re-filing of this Indenture,
any indentures supplemental hereto and any other requisite documents and with
respect to the execution and filing of any financing statements and continuation
statements as is necessary to maintain the lien and security interest created by
this Indenture and reciting the details of such action or stating that in the
opinion of such counsel no such action is necessary to maintain such lien and
security interest. Such Opinion of Counsel shall also describe the recording,
filing, re-recording and re-filing of this Indenture, any indentures
supplemental hereto and any other requisite documents and the execution and
filing of any financing statements and continuation statements that will, in the
opinion of such counsel, be required to maintain the lien and security interest
of this Indenture until December 15 in the following calendar year. In rendering
such opinion, such counsel may rely upon an Officers' Certificate of the
Servicer as to the filing of any financing statements and to the effect that no
further assignment of the related Contract or satisfaction and discharge thereof
has been recorded and that the original financing statements so filed have not
been discharged.
SECTION 5.10 PERFORMANCE OF OBLIGATIONS; Servicing Agreements.
(a) The Company will punctually perform and observe all of its
obligations and agreements contained in the Servicing Agreements.
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(b) The Company will not take any action or permit any action to be
taken by others that would release any Person from any of such Person's
covenants or obligations under any of the Contract Documents or under any
instrument included in the Trust Estate, or that would result in the amendment,
hypothecation, subordination, termination or discharge of, or impair the
validity or effectiveness of, any of the Contract Documents or any such
instrument, except as expressly provided in this Indenture, the Servicing
Agreements or such Contract Documents or other instrument.
(c) If the Company shall have knowledge of the occurrence of a default
by the Servicer of any of its material obligations under the Servicing
Agreements, the Company shall promptly notify the Trustee thereof, and shall
specify in such notice the action, if any, the Company is taking in respect of
such default. If such default arises from the failure of the Servicer to perform
any of its obligations under the Servicing Agreements with respect to the
Contracts, the Company may remedy such failure. So long as any such default
under the Servicing Agreements shall be continuing, the Trustee may, and upon
the direction of the Holders of Securities representing more than 25% of the
aggregate principal amount of the Outstanding Securities the Trustee shall,
direct the Company to, and the Company shall, terminate all of the rights and
powers of the Servicer under the Servicing Agreements. Unless directed or
permitted by the Trustee or the Holders of Securities representing not less than
50% of the aggregate principal amount of the Outstanding Securities, the Company
may not waive any such default under the Servicing Agreements or terminate the
rights and powers of the Servicer under the Servicing Agreements.
(d) Upon any termination of the Servicer's rights and powers, all
rights, powers, duties, obligations and responsibilities of the Servicer with
respect to the related Contracts (except for any obligations of the Servicer to
indemnify the Company) shall vest in and be assumed by the Company, or any
servicing agent that the Company may designate, and the Company or its servicing
agent shall be the successor in all respects to the Servicer in its capacity as
servicer with respect to such Contracts under the Servicing Agreements (except
for any obligations of the Servicer to indemnify the Company). The Company may
resign as the Servicer by giving written notice of such resignation to the
Trustee and in such event will be released from such duties and obligations,
such release not to be effective until the date a new servicer enters into a
servicing agreement with the Company as provided below and has been approved in
writing by the Trustee. Any successor servicer shall enter into a servicing
agreement with the Company substantially similar to the Servicing Agreement. The
Company may make such arrangements for the compensation of such successor
servicer as it and such successor servicer shall agree, provided that such
compensation of the successor servicer shall not be in excess of that payable to
the Servicer under the Servicing Agreements, unless the Servicer or the Company
agrees to pay such additional compensation.
SECTION 5.11 NEGATIVE COVENANTS.
The Company will not:
(i) sell, transfer, exchange or otherwise dispose of any of
the Trust Estate except as expressly permitted by this Indenture;
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(ii) obtain or carry insurance relating to the Contracts
separate from that required by the Servicing Agreement, unless the
Trustee shall be named therein as a loss payee;
(iii) claim any credit on, or take any deduction from, the
principal of or interest payable in respect to the Securities by reason
of the payment of any taxes levied or assessed upon any part of the
Trust Estate;
(iv) engage in any business or activity other than in
connection with the purchase, collection and servicing of lease
Contracts or consumer obligations secured by motor vehicles, the
repossession and resale of motor vehicles and the raising of capital,
both debt and equity, and any other incidental businesses or
activities, without the consent of the Holders of a majority of the
aggregate principal amount of the Securities then outstanding;
(v) without the consent of the Holders of a majority of the
aggregate principal amount of the Securities then outstanding, create,
incur, assume or in any manner become liable in respect of any
indebtedness other than the Securities, any indebtedness incurred for
the purpose of the purchase of lease Contracts or consumer obligations
relating to or secured by motor vehicles (including any related
borrowing and transactional costs), any Allowed Expenses and any other
amounts incurred in the ordinary course of the Company's business;
(vi) dissolve or liquidate in whole or in part;
(vii) merge or consolidate with any corporation, partnership
or other entity other than another direct or indirect wholly-owned
Subsidiary of an Affiliate of the Company or the Servicer; any such
merger or consolidation with another Subsidiary of the Servicer shall
be subject to the following conditions:
(1) the surviving or resulting entity shall be a
corporation organized under the laws of the United States or any state
thereof whose business and activities shall be limited as set forth in
paragraph (iv) above;
(2) the surviving or resulting corporation (if other
than the Company) shall expressly assume by an indenture supplemental
hereto all of the Company's obligations hereunder;
(3) the surviving or resulting corporation shall have
the same fiscal year as the Company; and
(4) immediately after consummation of the merger or
consolidation no Event of Default or Default shall exist with respect
to the Securities;
(viii) (to the extent that it may lawfully so covenant and to
the extent that such covenant is lawfully enforceable) institute any
bankruptcy, insolvency or receivership proceedings with respect to
itself or its properties;
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(ix) (1) permit the validity or effectiveness of this
Indenture to be impaired, or permit the lien of this Indenture to be
amended, hypothecated, subordinated, terminated or discharged, or
permit any Person to be released from any covenants or obligations
under this Indenture, except as may be expressly permitted hereby, (2)
permit any lien, charge, security interest, mortgage or other
encumbrance (other than the lien of this Indenture) to be created on or
extend to or otherwise arise upon or burden the Trust Estate or any
part thereof or any interest therein or the proceeds thereof, or (3)
permit the lien of this Indenture not to constitute a valid first
priority security interest in the Trust Estate; or
(x) originate or acquire any Contract with an Obligor located
in any jurisdiction unless at the time of such origination or
acquisition of such Contract by the Company or the Servicer, both the
Company and the Servicer shall have obtained all licenses, permits and
governmental approvals, if any (1) necessary to comply with the laws of
such jurisdiction with respect to their respective operations and
businesses, (2) necessary to perform their respective obligations as
contemplated by the Indenture and the Servicing Agreements with respect
to such Contract, (3) necessary to maintain the enforce ability of such
Contract and the security interest in the related Leased Vehicle and to
prevent such Contract or any portion thereof from becoming void or
voidable by the Obligor or any other person, and (4) if such Contract
has been assigned to the Company, necessary for such assignment to be a
lawful and binding assignment on the assignor and the Obligor.
(xi) enter into any transaction with the Servicer, or any
Affiliate of the Servicer on terms less favorable to the Company than
could be obtained from an independent third party in an arms-length
transaction.
SECTION 5.12 SUBSTITUTION OR RELEASE OF COLLATERAL OR WITHDRAWAL OF CASH IN
TRUST ESTATE.
(a) The Company shall furnish to the Trustee an Officer's Certificate
stating the fair value of any property or securities the deposit of which with
the Trustee is to be the basis for the withdrawal or release of any cash,
property or securities constituting a part of the Trust Estate. If the fair
value to the Company of any such securities and all other such securities made
the basis for the withdrawal or release of any cash, property or securities
constituting part of the Trust Estate since the commencement of the then current
calendar year, as set forth in the Officer's Certificates with respect thereto,
is 10% or more of the aggregate principal amount of the Notes at that time
Outstanding, and if the fair value of such securities so delivered is at least
$25,000 and one percent of the aggregate principal amount of the Notes at that
time outstanding, the Company shall furnish a certificate of an Independent
appraiser or financial expert as to the fair value of the securities so
delivered. If the property so delivered has been used or operated by a Person
other than the Company, within six months prior to the date of acquisition by
the Company, in a business similar to that in which it has been or is to be used
or operated by the Company, and if the fair value to the Company of such
property is not less than $25,000 and not less than one percent of the aggregate
principal amount of the Notes at that time Outstanding, the Company shall
furnish an opinion of an Independent engineer, appraiser or other expert
covering the fair value to the Company of the property so subjected to the lien
of the Indenture.
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(b) The Company shall furnish to the Trustee an Officer's Certificate
as to the fair value of any property or securities to be released from the lien
of this Indenture and stating that in the opinion of the signer the proposed
release will not impair the security under this Indenture in contravention of
its provisions. If the fair value of such property or securities and of all
other property or securities released since the commencement of the then current
calendar year, as set forth in such Officer's Certificates required by the
preceding sentence, is 10% or more of the aggregate principal amount of the
Notes at the time Outstanding and if the fair value of the property or
securities proposed to be released is at least $25,000 and one percent of the
aggregate principal amount of the Notes at the time Outstanding, the Company
shall furnish an opinion of an Independent engineer, appraiser or other expert
with respect to the same subject matter required to be set forth in such
Officer's Certificate.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.1 EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest on any
Security when the same becomes due and payable and the default
continues for a period of 30 days;
(2) the Company defaults in the payment of the principal of
any Security when the same becomes due and payable at the Stated
Maturity, upon redemption or otherwise;
(3) the Company falls to comply with any of its other
agreements in the Securities or this Indenture (other than a covenant
or warranty, a default in the observance of which is elsewhere in this
section specifically dealt with) and the default continues for a period
of 30 days alter receipt by the Company of written notice of such
default from the Trustee specifying such default and requiring it to be
remedied and stating that such notice is a "Notice of Default"
hereunder or after receipt by the Company and the Trustee of such
notice from the Holders of not less than 25% in aggregate principal
amount of the Securities then Outstanding;
(4) if any representation or warranty of the Company made in
this Indenture or in any certificate or other writing delivered
pursuant hereto or in connection herewith shall prove to be incorrect m
any material respect as of the time when the same shall have been made
and, within 30 days after receipt by the Company of written notice from
the Trustee specifying such inaccuracy and requiring it to be remedied
and stating that such notice is a "Notice of Default" hereunder or
after receipt by the Company and the Trustee of such notice from the
Holders of Securities representing at least 25 % of the aggregate
principal amount of the Outstanding Securities, the circumstance or
condition in respect of which such representation or warranty was
incorrect shall not have been eliminated or otherwise cured;
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(5) if (i) the validity or effectiveness of this Indenture or
any Grant under this Indenture shall be impaired, or this Indenture
shall be amended, hypothecated, subordinated, terminated or discharged,
or any Person shall be released from any covenants or obligations under
this Indenture or the Servicing Agreements, in each case except as may
be expressly permitted hereby and thereby, (ii) any lien, charge,
security interest, mortgage or other encumbrance (exclusive of any
mechanic's lien on any Leased Vehicle) shall be created on or extend to
or otherwise arise upon or burden the Trust Estate or any part thereof
or any interest therein or the proceeds thereof, or (iii) this
Indenture shall not constitute a valid first priority security interest
in the Trust Estate, and if any of the foregoing Defaults shall
continue for a period of 30 days after receipt by the Company of
written notice from the Trustee specifying such Default and requiring
it to be remedied and stating that such notice is a "Notice of Default"
hereunder or after receipt by the Company and the Trustee of such
notice from the Holders of Securities representing at least 25 % of the
aggregate principal amount of the Outstanding Securities; or
(6) the Company, pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
(C) consents to the appointment of a receiver,
trustee, assignee, liquidator or similar official of it or for all or
substantially all of its property; or
(D) makes a general assignment for the benefit of its
creditors; or
(7) a court of competent jurisdiction enters an order or
decree, which remains unstayed and in effect for 60 days, under any
Bankruptcy Law against the Company:
(A) for relief in an involuntary case;
(B) appointing a receiver, trustee, assignee,
liquidator or similar official for all or substantially all of its
property; or
(C) ordering its liquidation.
The term "Bankruptcy Law" means title 11, U.S. Code, or any similar
Federal or State law for the relief of debtors.
SECTION 6.2 ACCELERATION.
If an Event of Default occurs and is continuing, the Trustee may, or at
the direction of the Holders of at least 25 % in principal amount of the
Securities shall, by notice to the Company, declare the principal amount of all
the Securities together with accrued interest thereon to be due and
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payable immediately, and upon any such declaration such principal and accrued
and unpaid interest shall become immediately due and payable, notwithstanding
anything contained in this Indenture or the Securities to the contrary. The
Holders of a majority in principal amount of the Outstanding Securities may, by
written notice to the Trustee, rescind an acceleration and its consequences if
all existing Events of Default have been cured or waived, all expenses relating
to the Default have been paid and if the rescission would not conflict with any
judgment or decree.
SECTION 6.3 REMEDIES.
(a) If an Event of Default shall have occurred and be continuing, the
Trustee may, subject to Section 6.2, do one or more of the following:
(i) make demand and institute judicial proceedings in equity
or law for the collection of all amounts then payable on the
Securities, or under this Indenture, whether by declaration or
otherwise, enforce all judgments obtained, and collect from the Company
the Trust Estate securing the Securities and moneys adjudged due;
(ii) subject to Section 6.14, sell the Trust Estate securing
the Securities or any portion thereof or rights or interest therein, at
one or more public or private Sales called and conducted in any manner
permitted by law;
(iii) institute judicial proceedings in equity or at law from
time to time for the complete or partial foreclosure of this Indenture
with respect to the Trust Estate; and
(iv) exercise any remedies of a secured party under the UCC
and take any other appropriate action to protect and enforce the rights
and remedies of the Trustee or the Holders of the Securities hereunder.
(b) The Trustee may maintain a proceeding even if it does not possess
any of the Securities or does not produce any of them in the proceedings. A
delay or omission by the Trustee or any Securityholder in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or an acquiescence in the Event of Default. No remedy
is exclusive of any other remedy.
All available remedies are cumulative.
SECTION 6.4 WAIVER OF PAST DEFAULTS.
Subject to Section 9.2, the Holders of a majority in principal amount
of the Outstanding Securities may, by written notice to the Trustee, waive an
existing Default and its consequences. When a Default is waived in accordance
herewith, it is cured and shall stop continuing.
SECTION 6.5 CONTROL BY MAJORITY.
The Holders of a majority in aggregate principal amount of the
Outstanding Securities may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on it. However, the Trustee may refuse to follow any direction
that conflicts with law or this Indenture, that is unduly prejudicial to the
rights of Securityholders not joining in such direction, or that would involve
the Trustee in personal liability.
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SECTION 6.6 LIMITATION ON SUITS.
(a) A Securityholder may not pursue any remedy with respect to this
Indenture or the Securities unless:
(i) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal
amount of the Outstanding Securities make a written request to the
Trustee to pursue the remedy;
(iii) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(iv) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity and the
Event of Default has not been waived; and
(v) the Trustee has received no contrary direction from the
Holders of a majority in principal amount of the Outstanding Securities
during such 60-day period.
(b) A Securityholder may not use this Indenture to prejudice the rights
Of another Securityholder or to obtain a preference or priority over another
securityholder.
SECTION 6.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Security to receive payment of principal and interest on the
Security, on or after the respective due dates, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of the Holder.
SECTION 6.8 COLLECTION SUIT BY TRUSTEE.
If an Event of Default in payment of interest or principal specified in
Section 6.1(1) or (2) occurs and is continuing, the Trustee may recover judgment
in its own name and as trustee of an express trust against the Company for the
whole amount of principal and interest remaining unpaid.
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM.
(a) The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee and the Securityholders allowed in any judicial proceedings relative to
the Company, its creditors or its property.
(b) Nothing herein contained shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement,
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adjustment or composition affecting the Securities or the rights of any Holder
thereof, or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding.
SECTION 6.10 PRIORITIES.
If the Trustee collects any money pursuant to this Article, it shall
pay out the money in the following order:
FIRST to the Trustee for the amounts due under Section 7.7;
SECOND, to Securityholders for amounts due and unpaid on the Securities
for principal and interest, ratably, without preference or priority of
any kind, according to the amounts due and payable on the Securities
for principal and interest, respectively;
THIRD, to the Servicer for any unpaid Allowed Expenses owed to or
incurred by it with respect to the Contracts; and
FOURTH, to the Company.
The Trustee shall fix a Special Record Date and payment date pursuant to Section
2.11 hereof for any payment to Securityholders under this Section 6.10.
SECTION 6.11 UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.7, or a suit by Holders of more than 10% in principal
amount of the Outstanding Securities.
SECTION 6.12 STAY, EXTENSION OR USURY LAWS.
The Company agrees (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim,
and will resist any and all efforts to be compelled to take the benefits or
advantage of any stay or extension law or any usury or other law, wherever
enacted, now or at any time hereafter in force, which would prohibit or forgive
the Company from paying all or any portion of the principal of and/or interest
on the Securities as contemplated herein, or which may affect the covenants or
performance of this Indenture, and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and agrees that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of any
such power as though no such law has been enacted.
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SECTION 6.13 OPTIONAL PRESERVATION OF TRUST ESTATE.
(a) If the Securities have been declared due and payable following an
Event of Default and such declaration and its consequences have not been
rescinded and annulled, the Trustee may, in its sole discretion, refrain from
selling the Trust Estate and may apply all amounts received with respect to such
Trust Estate to the payment of the principal of and interest on the Securities
as and when such principal and interest would have become due pursuant to the
terms hereof and of the Securities if there had not been a declaration of
acceleration of the maturity of the Securities, provided that:
(i) the Trustee shall have determined that the amounts
receivable with respect to such Trust Estate are sufficient to provide
the funds required to pay the principal of and interest on the
Securities as and when such principal and interest would have become
due pursuant to the terms hereof and of the Securities if there had not
been a declaration of acceleration of the maturity of the Securities;
and
(ii) the Securityholders shall not have directed the Trustee
in accordance with Section 6.5 (subject, however, to Section 6.14(b))
to sell the Trust Estate securing the Securities.
(b) the Trustee may, but need not, obtain and rely upon an opinion of
an independent investment banking firm as to the feasibility of any action
proposed to be taken in accordance with Section 6.13(a) and as to the
sufficiency of the amounts receivable with respect to the Trust Estate to make
the required payments of principal of and interest on the Securities, which
opinion shall be conclusive evidence as to such feasibility or sufficiency.
(c) If the conditions of Section 6.13(a) are not satisfied after the
Securities have been declared due and payable following an Event of Default or
the Trustee does not determine to take the action specified in Section 6.13(a),
then all amounts collected by the Trustee with respect to the Securities
pursuant to this Article 6 or otherwise shall be applied in accordance with
Section 6.10.
(d) Notwithstanding anything in this Indenture to the contrary, if the
Securities have been declared due and payable, then Trustee may, in its sole
discretion, retain the Trust Estate without compliance with this Section 6.13
and apply all amounts received with respect to the Trust Estate to the payment
of principal and interest on the Securities as and when such principal and
interest would have become due pursuant to the terms hereof and of the
Securities if there had not been a declaration of acceleration of the maturity
of the Securities.
SECTION 6.14 SALE OF TRUST ESTATE.
(a) The power to effect any sale (a "Sale") of any portion of the Trust
Estate pursuant to Section 6.3 shall not be exhausted by any one or more Sales
as to any portion of such Trust Estate remaining unsold, but shall continue
unimpaired until the entire such Trust Estate shall have been sold or all
amounts payable on the Securities secured thereby and under this Indenture with
respect thereto shall have been paid. The Trustee may from time to time postpone
any Sale by public
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announcement made at the time and place of such Sale. The Trustee hereby
expressly waives its rights to any amount fixed by law as compensation for any
Sale.
(b) (i) Without the consent or direction to the contrary by the Holders
of a majority in principal amount of the Securities then Outstanding, the
Trustee shall not sell or otherwise dispose of the Trust Estate following an
Event of Default for an amount less than the sum of (x) the amount of fees and
expenses of such sale that are reimbursable to the Trustee and (y) the entire
amount that would be distributable to the Holders of the Securities, in full
payment thereof in accordance with Section 6.10, and (ii) without the consent of
or direction to the contrary by the Holders of a majority in principal amount of
the Securities then Outstanding, at any public Sale at which no other Person
bids an amount equal to or greater than the amount described in clause (y)
above, the Trustee shall bid an amount at least equal to $1.00 more than the
highest other bid.
(c) The Trustee may bid for and acquire any portion of the Trust Estate
in connection with a public Sale thereof. The Securities need not be produced in
order to complete any such sale. The Trustee may, subject to this Indenture,
hold, lease, operate, manage or otherwise deal with any property so acquired in
any manner permitted by law.
(d) The Trustee shall execute and deliver an appropriate instrument of
conveyance transferring its interest in any portion of the Trust Estate in
connection with a Sale thereof. In addition, the Trustee is hereby irrevocably
appointed the agent and attorney-in-fact of the Company to transfer and convey
its interest in any portion of the Trust Estate in connection with a Sale
thereof (including changing the designation of the secured party on any
certificate of title or financing statements), and to take all action necessary
to effect such Sale. No purchaser or transferee at such a Sale shall be bound to
ascertain the Trustee's authority, inquire into the satisfaction of any
conditions precedent or see to the application of any moneys.
(e) Notwithstanding anything in this Indenture to the contrary, if an
Event of Default specified in Section 6.1(1) or (2) is the Event of Default, or
one of the Events of Default, on the basis of which the Securities have been
declared due and payable, then the Trustee may, in its sole discretion, sell the
Trust Estate without compliance with this Section 6.14.
ARTICLE 7
TRUSTEE
SECTION 7.1 DUTIES OF TRUSTEE.
