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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 2000
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. 3
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
8144 WALNUT HILL LANE, NUMBER 680 8144 WALNUT HILL LANE, NUMBER 680
DALLAS, TEXAS 75231 DALLAS, TEXAS 75231
(214)360-9966 (214)360-9966
(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
811 BARTON SPRINGS ROAD, SUITE 730 5700 S.W. 45TH STREET
AUSTIN, TEXAS 78704 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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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............................................... Not Applicable
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 Notes; Collateral
for the Notes
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.................... Use of Proceeds; The Company, Security
Ownership of Certain Beneficial
Owners and Management; Management --
Certain Relationships and Related
Transactions
16. Description of Business................................ Available Information; Risk Factors;
The Company; 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
19. Certain Relationships and Related Transactions......... The Company -- The Business of the
Company; Management -- Certain
Relationships and Transactions
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ITEM
NO. ITEM LOCATION IN PROSPECTUS
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20. Market for Common Equity and Related Stockholder
Matters.............................................. Not Applicable
21. Executive Compensation................................. Management
22. Financial Statements................................... Financial statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. Not Applicable
</TABLE>
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<PAGE> 4
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. Our address is 8144 Walnut Lane, Number
680, Dallas, Texas 75231. Our telephone number is
(214) 360-9966.
What we do: Purchase passenger cars, light trucks, suburban utility
vehicles, minivans and motorcycles and lease them to
customers with damaged credit ratings; Transition
Leasing Management, Inc. performs all services necessary
for our operations.
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 2.
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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........... 8.0% $ 20,000 $ 1,600,000
Other offering expenses..................... 2.0 5,000 400,000
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. This Offering will terminate
on the first to occur of:
- March 31, 2000, if we have not received subscriptions totaling $250,000
by that date,
- our receipt of $20,000,000 in subscriptions,
- December 31, 2000 or
- such earlier date as we elect in our sole discretion.
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The date of this Prospectus is January 25, 2000
<PAGE> 5
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 set forth
on the cover page of this prospectus and 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.
Terms of the Notes. The basic terms of the notes we are offering to you are
as follows:
Maturity Date: December 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
day after your subscription payment is received.
Principal Payments: No principal payments will be due until maturity.
Sinking Fund: From and after the earlier of December 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 June 30, 2001. 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. Any
redemption will be effected at a price equal to the
principal amount of the note outstanding plus
interest accrued through the date of the
redemption.
Collateral for our notes: All of our assets: our vehicles, our lease
contracts and, should we lapse into default under
the notes, our funds will be held in trust for the
benefit of the noteholders.
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:
RESTRICTIONS ON OUR BUSINESS ACTIVITY, RESTRICTIONS ON OUR ASSETS AND THE
ABSENCE OF ANY GUARANTOR MAY LIMIT OUT ABILITY TO REPAY THE NOTES AND YOUR
ABILITY TO SEEK PAYMENTS FROM OTHER SOURCES
We were organized by Transition Leasing 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, Transition Leasing, 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.
OUR SINKING FUND PAYMENTS MAY NOT GENERATE SUFFICIENT PROCEEDS OR ASSETS TO
REPAY THE ENTIRE PRINCIPAL AMOUNT OF YOUR NOTES AT MATURITY
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 December 31, 2002 or 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.
PAYMENT OF YOUR NOTES WILL DEPEND UPON CREDIT DECISIONS BY TRANSITION LEASING
MANAGEMENT, INC.
We will be dependent upon Transition Leasing'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 Transition Leasing
could impair our ability to repay the notes.
A FAILURE BY TRANSITION LEASING MANAGEMENT, INC. TO FIND ENOUGH LEASE CUSTOMERS
TO MAKE ADEQUATE USE OF OUR CASH FLOW WOULD REDUCE OUR ABILITY TO REPAY YOUR
NOTES
We will depend on Transition Leasing 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
Transition Leasing'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
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<PAGE> 7
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
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.
WE MAY REDEEM YOUR NOTES PRIOR TO THEIR MATURITY AND AT A TIME WHEN YOU CANNOT
REINVEST THEM WITH A YIELD COMPARABLE TO THE YIELD OF THE NOTES. THE ACTUAL
YIELD RATE OF THE NOTES IS LESS THAN THE STATED INTEREST RATE
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.
TRANSITION LEASING MANAGEMENT, INC.'S POLICY REGARDING COLLECTION AND DEFAULTS
MAY IMPAIR OUR PROFITABILITY AND ABILITY TO REPAY THE NOTES
In the event that a lease payment is more than 30 days overdue, Transition
Leasing generally will commence repossession of the leased vehicle. However,
Transition Leasing 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.
OVERESTIMATION OF THE RESIDUAL VALUE OF LEASED VEHICLES COULD CAUSE US TO SUFFER
LOSSES WHEN VEHICLES ARE REPOSSESSED OR RETURNED TO US UPON LEASE EXPIRATION
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 Transition Leasing.
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.
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<PAGE> 8
THE ABSENCE OF ANY MARKET FOR THE NOTES MAY LIMIT YOUR ABILITY TO SELL NOTES
PRIOR TO THEIR MATURITY OR TO USE THEM AS COLLATERAL FOR LOANS
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.
IF WE DEFAULT UNDER THE NOTES OR THE INDENTURE, THE TRUSTEE WILL BE PAID ALL
AMOUNTS OWED THE TRUSTEE BEFORE ANY PAYMENTS ARE MADE TO HOLDERS OF NOTES
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.
BECAUSE THE RATE OF INTEREST ON THE NOTES EXCEEDS THE RATE OF INTEREST THAT WE
CAN EARN ON THE INVESTMENTS PERMITTED UNDER THE TERMS OF THE INDENTURE, FAILURE
TO MAKE PROMPT USE OF OUR PROCEEDS TO PURCHASE AND LEASE VEHICLES MAY REDUCE OUR
ABILITY TO REPAY THE NOTES
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 the yields we anticipate receiving from the lease contracts and
less than the cost of such funds, i.e., the interest rate payable on the notes.
CERTAIN LEGAL MATTERS RELATING TO THE CONTRACTS
Some creditors may have rights with respect to individual leased vehicles
which will limit the value of such vehicles as collateral or as a source of
repayment funds. 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.
Transition Leasing may find it difficult to collect fully from lease
customers who declare bankruptcy or who have insufficient assets to pay the
amount owed to us and Transition Leasing's failure to do so will diminish our
profitability and our ability to repay the notes. 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.
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<PAGE> 9
Federal and state consumer protection laws may limit our ability to enforce
the leases generated by Transition Leasing. 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 lessors 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 a contract liable to the lease customer for any
violation by the assignor. Accordingly, as a holder of the lease contracts, we
could be subject to liability to a lease customer under one or more of the lease
contracts. Transition Leasing 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,
Transition Leasing will be obligated to repurchase the lease contract.
TORT CLAIMANTS AGAINST OUR LEASE CUSTOMERS MAY SEEK RECOVERY FROM US AS THE
OWNER OF THE LEASED VEHICLE
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
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 MAY REDUCE OUR PROFITABILITY AND ABILITY TO REPAY THE
NOTES
We are the third single-purpose vehicle leasing subsidiary formed by
Transition Leasing. Prior to forming our Company, Transition Leasing organized
Transition Auto Finance, Inc. ("Transition Auto Finance, Inc."), and Transition
Auto Finance II, Inc. ("Transition Auto Finance II, Inc."). Transition Auto
Finance, Inc. has redeemed all the notes it had issued and no longer conducts
business. Transition Auto Finance II, Inc. 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 Transition
Auto Finance II, Inc. is engaging in that same activity, we would be competing
against