(a) For so long as any Notes remain outstanding, the Trustee shall:
(i) maintain the custodianship of the documentation delivered
to it evidencing title or perfected security interest in the Company's
assets;
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(ii) verify all funds deposited in the trust account for the
benefit of the Securityholders and use its best efforts to verify all
payments called for under the terms of this Indenture;
(iii) verify the delivery of all reports and other instruments
required pursuant to the terms of this Indenture and the Securities
Exchange Act of 1934;
(iv) examine all reports or other instruments furnished to the
Trustee pursuant to the terms of this Indenture and determine, based on
the information provided, whether there is a violation of any of the
terms and conditions set forth in this Indenture;
(b) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(c) Except during the continuance of an Event of Default:
(i) The Trustee need perform only those duties that are
specifically set forth in this Indenture and no others.
(ii) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee.
(d) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, breach of this Indenture or
its own willful misconduct, except that:
(i) This paragraph does not limit the effect of paragraph (c)
of this Section.
(ii) The Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts.
(iii) The Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it from the Holders of not less than a majority
in principal amount of the Notes at the time Outstanding.
(e) The Trustee shall not be liable for any action or omission taken or
not taken by the Servicer of any kind or nature.
(f) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives written indemnity and security satisfactory to it
against any loss, liability or expense and no provision of this Indenture or any
other document shall require the Trustee to expend or risk its own funds or
otherwise incur financial liability in the performance of any of its duties
hereunder or in the exercise of any of its rights or powers, if it shall have
reasonable grounds to believe that repayment of such funds or adequate indemnity
against such risk or liability is not reasonably assured to it; provided,
however, that in the event that the Trustee determines that there has been an
Event of Default, the Trustee shall not be entitled to such indemnification and
security other than that provided in this Indenture as a condition to
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providing notice of such default to the Securityholders in accordance with the
terms of this Indenture and to taking appropriate remedial action.
(g) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree with the Company. Money held in trust by
the Trustee need not be segregated from other funds except to the extent
required by law.
(h) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraph (b), (c), (d) and (e) of this Section.
SECTION 7.2 RIGHTS OF TRUSTEE.
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter stated in the document. The Trustee shall not be
bound to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report, notice,
request, direction, consent, order, bond, debenture or other paper or document,
but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records, and premises of the Company, personally
or by agent or attorney, to the extent reasonably required by such inquiry or
investigation.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such Certificate or Opinion.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith that it believes to be authorized or within its rights or
powers.
(e) The Trustee may consult with counsel of its selection and the
advice of such counsel or any opinion of counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon;
(f) The Trustee shall not be deemed to have notice of any Default or
Event of Default unless a Trust Officer of the Trustee has actual knowledge
thereof or unless written notice of any event which is in fact such a default is
received by the Trustee at the principal corporate trust office of the Trustee,
and such notice references the Securities and this Indenture.
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or its
Affiliate with the same rights it would have if it were not the Trustee. Any
Paying Agent, Registrar or Co-registrar may do the same with like rights.
However, the Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.4 TRUSTEE'S DISCLAIMER.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities. It shall not be accountable for the Company's
use of the proceeds from the Securities and shall not be responsible for any
statement in the Securities, other than its certificate of authentication, or in
any prospectus used in the sale of the Securities, other than statements
provided in writing by the Trustee for use in such prospectus.
SECTION 7.5 NOTICE OF DEFAULTS.
If a Default occurs and is continuing and if it is known to the
Trustee, the Trustee shall mail to each Securityholder notice of the Default
within 90 days after it obtains actual knowledge of the
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Default. Except in the case of a Default in payment on any Security, the Trustee
may withhold the notice if and so long as the board of directors, the executive
committee or a trust committee of the directors and/or responsible officers of
the Trustee in good faith determines that withholding notice is in the interests
of Securityholders.
SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS.
(a) Within 60 days after each December 31 beginning with December 31,
1999, the Trustee shall, to the extent required by TIA Section 313(a), mail to
each Securityholder a brief report dated as of such December 31 that complies
with TIA Section 313(a). The Trustee also shall also, to the extent required by
TIA Section 313(b), comply with TIA Section 313(b)(l) and (2).
(b) If this Indenture is qualified with the SEC under the TIA, a copy
of each report at the time of its mailing to Securityholders shall be filed with
the SEC and each national securities exchange on which the Securities are
listed. The Company shall notify the Trustee if and when the Securities are
listed on any national securities exchange (as defined in the Securities
Exchange Act of 1934) or quoted on NASDAQ.
(c) Within 60 days after each December 31 beginning with December 31,
1999, the Trustee shall mail to each Securityholder a brief report which
indicates whether the Trustee has fulfilled its obligations under this Indenture
and whether there have been any known uncured defaults under this Indenture.
SECTION 7.7 COMPENSATION AND INDEMNITY.
(a) The Company shall pay to the Trustee from time to time as
compensation for its services the amounts set forth on the Trustee's Fee
Schedule attached hereto as Exhibit C, as may be agreed upon from time to time
by the Trustee and the Company. In addition, the Company shall reimburse the
Trustee upon request for all reasonable out-of-pocket expenses incurred by it.
Such expenses may include the reasonable compensation and expenses of the
Trustee's agents and counsel. The Company shall indemnify and hold harmless the
Trustee and its successors and their respective officers, directors, employees,
agents and attorneys against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses and
disbursements of any kind or nature whatsoever (including, reasonable attorneys'
fees) that may be imposed on, incurred by or asserted against Trustee or its
successors, or their respective officers, directors, employees, agents and
attorneys, in connection with the performance of its duties hereunder. The
Trustee shall notify the Company promptly of any claim for which it may seek
indemnity. The Company shall defend the claim and the Trustee shall cooperate in
the defense. The Trustee may have separate counsel and the Company shall pay the
reasonable fees and expenses of such counsel. The Company need not pay for any
settlement made without its consent. The Company need not reimburse any expense
or indemnify against any loss or liability incurred by the Trustee through the
Trustee's negligence or bad faith, other than to the extent that such negligence
or bad faith is excused pursuant to Sections 7.1 and 7.2.
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(b) To secure the Company's payment of these obligations, the Trustee
shall have a lien prior to the Securities on all money or property held or
collected by the Trustee, except that held in trust to pay principal and
interest on the Securities. Such obligations shall survive the satisfaction and
discharge of this Indenture.
(c) When the Trustee incurs expenses or renders services after an Event
of Default specified in Section 6.1(7) or (8), the expenses and the compensation
for the services are intended to constitute expenses of administration under any
Bankruptcy Law.
(d) The provisions of this Section 7.7 shall survive the satisfaction
and discharge or other termination of this Indenture.
SECTION 7.8 REPLACEMENT OF TRUSTEE.
(a) The Trustee may resign at any time upon 30 days prior written
notice to the Company. The Holders of a majority in principal amount of the
Outstanding Securities may remove the Trustee at any time upon 30 days prior
written notice to the removed Trustee and may appoint a successor Trustee with
the Company's consent. The Company shall remove the Trustee if:
(i) The Trustee falls to comply with Section 7.10;
(ii) the Trustee is adjudged a bankrupt or an insolvent; or
(iii) a receiver or other public officer takes charge of the
Trustee or its property.
(b) If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. The resignation or removal of the Trustee shall not be effective until
a successor Trustee has been appointed and has assumed the responsibilities of
Trustee hereunder.
(c) A successor Trustee shall deliver a written acceptance of this
appointment to the retiring Trustee and to the Company. Immediately thereafter,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee. Upon delivery of such written acceptance, the resignation or
removal of the retiring Trustee shall become effective and the retiring Trustee
shall cease to be Trustee hereunder and shall be discharged from any
responsibility or obligations for actions taken by any successor Trustee. The
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. A successor Trustee shall mail notice of its succession to
each Securityholder.
(d) If a successor Trustee does not take office within 60 days after
the retiring Trustee resigns or is removed, the retiring Trustee, the Company or
the Holders of a majority in principal amount of the Securities may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
(e) If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
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SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates with, merges or converts into, or transfers
all or substantially all of its corporate trust assets to, another Person or if
the Trustee consolidates with, merges or converts into, or transfers a
substantial portion of its corporate trust assets to a Person that is
wholly-owned by the Trustee or by the Trustee's parent (of which the Trustee is
a wholly-owned subsidiary), the resulting, surviving or transferee Person
without any further act shall be the successor Trustee.
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1) and (5). The Trustee shall have a combined
capital and surplus of at least $1,000,000 as set forth in its most recent
published annual report of condition. The Trustee shall comply with TIA Section
310(b).
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated.
SECTION 7.12 WITHHOLDING TAXES.
Whenever it is acting as a Paying Agent for the Securities, the Trustee
shall comply with all requirements of the Internal Revenue Code of 1986, as
amended (or any successor or amendatory statutes), and all regulations
thereunder, with respect to the withholding from any payments made on such
Securities of any withholding taxes imposed thereon and with respect to any
reporting requirements in connection therewith.
ARTICLE 8
DISCHARGE OF INDENTURE
SECTION 8.1 SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall cease to be of further effect, except as to
surviving rights of transfer or exchange of Securities herein expressly provided
for, and the Trustee, on demand of and at the expense of the Company, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered
(other than Securities that have been destroyed, lost or stolen and
that have been replaced or paid as provided in Section 2.8) have been
delivered to the Trustee for cancellation; or
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(B) all such Securities not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Company, and the Company, in the case of (i), (ii) or (iii) above, has
deposited or caused to be deposited with the Trustee as trust funds in
trust for such purpose an amount sufficient to pay and discharge the
entire indebtedness on such Securities not theretofore delivered to the
Trustee for cancellation, the principal at Stated Maturity of such
Securities, or the applicable Redemption Price with respect thereto
upon redemption.
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company under Sections 7.7 and 8.3 shall survive.
SECTION 8.2 APPLICATION OF TRUST MONEY.
All money deposited with the Trustee pursuant to Section 8.1 shall be
held in trust and applied by it, in accordance with the provisions of the
Securities and this Indenture, to the payment, either directly or through any
Paying Agent as the Trustee shall be directed by Company Order, to the Persons
entitled thereto of the principal at Stated Maturity, or the Redemption Price,
or the Securities for whose payment such money has been deposited with the
Trustee; but such money need not be segregated from other funds except to the
extent required by law.
SECTION 8.3 REPAYMENT TO COMPANY.
The Trustee and the Paying Agent shall promptly pay to the Company upon
request any money or securities held by them at any time in excess of the
amounts needed to pay and discharge the Securities in full. The Trustee and the
Paying Agent shall pay to the Company upon request any money or securities held
by them for the payment of principal or interest that remains unclaimed for two
years. After such payment to the Company, Securityholders entitled to such funds
must look to the Company for the payment of such unclaimed principal or
interest.
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ARTICLE 9
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.1 WITHOUT CONSENT OF HOLDERS.
(a) The Company and the Trustee may amend or supplement this Indenture
or the Securities without notice to or consent of any Securityholder:
(i) to cure any ambiguity, defect or inconsistency in this
Indenture or the Securities;
(ii) to effect a merger or consolidation in conformance with
Section 5.11(vii);
(iii) to provide for uncertificated Securities in addition to
or in place of certificated Securities;
(iv) to make any change that does not materially adversely
affect the rights of any Securityholder; or
(v) to modify or add to the provisions of this Indenture to
the extent necessary to qualify it under the TIA or under any similar
federal statute hereafter enacted.
(b) The Trustee may waive compliance by the Company with any provision
of this Indenture or the Securities without notice to or consent of any
Securityholder if the waiver does not adversely affect the rights of any
Securityholder, provided that the Indenture or the Securities reflect the terms
of such waiver.
SECTION 9.2 WITH CONSENT OF HOLDERS.
(a) The Company and the Trustee may amend or supplement this Indenture
or the Securities without notice to any Securityholder but with the written
consent of the Holders of at least a majority in principal amount of the
Securities. The Holders of a majority in principal amount of the Securities may
waive compliance by the Company with any provision of this Indenture or the
Securities without notice to any Securityholder. However, without the consent of
each Securityholder affected, an amendment, supplement or waiver, including a
waiver pursuant to Section 6.4, may not:
(i) reduce the amount of Securities whose Holders must consent
to an amendment, supplement or waiver;
(ii) reduce the rate of or extend the time for payment of
interest on any Security;
(iii) reduce the principal of or extend the Stated Maturity of
any Security;
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(iv) permit the creation of any lien ranking prior to or on a
parity with the lien of this Indenture with respect to any part of a
Trust Estate or terminate the lien of this Indenture on any property at
any time subject hereto or deprive the Holder of any Note of the
security afforded by the lien of this Indenture; or
(v) make any Security payable in money other than that stated
in the Security.
(b) After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing the amendment.
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment to or supplement of this Indenture or the Securities
shall comply with the TIA as then in effect so long as this Indenture shall then
be qualified under the TIA.
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS.
(a) A consent to an amendment, supplement or waiver by a Holder of a
Security shall bind the holder and every subsequent Holder of a Security or
portion of a Security that evidences the same debt as the consenting Holder's
Security, even if notation of the consent is not made on any Security. However,
any such Holder or subsequent Holder may revoke the consent as to his Security
or portion of a Security. The Trustee must receive the notice of revocation
before the date the amendment, supplement or waiver becomes effective.
(b) After an amendment, supplement or waiver becomes effective, it
shall bind every Securityholder unless it makes a change described in clause
(ii), (iii), (iv) or (v) of Section 9.2(a). In that case the amendment,
supplement or waiver shall bind each Holder of a Security or portion of a
Security that evidences the same debt as the consenting Holder's Security.
SECTION 9.5 NOTATION ON OR EXCHANGE OF SECURITIES.
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the Trustee.
The Trustee may place an appropriate notation on the Security concerning the
change terms and return it to the Holder. Alternatively, if the Company or the
Trustee so determines, the Company in exchange for the Security shall issue, and
the Trustee shall authenticate, a new Security that reflects the changed terms.
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amendment, supplement or waiver authorized
pursuant to this Article if the amendment, supplement or waiver does not
adversely affect the rights of the Trustee or Securityholders. If it does, the
Trustee may but need not sign it. The Company may not sign an amendment or
supplement until such amendment or supplement is approved by the Chairman of the
Board, President or any Vice President of the Company or any other officer of
the Company customarily performing functions similar to those performed by any
of the above designated officers,
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and such approval shall evidence the Company's determination that such
amendment, supplement or waiver does not adversely affect the rights of the
Securityholders.
ARTICLE 10
MEETINGS OF SECURITYHOLDERS
SECTION 10.1 PURPOSES FOR WHICH MEETINGS MAY BE CALLED.
A meeting of Securityholders may be called for the following purposes:
(a) to give any notice to the Company or to the Trustee, or to
give any direction to the Trustee, or to waive or to consent to the
waiving of any default hereunder and its consequences;
(b) to remove the Trustee, or appoint a successor Trustee or
apply to a court for a successor Trustee;
(c) to consent to the execution of a supplemental indenture;
or
(d) to take any other action (i) authorized to be taken by or
on behalf of the Holders of any specified aggregate principal amount of
the Securities under this Indenture, or authorized or permitted by law,
or (ii) which the Trustee deems necessary or appropriate in connection
with the administration of the Indenture.
SECTION 10.2 MANNER OF CALLING MEETINGS.
(a) The Trustee may call a meeting of Securityholders to take any
action specified in Section 10.1. Notice setting forth the time and place of,
and the action proposed to be taken at, such meeting shall be mailed by the
Trustee to the Company and to the Holders of the Securities not less than ten or
more than 60 days prior to the date fixed for the meeting.
(b) Any meeting shall be valid without notice if the Holders of all
Securities are present in person or by proxy, or if notice is waived before or
alter the meeting by the Holders of all Securities outstanding, and if the
Company and the Trustee are either present or have, before or after the meeting,
waived notice.
SECTION 10.3 CALL OF MEETINGS BY COMPANY OR SECURITYHOLDERS.
In case at any time the Company or the Holders of not less than 50% in
aggregate principal amount of the Securities then outstanding shall have
requested in writing that the Trustee call a meeting of Securityholders to take
any action specified in Section 10.1, and the Trustee shall not have mailed the
notice of such meeting within 20 days after receipt of such request, then the
Company or the Holders of Securities in the amount above specified may determine
the time and place for such meeting and may call such meeting by mailing notice
thereof.
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SECTION 10.4 WHO MAY ATTEND AND VOTE AT MEETINGS.
To be entitled to vote at any meetings of Securityholders, a person
shall (a) be a Holder of one or more Securities, or (b) be a person appointed by
an instrument in writing as proxy for the Holder of Securities. The only persons
who shall be entitled to be present or to speak at any meeting of
Securityholders shall be the persons entitled to vote at such meeting and their
counsel and any representatives of the Trustee and the Company and their
counsel.
SECTION 10.5 REGULATIONS MAY BE MADE BY TRUSTEE; CONDUCT OF THE MEETING; VOTING
RIGHTS.
(a) The Trustee may make such reasonable regulations as it may deem
advisable for any meeting of Securityholders, to prove the holding of
Securities, the appointment of proxies, and other evidence of the right to vote,
to fix a record date and to provide for such other matters concerning the
conduct of the meeting as it shall deem appropriate.
(b) At any meeting each Securityholder or proxy shall be entitled to
one vote for each $1,000 principal amount of Securities held by him; provided,
however, that the Company shall not be entitled to vote any Securities held of
record by it. At any meeting of Securityholders, the presence of persons holding
or representing any number of Securities shall be sufficient for a quorum.
SECTION 10.6 EXERCISE OF RIGHTS OF TRUSTEE OR SECURITYHOLDERS MAY NOT BE
HINDERED OR DELAYED BY CALL OF MEETING.
Nothing in this Article shall be deemed or construed to authorize or
permit, by reason of any call of a meeting of Securityholders or any rights
expressly or impliedly conferred hereunder to make such call, any hindrance or
delay in the exercise of any rights conferred upon or reserved to the Trustee or
to the Securityholders or by the Securities.
SECTION 10.7 EVIDENCE OF ACTIONS BY SECURITYHOLDERS.
Whenever the Holders of a specified percentage in aggregate principal
amount of the Securities may take any action, the fact that the holders of such
percentage have acted may be evidenced by (a) instruments of similar tenor
executed by securityholders in person or by attorney or written proxy, or (b)
the Holders of Securities voting in favor thereof at any meeting of
Securityholders called and held in accordance with the provisions of this
Article 10, or (c) by a combination thereof. The Trustee may require proof of
any matter concerning the execution of any instrument by a Securityholder or his
attorney or proxy as it shall deem necessary.
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ARTICLE 11
MISCELLANEOUS
SECTION 11.1 TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies, or conflicts with
the duties imposed on any Person by Sections 310 through 317, inclusive, of the
TIA, the duties imposed under such Sections shall control.
SECTION 11.2 NOTICES.
(a) Any notice or communication shall be sufficiently given if in
writing and delivered in person or mailed by first class mail addressed as
follows:
if to the Company: Transition Auto Finance III, Inc.
5422 Alpha Road, Suite 100
Dallas, Texas 75240
Attn: Ken Lowe, President
if to the Trustee: Trust Management, Inc.
210 West Sixth Street, Suite 605
Fort Worth, Texas 76102
Attn: Robert C. Finley, President
if to the Servicer: Transition Leasing Management, Inc.
5422 Alpha Road, Suite 100
Dallas, Texas 75240
Attn: Ken Lowe, President
(b) The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
(c) Any notice or communication mailed to a Securityholder shall be
mailed first class, postage prepaid to him at his address as it appears on the
Note Register of the Registrar and shall be sufficiently given to him if so
mailed within the time prescribed. If the Company mails a notice or
communication to Securityholders, it shall mail a copy to the Trustee at the
same time.
(d) Failure to mail a notice or communication to a Securityholder or
any defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
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SECTION 11.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Securityholders may communicate pursuant to TIA Section 312(b) with
other Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA Section 312(c).
SECTION 11.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
(a) Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the Trustee:
(i) an Officers' Certificate stating that, in the opinion of
the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(ii) an Opinion of Counsel stating that, in the opinion of
such counsel, all such conditions precedent have been complied with.
(b) Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include (i) a
statement that the person making such certificate or opinion has read such
covenant or condition; (ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based; (iii) a statement that, in the opinion of
such person, he has made such examination or investigation as is necessary to
enable him to express an informed opinion as to whether or not such covenant or
condition has been complied with; and (iv) a statement as to whether or not, in
the opinion of such person, such condition or covenant has been complied with.
SECTION 11.5 RULES BY PAYING AGENT AND REGISTRAR.
The Paying Agent or Registrar may make reasonable rules for its
functions.
SECTION 11.6 LEGAL HOLIDAYS.
A "Legal Holiday" is a Saturday, a Sunday, or a day on which banking
institutions are not required to be open in the State of Texas. If a Payment
Date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday.
SECTION 11.7 GOVERNING LAW.
The laws of the State of Texas shall govern this Indenture and the
Securities.
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SECTION 11.8 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or an Affiliate of the Company. Any such
indenture, loan or debt agreement may not be used to interpret this Indenture.
SECTION 11.9 NO RECOURSE AGAINST OTHERS.
No recourse may be taken, directly or indirectly, against any
incorporator, subscriber to the capital stock, stockholder, officer, director,
agent or employee of the Company or the Servicer or of any predecessor or
successor of the Company or the Servicer with respect to the obligations of the
Company or the Servicer with respect to the Securities or under this Indenture
or any certificate or other writing delivered in connection herewith or
therewith, and all such liability is waived and released by the Trustee and all
Securityholders.
SECTION 11.10 SUCCESSORS.
All agreements of the Company and the Servicer in this Indenture and
the Securities shall bind their respective successors. All agreements of the
Trustee in this Indenture shall bind its successor.
SECTION 11.11 DUPLICATE ORIGINALS.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
ARTICLE 12
AGREEMENTS OF SERVICER
SECTION 12.1 GENERAL.
The Servicer agrees that all covenants, representations and warranties
made by the Servicer in the Servicing Agreements with respect to the Contracts
shall also be for the benefit of the Trustee and the Holders.
SECTION 12.2 SERVICER ACTING AS CUSTODIAN.
The Servicer acknowledges that any collections or proceeds from the
Contracts in the Master Collections Account, or otherwise in the possession or
control of the Servicer, are the Company's property. In holding such proceeds
and collections, the Servicer agrees to act as custodian and bailee of the
Company and the Additional Lender, if any, at all times.
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SECTION 12.3 REPRESENTATIONS AND WARRANTIES CONCERNING THE SERVICER.
The Servicer represents and warrants to the Company and the Trustee as
follows:
(a) The Servicer (i) has been duly organized and is validly
existing and in good standing as a corporation organized and existing
under the laws of the State of Texas, (ii) has qualified to do business
as a foreign corporation and is in good standing in each jurisdiction
where the character of its properties or the nature of its activities
makes such qualification necessary, and (iii) has full power, authority
and legal right to own its property, to carry on its business as
presently conducted, and to enter into and perform its obligations
under this Indenture.
(b) The execution and delivery by the Servicer of this
Indenture are within the corporate power of the Servicer and have been
duly authorized by all necessary corporate action on the part of the
Servicer. Neither the execution and delivery of this Indenture, nor the
consummation of the transactions herein contemplated, nor compliance
with the provisions hereof, will conflict with or result in a breach
of, or constitute a default under, any of the provisions of any law,
governmental rule, regulation, judgment, decree or order binding on the
Servicer or its properties or the charter or bylaws of the Servicer, or
any of the provisions of any indenture, mortgage, contract or other
instrument to which the Servicer is a party or by which it is bound or
result in the creation or imposition of any lien, charge or encumbrance
upon any of its property pursuant to the terms of any such indenture,
mortgage, contract or other instrument.
(c) The Servicer is not required to obtain the consent of any
other party or consent, license, approval or authorization of, or
registration or declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery, performance,
validity or enforceability of this Indenture.
(d) This Indenture has been duly executed and delivered by the
Servicer and the provisions of Article Twelve hereof constitute legal,
valid and binding covenants enforceable against the Servicer in
accordance with their terms (subject to applicable bankruptcy and
insolvency laws and other similar laws affecting the enforcement of
creditors' rights generally).
(e) There are no actions, suits or proceedings pending or, to
the knowledge of the Servicer, threatened against or affecting the
Servicer, before or by any court, administrative agency, arbitrator or
governmental body with respect to any of the transactions contemplated
by the Servicing Agreements or this Indenture.
SECTION 12.4 CORPORATE EXISTENCE; STATUS AS SERVICER; MERGER.
(a) The Servicer shall keep in full effect its existence, rights and
franchises as a corporation under the laws of the State of Texas, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be
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necessary to protect the validity and enforceability of the Contract Documents,
this Indenture and the Servicing Agreements.
(b) The Servicer shall not consolidate with or merge into any other
corporation or convey, transfer or lease substantially all of its assets as an
entirety to any person unless the corporation formed by such consolidation or
into which the Servicer has merged or the person which acquires by conveyance,
transfer or lease substantially all the assets of the Servicer as an entirety is
an entity organized and existing under the laws of the United States or any
state or the District of Columbia and executes and delivers to the Company and
the Trustee an agreement in form and substance reasonably satisfactory to the
Company and the Trustee, which contains an assumption by such successor entity
of the due and punctual performance and observance of each covenant and
condition to be performed or observed by the Servicer under this Indenture and
the Servicing Agreements.
SECTION 12.5 PERFORMANCE OF OBLIGATIONS.
(a) The Servicer shall punctually perform and observe all of its
obligations and agreements contained in this Indenture and the Servicing
Agreements.
(b) The Servicer shall not take any action, or permit any action to be
taken by others, which would excuse any person from any of its covenants or
obligations under any of the Contract Documents, or which would result in the
amendment, hypothecation, subordination, termination or discharge of, or impair
the validity or effectiveness of, any of the Contract Documents or any such
instrument, except as expressly provided herein and therein.
SECTION 12.6 THE SERVICER NOT TO RESIGN; ASSIGNMENT.
(a) The Servicer shall not resign from the duties and obligations
hereby imposed on it unless, by reason of change in applicable legal
requirements, the continued performance by the Servicer of its duties under this
Indenture would cause it to be in violation of such legal requirements in a
manner which would result in a material adverse effect on the Servicer or its
financial condition. No such resignation shall become effective unless and until
a new industry qualified servicer acceptable to the Company is willing to
service the Contracts and enters into a servicing agreement with the Company in
form and substance substantially similar to the Servicing Agreement and assumes,
pursuant to a written instrument reasonably satisfactory to the Trustee, the
obligations and duties of the Servicer arising under this Indenture. No such
resignation shall affect the obligation of the Servicer to repurchase any
Contract pursuant to Section 12.9.
(b) The Servicer may not assign this Indenture or the Servicing
Agreement or any of its rights, powers, duties or obligations hereunder,
provided that the Servicer may assign this Indenture and the Servicing Agreement
in connection with a consolidation, merger, conveyance, transfer or lease made
in compliance with Section 12.5 (b), and provided further that the Servicer may
contract with industry qualified third parties for the performance of its duties
under the Servicing Agreements and this Indenture, except that any such contract
shall not relieve the Servicer from liability for its obligations under the
Servicing Agreements and this Indenture.
(c) For a period of 90 days after the occurrence of any Subsidiary
Payment Default (as hereinafter defined), the Trustee shall have the right to
remove the Servicer and terminate the Servicing Agreement upon delivery of
written notice of removal and termination to the Servicer. As used in this
Section 12.7(c), the term "Subsidiary Payment Default" shall mean any default in
the payment of principal and interest on any other Asset-Backed Securities (as
hereinafter defined) issued (i) by an entity owned or controlled by Transition
Leasing or any affiliate of Transition Leasing and formed for the purpose of
issuing Asset-Backed Securities, (ii) in connection with the same business plan
as that of the Company and (iii) in connection with a business plan utilizing
Transition Leasing as servicer. As used in this Section 12.7(c), the term
"Asset-Backed Securities" means securities that provide a stated rate of return
to holders of such securities and that are primarily paid, as to both return of
investment and return on investment, by the cash flow from the collateral
securing such payment obligations.
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SECTION 12.7 REPRESENTATIONS AND WARRANTIES AS TO THE CONTRACTS.
With respect to each Contract, the Servicer represents and warrants to
the Company, effective as of the date each such Contract is executed by the
Company, as follows:
(a) All of the representations and warranties with respect to
the Servicer set forth in Section 12.4 continue to be true and correct;
(b) In acting with respect to each Contract, Servicer shall
comply in all material respects with, all applicable Federal, state and
local laws, regulations and official rulings;
(c) Each Contract (i) shall have been originated in the United
States of America by the Servicer in the ordinary course of an
automobile dealer's business, shall have been fully and properly
executed by the parties thereto, (ii) shall contain customary and
enforceable provisions such that the rights and remedies of the holder
thereof shall be adequate for realization against the Contract lessee
for the benefits of the Contract, (iii) shall have met, at the time of
its execution, in all material respects all purchasing criteria set
forth on EXHIBIT A attached hereto and in the Servicing Agreements, and
(iv) shall not be a Defaulted Contract.
(d) (i) The Title Document for the related Leased Vehicle
shows (or if a new or replacement Title Document is applied for with
respect to such Leased Vehicle, the official receipt from the
responsible state or local governmental authority indicating that an
application has been made and that the Title Document, when issued,
will show) the Company as the owner of the Leased Vehicle and the
Trustee, on behalf of the Trust, as the holder of a first priority
security interest in such Leased Vehicle, (ii) within 120 days after
the Purchase Date for the Contract relating to the Leased Vehicle, the
Title Document for such Leased Vehicle will show the Company as the
owner of the Leased Vehicle and the Trustee, on behalf of the Trust, as
the holder of a first priority security interest in such leased
Vehicle, and (iii) the Company, upon execution of the Contract, will
own the Leased Vehicle and the Trustee, on behalf of the Trust,
delivery of the Assignment, will have a valid and enforceable security
interest in the Leased Vehicle.
(e) Each Contract and the sale or lease of each Leased Vehicle
shall have complied at the time it was originated in all material
respects with all requirements of applicable federal, state, and local
laws, and regulations thereunder, including without limitation, usury
laws, the Federal Truth-In-Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Federal Trade Commission Act, the Federal Reserve Board's
Regulations B and Z, and state adaptations of the National Consumer Act
and of the Uniform Consumer Credit Code, and other consumer laws and
equal credit opportunity and disclosure laws.
(f) Each Contract shall represent the genuine, legal, valid,
and binding payment obligation in writing of the Obligor, enforceable
by the holder thereof in accordance with its
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terms subject to the effect of bankruptcy, insolvency, reorganization,
or other similar laws affecting the enforcement of creditor's rights
generally.
(g) No provision of a Contract shall have been waived, amended
or modified, except as disclosed in writing by Servicer.
(h) No right of rescission, set off, counterclaim, or defense
shall have been asserted or threatened with respect to any Contracts.
(i) It is the intention of the Servicer that the beneficial
interest in and title to the Contracts not be part of Servicer's estate
in the event of the filing of a bankruptcy petition by or against
Servicer under bankruptcy law.
(j) No Contract shall have been originated in, or shall be
subject to the laws of, any jurisdiction under which the execution of
such Contract would be unlawful, void, or voidable.
SECTION 12.8 PURCHASE OF CERTAIN CONTRACTS.
(a) The representations and warranties of the Servicer set forth in
Section 12.7 with respect to each Contract shall survive delivery of the
Contract Documents to the Company and shall continue so long as such Contract
remains outstanding. Upon discovery by the Company, the Servicer or the Trustee
that any of such representations or warranties was incorrect as of the time made
or that any of the Contract Documents relating to any such Contract has not been
properly executed by the Obligor or the Servicer or contains a material defect
or has not been received by the Company, the party making such discovery shall
give prompt notice to the Trustee (other than in cases where the Trustee has
given notice thereof) and to the other party (or parties in cases where the
Trustee has given notice thereof). If any such defect, incorrectness or omission
materially and adversely affects the interest of the Holders in and to the
related Contracts, the Servicer shall, within 90 days after discovery thereof or
receipt of notice thereof, cure the defect or eliminate or otherwise cure the
circumstances or condition in respect of which the representation or warranty
was incorrect as of the time made. If the Servicer is unable to do so, it shall
purchase such Contract from the Company through a deposit into the Master
Collections Account no later than the end of the calendar month after which such
90-day period expired of an amount equal to the product of (x) the
Price/Payments Ratio multiplied by (y) the aggregate unpaid installments on the
Contract. Upon any such purchase, the Company shall execute and deliver such
instruments of transfer or assignment, in each case without recourse, as shall
be necessary to vest in the Servicer any Contract purchased hereunder.
(b) It is understood that, without limiting the meaning of the term
"materially and adversely affects", the interest of the Holders shall be deemed
materially and adversely affected if (i) the Company, the Trustee or any of such
Holders are put under any obligation to pay any other Person any sum of money as
a result of a defect or misrepresentation described in subsection (a) above, or
(ii) the Trustee or the Majority Holders, acting reasonably, determine, by
written notice
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to the Company, that such defect or misrepresentation materially and adversely
affects the interests of the Holders in and to a Contract.
(c) At the time of any purchase by the Servicer of any Contract,
pursuant to the provisions of subparagraph (a) above or otherwise, the Servicer
shall certify to the Trustee in writing that (i) such purchase is not for the
purpose of recognizing gains or decreasing losses resulting from market value
changes in the Company's portfolio of Contracts and Leased Vehicles (ii) such
purchase is at the price determined by the following formula: the purchase price
paid by the Company for the Contract (and the Leased Vehicle related thereto),
less the amount of any lease payments received by the Company after the
acquisition of the Contract.
SECTION 12.9 INDEMNIFICATION.
Servicer hereby indemnifies and holds harmless Trustee and its
successors and their respective officers, directors, employees, agents and
attorneys against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against Trustee or its successors, or their respective officers,
directors, employees, agents or attorneys, due to (i) any breach by Servicer of
its representations, warranties or covenants provided for in the Servicing
Agreements or this Indenture, or (ii) any action or inaction of Servicer, or
through Servicer, in any way relating to, or arising out of, the Servicing
Agreements or this Indenture, any and all transfers or assignments of the
Contracts, or any of the transactions contemplated herein or therein or the
creation or collection or enforcement of any of the Contracts. Servicer,
however, does not assume the risk of uncollectibility and does not indemnify
Trustee and/or its successors, or their officers, directors, employees, agents
or attorneys, against the uncollectibility of all or any part of the Contracts
as against the Obligor thereof, except for uncollectibility resulting from a
breach by Servicer of any warranty, representation or covenant contained herein.
The indemnities contained in this Section shall survive any termination of this
Indenture or the Servicing Agreements.
SECTION 12.10 TERMINATION.
The respective duties and obligations of the Servicer under this
Article Twelve shall terminate upon the earlier of (i) the satisfaction and
discharge of this Indenture pursuant to Article Eight, or (ii) the latest to
occur of (A) the final payment or other liquidation of the last Outstanding
Contract owned by the Company, and (B) the disposition of all property acquired
upon repossession or comparable conversion of any Leased Vehicle securing a
Contract.
SECTION 12.11 AMENDMENT.
(a) The provisions of this Article Twelve may be amended from time to
time by the Company, the Servicer and the Trustee, without the consent of any
Holder, provided that such action shall not adversely affect in any material
respect the interests of any Holder.
(b) The provisions of this Article Twelve may also be amended from time
to time by the Company, the Servicer and the Trustee, with the consent of the
Majority Holders for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this
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Article, provided, however, that no such amendment shall, without consent of
each Holder, (i) alter the priorities with which any allocation of funds shall
be made under this Article; (ii) deprive any such Holder of the benefit of this
Indenture; or (iii) modify this Section.
(c) Promptly after the execution of any amendment pursuant to Section
12.12(b), the Company shall cause to be sent to each Holder a notice setting
forth in general terms the substance of such amendment. Any failure to do so
shall not affect the validity of such amendment.
(d) It shall not be necessary, in any consent of Holders under this
Section, to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent shall approve the substance thereof. The manner of
obtaining such consents and of evidencing the authorization of the execution
thereof by Holders shall be subject to such reasonable regulations as the
Trustee may prescribe.
(e) Any amendment or modification effected contrary to the provisions
of this Section shall be void.
SECTION 12.12 INSPECTION AND AUDIT RIGHTS.
The Servicer agrees that, upon reasonable prior notice, it will permit
any representative of the Trustee, during the Servicer's normal business hours,
to examine all of the books of account, records, reports and other papers of the
Servicer relating to the Contracts, to make copies and extracts therefrom, to
cause such books to be audited by independent accountants selected by the
Trustee, and to discuss the affairs, finances and accounts relating to the
Contracts with the Servicer's officers, employees and independent accountants
(and by this provision the Servicer hereby authorizes said accountants to
discuss with such representatives such affairs, finances and accounts), all at
such reasonable times and as often as may be reasonably requested. Any expense
incident to the reasonable exercise by the Trustee of any right under this
Section shall be borne by the Trustee and reimbursed to it by the Company under
Section 7.7.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, as of the date and year first above written.
TRUST MANAGEMENT, INC.,
Attest: AS TRUSTEE
By:
- -------------------------------- --------------------------------
Title: Title:
-------------------------- -----------------------------
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Attest: TRANSITION AUTO FINANCE III, INC.
By:
- -------------------------------- --------------------------------
Secretary Ken Lowe, President
The undersigned Transition Leasing Management, Inc. joins in this
Indenture for the sole purpose of evidencing its agreement to the covenants,
representations and warranties pertaining to it that are set forth in Article
Twelve of this Indenture and not for the purpose of guaranteeing or otherwise
covenanting to pay the Notes or perform any of the Company's obligations
hereunder.
Attest: Transition Leasing Management, Inc.
By:
- -------------------------------- --------------------------------
Secretary Ken Lowe, President
STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
BEFORE ME, the undersigned authority, on this day personally appeared
Ken Lowe, President of Transition Auto Finance III, Inc., a Texas corporation,
known to me to be the person and officer whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for the
purposes and consideration therein expressed, in the capacity therein stated and
as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of
__________, 1998.
[SEAL] ---------------------------------------------------
Notary Public in and for the State of Texas
---------------------------------------------------
Notary Public Printed or Typed Name
My Commission Expires:
-----------------------------
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STATE OF TEXAS Section
Section
COUNTY OF TARRANT Section
BEFORE ME, the undersigned authority, on this day personally appeared
____________ _____________________, ____________________ of Trust Management,
Inc., known to me to be the person and officer whose name is subscribed to the
foregoing instrument, and acknowledged to me that he or she executed the same
for the purposes and consideration therein expressed, in the capacity therein
stated and as the act and deed of said trust company.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the ____ day of
___________, 1998.
[SEAL] ---------------------------------------------------
Notary Public in and for the State of Texas
---------------------------------------------------
Notary Public Printed or Typed Name
My Commission Expires:
-----------------------------
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EXHIBIT A
LEASED VEHICLE AND CONTRACT PURCHASE CRITERIA
TRANSITION AUTO FINANCE III, INC.
The following purchasing criteria shall govern all purchases of Leased
Vehicles and Eligible Additional Contracts by Transition Auto Finance III, Inc.
(the "Company") and by Transition Leasing Management, Inc. (the "Buyer") acting
on behalf of the Company, and no Leased Vehicle or Contract shall be purchased
that does not meet such criteria in all material respects.
I. VEHICLE CRITERIA
a. No vehicle that is to become a Leased Vehicle may be purchased
by the Buyer if the vehicle is more than four model years old.
No Contract may be acquired by the Buyer if the Contract is
secured by a Leased Vehicle that, at the time of lease, was
more than four model years old.
b. The purchase price payable by the Buyer for each vehicle that
is to become a Leased Vehicle (and thus to become subject to a
Contract) shall never exceed that amount that the Dealer shall
have received by bank draft upon the delivery of the Leased
Vehicle.
c. No motorcycle shall be purchased if the purchase price payable
for such motorcycle would cause the aggregate purchase price
paid for all motorcycles which are Leased Vehicles to exceed
10% of the net offering proceeds of the Company's offering of
11% Secured Notes.
II. DOWN PAYMENT RATIO
Obligors on all Contracts must have made a down payment in cash and/or
net trade-in allowance of not less than 15% of the actual price paid by
draft to the selling automobile or motorcycle Dealer for the related
Leased Vehicle; provided, however, that the down payment for any Leased
Vehicle which is more than three model years old shall equal at least
20% of the actual purchase price.
EXHIBIT A - Page 1
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III. CONTRACT TERMS
A. Each Contract must have an original term of 48 months or less.
B. Each Contract shall be in the form of industry-standard
consumer automobile lease Contracts.
IV. CREDIT CRITERIA
A. With respect to each Obligor on each Contract, the Buyer shall
perform all credit checks and reviews that are standard for
the motor vehicle lease industry and shall supply the
verification information to the Company at the time of
acquisition of each Contract.
B. In addition to the credit checks and reviews set forth in
paragraph IV.A. above, each Obligor must satisfy the following
criteria:
1. Verifiable home telephone number in Obligor's
residence;
2. Residence:
(a) Evidence of purchase, lease or rental
agreement in Obligor's name;
(b) Stability - Review length of time at last
two addresses, as well as time in area;
3. Employment: At least one year with last two
employers;
4. Obligor has verifiable income (check stub, W-2, 1099,
tax return, or bank statements);
5. Ratio of Obligor's net disposable income to gross
generally should exceed 60%;
6. References:
(a) Five relatives;
(b) Five personal.
7. Valid Texas driver's license;
8. If a previous bankruptcy, must have been discharged,
or if open, need letter of permission from bankruptcy
trustee.
9. Certain exceptions for first-time buyers permitted.
EXHIBIT A - Page 2
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EXHIBIT B
MONTHLY REPORT CERTIFICATE
For Month: _______________, ________ (the "Collection Period")
(year)
Company: Transition Auto Finance III, Inc.
Servicer: Transition Leasing Management, Inc.
Indenture: Dated as of __________________, 1999
Trustee: Trust Management, Inc.
I. INTEREST PAYMENTS ON NOTES (INDENTURE SECTION 5.1)
A. EXHIBIT I hereto sets forth a listing of the interest and any
principal payable to each Noteholder on the next Payment Date.
The Company certifies that computation of interest has been
made in conformance with the Indenture.
All capitalized terms used herein and not otherwise herein defined
shall have the same meaning as set forth in the Indenture.
Company and Servicer certify that, to the best of their knowledge, the
foregoing and attached information is true and correct.
Dated: ____________________, ________.
TRANSITION LEASING MANAGEMENT, INC.
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
TRANSITION AUTO FINANCE III, INC.
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
EXHIBIT B - Page 1
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EXHIBITS DESCRIPTION
-------- -----------
I Noteholder Interest Report
EXHIBIT B - Page 2
<PAGE> 77
EXHIBIT C
TRUSTEE'S FEE SCHEDULE
TRANSITION AUTO FINANCE III, INC.
11% SECURED NOTES
DUE OCTOBER 31, 2004
Acceptance Fee (payable
upon execution of the indenture) $12,000
Annual Administration Fee (billed) $15,000
Paying Agent/Registrar Services $5.00 (per year per note)
Interest Checks $1.00 each
Annual Collateral Custodial Services $5.00 (per year per Vehicle)
Custodial Acceptance/release $5.00 each
All out-of-pocket expenses such as long distance telephone, stationery,
insurance, courier, attorney or accountant expense, etc., will be billed at cost
to the Company. The Trustee understands that the closing of the Note issuance
will be completed in Fort Worth and there will not be any travel expenses
charged to the Company. These fees do not include servicing responsibilities
should the Trustee be involved due to a removal of the Servicer. The Trustee
would present servicing fees at that time. These fees do not include arbitrage
accounting or excess yield calculations, if required. If the common trust funds
of Trustee are utilized, there will be 0.5% annual fee deducted from the
account. If Trustee's duties are modified to any great extent, Trustee reserves
the right to re-evaluate its fees. Extraordinary services will be charged
according to time and scope of services.
EXHIBIT C - Page 1
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SCHEDULE A
SCHEDULE OF CONTRACTS OWNED BY
TRANSITION AUTO FINANCE III, INC.
SCHEDULE A - Page 1
<PAGE> 1
EXHIBIT 5.1
September 23, 1999
Transition Auto Finance III, Inc.
Transition Leasing Management, Inc.
5422 Alpha Road
Suite 100
Dallas, Texas 75240
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We have examined the Registration Statement on Form SB-2 (File No.
333-79831) originally filed by Transition Auto Finance III, Inc. (the "Company")
with the Securities and Exchange Commission (the "Commission") on June 11, 1999,
as thereafter amended or supplemented (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of (the "Notes"). The Notes are to be sold by the Underwriters on the Company's
behalf as described in the Registration Statement for resale to the public. As
your counsel in connection with this transaction, we have examined the
proceedings taken and are familiar with the proceedings proposed to be taken by
you in connection with the sale and issuance of the Notes.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Notes and upon completion of the proceedings being taken in order to permit such
transactions to be carried out in accordance with the securities laws of the
various states where required, the Notes, when issued and sold in the manner
described in the Registration Statement and in accordance with the resolutions
adopted by the Board of Directors of the Company, will be legally and validly
issued.
We consent to the use of this opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus constituting
a part thereof, and in any amendment or supplement thereto.
Very truly yours,
KUPERMAN, ORR, MOUER & ALBERS
A Professional Corporation
<PAGE> 1
EXHIBIT 8.1
September 23, 1999
Transition Auto Finance III, Inc.
5422 Alpha Road, Suite 100
Dallas, Texas 75240
Re: 11% Secured Notes (the "Notes") in the Aggregate Principal
Amount of $20,000,000: Opinion Regarding Tax Matters
Gentlemen:
We have acted as special tax counsel to Transition Auto Finance III,
Inc. (the "Corporation") in connection with the transactions described in that
certain Form SB-2, Registration Statement under the Securities Act of 1933,
filed with the Securities and Exchange Commission on June 11, 1999 (the
"Registration Statement"). The Corporation has requested the opinion set forth
below regarding the disclosure set forth in the Registration Statement under
"Certain Federal Income Tax Considerations."
The facts, as we understand them to be, are as set forth in the
Registration Statement and the exhibits thereto. As to various questions of fact
material to the opinion expressed below, we have relied upon the disclosures
made by you in the Registration Statement without independent check or
verification of the accuracy of such representations.
We also have examined such other documents and records pertaining to
the transactions described in the Registration Statement that have been
furnished to us by you in connection with the opinion hereinafter set forth. In
making our examinations, we have assumed the genuineness of all signatures and
the authenticity and accuracy of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies thereof and the authenticity of the originals of such
latter documents. Additionally, we have assumed that all transactions detailed
in the Registration Statement will be completed in the manner described therein.
On the basis of the foregoing, we are of the opinion that the
disclosures contained in the section of the Registration Statement entitled
"Certain Federal Income Tax Considerations" are accurate in all material
respects and address fairly the material federal income tax considerations
discussed therein. This opinion is based on certain statutory provisions,
regulations promulgated thereunder and interpretations thereof by the Internal
Revenue Service and courts having jurisdiction over such matters, all of which
are subject to change, either prospectively or retroactively.
<PAGE> 2
Transition Auto Finance III, Inc.
September 23, 1999
Page 2
We consent to the use of our name in the section of the Registration
Statement entitled "Legal Matters."
Very truly yours,
Drenner & Stuart, L.L.P.
By: /s/ Donald L. Stuart
--------------------------------
Donald L. Stuart
DLS/lfj
<PAGE> 1
EXHIBIT 8.2
[BROWN MCCARROLL & OAKS HARTLINE, L.L.P. LETTERHEAD]
September 23, 1999
Transition Leasing Management, Inc.
5422 Alpha Road
Suite 100
Dallas, Texas 75240
Attention: Mr. Ken Lowe, Chief Financial Officer and Secretary
Re: Transition Auto Finance III, Inc.; Public Offering of
Asset-Backed Fixed Rate Notes
Ladies and Gentlemen:
This firm has served as special counsel to Transition Leasing
Management, Inc. ("Transition Leasing"), a Texas corporation, and its
wholly-owned subsidiary, Transition Auto Finance III, Inc. (the "Company"), in
connection with the Company's registration on Form SB-2 (the "Registration
Statement") of up to $20,000,000 of its 11% Secured Notes (the "Notes") pursuant
to the Securities Act of 1933, as amended, and certain state securities laws,
including the Texas Securities Act. In connection with this registration, you
have requested our opinion with respect to the compliance of the Company's
intended automobile and motorcycle leasing transactions and activities as set
forth in the Prospectus (as hereinafter defined), including its relationships
with its parent in connection therewith, with the Texas Motor Vehicle Commission
Code, Art. 4413(36), Vernon's Texas Civil Statutes (the "Act"), and the
regulations (the "Regulations") promulgated under the provisions of the Act by
the Motor Vehicle Board of the Texas Department of Transportation (the "Motor
Vehicle Commission").
A. DOCUMENTS EXAMINED.
For purposes of rendering the opinions expressed in his opinion letter,
this firm has reviewed, examined, considered and relied upon the following:
<PAGE> 2
September 23, 1999
Page 2
1. The Prospectus contained in the Registration Statement (the
"Prospectus");
2. a Certificate (the "Certificate") of an officer of Transition
Leasing and the Company certifying as to the description of
the Company's intended method of operation; and
3. such other documents and instruments and other matters of fact
and law that this firm had considered necessary or appropriate
for the expression of the opinions contained in this opinion
letter.
B. OPINION.
Based solely upon our examination and consideration of the foregoing
documents and reliance thereon, and subject to the comments, assumptions,
limitations, qualifications and exceptions set forth in SECTION C, we are of the
opinion that:
1. The Company's intended automobile and motorcycle leasing
transactions and activities as set forth in the Prospectus,
including its relationships with Transition Leasing, are not
in violation of the Act or the Regulations. In rendering the
opinions expressed in this opinion letter, we note
particularly that, as described in the Prospectus and the
Certificate, (i) the Company has obtained a lessor license
from the Commission in accordance with the requirements of the
Act and the Regulations, (ii) Transition Leasing has obtained
a lease facilitator license from the Commission in accordance
with the requirements of the Act and the Regulations, (iii)
the Company intends to appoint Transition Leasing as its lease
facilitator under the Act; (iv) neither the Company nor
Transition Leasing will receive or accept any fees from a
dealer with respect to automobile leases; (v) the Company will
not pay any fees to any person or entity to solicit or procure
automobile or motorcycle leases, except for fees paid to
Transition Leasing, its lease facilitator; (vi) the Company's
lease contracts will disclose on the face of the contracts
that fees are or will be paid to Transition Leasing for the
solicitation or procurement of automobile or motorcycle
leases, and (vii) the Company and Transition Leasing have
complied with the requirements of the Act and the Regulations
regarding conducting business as a lessor or lease
facilitator, as the case may be, from an established and
permanent place of business.
2. You have raised a question as to whether the affiliated nature
of the relationship between Transition Leasing, its proposed
lease facilitator, and the Company violates the Act. In
responding to this question, we note that, despite the
numerous requirements and prohibitions placed on licensed
lessors and licensed lease facilitators by the Act and the
Regulations, neither the Act nor the Regulations contain any
prohibitions against a licensed lessor and a licensed lease
facilitator being related or affiliated through direct or
indirect ownership or control, or common ownership or control.
Based on our reading of the Act and the Regulations and our
discussions with the staff of the Texas Motor Vehicle Board of
the Texas Department of Transportation, we believe that
neither the Act nor the Regulations prohibit a licensed lessor
from appointing its parent as its licensed lease facilitator
and paying fees to its parent to procure automobile leases as
a licensed lease facilitator as long the subject licensed
lessor and its parent/licensed lease facilitator satisfy and
comply with the requirements of the Act and the Regulations
relating to appointment by a licensed lessor of
<PAGE> 3
September 23, 1999
Page 3
a licensed lease facilitator and the payment of fees by a
licensed lessor to its parent/licensed lease facilitator to
procure automobile or motorcycle leases.
C. COMMENTS, ASSUMPTIONS, LIMITATIONS, QUALIFICATIONS AND
EXCEPTIONS.
The opinions expressed in SECTION B above are based upon and subject
to, the further comments, assumptions, limitations, qualifications and
exceptions set forth below:
1. In rendering the opinions set forth in SECTION B above, this
firm has assumed that all of the statements made in the
documents reviewed by the firm are true, correct and complete,
and that none of such documents contain an untrue statement of
a material fact or omits a fact necessary to make the
statements made not misleading.
2. This firm has made no independent investigation as to the
accuracy or completeness of any representation, warranty, data
or other information, written or oral, made or furnished to
us, or reviewed by us, in rendering the opinions expressed in
SECTION B above.
3. Although this firm has acted as special counsel to Transition
Leasing and to the Company in connection with this matter, the
firm's engagement by Transition Leasing and the Company is
limited to this matter. Consequently, there may exist matters
of a factual or legal nature involving Transition Leasing or
the Company in connection with which this firm has not been
consulted and has not represented Transition Leasing or the
Company.
4. This opinion letter is limited to the matters stated in this
opinion letter and no opinions may be implied or inferred
beyond the matters expressly stated in this opinion letter.
5. The opinions expressed in SECTION B above are as of the date
of this opinion letter, and this firm assumes no obligations
to update or supplement such opinions to reflect any facts or
circumstances that may hereafter come to its attention or any
changes in law that may hereafter occur.
We hereby consent to the filing of his opinion letter as an exhibit to
the Company's Registration Statement on Form SB-2 (the "Registration Statement")
and to the use of our name under the caption "Legal Matters" in the Prospectus
forming part of the Registration Statement. In giving such consent, we do not
admit that we come within the category of persons whose consent is required by
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
<PAGE> 4
September 23, 1999
Page 4
His opinion letter is being delivered to the Company and Transition
Leasing for their sole use and benefit in connection with the Registration
Statement and may not be relied upon in any manner by any other person other
than as expressly provided in his opinion letter. Except with our prior written
consent or as otherwise expressly provided in his opinion letter, the opinions
in this opinion letter expressed are not to be used, circulated, quoted or
otherwise referred to, in whole or in part, in connection with any transaction
other than that contemplated by the Registration Statement, or by or to any
other person.
Very truly yours,
BROWN McCARROLL & OAKS HARTLINE, L. L. P.
By:
--------------------------------------
<PAGE> 1
EXHIBIT 8.3
[BROWN MCCARROLL & OAKS HARTLINE, L.L.P. LETTERHEAD]
September 23, 1999
Trust Management, Inc.
210 West Sixth Street
Suite 605
Fort Worth, Texas 76102
Attention: Mr. Robert Finley
Re: Transition Auto Finance III, Inc.; Public Offering of
Asset-Backed Fixed Rate Notes
Ladies and Gentlemen:
This firm has served as special counsel to Transition Leasing
Management, Inc. ("Transition Leasing"), a Texas corporation, and its
wholly-owned subsidiary, Transition Auto Finance III Inc. (the "Company"), in
connection with the Company's registration on Form SB-2 (the "Registration
Statement") of up to $20,000,000 of its 11% Secured Notes (the "Notes") pursuant
to the Securities Act of 1933, as amended, and certain state securities laws,
including the Texas Securities Act. In connection with this registration, the
Indenture dated ____________, 1999 (the "Indenture") between the Company and
Trust Management, Inc. (the "Trustee") requires that an opinion with respect to
certain matters relating to the security interests securing the Notes granted
under the Indenture be delivered to you as Trustee under the Indenture. Except
as otherwise expressly provided in this opinion letter, capitalized terms
defined in the Indenture are used in this opinion letter as defined in the
Indenture.
A. DOCUMENTS EXAMINED.
For purposes of rendering this opinion letter, this firm has examined,
considered and relied upon the following:
<PAGE> 2
Trust Management, Inc.
September ___, 1999
Page 2
1. The Prospectus contained in the Registration Statement (the
"Prospectus") with respect to the Offering;
2. The Indenture which has been signed by the Company;
3. The Pledge and Assignment of Deposit Accounts (the "Deposit
Accounts Assignment") executed by the Company and the Trustee
pledging and granting a security interest and lien in and to
the Operating Account, the Sinking Fund Account, and the
Master Collection Account.
4. A Certificate (the "Certificate") of an officer of Transition
Leasing and the Company certifying as to the description of
the Company's intended method of operation;
5. The UCC-1 financing statement (the "Financing Statement")
signed by the Company, naming the Trustee as the Secured Party
and describing the properties, assets and items included in
the Trust Estate in the description of the type or items of
property covered by such financing statement, filed with the
Office of the Secretary of State of Texas as document number
___________________; and
6. Such other documents and instruments and other matters of fact
and law that this firm had considered necessary or appropriate
for the expression of the opinions contained herein.
B. THE TRUST ESTATE.
A security interest securing the Notes is granted under the Indenture
in and to the Trust Estate. The Trust Estate consists of the following
properties, assets and items: (a) all Contracts acquired by the Company,
together with all related Contract Documents, and all payments or instruments
paid on account of such Contracts whenever received, and all other proceeds
(cash or non-cash) received in respect of such Contracts, (b) the Servicing
Agreement, (c) the Operating Account, (d) the Sinking Fund Account, including
all Eligible Investments therein and all income from the investment of funds
therein, (e) the Master Collection Account, (f) all Leased Vehicles, together
with any repossessed or returned Leased Vehicles (including any Leased Vehicle
returned upon termination of its Contract), and (g) all proceeds of the
conversion, voluntary or involuntary, of any of the foregoing into cash or other
liquid property, including, without limitation, all Net Liquidation Proceeds and
Insurance Proceeds.
C. OPINION.
Based solely upon our examination and consideration of, and reliance
on, the documents, instruments and other matters listed and described in SECTION
A above, and subject to the comments, assumptions, limitations, qualifications
and exceptions set forth in SECTION D, we are of the opinion that:
1. Under Section 9.203(a) and (b) of the Texas Uniform Commercial
Code (the "UCC"), a security interest (a) attaches when it
becomes enforceable against the debtor with respect to the
collateral, and (b) becomes enforceable against a debtor when
the debtor has signed a security agreement which contains a
description of the collateral, value has been given, and the
debtor has rights in the collateral. The Indenture and the
Deposit Accounts Assignment taken together are a security
agreement which contains a description of the collateral. As a
result of the execution of the Indenture and the Deposit
Accounts Assignment by the Company and the Trustee, value has
been given for purposes of Sections 1.201(44) and 9.203(a) of
the UCC. The security interests granted under the Indenture
and the Deposit
<PAGE> 3
Trust Management, Inc.
September ___, 1999
Page 3
Account Assignment will attach to the Trust Estate as and when
the Company acquires rights in the Trust Estate.
2. Under applicable Texas law, (a) filing financing statements
with the Secretary of State of Texas are, or may be, necessary
to perfect the security interests or liens granted under the
Indenture in the Contracts, the Servicing Agreement, any
investments of funds in the Operating Account, the Sinking
Fund Account, or the Master Collection Account other than
investments in money or instruments and the proceeds of the
items described in this clause (a); but (b) are not necessary,
and may not be effective, to perfect the security interests or
liens granted under the Indenture in the Leased Vehicles, the
Operating Account (except as provided in clause (a) above),
and the Sinking Fund Account (except as provided in clause (a)
above). The following procedures have been followed in order
to perfect the security interests granted under the Indenture
and the Deposit Accounts Assignment in and to each of the
respective types or items of collateral included in the Trust
Estate:
(a) The Financing Statement has been filed in the office
of the Secretary of State of Texas pursuant to the
UCC.
(b) The Leased Vehicles will be motor vehicles
(automobiles, motorcycles, and trucks) subject to
Chapter 501 of the Texas Transportation Code. Section
9.304(c) of the UCC provides that filing a financing
statement is not necessary or effective to perfect a
security interest in property subject to Chapter 501
of the Texas Transportation Code. Pursuant to
Sections 501.021 and 501.111 of the Texas
Transportation Code, a person may perfect a security
interest in a motor vehicle that is the subject of a
first or subsequent sale (as will be the case for the
Leased Vehicles) only by recording the security
interest on the certificate of title for the subject
motor vehicle, as provided in Chapter 501 of the
Texas Transportation Code. Based on the provisions of
the Indenture, the security interest granted under
the Indenture in and to each Leased Vehicle will be
perfected by recording the security interest on the
certificate of title issued by the Texas Department
of Transportation for the subject Leased Vehicle. The
security interest granted under the Indenture in and
to each repossessed or returned Leased Vehicle will
be perfected by recording the security interest on
the certificate of title issued by the Texas
Department of Transportation. Pursuant to the
Indenture and the Custodial Agreement, the Trustee
will have and maintain actual possession of the
certificate of title for each Leased Vehicle.
(c) The Contracts will be leases of automobiles,
motorcycles and trucks owned by the Company. Article
9.105(a)(2) of the Texas Uniform Commercial Code
("UCC") defines leases like the Contracts as "chattel
paper." Section 9.304(a) of the UCC provides that a
security interest in chattel paper may be perfected
by filing a financing statement, and Section 9.305 of
the UCC provides that a security interest in chattel
paper may also be perfected by the secured party
taking possession of the chattel paper. The Financing
Statement filed in the office of the Secretary of
State of Texas a UCC-1 includes the Contracts in the
description of the type or items of property covered
by the Financing Statement. Pursuant to the
provisions of the Indenture, the Trustee will
maintain
<PAGE> 4
Trust Management, Inc.
September ___, 1999
Page 4
actual possession of the Contracts pursuant to the
Indenture and the Custodial Agreement.
(d) The Servicing Agreement is a contractual agreement
and is considered a "general intangible" under
Section 9.106 of the UCC. Security interests in
general intangibles are perfected by filing in the
office of the Secretary of State of Texas a financing
statement signed by the debtor and including the
general intangibles in the description of the
collateral. The Financing Statement filed in the
office of the Secretary of State of Texas includes
the Servicing Agreement in the description of the
type or items of property covered by the Financing
Statement.
(e) The Operating Account, the Sinking Fund Account and
the Master Collection Account are deposit accounts,
and pledges of such accounts are not subject to the
provisions of Article 9 of the UCC as provided in
Section 9.104(12) of the UCC, except as provided with
respect to proceeds (Section 9.306) and priorities in
proceeds (Section 9.312). Perfection of a pledge of
these deposit bank accounts is made pursuant to Texas
common law rules covering the pledge of personal
property. Pledges are made by the pledgor executing a
pledge and assignment agreement in favor of the
pledgee and are perfected by the pledgor notifying
the depositary bank in writing of the pledge.
Operating Account, the Sinking Fund Account and the
Master Collection Account will be established at
Texas Community Bank. The Company and the Trustee
have executed a Pledge and Assignment of Deposit
Accounts providing for a pledge to the Trustee of,
and the grant of a security interest and lien in and
to, the Operating Account, the Sinking Fund Account
and the Master Collection Account. Texas Community
Bank has been notified of this pledge and assignment,
has acknowledged this pledge and assignment in
writing. The perfection of security interests with
respect to investments of funds within the Operating
Account, the Sinking Fund Account and the Master
Collection Account in instruments, documents, chattel
paper, and investment property will be subject to
applicable provisions of the UCC.
(f) The proceeds of the items included in the Trust
Estate which are described in subparagraphs (a), (b),
(c) and (d) of this Paragraph 1 that are subject to
perfection by filing under the UCC are subject to the
provisions of Section 9.306 of the UCC, and the
Trustee's security interest and lien in such proceeds
will be perfected by perfection of the underlying
property as noted above, subject to Section 9.306 of
the UCC.
3. Under Section 9.303(a) of the UCC, a security interest is
perfected when it has attached and when all the applicable
steps required for perfection have been taken. Subject to the
satisfaction of the requirements described in paragraph 1 of
this SECTION C regarding the attachment of the security
interests granted under the Indenture and the Deposit Accounts
Assignment in and to the Trust Estate, (a) the filings and
actions described in paragraph 2 of this Section C will
provide for the perfection of the security interests granted
under the Indenture and the Deposit Accounts Assignment in and
to the Trust Estate, and (b) no filings in any jurisdiction,
other than the filing described in paragraph 2 of this SECTION
C, or any actions other than the actions which have been taken
and are described in paragraph 2 of this
<PAGE> 5
Trust Management, Inc.
September ___, 1999
Page 5
SECTION C, will be necessary to perfect the security interests
of the Trustee granted under the Indenture and the Deposit
Accounts Assignment in the Trust Estate, as constituted as of
the date of this opinion letter, as against any third parties.
D. COMMENTS, ASSUMPTIONS, LIMITATIONS, QUALIFICATIONS AND EXCEPTIONS.
The opinions expressed in SECTION C above are based upon and subject
to, the following comments, assumptions (with respect to which we have no
knowledge to the contrary), limitations, qualifications and exceptions:
1. We have assumed the authenticity and completeness of all
documents, certificates and records submitted to us as
originals, the conformity to the original instruments of all
documents, certificates and records submitted to us as copies,
the authenticity and completeness of the originals of such
latter instruments and the correctness of all statements of
fact, including, without limitation, all representations and
warranties, contained in the Agreement and all other
documents, certificates or records that we have examined.
Additionally, we have assumed that the Trustee is authorized
and empowered to execute the Indenture and the Deposit
Accounts Assignment and to enter into the transactions
contemplated by the Indenture and the Deposit Accounts
Assignment. We have assumed the existence, good standing,
power and authority of each party (other than the Company) to
the documents submitted to us. Except with respect to the
Company, we have assumed the due authorization, execution and
delivery of all such documents by the other respective parties
thereto, and the authority and legal capacity of all persons
executing such documents on behalf of such other parties, and
that such documents are legal, valid and binding agreements of
and enforceable against such other parties in accordance with
their respective terms.
2. We have assumed that all certifications, representations and
warranties of the Company set forth in the Indenture and the
Deposit Accounts Assignment are true and correct, and have
relied on these certifications, representations and warranties
in rendering the opinions expressed in this opinion letter.
3. Except with respect to the Company, we have assumed that each
of the respective parties to the Indenture and the Deposit
Accounts Assignment and all other agreements, instruments and
documents described in SECTION A above which we have reviewed
(collectively, the "Reviewed Documents") have performed,
complied with, or otherwise satisfied, their respective
obligations with respect to the transactions evidenced and
contemplated by the Reviewed Documents.
4. We have assumed that none of the Reviewed Documents contains
any untrue statement of fact or omits to state a material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and
none of the parties to any of the Reviewed Documents has made
or taken any false, fraudulent, misleading or deceptive
statements or actions, or has otherwise, by act or omission,
done or permitted to be done, anything false, fraudulent,
misleading or deceptive in connection with the execution and
delivery of the Reviewed Documents or the consummation of the
transactions evidenced and contemplated by the Reviewed
Documents.
<PAGE> 6
Trust Management, Inc.
September ___, 1999
Page 6
5. In rendering the opinions set forth above, (a) we have
undertaken no detailed or complete investigation of the books,
records and affairs of the Company, (b) we have acted solely
on the basis of the matters on which we have been engaged by
the Company and on representations made to us by the Company,
and (c) we have relied upon our review of the records of the
Secretary of State of Texas, our inquiry with representatives
of the Company, and the certifications, representations and
warranties of the Company set forth in the Agreement and have
made no review or search of the records of any state or
federal court in which any proceedings may be pending for the
termination, dissolution or annulment of the Company. To the
best of our knowledge, there are no such proceedings pending
in any state or federal court. This firm has made no
independent investigation as to the accuracy or completeness
of any representation, warranty, data or other information,
written or oral, made or furnished to us.
6. This firm's engagement by Transition Leasing and the Company
is limited to acting as special counsel to Transition Leasing
and to the Company in connection with this matter.
Consequently, there may exist matters of a factual or legal
nature involving Transition Leasing or the Company in
connection with which this firm has not been consulted and has
not represented Transition Leasing or the Company.
7. The opinions expressed in this opinion letter are limited to
the federal laws of the United States of America and the laws
of the State of Texas. This opinion letter is strictly limited
to the matters expressly stated in this opinion letter and no
other or more extensive opinion is to be inferred or may be
implied beyond the matters expressly stated in this opinion
letter. This opinion letter is limited to the matters stated
in this opinion letter and no opinions may be implied or
inferred beyond the matters expressly stated in this opinion
letter.
8. The opinions expressed in this opinion letter are made as of
the date of this opinion letter, and this firm assumes no
obligations to update or supplement such opinions to reflect
any facts or circumstances that may hereafter come to its
attention or any changes in law that may hereafter occur.
9. This opinion letter is being delivered to the Trustee for the
sole use and benefit of the Trustee in connection with the
Indenture and may not be relied upon in any manner by any
person other than the Trustee and the Trustee's legal counsel.
Except with our prior written consent or as otherwise
expressly provided in this opinion letter, the opinions
expressed in this opinion letter are not to be used,
circulated, quoted or otherwise referred to, in whole or in
part, in connection with any transaction other than that
contemplated by the Indenture, or by or to any other person.
Very truly yours,
BROWN McCARROLL & OAKS HARTLINE,
L. L. P.
By:
--------------------------------------
<PAGE> 1
EXHIBIT 10.4
SELECTED DEALER AGREEMENT
This agreement is hereby entered into by and between
______________________ ("Dealer") and GREAT NATION INVESTMENT CORPORATION
("Underwriter") upon the date of acceptance by Underwriter as set forth below.
R E C I T A L S:
WHEREAS, TRANSITION AUTO FINANCE III, INC. ("Issuer") proposes to make
a public offering and sale of $20,000,000 of Redeemable Secured Notes (the
"Notes") on a best efforts basis through Underwriter and certain additional
broker dealers who are members of the National Association of Securities
Dealers, Inc. (the "NASD"); and
WHEREAS, Dealer desires to offer the Notes on a best efforts basis;
A G R E E M E N T:
NOW, THEREFORE, Dealer and Underwriter do hereby agree that Dealer may
offer for sale the Notes of Issuer upon the following terms and conditions:
1. BEST EFFORTS. Dealer agrees to use its best efforts to solicit and
obtain subscriptions to purchase the Notes in accordance with the terms and
conditions set forth herein.
2. REPRESENTATION AND WARRANTIES. Dealer represents and warrants that
(i) it is a member in good standing of the NASD, (ii) is registered as a
broker-dealer under the Securities and Exchange Act of 1934, (iii) is licensed
as a broker-dealer under the law of the state(s) listed below the Dealer's
signature hereunder, (iv) neither Dealer nor any of its executive officers and
directors are currently subject to any administrative order or judgment in any
state which prohibits the use of any exemption from registration in connection
with the purchase or sale of securities, (v) neither Dealer nor any of its
executive officers and directors are subject to any order, judgment or decree of
any court of competent jurisdiction temporarily or preliminarily restraining or
enjoining, or subject to any order, judgment or decree of any Court of competent
jurisdiction entered within the last five years permanently restraining or
enjoining such person from engaging in or continuing any conduct or practice in
connection with the purchase or sale of any security or commodity or involving
the making of any false filing with any such state, and (vi) neither Dealer nor
any of its executive officers and directors have been convicted of a felony
involving the purchase or sale of a security within five years prior to the
commencement of the Offering.
3. DUTIES. Dealer covenants and agrees:
(a) To use its best efforts to procure purchases for the Notes
in accordance with the terms of the Offering as set forth in the
Prospectus. Such purchases shall be at or above the minimum investment
in the Notes as set forth in the Prospectus.
<PAGE> 2
Dealer shall not be entitled to solicit the services of other
broker-dealers or pass through or reallow any portion of the
compensation set forth in Section 4 in connection with performing the
Dealer's service hereunder.
(b) To at all times comply with all applicable provisions of
the Securities Act of 1933, as amended (the "Act"), the Securities Act
of 1934 and the rules and regulations of the Commission thereunder,
state Blue Sky securities laws and the rules of the NASD, including,
without limitation, Rules 2730, 2740, 2420 and 2750 of the NASD Rules
of Fair Practice, all prospectus delivery requirements as required by
law and the prohibition against the direct or indirect payment or
awarding of any finder's fees, commissions, or other compensation to
any person engaged by a potential investor or investment advice as an
inducement to such advisor to advise the purchase of an interest in a
particular program; provided, however, that the payment of the normal
sales commissions payable to a registered broker-dealer or other
properly licensed person for selling the Notes shall not be prohibited;
(c) To sell the Notes only in state(s) and jurisdiction(s) in
which Dealer is licensed as a broker-dealer, and only in state(s) and
jurisdiction(s) and in such amounts for which Blue Sky clearance has
been obtained as indicated to Dealer by the Underwriter;
(d) To take actions as may be required by law or which it may
deem reasonably necessary in order to ascertain that a purchase of the
Notes is suitable for a prospective purchaser, and maintain a record
thereof for a period of at least six years, or such other period as
required by law;
(e) To supply the Underwriter with such written reports of
Dealer's activities relating to the offering of the Notes as the
Underwriter may from time to time reasonably request;
(f) To obtain in connection with the sale of the Notes, the
appropriate payment by the purchaser for the number or amount of the
Notes indicated in the form of a check payable to the escrow agent
until escrow is broken and thereafter a check made payable to
Underwriter. In either event, such funds shall be transmitted to the
escrow agent or Trustee by noon of the next business day following the
day of receipt.
In the event that the payment received by Dealer is not made
payable as set forth in subparagraph (f) above, then Dealer agrees to
return such payment to the purchaser within one business day from
receipt thereof. In the event that a payment is received by the
Underwriter which is not made payable as set forth in this subparagraph
(f), then Underwriter will return such payment within one business day
from receipt thereof.
-2-
<PAGE> 3
If there is no escrow, the Registrar will mail the securities
to the security purchaser after the receipt of payment. If there is an
escrow, the Registrar will mail the securities to the security
purchaser after the conditions of escrow have been met. The procedure
for the handling of orders shall be subject to instructions which shall
be forwarded from time to time to all members of the Selling Group.
Neither the escrow agent or the Underwriter, as applicable, will accept
any order from Dealer which is placed on a conditional basis or subject
to any delay or contingency prior to execution.
In addition, Dealer will provide the Underwriter with the
name, address and social security or tax identification number of, and
the amount tendered and number of Notes indicated for, by each such
participant.
(g) In recommending to a participant the purchase, sale or
exchange of the Notes, Dealer and persons associated with Dealer shall:
(1) Have reasonable grounds to believe, on the basis
of information obtained from the participant concerning his
investment objectives, other investments, financial situation
and needs, and any other information known by the Dealer or
associated person that:
(a) The participant is, or will be, in an
financial position appropriate to enable the
participant to realize to a significant extent the
benefits described in the Prospectus;
(b) An investment in the Issuer is otherwise
suitable for the participant; and
(2) Maintain in the files of the Dealer for a period
of six years documents disclosing the basis upon which the
determination of suitability was reached as to each
participant.
Notwithstanding the above, the Underwriter has no duty to
determine the suitability of the investment for a particular investor
and nothing contained herein shall imply to the Underwriter any such
duty. Nor shall the Underwriter be subject to any duty to determine if
Dealer has complied with Dealer's duty to determine the suitability of
the investment for a particular investor.
(h) To comply with and abide by all terms and conditions of
the Prospectus;
(i) To not alter, change or modify in any regards the
prospectus or any sales materials provided by the Underwriter and
furthermore, Dealer understands
-3-
<PAGE> 4
that if Dealer uses any other sales materials not provided by the
Underwriter, then Dealer does so at Dealer's own risk and peril.
(j) To review the Prospectus and other materials provided by
the Issuer, and to have reasonable grounds to believe, based on
information obtained from the Issuer, through the Prospectus and any
other materials provided, that all material facts are adequately and
accurately disclosed and provide a basis for evaluating the proposed
activities of the Issuer. In determining the adequacy of disclosed
facts pursuant to this Section 2, Dealer and persons associated with
Dealer shall obtain information of material facts relating at a minimum
to the following, if relevant in view of the nature of the proposed
activities of the Issuer:
(1) Items of compensation;
(2) Physical properties;
(3) Tax aspects;
(4) The Issuer's conflicts and risk factors; and
(5) Appraisals and other financial data.
(k) Prior to the purchase of the Notes, to inform the
prospective participant of all pertinent facts relating to the
liquidity and marketability of the Notes during the term of the
investment.
(l) To promptly inform the Underwriter if Dealer shall have
knowledge of any material misstatement or material omission in any
customer records.
4. COMPENSATION. Dealer shall receive as compensation Selling
Commissions of six percent (6%) and up to 2% in connection with due diligence
activities of the sales price of any Notes sold by the Dealer to the public in
accordance herewith. Notwithstanding the above, no Sales Commissions and no
expense allowance or reimbursement shall be paid with respect to the Notes sold
hereunder until escrow has been met. Subject to the previous sentence, all
Selling Commissions and other compensation to Dealer under this Agreement shall
be paid as hereinafter provided. It is understood by Dealer that a portion of
its commission is being paid to Dealer in consideration of its efforts to
conduct the due diligence determined by the Dealer to be reasonably necessary
and that Dealer will be solely responsible for such diligence; the Underwriter
will have no responsibility or liability pertaining thereto (although the
Underwriter may, in its discretion, reallow a portion of its due diligence cost
reimbursement to Dealer in connection therewith). Notwithstanding the foregoing,
Dealer will not be entitled to receive compensation pursuant to this section 3
in the event that (i) the Underwriter or the Issuer determines that any offer,
sale or solicitation
-4-
<PAGE> 5
by Dealer was made in violation of the Act, of any of the regulations
thereunder, of the securities or Blue Sky laws of any jurisdiction or the NASD,
or of any covenant or representation made hereunder, (ii) if the Underwriter
shall not have previously received from Dealer a confirmed copy of this
Agreement; or (iii) with respect to certain subscriptions, the Issuer or the
Underwriter, in their sole discretion, do not accept (in whole or in part) such
subscriptions to purchase Notes obtained by Dealer for any reason, or any
Documents for such subscriptions, if any, fully complete and duly executed, are
received by the Underwriter after the final Closing Date.
Prior to escrow being met, all monies for the purchase of the Notes by
subscribers will be sent directly to the escrow agent. The Trustee will pay all
commissions to the Underwriter and the Underwriter does hereby agree to remit to
Dealer the commissions due Dealer as follows:
After escrow is broken, commission checks will be mailed to
Dealer by the Underwriter no later than the 25th of the month in regard
to all customer funds received by the Trustee during the first 15 days
of the month and no later than the 10th day of the following month in
regard to all customer funds received by the Trustee after the 15th day
of the month. Commissions will not be paid until all of the conditions
of the escrow are met. Once the conditions of the escrow are met, then
such initial commissions will be paid to Dealer by Underwriter on the
next scheduled commission pay date after receipt of the funds by
Underwriter.
In the event that the Trustee pays the commissions due Dealer directly
to Dealer, then Underwriter is released thereby for the payment of such
commissions actually paid to Dealer by Trustee.
5. SALES INCENTIVE PROGRAMS. No sales incentive bonuses shall be paid
directly or indirectly in connection with the offer and sale of the Notes.
6. TERMS AND TERMINATION. Dealer's obligations under this Agreement
shall commence as of the date of this Agreement or the effective date of the
Prospectus, whichever occurs later, and shall continue (unless otherwise
terminated as provided herein) until Dealer has been notified that the Offering
of the Notes has ceased or has been completed.
Dealer's services, under this Agreement, may be terminated by the
Underwriter, if (i) Dealer fails to comply with any provisions of this
Agreement; (ii) any of Dealer's representations or warranties made herein are
false; or (iii) Dealer ceases to be (a) a member in good standing of the NASD,
(b) registered as a broker-dealer under the Securities Exchange Act of 1934, (c)
licensed as a broker-dealer under the Securities Exchange Act of 1934, or (d)
licensed as a broker-dealer under the state(s) listed on the signature page
hereto; provided, however, that if Dealer ceases to be registered in less than
-5-
<PAGE> 6
all the states listed herein, this Agreement may not be terminated by the
Underwriter, but Dealer shall no longer offer or sell the Notes in such states.
Dealer will notify the Underwriter in writing of the occurrence of any of the
foregoing.
Furthermore, either party hereto may terminate this Agreement, with or
without cause, upon ten days prior written notice.
In the event of termination, Dealer shall not be entitled to any
commissions earned after the date of the occurrence giving rise to the
termination or any restitution for the value of its services thereafter
performed.
7. AUTHORITY. It is understood that Dealer's relationship with the
Underwriter is as an independent contractor and that nothing herein shall be
construed as creating a partnership, joint venture, or employer and employee
relationship between Dealer and the Underwriter. Dealer is not authorized to
give any information or make any representations or warranties in connection
with the offer and sale of the Notes except as stated in the Prospectus, or any
sales material provided by the Underwriter; and provided further that any such
sales material or advertising may be delivered to a person only if a copy of the
Prospectus is forwarded upon receipt of an indication of interest.
8. THIRD PARTY BENEFICIARY. It is understood that the Issuer intends to
rely, in connection with the Offering on the covenants, representations and
warranties made herein by Dealer to the Underwriter, and that the Issuer is
intended to be a third party beneficiary of such covenants, representations and
warranties.
9. INDEMNIFICATION. Dealer agrees to indemnify and hold harmless the
Issuer and the Underwriter and their controlling persons, shareholders, officers
and directors for any and all losses, claims, damages, liabilities, and
expenses, including attorney's fees, arising in connection with the offering or
sale of Notes, insofar as such losses, claims, damages, or liabilities (or
action in respect thereof) arise out of, or are based upon any unauthorized
verbal or written representations by Dealer, any untrue statements or alleged
untrue statement of any material fact made by Dealer, or the failure of Dealer
or Underwriter to deliver a copy of the Prospectus to a purchaser of the Notes
procured by Dealer at or prior to the time such person agrees to purchase the
Notes, or for a violation by Dealer of any federal, state (including state Blue
Sky and securities laws and any applicable suitability requirements) or local
statute or common law, or of any court order, or of any rule or regulation of
any governmental unit or agency or the NASD, for the breach of any
representation or warranty made by Dealer herein, or for the failure of Dealer
to properly perform any of its duties described herein, and to reimburse any
legal or other expense reasonably incurred by any of such persons in connection
with investigation or defense of such loss, claim, damage, liability, or action.
-6-
<PAGE> 7
Notwithstanding the foregoing, the Underwriter and their Affiliates and
any person acting as a Selected Dealer shall not be indemnified hereunder for
any losses, liabilities or expenses arising from or out of an alleged violation
of federal or state securities laws unless (1) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee and the court approves
indemnification or the litigation costs, or (2) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
indemnification of the litigation costs, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made. If any claim for indemnification for federal or state securities law
violation, the party seeking indemnification shall place before the court the
position of the S.E.C. and any other applicable regulatory authority with
respect to the issue of the indemnification for securities law violations.
10. METHOD AND LOCATION OF NOTICES. All communications hereunder,
except as herein otherwise specifically provided, shall be in writing and shall
be mailed, delivered, or telecopied as follows:
To Underwriter at:
5408 A Bell Street Amarillo, Texas 79109 FAX (806) 353-9631,
and
To Dealer at:
-----------------------------------
-----------------------------------
FAX .
-------------------------------
Notice shall be deemed to be given by a party to another (i) if by
personal delivery, on the date of such delivery, (ii) if telecopied, on the date
of transmission, if the receiving party confirms receipt of such notice
telephonically, and (iii) if mailed, three days after delivery to the mails,
postage prepaid, registered mail, return receipt requested, to the addresses
provided in this Section 10.
11. RESPONSIBILITY FOR COMPLIANCE. Dealer is solely responsible for
Dealer's compliance with all applicable securities laws in regard to the
offering of the Notes and nothing contained herein shall be construed so as to
cause the Underwriter to assume responsibility for Dealer's compliance.
12. COMPLIANCE WITH UNDERWRITING AGREEMENT. Dealer hereby acknowledges
that Dealer has been provided with a copy of the Best Efforts Underwriting
Agreement entered into by and between Underwriter and Issuer in regard to the
offering of the Notes
-7-
<PAGE> 8
and Dealer does hereby agree to be bound by the terms and conditions of such
agreement as applicable to Dealer. Furthermore, such Underwriting Agreement
shall inure to the benefit of Dealer to the extent applicable.
13. MISCELLANEOUS.
(a) Any customer account information submitted by the Dealer
shall be considered confidential. The Underwriter shall not use such information
as a source for solicitation purposes or in any other manner that is
inconsistent with the purposes of this Agreement.
(b) No rights or interests created hereunder may be
transferred, conveyed or assigned except with the prior written consent of the
Underwriter.
(c) Notwithstanding the date or dates that this Agreement
shall be actually signed by the parties hereto, Dealer's representations,
warranties and agreements herein shall be effective as if made prior to the
commencement by Dealer of its performance hereunder.
DEALER:
-------------------------------------
By:
----------------------------------
Title:
-------------------------------
Dated:
-------------------------------
States in which Dealer is licensed:
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
-8-
<PAGE> 9
UNDERWRITER:
GREAT NATION INVESTMENT CORPORATION
By:
----------------------------------
Byron Pat Treat
Its President
Date:
-------------------------------
-9-
<PAGE> 1
EXHIBIT 10.6
TAX SHARING AGREEMENT
Agreement effective as of the first day of the consolidated return year
beginning January 1, 1999, by and between Transition Leasing Management, Inc.
("Parent"), a Texas corporation, Transition Auto Finance, Inc., a Texas
corporation, ("TAFI") and Transition Auto Finance II, Inc., a Texas corporation
("TAFI-II") and Transition Auto Finance III, Inc., a Texas corporation,
("TAFI-III").
W I T N E S S E T H
WHEREAS, each of TAFI, TAFI-II and TAFI-III are subsidiaries of Parent
and the parties hereto (hereinafter sometimes referred to singularly as a
"Member" and collectively as "Members") are part of an affiliated group
("Affiliated Group") as defined by the Internal Revenue Code of 1986, as amended
("Code"), Section 1504(a); and
WHEREAS, such Affiliated Group filed a consolidated federal income tax
return in accordance with Section 1501 of the Code for tax years ending prior to
July 1, 1994, and is required to file consolidated income tax returns for years
subsequent thereto; and
WHEREAS, it is the intent and desire of the parties hereto that a
method be established for allocating the consolidated "federal income tax
liability" (as determined under Regulations Section 1.1502-2) of the Affiliated
Group among its Members (as required by Section 1552(a) of the Code) and the
manner in which such liability shall be paid;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. A U.S. consolidated federal income tax return shall be filed by
Parent for each taxable year in respect of which this Agreement is in effect and
for which the Affiliated Group is required or permitted to file a consolidated
federal income tax return. Parent and each subsidiary shall execute and file
such consents, elections, and other documents that may be required or
appropriate for the proper filing of such returns.
2. The Affiliated Group acknowledges that the consolidated federal
income tax liability of such Affiliated Group shall be apportioned among the
Members in accordance with the method set forth in Section 1552(a)(1) of the
Code.
3. In order to compensate Members of the Affiliated Group for the use
of net operating losses or tax credits in arriving at the consolidated federal
income tax liability of the Affiliated Group, the Members of the Affiliated
Group agree to determine and allocate the tax liability of the Affiliated Group
among themselves in the following manner:
Step 1. The consolidated federal income tax liability of the
Affiliated Group, as determined under Regulations Section 1.1502-2
shall be allocated to the Members in accordance with Regulations
Section 1.1552-1 (a)( I);
<PAGE> 2
Step 2. An additional amount shall be allocated to each Member
equal to 100 percent of the excess, if any, of (1) the "separate return
tax liability" (as defined below) of such Member for the taxable year,
over (2) the tax liability of such Member in accordance with Step 1 of
paragraph 3 of this Agreement. For purposes of the preceding sentence,
the "separate return tax liability" of each Member for the taxable year
shall be determined as if such Member were filing a separate tax return
under the Code, with the modifications set forth in Regulation Section
l.1552-1(a)(2)(ii). If the computation of a Member's separate return
tax liability as provided herein does not result in a positive amount
such Member's separate return tax liability shall be deemed to be zero.
Step 3. The total of any additional amounts allocated to
Members pursuant to Step 2 of paragraph 3 of this Agreement shall be
paid strictly as provided in paragraph 6, and subject to the principles
of paragraph 4, of this Agreement by such Members to those other
Members which had items of income, deductions, net operating losses, or
tax credits to which such total is attributable pursuant to a
consistent method which reasonably reflects such items of income,
deductions, net operating losses, or tax credits (such consistency and
reasonableness to be determined by the party charged with the
administration of this Agreement in accordance with paragraph 5 of this
Agreement). However, for this purpose, the amounts paid to Members will
generally be deemed consistent and reasonable if paid on a basis equal
to highest marginal corporate tax rate in effect with respect to net
operating losses utilized and 100 percent of tax credits utilized
(unless, due to special circumstances, this would be inequitable) and
which is substantiated by specific records maintained by the Affiliated
Group for such purposes.
Under the principles of Revenue Ruling 66-374, 1966-2 C.B. 427, the
"net operating loss" of a Member is the deduction which such Member would have
had available if it actually filed a separate return for the year and thus would
not include any portion of a Member's net operating loss sustained in a prior or
subsequent year which had been absorbed by the Affiliated Group or by the Member
in computing actual liabilities for prior or subsequent years. Notwithstanding
the preceding sentence, no benefit under Step 3 of paragraph 3 of this Agreement
shall be granted a Member unless the net operating loss is availed in reducing
the consolidated federal income tax liability. The rules stated in the previous
sentences regarding carryover net operating losses will also apply in the
computation of other carryover items such as investment tax credits, foreign tax
credits, and charitable contributions deductions.
4. Regarding the application of the allocation method in paragraph 3
of this Agreement, the following principles will govern:
(a) Allocation of the consolidated federal income tax
liability for the Affiliated Group under Step 1 of paragraph 3 of this
Agreement, shall (in accordance with Regulations Section 1.1552-1
(b)(2)) in the amount allocated to each Member (i) decrease the
earnings and profits of such Member and (ii) be treated as a liability
of such Member for such amount. The Members agree that any liability
created hereby shall not be satisfied by an actual payment between
Members but rather that the amount shall be treated as paid through
-2-
<PAGE> 3
a distribution with respect to stock, a contribution of capital, or
combination thereof, as the case may be, following the principles of
Regulation Section 1.1552-l(b)(2).
(b) Allocations under Step 2 and Step 3 (but not Step 1) to
individual Members of the Affiliated Group will create
liabilities and receivables among such Members under the
principles of Regulations Section 1.1552-1(b)(2). The Members
agree that any liability created hereby shall not be satisfied by
an actual payment between Members but rather that the amount
shall be treated as paid through a distribution with respect to
stock, a contribution of capital, or combination thereof, as the
case may be, following the principles of Regulation Section
1.1552-1 (b)(2).
5. The provisions of this Agreement shall be administered by Parent.
6. Parent shall prepare and file, or cause to be prepared and filed,
all consolidated federal income tax returns, and estimated tax returns and all
state, local consolidated combined or unitary income tax returns and estimated
tax returns thereof, Parent shall pay all taxes due with respect to such returns
and shall indemnify and hold harmless each Subsidiary against all liability in
respect thereof, For purposes of state, and local consolidated, combined and
unitary income taxes, principles analogous to those in paragraph 3 of this
Agreement shall be used to determine the liability therefor and payments to be
made.
7. If the consolidated federal income tax liability is adjusted for
any taxable period, whether by means of an amended return, claim for refund, or
after-tax audit by the Internal Revenue Service, the liability of each Member
shall be recomputed under paragraphs 2 and 3 of this Agreement to give effect to
such adjustments. In the case of a refund, the Parent shall be entitled to
retain any such refund, subject only to its obligation under paragraph 6.
8. This Agreement shall apply to the taxable year specified in the
preamble of this Agreement, and all subsequent taxable years no earlier than the
repayment of indebtedness represented by up to $10,000,000 of TAFI-II's 11%
Secured Notes, up to $20,000,000 of TAFI-III's 11% Secured Notes and any
subsequent financing programs. Notwithstanding such termination, this Agreement
shall continue in effect with respect to any payment or refunds due for all
taxable periods prior to termination.
9. This Agreement constitutes the entire agreement of the Members
concerning the subject matter hereof and supersedes all other agreements,
whether or not written, This Agreement shall not be amended unless the Members
agree in writing thereto and in no event shall any amendment hereto be made
until the indebtedness represented by the Floating Rate Secured Notes or any
subsequent financing programs has been fully paid.
10. All material including, but not limited to, returns, supporting
schedules, work papers, correspondence, and other documents relating to the
consolidated federal income tax returns filed for a taxable year during which
this Agreement was in effect shall be made available to any Member to the
Agreement during regular business hours for a minimum period equal to applicable
federal record retention requirements,
-3-
<PAGE> 4
11. All determinations required hereunder shall be made by the
independent accounting firm regularly employed by Parent at the time of such
determination. Such determination shall be binding and conclusive upon the
parties hereto for the purposes hereof.
12. Any Member corporation which leaves the consolidated group shall
be bound by this Agreement with respect to periods during which it was a member
of the consolidated group.
13. The Members hereto specifically recognize that from time to time
other companies may become Members of the Affiliated Group and hereby agree that
such new Members may become parties to this Agreement by executing the master
copy of this Agreement which shall be maintained at Parent's headquarters. It
will not be necessary for all the other Members to resign the Agreement but the
new Member may simply sign the existing Agreement and it will be effective as if
the old Members had resigned.
14. Any alteration, modification, addition, deletion, or other change
in the consolidated income tax return provisions of the Code or the regulations
thereunder shall automatically be applicable to this Agreement mutatis mutandis.
15. Failure of one or more parties hereto to qualify by meeting the
definition of Member of the "Affiliated Group" shall not operate to terminate
this Agreement with respect to the other parties as long as two or more parties
hereto continue so to qualify.
16. This Agreement shall bind and inure to the respective successors
and assigns of the parties hereto; but no assignment shall relieve any party of
its obligations hereunder.
17. This Agreement shall be governed by the laws of the State of
Texas.
IN WITNESS WHEREOF, the parties hereto have caused their names to be
subscribed and executed by their respective authorized officers on the dates
indicated, effective as of the date first written above.
Date: TRANSITION LEASING MANAGEMENT, INC.
--------------------------- a Texas corporation
By:
---------------------------------
Name:
-------------------------------
Title:
-----------------------------
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<PAGE> 5
Date: TRANSITION AUTO FINANCE, INC.
----------------------- a Texas corporation
By:
---------------------------------
Name:
-------------------------------
Title:
-----------------------------
Date: TRANSITION AUTO FINANCE II, INC.
----------------------- a Texas corporation
By:
---------------------------------
Name:
-------------------------------
Title:
-----------------------------
Date: TRANSITION AUTO FINANCE II, INC.
----------------------- a Texas corporation
By:
---------------------------------
Name:
-------------------------------
Title:
-----------------------------
-5-
<PAGE> 1
EXHIBIT 24.1
CONSENT OF COUNSEL
Drenner & Stuart, L.L.P., a limited liability partnership, hereby
consents to the use of its name under the heading "Legal Matters" in the
Prospectus constituting a part of the Form SB-2 Registration Statement filed by
Transition Auto Finance III, Inc. ("TAF-III") for the registration of
$20,000,000 in aggregate principal amount of 11% Secured Promissory Notes to be
issued by TAF-III.
/s/ Drenner & Stuart, L.L.P.
----------------------------------
Drenner & Stuart, L.L.P.
September 23, 1999
<PAGE> 1
EXHIBIT 24.2
CONSENT OF COUNSEL
Kuperman, Orr, Mouer & Albers, P.C., a professional corporation, hereby
consents to the use of its name under the heading "Legal Matters" in the
Prospectus constituting a part of the Form SB-2 Registration Statement filed by
Transition Auto Finance III, Inc. ("TAF-III") for the registration of
$20,000,000 in aggregate principal amount of 11% Secured Promissory Notes to be
issued by TAF-III.
/s/ Kuperman, Orr, Mouer & Albers, P.C.
----------------------------------------
Kuperman, Orr, Mouer & Albers, P.C.
September 23, 1999
<PAGE> 1
EXHIBIT 24.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 of our report
included herein dated June 9, 1999 relating to the financial statements of
Transition Auto Finance III, Inc., and to our firm being named under the caption
"Experts" in the Prospectus.
Sprouse & Winn, L.L.P.
Austin, Texas
June 10, 1999
<PAGE> 1
EXHIBIT 24.4
CONSENT OF COUNSEL
Brown McCarroll & Oaks Hartline, L.L.P. a Texas limited liability
partnership, hereby consents to the use of its name under the heading "Legal
Matters" in the Prospectus constituting a part of the Form SB-2 Registration
Statement filed by Transition Auto Finance III, Inc. ("TAF-III") for the
registration of $20,000,000 in aggregate principal amount of 11% Secured
Promissory Notes to be issued by TAF-III.
Brown McCarroll & Oaks Hartline, L.L.P.
/s/ Stephen A. Mitchell
-----------------------
By: Stephen A. Mitchell
September 23, 1999
<PAGE> 1
Securities Act of 1933 File No. 333----------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(b)(2) [X]
TRUST MANAGEMENT, INC.
(Exact name of trustee as specified in its charter)
TEXAS
(Jurisdiction of incorporation or organization if not a U.S. national bank)
75-1333672
(I.R.S. Employer Identification Number)
210 W. 6TH STREET, SUITE 605, FT. WORTH, TEXAS
(Address of principal executive offices)
76102
(Zip code)
ROBERT C. FINLEY, PRESIDENT
210 W 6TH STREET, SUITE 605
FT. WORTH, TEXAS 76102
(817) 335-2933
(Name, address and telephone number of agent for service)
TRANSITION AUTO FINANCE III, INC.
(Exact name of obligor as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation or organization)
75-2753067
(I.R.S. Employer Identification Number)
5422 ALPHA ROAD, SUITE 100, DALLAS, TEXAS (Address of
principal executive offices)
75240
(Zip code)
11% REDEEMABLE SECURED PROMISSORY NOTES DUE OCTOBER 31, 2004
(Title of indenture securities)
The application relates to all of the securities registered pursuant to the
delayed offering registration statement.
<PAGE> 2
ITEM 1. GENERAL INFORMATION
(a) Trust Management, Inc.(the Trustee ) is subject to the examining or
supervisory authority of the following authorities:
Texas Department of Banking
(b) The Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
TRANSITION AUTO FINANCE III, INC. (the "Obligor"), is not affiliated with the
Trustee.
ITEM 3. VOTING SECURITIES OF THE TRUSTEE.
As of August 31, 1999, the Trustee has no outstanding voting securities.
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES.
The Trustee is not a trustee under any other indenture under which any other
securities, or certificates of interest or participation in any other
securities, of the Obligor are outstanding.
ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
Neither the Trustee, nor any of the directors or executive officers of the
Trustee is a director, officer, partner, employee, appointee, or representative
of the Obligor or of any underwriter for the Obligor.
ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
As of August 31, 1999, neither the Obligor, nor any of its directors, partners
or executive officers beneficially owned any voting securities of the Trustee.
ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE UNDERWRITERS OR THEIR
OFFICIALS.
As of August 31, 1999, no underwriter for the Obligor, nor any director, partner
or executive officer of any such underwriter, beneficially owned any voting
securities of the Trustee.
ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
As of August 31, 1999, the Trustee did not beneficially own any securities of
the Obligor, nor did the Trustee hold any such securities as collateral security
for obligations in default.
ITEM 9. SECURITIES OF THE UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
As of August 31, 1999, the Trustee did not beneficially own any securities of
any underwriter for the Obligor, nor did the Trustee hold any such securities as
collateral security for obligations in default.
ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
As of August 31, 1999, the Trustee did not beneficially own or hold as
collateral security for any obligations in default any voting securities of any
person who, to the Trustee's knowledge, (l) owned 10% or more of the voting
securities of the Obligor, or (2) is an affiliate, other than a subsidiary, of
the Obligor.
<PAGE> 3
ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
As of August 31, 1999, the Trustee did not beneficially own or hold as
collateral security for any obligations in default any securities of any person,
who to the trustee's knowledge, owned 50% or more of the voting securities of
the Obligor.
ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
As of August 31, 1999, the Obligor was not indebted to the Trustee.
ITEM 13. DEFAULTS BY THE OBLIGOR.
(a) There has been no default with respect to the securities under this
Indenture.
(b) The Trustee is not a trustee under another indenture under which any other
securities, or certificates of interest or participation in any other
securities, of the Obligor are outstanding, nor a trustee for more than one
outstanding series of securities under the indenture.
ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS.
No underwriter of the Obligor is an affiliate of the Trustee.
ITEM 15. FOREIGN TRUSTEE.
This item is not applicable.
ITEM 16. LIST OF EXHIBITS.
16.1 Certificate of Amendment to the Charter of Trust Management, Inc.
16.2 Certificate of Authority of Trust Management, Inc. to commence
business.
16.3 Authorization of Trust Management, Inc. to exercise corporate trust
powers.
16.4 By-Laws of Trust Management, Inc.
16.5 Not applicable.
16.6 Consent of Trustee.
16.7 Latest Report of Condition of Trust Management, Inc.
16.8 Not applicable.
16.9 Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Trust Management, Inc., a corporation organized and existing under the laws of
the State of Texas, has duly caused this statement of eligibility to be signed
on its behalf by the undersigned, thereunto duly authorized, all in the city of
Fort Worth, and State of Texas, on the 23rd day of September, 1999.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert C. Finley
------------------------------------
Robert C. Finley, President
<PAGE> 4
NOTE
The answers to this statement insofar as such answers relate to what persons
have been underwriters for any securities of the obligor within three years
prior to the date of filing this statement, or what persons are owners of 10% or
more of the voting securities of the obligor, or affiliates, are based upon
information furnished to the Trustee by the obligor. While the Trustee has no
reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Trust Management, Inc., a corporation organized and existing under the laws of
the State of Texas, has duly caused this statement of eligibility to be signed
on its behalf by the undersigned, thereunto duly authorized, all in the City of
Ft. Worth, and State of Texas, on the 23rd day of September, 1999.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert c. Finley
-------------------------------------
Robert C. Finley, President
<PAGE> 5
EXHIBIT 16.1
Certificate of Amendment of Trust Management, Inc.
<PAGE> 6
THE STATE OF TEXAS
OFFICE OF THE SECRETARY OF STATE
CERTIFICATE OF AMENDMENT
OF
TRUST MANAGEMENT, INC.
FORMERLY: A. B. CULBERTSON AND COMPANY
CHARTER NO. 120580
The undersigned, as Secretary of State of the State of Texas, hereby
certifies that duplicate originals of Articles of Amendment to the Articles of
Incorporation of the above corporation duly signed and verified pursuant to the
provisions of the Texas Business Corporation Act, have been received in this
office and are found to conform to law.
ACCORDINGLY the undersigned, as such Secretary of State, and by
virtue of the authority vested in him by law, hereby issues this Certificate of
Amendment to the Articles of Incorporation and attaches hereto a duplicate
original of the Articles of Amendment.
Dated: August 10, 1970
------------------------------------
Secretary of State
<PAGE> 7
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
A.B. CULBERTSON AND COMPANY
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is A. B. CULBERTSON AND COMPANY.
ARTICLE TWO
The following amendment to the Articles of Incorporation changing the
name of the corporation was adopted by the shareholders of the corporation on
August 5, 1970.
Article One of the Articles of Incorporation, as heretofore amended,
is hereby amended so as to read and provide as follows:
The name of the corporation is TRUST MANAGEMENT, INC.
ARTICLE THREE
The number of shares of the corporation outstanding at the time of
such adoption was 32,500; and the number of shares entitled-to vote thereon was
32,500.
ARTICLE FOUR
The holders of all of the shares outstanding and entitled to vote on
said amendment have signed a consent in writing adopting said amendment.
DATED the 6th day of August, 1970.
A.B. CULBERTSON AND COMPANY
By: /s/
--------------------------------
Its Vice President
By: /s/
--------------------------------
Its Secretary
<PAGE> 8
STATE OF TEXAS )
)
COUNTY OF TARRANT )
I, Dorothy Hoover, a Notary Public, do hereby certify that on this
the 6th day of August, 1970, personally appeared before me Charles E. Martin,
who declared he is Vice President of the corporation executing the foregoing
document, and being first duly sworn, acknowledged that he signed the foregoing
document in the capacity therein set forth and declared that the statements
therein contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and
year before written.
/s/
--------------------------------
Notary Public in and for
Tarrant County, Texas
Commission Expires: June 1, 1971
<PAGE> 9
EXHIBIT 16.2
CERTIFICATE OF AUTHORITY OF TRUST MANAGEMENT, INC.
TO COMMENCE BUSINESS
<PAGE> 10
THE STATE OF TEXAS
SECRETARY OF STATE
IT IS HEREBY CERTIFIED, THAT
Articles of Incorporation
of
TRUST MANAGEMENT, INC.
were filed in this office and a certificate of
incorporated was issued on
June 30, 1954;
IT IS FURTHER CERTIFIED, that no certificate
of dissolution has been issued, and the corporation
is still in existence.
IN TESTIMONY WHEREOF, I have hereunto signed
my name officially and caused to be
impressed hereon the Seal of State at my
office in the City of Austin, this 6th day
of April, 1988
/s/
--------------------------------------------
Secretary of State
<PAGE> 11
EXHIBIT 16.3
Authorization of Trust Management, Inc.to exercise corporate trust powers.
STATE OF TEXAS
DEPARTMENT OF BANKING
CERTIFICATE OF AUTHORITY
95-37
--------------
charter number
This is to certify that
TRUST MANAGEMENT, INC.
is duly authorized under the laws of the State of Texas to
conduct business as a Trust Company at
210 West 6th Street, Suite 605
Fort Worth, Tarrant County,
Texas
In witness whereof, I have hereunto set my
hand at the City of Austin, Travis County,
in the State of Texas, on this the 15th day
of June, 1992.
/s/ RANDALL S. JAMES
-----------------------------------------------
Randall S. James, Banking Commissioner of Texas
<PAGE> 12
EXHIBIT 16.4
Bylaws of Trust Management, Inc.
<PAGE> 13
REVISED BYLAWS OF
TRUST MANAGEMENT, INC.
Contents
<TABLE>
<S> <C> <C>
Article 1: Offices
1.01 Registered Office and Agent
1.02 Other Offices
Article 2: Shareholders
2.01 Place of Meetings
2.02 Annual Meeting
2.03 Special Meetings
2.04 Notice
2.05 Order of Business at Meetings
2.06 Quorum
2.07 Majority Vote; Withdrawal of Quorum
2.08 Method of Voting
2.09 Election of Directors; Non-cumulative Voting
2.10 Voting List
2.11 Record Date; Closing Transfer Books
2.12 Action Without Meeting
2.13 Telephone Meetings
Article 3: Directors
3.01 Management
3.02 Place of Meetings
3.03 Regular Meetings; Notice
3.04 Special Meetings; Notice
3.05 Quorum; Majority Vote
3.06 Number; Qualification; Election; Term
3.07 Change in Number
3.08 Removal
3.09 Vacancies
3.10 Procedure
3.11 Compensation
3.12 Interested Directors, Officers, and Shareholders
3.13 Action Without Meeting
3.14 Telephone Meetings
3.15 Deadlock
Article 4: Notice
4.01 Method
4.02 Waiver
Article 5: Officers and Agents
5.01 Number; Qualification; Election
</TABLE>
<PAGE> 14
<TABLE>
<S> <C> <C>
5.02 Term and Compensation
5.03 Removal
5.04 Vacancies
5.05 Authority
5.06 President
5.07 Vice President
5.08 Secretary
5.09 Treasurer
5.10 Excess Compensation
Article 6: Certificates and Shareholders
6.01 Certificates
6.02 Issuance
6.03 Payment for Shares
6.04 No Pre-Emptive Rights
6.05 Lien
6.06 Replacement of Lost, Stolen(1) or Destroyed Certificates
6.07 Transfer of Shares
6.08 Registered Shareholders
Article 7: Indemnification
7.01 Indemnification of Directors, Officers, Employees, etc.
7.02 Limitations on Indemnification
7.03 Indemnity for Successful Defense
7.04 Advancement of Expenses
7.05 Indemnification Not Exclusive
7.06 Liability Insurance
7.07 Notification of Shareholders
Article 8: General Provisions
8.01 Dividends and Reserves
8.02 Books and Records
8.03 Annual Statement
8.04 Checks and Notes
8.05 Fiscal Year
8.06 Seal
8.07 Resignation
8.08 Interested Directors, Officers, and Shareholders
8.09 Purchase Own Shares
8.10 Construction
8.11 Amendment of Bylaws
8.12 Table of Contents; Headings
</TABLE>
<PAGE> 15
Article 1: Offices
1.01 Registered Office and Agent. The registered office of the
corporation shall be located in Fort Worth, Tarrant County, Texas.
1.02 Other Offices. The corporation may also have offices at such
other places both within and without the State of Texas as the board of
directors may from time to time determine or the business of the corporation may
require.
Article 2: Shareholders
2.01 Place of Meetings. All meetings of the shareholders for the
election of directors shall be held at such time and place, within or without
the State of Texas, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
2.02 Annual Meeting. An annual meeting of the shareholders shall be
held each year on the second Tuesday in September. If such day is a legal
holiday, then the meeting shall be on the next secular day following. At the
meeting, the shareholders shall elect directors and transact such other business
as may properly be brought before the meeting.
2.03 Special Meetings. Unless otherwise prescribed by statute or by
the articles of incorporation, or by these bylaws, special meetings of the
shareholders, for any purpose or purposes, may be called by the president, the
board of directors, or the holders of not less than one-tenth of all the shares
entitled to vote at the meetings. Business transacted at a special meeting shall
be confined to the objects stated in the notice of the meeting.
2.04 Notice. Written or printed notice stating the place, day and
hour of the meeting, and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten nor more
than fifty days before the date of the meeting, either personally or by mail, by
or at the direction of the president, the secretary, or the officer or person
calling the meeting, to each shareholder of record entitled to vote at the
meeting. If mailed, the notice shall be deemed to be delivered when deposited in
the United States mail addressed to the shareholder at his address as it appears
on the stock transfer books of the corporation, with postage thereon prepaid.
2.05 Order of Business at Meetings. The order of business at annual
meetings and so far as practicable at other meetings of shareholders shall be as
follows unless changed by the board of directors:
(a) Call to order
(b) Proof of due notice of meeting
(c) Determination of quorum and examination of proxies
(d) Announcement of availability of voting list
(e) Announcement of distribution of annual statement
(f) Reading and disposing of minutes of last meeting of
shareholders
(g) Reports of officers and committees
(h) Appointment of voting inspectors
(i) Unfinished business
(j) New business
(k) Nomination of directors
(1) Opening of polls for voting
(m) Recess
(n) Reconvening; closing of polls
(o) Report of voting inspectors
<PAGE> 16
(p) Other business
(q) Adjournment
2.06 Quorum. The holders of a majority of the shares issued and
outstanding and entitled to vote, present in person or represented by proxy,
shall be requisite and shall constitute a quorum at all meetings of the
shareholders for the transaction of business except as otherwise provided by
statute, by the articles of incorporation or by these bylaws. If a quorum is not
present or represented at a meeting of the shareholders, the shareholders
entitled to vote, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented. At the adjourned meeting
at which a quorum is present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
2.07 Majority Vote; Withdrawal of Quorum. When a quorum is present at
any meeting, the vote of the holders of a majority of the shares having voting
power, present in person or represented by proxy, shall decide any question
brought before the meeting, unless the question is one upon which, by express
provision of the statutes or of the articles of incorporation or of these
bylaws, a different vote is required in which case the express provision shall
govern and control the decision of the question. The shareholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
2.08 Method of Voting. Each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Articles of Incorporation and
except as otherwise provided by Article 5.13 of the Texas Business Corporation
Act. At any meeting of the shareholders, every shareholder having the right to
vote may vote either in person, or by proxy executed in writing by the
shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid
after eleven months from the date of its execution, unless otherwise provided in
the proxy. Each proxy shall be revocable unless expressly provided therein to be
irrevocable and unless otherwise made irrevocable by law. Each proxy shall be
filed with the secretary of the corporation prior to or at the time of the
meeting. Voting for directors shall be in accordance with Section 2.09 of these
bylaws. Any vote may be taken by voice or by show of hands unless someone
entitled to vote objects, in which case, written ballots shall be used.
2.09 Election of Directors; Non-cumulative Voting. Directors shall be
elected by plurality vote. Cumulative voting shall not be permitted.
2.10 Voting List. At least ten days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, with the address of each and the number
of voting shares held by each, shall be prepared by the officer or agent having
charge of the stock transfer books. For a period of ten days prior to the
meeting, the list shall be kept on file at the registered office of the
corporation and shall be subject to inspection by any shareholder at any time
during usual business hours. The list shall also be produced and kept open at
the time and place of the meeting during the whole time thereof, and shall be
subject to the inspection of any shareholder during the whole time of the
meeting.
2.11 Record Date; Closing Transfer Books. For the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the board of directors of the corporation may provide that the
stock transfer books shall be closed for a stated period but not to exceed, in
any case, fifty days. If the stock transfer books are closed for the purpose of
determining shareholders
<PAGE> 17
entitled to notice of or to vote at a meeting of shareholders, such books shall
be closed for at least ten days immediately preceding such meeting. In lieu of
closing the stock transfer books, the board of directors may fix in advance a
date as the record date for any such determination of shareholders, such date in
any case to be not more than fifty days and, in case of a meeting of
shareholders, not less than ten days prior to the date on which the particular
action, requiring such determination of shareholders, is to be taken. If the
stock transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date of which notice of the meeting is mailed or the date on which the
resolution of the board of directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided herein, such determination shall apply to
any adjournment thereof except when the determination has been made through the
closing of stock transfer books, and the stated period of closing has expired.
2.12 Action Without Meeting. Any action required by statute to be
taken at a meeting of the shareholders, or any action which may be taken at a
meeting of the shareholders, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof, and
the consent shall have the same force and effect as a unanimous vote of the
shareholders. Any signed consent, or a signed copy thereof, shall be placed in
the minute book of the corporation.
2.13 Telephone Meetings. Subject to the provisions of these bylaws,
for notice of meetings, shareholders may participate in and hold a meeting of
the shareholders by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this section shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Article 3: Directors
3.01 Management. The business and affairs of the corporation shall be
managed by the board of directors who may exercise all powers of the corporation
and do all lawful acts and things as are not (by statute or by the articles of
incorporation or by these bylaws) directed or required to be exercised or done
by the shareholders.
3.02 Place of Meetings. Meetings of the board of directors, regular
or special, may be held either within or without the State of Texas.
3.03 Regular Meetings; Notice. Regular meetings of the board of
directors may be held without notice at such time and place as shall from time
to time be determined by the board.
3.04 Special Meetings; Notice. Special meetings of the board of
directors may be called by the president on three days' notice to each director,
either personally or by mail or by telegram. Special meetings shall be called by
the secretary or by two directors in like manner and on like notice. Except as
otherwise expressly provided by statute, or by the articles of incorporation, or
by these bylaws, neither the business to be transacted at, nor the purpose of,
any special meeting need be specified in a notice or waiver of notice.
3.05 Quorum; Majority Vote. At all meetings of the board of directors
a majority of the number of directors fixed by these bylaws then holding office
shall constitute a quorum for the transaction of business. The act of a majority
of the directors present at any meeting at which a quorum is present shall be
the act of the board of directors, except as otherwise specifically
<PAGE> 18
provided by statute or by the articles of incorporation or by these bylaws. If a
quorum is not present at a meeting of the board of directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum is present.
3.06 Number; Qualification; Election; Term. The board of directors
shall consist of at least three. Directors need not be shareholders or residents
of the State of Texas. The directors shall be elected at the annual meeting of
the shareholders, except as hereafter provided. Each director elected shall hold
office until his successor shall be elected and shall qualify.
3.07 Change in Number. The number of directors may be increased or
decreased from time to time by amendment to these bylaws but no decrease shall
have the effect of shortening the term of any incumbent director. Any
directorship to be filled by reason of an increase in the number of directors
shall be filled by election at an annual meeting or at a special meeting of
shareholders called for that purpose.
3.08 Removal. Any or all director(s) may be removed either with or
without cause at any special or annual meeting of shareholders, by the
affirmative vote of a majority of shares of the shareholders present in person
or by proxy at the meeting and entitled to vote for the election of such
director if notice of intention to act upon the matter shall have been given in
the notice calling such meeting.
3.09 Vacancies. Any vacancy occurring in the board of directors (by
death, resignation, removal, or otherwise) may be filled by an affirmative vote
of a majority of the remaining directors though less than a quorum of the board
of directors. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. Any vacancy created by an increase
in the number of directors shall be filled by election at an annual meeting or a
special meeting of the shareholders called for that purpose.
3.10 Procedure. The board of directors shall keep regular minutes of
its proceedings. The minutes shall be placed in the minute book of the
corporation.
3.11 Compensation. By resolution of the board of directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors. No such payment shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Interested Directors, Officers, and Shareholders.
(a) Validity. Any contract or other transaction between the
corporation and any of its directors, officers, or shareholders (or any
corporation or firm which any of them are directly or indirectly interested)
shall be valid for all purposes notwithstanding the presence of the director,
officer, or shareholder at the meeting authorizing the contract or transaction,
or his participation in the meeting or authorization.
(b) Disclosure, Approval. The foregoing shall, however, apply
only if the interest of each interested director, officer, or shareholder is
known or disclosed:
(1) To the board of directors and it nevertheless authorizes
or ratifies the contract or transaction by a majority of the directors present,
each interested director to be counted in determining whether a quorum is
present but not in calculating the majority necessary to carry the vote; or
<PAGE> 19
(2) To the shareholders and they nevertheless authorize or
ratify the contract or transaction by a majority of the shares present, each
interested person to be counted for quorum and voting purposes.
(c) Non-Exclusive. This provision shall not be construed to
invalidate any contract or transaction which would be valid in the absence of
this provision.
3.13 Action Without Meeting. Any action required by statute to be
taken at a meeting of the directors, or any action which may be taken at a
meeting of the directors, may be taken without a meeting if a consent in
writing, setting forth the action so taken shall be signed by all of the
directors entitled to vote with respect to the subject matter thereof(1) and the
consent shall have the same force and effect as a unanimous vote of the
directors. Any signed consent, or a signed copy thereof, shall be placed in the
minute book of the corporation.
3.14 Telephone Meetings. Subject to the provisions of these bylaws,
for notice of meetings, members of the board of directors or members of any
committee designated by such board, may participate in and hold a meeting of the
board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this section shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
3.15 Deadlock. If the directors are deadlocked on an issue, the
shareholders shall intervene and their vote shall control as to the disputed
issue.
Article 4: Notice
4.01 Method. Whenever by statute or the articles of incorporation, or
these bylaws, notice is required to be given to a director or shareholder, and
no provision is made as to how the notice shall be given, it shall not be
construed to mean personal notice, but the notice may be given (a) in writing,
by mail, postage prepaid, addressed to the director or shareholder at the
address appearing on the books of the corporation, or (b) in any other method
permitted by law. Any notice required or permitted to be given by mail shall be
deemed given at the time when the same is thus deposited in the United States
mails.
4.02 Waiver. Whenever, by statute or the articles of incorporation or
these bylaws, notice is required to be given to a shareholder or director, a
waiver thereof in writing signed by the person or persons entitled to the
notice, whether before or after the time stated in the notice, shall be
equivalent to the giving of the notice. Attendance of a director at a meeting
shall constitute a waiver of notice of the meeting, except where a director
attends for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
Article 5: Officers and Agents
5.01 Number; Qualification; Election.
(a) The corporation shall have:
(1) a president, a vice president, a secretary, and a
treasurer; and
(2) such other officers and assistant officers and agents as
the board of directors may think necessary.
<PAGE> 20
(b) No officer or agent need be a shareholder, a
director, or a resident of Texas.
(c) Officers named in Section 5.01(a)(1) shall be
elected by the board of directors on the expiration of an officer's term or
whenever a vacancy exists. Officers and agents named in Section 5.01(a)(2) may
be elected by the board at any meeting.
5.02 Term and Compensation. Unless otherwise specified by the board
at the time of election or appointment, or in an employment contract approved by
the board, each officer's and agent's term shall end at the first meeting of
directors after the next annual meeting of shareholders. He shall serve until
the end of his term or, if earlier, his death, resignation, or removal. The
compensation of officers and agents shall be fixed from time to time by the
board of directors.
5.03 Removal. Any officer or agent elected or appointed by the board
of directors may be removed by the board of directors whenever in its judgment
the best interests of the corporation will be served thereby. The removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
5.04 Vacancies. Any vacancy occurring in any office of the
corporation (by death, resignation, removal or otherwise) may be filled by the
board of directors.
5.05 Authority. Officers and agents shall have such authority and
perform such duties in the management of the corporation as are provided in
these bylaws or as may be determined by resolution of the board of directors not
inconsistent with these bylaws.
5.06 President. The president shall be the chief executive officer of
the corporation. He shall preside at all meetings of the shareholders and the
board of directors, shall have general and active management of the business and
affairs of the corporation, and shall see that all orders and resolutions of the
board are carried into effect. He shall perform such other duties and have such
other authority and powers as the board of directors may from time to time
prescribe.
5.07 Vice President. The vice president shall, in the absence or
disability of the president, perform the duties and have the authority and
exercise the powers of the president. He shall perform such other duties and
have such other authority and powers as the board of directors may from time to
time prescribe or as the president may from time to time delegate.
5.08 Secretary.
(a) The secretary shall attend all meetings of the board of
directors and all meetings of the shareholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for the executive committee when required.
(b) He shall give, or cause to be given, notice of all meetings
of the shareholders and special meetings of the board of directors.
(c) He shall keep the seal of the corporation and, when
authorized by the board of directors or the executive committee, may affix the
same to any instrument and may attest the signature of any officer to any
instrument, but neither the presence of the seal nor the attestation by the
secretary shall be necessary to the validity of any instrument otherwise valid.
(d) He shall be under the supervision of the president. He shall
perform the duties of treasurer if no treasurer is elected. He shall perform
such other duties and have such
<PAGE> 21
other authority and powers as the board of directors may from time to time
prescribe or as the president may from time to time delegate.
5.09 Treasurer.
(a) The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements of the corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated by the board of directors.
(b) He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for disbursements, and
shall render to the president and directors, at the regular meetings of the
board, or whenever they may require it, an account of all of his transactions as
treasurer and of the financial condition of the corporation.
(c) If required by the board of directors, he shall give the
corporation a bond in such form, in such sum, and with such surety or sureties
as shall be satisfactory to the board for the faithful performance of the duties
of his office and for the restoration to the corporation, in case of his death,
resignation, retirement, or removal from office, of all books, papers, vouchers,
money, and other property of whatever kind in his possession or under his
control belonging to the corporation.
(d) He shall perform such other duties and have such other
authority and powers as the board of directors may from time to time prescribe
or as the president may from time to time delegate.
5.10 Excess Compensation. Any payments made to an officer of the
corporation such as a salary, commission, bonus, interest, or rent, or
entertainment expense incurred by him, which is disallowed in whole or in part
as a deductible expense by the Internal Revenue Service, will be reimbursed by
such officer to this corporation to the full extent of such disallowance. It
will be the duty of the Board of Directors to enforce payment of each such
amount disallowed. In lieu of payment by the officer, subject to the
determination of the directors, proportionate amounts may be withheld from his
future compensation payments until the amount owed to the corporation has been
recovered.
Article 6: Certificates and Shareholders
6.01 Certificates. Certificates in the form determined by the board
of directors shall be delivered representing all shares to which shareholders
are entitled. Certificates shall be consecutively numbered and shall be entered
in the books of the corporation as they are issued. Each certificate shall state
on the face thereof the holder's name, the number and class of shares, the par
value of shares, or a statement that the shares are without par value, and such
other matters as may be required by law. They shall be signed by the president
or vice president and such other officer or officers as the board of directors
shall designate, and may be sealed with the seal of the corporation or a
facsimile thereof. If any certificate is countersigned by a transfer agent, or
an assistant transfer agent, or registered by a registrar (either of which is
other than the corporation or an employee of the corporation), the signature of
the officer may be facsimile. Each certificate representing shares shall state
upon the face thereof: (A) that the corporation is organized under the laws of
the State of Texas; (B) the name of the person to whom issued; (C) the number
and class of shares and the designation of the series, if any, which such
certificate represents; and (D) the par value of each share represented by such
certificate, or a statement that the shares are without par value.
6.02 Issuance. Shares (both treasury and authorized but unissued) may
be issued for
<PAGE> 22
such consideration (not less than par value) and to such persons as the Board of
Directors may determine from time to time. Shares may not be issued until the
full amount of the consideration, fixed as provided by law, has been paid.
6.03 Payment for Shares. The consideration paid for the issuance of
shares shall consist of money paid, labor done (including services actually
performed for the corporation), or property (tangible or intangible) actually
received. Neither promissory notes nor the promise of future services shall
constitute payment or part payment for shares of the corporation. In the absence
of fraud in the transaction, the judgment of the Board of Directors as to the
value of the consideration received for shares shall be conclusive. When such
consideration has been paid to the corporation, the shares shall be deemed to
have been issued, the shareholder entitled to receive such issue shall be a
shareholder with respect to such shares, and the shares shall be considered
fully paid and nonassessable. The consideration received for shares shall be
allocated by the board of directors in accordance with law between stated
capital and capital surplus accounts.
6.04 No Pre-Emptive Rights. No shareholder or other person shall have
any pre-emptive right whatsoever.
6.05 Lien. For any indebtedness of a shareholder to the corporation,
the corporation shall have a first and prior lien on all shares of its stock
owned by such shareholder and on all dividends or other distributions declared
thereon.
6.06 Replacement of Lost, Stolen, or Destroyed Certificates.
The board of directors may direct a new certificate or certificates
to be issued in place of any certificate previously issued by the corporation
alleged to have been lost or destroyed, upon the making of an affidavit of that
fact by the person claiming the loss or destruction. In so doing the board of
directors may, in its discretion and as a condition precedent to the issuance
require a bond (with a surety or sureties satisfactory to the corporation) in
such sum as it may direct, as indemnity against any claim, or expense resulting
from any claim, that may be made against the corporation with respect to the
certificate alleged to have been lost or destroyed. When a certificate has been
lost, apparently destroyed, or wrongfully taken, and the holder of record fails
to notify the corporation within a reasonable time after such holder has notice
of it, and the corporation registers a transfer of the shares represented by the
certificate before receiving such notification, the holder of record is
precluded from making any claim against the corporation for the transfer or for
a new certificate.
6.07 Transfer of Shares. Shares of stock shall be transferable only
on the books of the corporation by the holder thereof in person or by his duly
authorize& attorney. Upon surrender, to the corporation or its transfer agent,
of a certificate representing shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, the corporation or
its transfer agent shall issue a new certificate to the person entitled thereto,
cancel the old certificate, and record the transaction upon its books.
6.08 Registered Shareholders. The corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in any share or shares on the part of any other person,
whether or not it has express or other notice thereof, except as otherwise
provided by law.
<PAGE> 23
Article 7: Indemnification
7.01 Indemnification of Directors, Officers, Employees, Etc.
Subject to the limitations set forth in Section 7.02, the corporation
shall indemnify any person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding, whether civil, criminal,
administrative, arbitrative, or investigative, including any appeal in such
proceeding and any inquiry or investigation that could lead to such proceeding,
by reason of the fact that the person is or was a director, officer, employee,
or agent of the corporation, or, while occupying such position with the
corporation, is or was serving at the request of the corporation in a similar
functionary position of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. Indemnification shall be against all
expenses, including, without limitation, attorneys' fees, court costs, expert
witness fees, judgments, decrees, fines, penalties, settlements, and reasonable
expenses actually incurred by the person in connection with the proceeding,
except that in any action brought by or on behalf of the corporation,
indemnification shall be limited to reasonable expenses actually incurred by the
person in connection with the proceeding.
7.02 Limitations on Indemnification
(a) If a person is found liable to the corporation or is found
liable on the basis that personal benefit was improperly received by such
person, whether or not the benefit resulted from an action taken in the person's
official capacity, the indemnification (1) is limited to reasonable expenses
actually incurred by the person in connection with the proceeding; and (2) shall
not be made in respect of any proceeding in which the person shall have been
found liable for willful or intentional misconduct in the performance of his
duty to the corporation.
(b) Indemnification under Section 7.01 of these Bylaws shall be
available only after a determination has been made that the person:
(1) acted in good faith;
(2) reasonably believed:
(i) In the case of conduct in an official capacity, his
conduct was in the best interests of the corporation;
and
(ii) In all other cases, that his conduct was at least
not opposed to the best interests of the corporation;
and
(3) In the case of any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful.
The termination of any action, suit, or proceeding by judgment,
order, settlement, conviction, or on a plea of nob contendere or its equivalent,
shall not of itself be determinative that the person failed to act in accordance
with these requirements. A person shall be deemed to have been found liable in
respect of any claim, issue or matter only after the person shall have been so
adjudged by a court of competent jurisdiction after exhaustion of all appeals
therefrom.
(c) The determination of indemnification required by Subsection
(b) must be made:
(1) By majority vote of a quorum of directors who at the
time of the vote are not named as defendants or respondents in the proceeding;
(2) If such a quorum cannot be obtained, by a majority vote
of a committee of the board of directors, designated to act in the matter by
majority vote of all directors, consisting solely of two or more directors who
at the time of the vote are not named defendants or respondents in the
proceeding;
<PAGE> 24
(3) By special legal counsel selected by the board of
directors or by a committee of the board by vote as set forth in Paragraphs (1)
or (2) of this Subsection (c), or, if such a quorum cannot be obtained and such
a committee cannot be established, by a majority vote of all directors; or
(4) By the shareholders in a vote that excludes the shares
held by those directors who are named defendants or respondents in the
proceeding.
(d) The determination as to reasonableness of expenses shall
be made in the same manner as the determination that indemnification is
permissible, except that if the determination that indemnification is
permissible is made by special legal counsel, determination as to reasonableness
of expenses shall be made in the manner specified in paragraph (3) of Subsection
(c), for the selection of special legal counsel.
(e) The provision for mandatory indemnification set forth in
Section 7.01, subject to the limitations set forth in this Section 7.02, shall
be deemed to constitute authorization of indemnification in the manner required
by law.
7.03 Indemnity for Successful Defense
Notwithstanding any limitation set forth in Sections 7.01 and 7.02
above, the corporation shall indemnify any person to which Section 7.01 applies
against reasonable expenses, including, without limitation, attorney's fees,
court costs and expert witness fees, incurred by such person in connection with
any proceeding, described in Section 7.01, in which such person is or was a
named defendant or respondent if such person has been wholly successful, on the
merits or otherwise, in the defense of the proceeding.
7.04 Advancement of Expenses
Reasonable expenses incurred by a director, officer, employee, or
agent of the corporation who was, is, or is threatened to be made a named
defendant or respondent in a proceeding, described in Section 7.01, may be paid
or reimbursed by the corporation in advance of the final disposition as
authorized by the board of directors. Before authorizing the advance, the board
of directors must determine that the facts then known to the board of directors
would not preclude indemnification under these bylaws.
In addition, the board must receive:
(1) A written affirmation by the director, officer-,
employee, or agent of that person's good faith belief that he meets the standard
of conduct, defined in Section 7.02 herein, which is necessary under these
bylaws for indemnification; and
(2) A written undertaking by or on behalf of the director,
officer, employee, or agent to repay the expenses if it is ultimately determined
that he has not met the standard of conduct, defined in Section 7.02 herein,
which is necessary under these bylaws for indemnification.
7.05 Indemnification Not Exclusive
The indemnification provided by this Article shall not be deemed
exclusive of any other power to indemnify or right to indemnification that the
corporation or any person referred to in this Article may have or acquire under
the laws of the State of Texas.
<PAGE> 25
7.06 Liability Insurance
The corporation may purchase and maintain insurance on behalf of any
person described in Section 7.01 against any liability asserted against and
incurred by that person whether or not the corporation would have the power to
indemnify him against that liability under the provisions of this Article.
7.07 Notification of Shareholders
Any indemnification or advance of expenses in accordance with this
Article 7 shall be reported in writing to the shareholders with or before the
notice or waiver of notice of the next shareholder's meeting or with or before
the next submission to shareholders of a consent to action without a meeting.
Article 8: General Provisions
8.01 Dividends and Reserves.
(a) Declaration and Payment. Subject to statute and the articles
of incorporation, dividends may be declared by the board of directors at any
regular or special meeting and may be paid in cash, in property, or in shares of
the corporation. The declaration and payment shall be at the discretion of the
board of directors.
(b) Record Date. The board of directors may fix in advance a
record date for the purpose of determining shareholders entitled to receive
payment of any dividend, the record date to be not more than fifty days prior to
the payment date of the dividend, or the board of directors may close the stock
transfer books for that purpose for a period of not more than fifty days prior
to the payment date of the dividend. In the absence of any action by the board
of directors, the date upon which the board of directors adopts the resolution
declaring the dividend shall be the record date.
(c) Reserves. By resolution the board of directors may create
such reserve or reserves out of the earned surplus of the corporation as the
directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends, or to repair or maintain any property
of the corporation, or for any other purpose they think beneficial to the
corporation. The directors may modify or abolish any such reserve in the manner
in which it was created.
8.02 Books and Records. The corporation shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of its shareholders and board of directors, and shall keep at its registered
office or principal place of business, or at the office of its transfer agent or
registrar, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of the shares held by each.
8.03 Annual Statement. The board of directors shall present at each
annual meeting of shareholders a full and clear statement of the business and
condition of the corporation ration, including a reasonably detailed balance
sheet, income statement, and surplus statement.
8.04 Checks and Notes. All checks or demands for money and notes of
the corporation shall be signed by such officer or officers or such other person
or persons as the board of directors may from time to time designate.
8.05 Fiscal Year. The fiscal year of the corporation shall be
selected by resolution of the board of directors.
8.06 Seal. The corporation seal (of which there may be one or more
exemplars) shall contain the name of the corporation and the name of the state
of incorporation. The seal may be
<PAGE> 26
used by impressing it or reproducing a facsimile of it, or otherwise.
8.07 Resignation. Any director, officer, or agent may resign by
giving written notice to the president or the secretary. The resignation shall
take effect at the time specified therein. Unless otherwise specified therein,
the acceptance of a resignation shall not be necessary to make it effective.
8.08 Interested Directors, Officers, and Shareholders.
(A) If paragraph (B) below is satisfied, no contract or other
transaction between the corporation and any of its directors, officers, or
shareholders (or any corporation or firm in which any of them is directly or
indirectly interested) shall be invalid solely because of this relationship or
because of the presence of such director, officer, or shareholder at the meeting
authorizing such contract or transaction, or such person's participation in such
meeting or authorization.
(B) Paragraph (A) above shall apply only if:
(1) The contract or transaction is fair to the corporation as of
the time it is authorized or ratified by the board of directors, a committee of
the board, or the shareholders; or
(2) The material facts of the relationship or interest of each
such director, officer, or shareholder are known or disclosed; (a) to the
shareholders and they nevertheless authorize or ratify the contract or
transaction by a majority of the shares present, each such interested person to
be counted for quorum and voting purposes; or (b) to the board of directors and
it nevertheless authorizes or ratifies the contract or transaction by a majority
of the directors present, each such interested director to be counted in
determining whether a quorum is present but not in calculating the majority
necessary to carry the vote.
(C) The provisions contained in paragraph (A) and (B) above shall not
be construed to invalidate a contract or transaction which would be valid in the
absence of such provisions.
8.09 Purchase Own Shares. The corporation may, directly or
indirectly, purchase its own shares to the extent of the aggregate of
unrestricted capital surplus available therefor and unrestricted reduction
surplus available therefor.
8.10 Construction. Whenever the context so requires, the masculine
shall include the feminine and neuter, and the singular shall include the
plural, and conversely. If any portion of these bylaws shall be invalid or
inoperative, then, so far as is reasonable and possible:
(a) The remainder of these bylaws shall be considered valid and
operative, and
(b) Effect shall be given to the intent manifested by the
portion held invalid or inoperative.
8.11 Amendment of Bylaws. These bylaws may be altered, amended, or
repealed at any meeting of the board of directors at which a quorum is present,
by the affirmative vote of a majority of the directors present at the meeting,
provided notice of the proposed alteration, amendment, or repeal is contained in
the notice of the meeting.
8.12 Table of Contents; Headings. The table of contents and headings
used in these bylaws have been inserted for convenience only and do not
constitute matter to be construed in interpretation.
<PAGE> 27
EXHIBIT 16.6
CONSENT OF TRUSTEE
We hereby consent that reports of examinations by Federal, State,
Territorial, or District authorities may be furnished by such authorities to the
Commission upon request therefor.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert C. Finley
--------------------------------
Robert C. Finley
President
<PAGE> 28
EXHIBIT 16.7
Latest Report of Condition of Trust Management, Inc.
<PAGE> 29
TEXAS DEPARTMENT OF BANKING
TRUST COMPANY
QUARTERLY REPORT OF CONDITION AND INCOME
================================================================================
Name and Address:
TRUST MANAGEMENT, INC.
210 WEST SIXTH STREET
SUITE 605
FORT WORTH, TEXAS 76102
- --------------------------------------------------------------------------------
Charter Number: 95-37 Reporting Period: January 1 through 06/30/1999
================================================================================
The Report of Conditions and Income must be printed, signed by an
authorized officer (or officers), and attested by not less than three
directors other than the officer(s) signing the report.
I, the undersigned officer, do hereby declare that this Report of
Condition and Income has been prepared in conformance with official
instructions and is true and correct.
================================================================================
Signature of Officer Authorized To Sign Report: Date Signed:
/s/ Leanna P. Sharp July 28, 1999
- --------------------------------------------------------------------------------
Name and Title of Authorized Officer: Area Code/Phone Number:
Leanna P. Sharp, Sr. Vice President (817) 335-2933
================================================================================
We, the undersigned directors, attest the correctness of this Report of
Condition and Income and declare that it has been examined by us and to
the best of our knowledge and belief has been prepared in conformance
with official instructions and is true and correct.
- --------------------------------------------------------------------------------
Signature of Director: Signature of Director: Signature of Director:
/s/ Robert C. Finley /s/ Dee S. Finley, Jr. /s/ James M. Whitton
- --------------------------------------------------------------------------------
<PAGE> 30
- --------------------------------------------------------------------------------
SECTION A TRUST MANAGEMENT, INC.
BALANCE SHEET 210 WEST SIXTH STREET
as of SUITE 605
06/30/1999 FORT WORTH, TEXAS 76102
(Month, Day, Year)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------
1. Cash ..................................................................... 29,109
1.a Mutual Funds ........................................................ 0
1.b Money Market Mutual Funds ........................................... 794147
2. Investment Securities (Schedule A1, Column B, line 5) .................... 0
3. Corporate Stock .......................................................... 256776
4. Trading Account Securities ............................................... 25000
5. Loans (net) .............................................................. 0
6. Premises, furniture, fixtures and other assets representing premises ..... 37371
7. Real Estate Owned other than premises .................................... 0
8. Other Assets (Schedule A2, line 16) ...................................... 228783
9. TOTAL ASSETS (sum of 1 through 8) ........................................ 1371186
- -----------------------------------------------------------------------------------------
LIABILITIES & EQUITY CAPITAL
- -----------------------------------------------------------------------------------------
10. Accounts Payable ......................................................... 6186
11. Accrued Taxes ............................................................ -17976
12. Accrued Interest ......................................................... 9214
13. Mortgage indebtedness .................................................... 0
14. Other liabilities for borrowed money ..................................... 0
15. Subordinated notes and debentures ........................................ 0
16. Other liabilities (Schedule A3, line 7) .................................. 14831
17. TOTAL LIABILITIES (sum of 10 through 16) ................................. 12255
18. EQUITY CAPITAL & RESERVES (Schedule A4, Column E, line 11) ............... 1358931
19. TOTAL LIABILITIES & EQUITY CAPITAL (sum of 17 and 18) .................... 1371186
- -----------------------------------------------------------------------------------------
SCHEDULE A1 - INVESTMENT SECURITIES
- -----------------------------------------------------------------------------------------
Type of Investments Market Value Book Value
1. U.S. Government obligations ........................... 0 0
2. U.S. Government agencies obligations .................. 0 0
3. State, county and municipal obligations ............... 0 0
4. Other bonds, notes and debentures ..................... 0 0
5. TOTAL INVESTMENT SECURITIES (sum of 1 through 4) ...... 0 0
- -----------------------------------------------------------------------------------------
SCHEDULE A2 - OTHER ASSETS
- -----------------------------------------------------------------------------------------
1. Accounts Receivable ...................................................... 124505
2. Due from affiliates or subsidiaries (net) ................................ 0
3. Interest earned or accrued but not collected ............................. 51441
4. Prepaid expenses ......................................................... 21726
5. Cash items not in the process of collection .............................. 0
6. Deferred tax assets (net) ................................................ 0
7. Accrued interest purchased ............................................... 0
8. Margin accounts .......................................................... 0
9. Purchased computer software .............................................. 7428
10. Direct lease financing ................................................... 0
11. Investment in unconsolidated subsidiaries & associated companies ......... 0
12. Cash surrender value of life insurance policies .......................... 0
13. Furniture and equipment rented to others ................................. 0
14. Goodwill ................................................................. 23683
15. All other (itemize amounts over 25% of line 16) .......................... 0
16. TOTAL OTHER ASSETS (sum of 1 through 15) ................................. 228783
- -----------------------------------------------------------------------------------------
SCHEDULE A3 - OTHER LIABILITIES
- -----------------------------------------------------------------------------------------
1. Due to affiliates or subsidiaries (net) .................................. 0
2. Dividends declared but not yet paid ...................................... 0
3. Expenses accrued and unpaid .............................................. 7986
4. Minority interest in consolidated subsidiaries ........................... 0
5. Deferred income taxes .................................................... 6845
6. All other (itemize amounts over 25% of line 7) ........................... 0
7. TOTAL OTHER LIABILITIES (sum of 1 through 6) ............................. 14831
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SCHEDULE A4 A. B. C. D. E.
CHANGES IN EQUITY Preferred Common Surplus Undivided Total
CAPITAL Stock Stock Profits and Equity
(Year to Date) (Par Value) (Par Value) Cap. Resv. Capital
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Balance end of previous year 0 39972 760028 541885 1341885
2. Adjustments 0 0 0 0 0
3. Adjusted balance end of prev. year 0 39972 760028 541885 1371885
4. Net income (loss) 0 0 0 17046 17046
5. Sale, conversion, acquisition or
retirement of Capital net
a. Transactions with own holding
co. or affiliates 0 0 0 0 0
b. Other 0 0 0 0 0
6. Charges incident to mergers and
absorptions (net) 0 0 0 0 0
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
CHANGES IN EQUITY Preferred Common Surplus Undivided Total Equity
CAPITAL Stock Stock Profits and
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
7. LESS: Cash div. declared on
Common Stock 0 0 0 0 0
8. LESS: Cash div. declared on
Preferred Stock 0 0 0 0 0
9. Stock dividend issued 0 0 0 0 0
10. Other: inc (dec) (itemize below) 0 0 0 0 0
11. Balance end of Current Period 0 39972 760028 558931 1358931
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
MEMORANDA (Press F2 to Add/Change #1, F3 to Add/Change #2)
1. Itemize adjustments to shown in item 2:
2. Itemize other increases or decreases shown in item 10:
- --------------------------------------------------------------------------------
<PAGE> 32
<TABLE>
<S> <C>
==================================================================================================
SCHEDULE B - INCOME AND EXPENSES
==================================================================================================
1. Operating Income:
1a. Interest and fees on loans .......................................... 0
1b. Interest on balances with depositor institutions .................... 142432
1c. Interest on U.S. Treasury securities ................................ 7065
1d. Interest on obligations of other U.S. Gov. agencies and corp ........ 11175
1e. Interest on obligations of States and political sub. of the U.S. .... 0
1f. Interest on other bonds, notes, and debentures ...................... 0
1g. Dividends on corporate stock ........................................ 12075
1h. Income from lease financing ......................................... 0
1i. Income from fiduciary activities (Section D, line 5) ................ 232323
1j. Other service charges, commissions, and fees ........................ 1640
1k. Other income (Schedule B1, line 8) .................................. 0
1l. TOTAL OPERATING INCOME (sum of 1a through 1k) ....................... 4066710
2. Operating Expenses:
2a. Salaries and wages .................................................. 178875
2b. Employee benefits ................................................... 21958
2c. Audits and examinations ............................................. 4500
2d. Marketing ........................................................... 11005
2e. Interest on borrowed money .......................................... 0
2f. Interest on subordinated notes and debentures ....................... 0
2g. Occupancy expense (net of rental income) ............................ 12952
2h. Furniture and equipment expense ..................................... 16299
2i. Provision for possible loan losses .................................. 0
2j. Other operating expenses (Schedule B2, line 14) ..................... 118641
2k. TOTAL OPERATING EXPENSES (sum of 2a through 2j) ..................... 364230
3. Income before income taxes and securities gains (11 minutes 2k) ........... 42480
4. Securities gains (losses) ................................................. 0
5. Applicable income taxes ................................................... -25434
6. Net income (3 plus or minus 4 and 5) ...................................... 17046
7. Extraordinary items (net of tax effect) ................................... 0
8. NET OPERATING INCOME (6 plus or minus 7) .................................. 17046
==================================================================================================
SCHEDULE B1 - OTHER OPERATING INCOME
==================================================================================================
1. Investment advisory services (trust accounts) ............................. 0
2. Investment advisory services (non-trust accounts) ......................... 0
3. Income from affiliates (Schedule D1, line 6) .............................. 0
4 Trading account (net) ..................................................... 0
5. Equity in net income of unconsolidated subsidiaries ....................... 0
6. Data processing (non-affiliate) ........................................... 0
7. All other (non-affiliate) ................................................. 0
8. TOTAL OTHER OPERATING INCOME (sum of 1 through 7) ......................... 0
==================================================================================================
SCHEDULE B2 - OTHER OPERATING EXPENSES
==================================================================================================
1. Directors and committee fees .............................................. 2100
2. Insurance ................................................................. 3729
3. Legal fees ................................................................ 1101
4. Losses on the sale of assets (excluding securities) ....................... 0
5. Amortization of intangible assets ......................................... 3946
6. Franchise taxes ........................................................... 4724
7. Travel & entertainment .................................................... 4190
8. Broker/Dealer (non-affiliate) ............................................. 0
9. Investment advisory services (non-affiliate) .............................. 0
10. Referral fees (non-affiliate) ............................................. 0
11. Data processing (non-affiliate) ........................................... 33945
12. Affiliate service(s) (Schedule D2, line 7) ................................ 0
13. All other (non-affiliate) ................................................. 64906
14. TOTAL OTHER OPERATING EXPENSES (sum of 1 through 13) ...................... 118641
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SECTION C Em. Benefit Personal Estates Employee All Other Totals
REPORT OF TRUST ASSETS Trust Trust Benefit Agy
Agy
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Noninterest Bearing Deposits 0 0 0 0 0 0
2. Interest Bearing Deposits 8 8 0 0 431 431
3. U.S.G. & Agency Obligations 0 0 0 0 1100 1100
4. State, Co. & Muni Obligations 0 0 0 0 0 0
5. Money Market Mutual Funds 0 0 0 0 7080 7080
6. Other Short Term Obligations 0 0 0 0 0 0
7. Other Notes & Bonds 0 0 0 0 0 0
8. Common & Preferred Stocks 0 0 0 0 0 0
9. Real Estate Mortgages 0 0 0 0 0 0
10. Real Estate 0 0 0 0 0 0
11. Miscellaneous Assets 0 0 0 0 6 6
12. Total Discretionary Assets 0 0 0 0 8617 8617
13. Total # of Discretionary Assets 0 0 0 0 37 37
14. Total Non-Discretionary Assets 82659 0 0 0 0 82659
15. Total # of Non-Discretionary Accounts 3260 0 0 0 0 3260
16. TOTAL ASSETS (sum of 12 and 14) 82659 0 0 0 8617 91276
17. TOTAL # OF ACCOUNTS (sum of 13 and 15) 3260 0 0 0 37 3297
18. MEMORANDA TOTAL LIABILITIES 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
SECTION D - FIDUCIARY INCOME (CONFIDENTIAL INFORMATION)
- -----------------------------------------------------------------------------------------------
INCOME FROM FIDUCIARY ACTIVITIES
1. Gross Fees, Commissions & Other Fiduciary Income
1a. Employee Benefit Trust Accounts ................................... 124993
1b. Personal Trust & Estate Accounts .................................. 0
1c. Employee Benefit Agency Accounts .................................. 0
1d. Other Agency Accounts ............................................. 0
1e. Corporate Trust & Agency Accounts ................................. 107330
1f. All Other Fiduciary Income......................................... 0
1g. Gross Fiduciary Income (sum of 1a through 1f) ..................... 232323
- -----------------------------------------------------------------------------------------------
2. Settlements, Surcharges & Other Losses)
2a. Employee Benefit Trust Accounts - Discretionary Accounts .......... 0
2b. Personal Trust & Estate Accounts - Discretionary Accounts ......... 0
2c. Employee Benefit Agencies - Discretionary Accounts ................ 0
2d. Other Agency Accounts - Discretionary Accounts .................... 0
2e. Employee Benefit Trust Accounts - Non-Discretionary Accounts ...... 0
2f. Personal Trust & Estate Accounts - Non-Discretionary Accounts ..... 0
2g. Employee Benefit Agencies - Non-Discretionary Accounts ............ 0
2h. Other Agency Accounts - Non-Discretionary Accounts ................ 0
2i. Corporate Trust & Agency Accounts ................................. 0
2j. All Other Activities .............................................. 0
2k. Gross Settlement, Surcharges & Other Losses ....................... 0
3. Recoveries To Previously Reported Losses .......................... 0
4. Net Settlements, Surcharges & Other Losses ........................ 0
- -----------------------------------------------------------------------------------------------
5. FIDUCIARY INCOME (LOSS) ........................................... 232323
===============================================================================================
Gross Settlements, Surcharges & Other Losses by Typo
===============================================================================================
6. Investment ........................................................ 0
7. Administrative .................................................... 0
8. Operational ....................................................... 0
9. Gross Settlements, Surcharges & Other Losses ...................... 0
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
====================================================================================================================
MEMORANDA (CONFIDENTIAL) Number of Accounts
=============================================================================================-----------------------
<S> <C> <C>
Non Fiduciary Advisory/Management Accounts ...................................................... 0 0
- --------------------------------------------------------------------------------------------------------------------
GENERAL COMMENTS (press F2 to enter/edit comments):
- --------------------------------------------------------------------------------------------------------------------
SCHEDULE C1 Class Type of Total No. of Part.
COLLECTIVE INVESTMENT FUNDS Code Code Fund Acct. in Fund
====================================================================================================================
Name of Fund 0 0 0 0
====================================================================================================================
CLASSIFICATION CODE TYPE OF FUND
01 Personal Trust 01 Equity 07 Mortgage
02 Employee Benefit 02 Diversified or Balanced 08 Foreign Equity
03 Keogh (HR10) 03 Fixed Income 09 Foreign Fixed Income
04 Charitable Trust 04 Municipal Bond 10 Index Equity
05 Other 05 Real Estate Equity 11 Index Fixed Income
06 Short Term Investment 12 Other
====================================================================================================================
SCHEDULE C2 Number of Accounts Prin. Amt Out Securities
====================================================================================================================
Type of Account
1. Corporate Securities Trusteeships .......................... 37 ..................... 79985
2. Tax Exempt & Other Municipal Sec. Trusteeships ............. 0 ..................... 0
3. Stock or Bond Transfer Agent or Registrar .................. 0 .....................
4. Mutual Fund Transfer Agent ................................. 0 .....................
5. Separate Dividend & Interest/Coupon Paying Agent ........... 0 .....................
6. All Other Corporate Agencies ............................... 0 .....................
7. TOTALS ..................................................... 37 ..................... 79985
====================================================================================================================
SCHEDULE D1 (CONFIDENTIAL)
====================================================================================================================
Income for Services Provided TO Affiliate(s)
1. Investment advisory services ................................................................... 0
2. Referral Fees .................................................................................. 0
3. Asset management/custodial ..................................................................... 0
4. Data processing ................................................................................ 0
5. All Other ...................................................................................... 0
6. Total Affiliate Services (sum of 1 through 5) .................................................. 0
====================================================================================================================
SCHEDULE D2 (CONFIDENTIAL)
====================================================================================================================
Expenses for Services Provided BY Affiliates(s)
1. Broker/Dealer .................................................................................. 0
2. Investment advisory services ................................................................... 0
3. Referral Fees .................................................................................. 0
4. Asset management/custodial ..................................................................... 0
5. Data processing ................................................................................ 0
6. All Other ...................................................................................... 0
7. Total Affiliate Services (sum of 1 through 6) .................................................. 0
====================================================================================================================
</TABLE>
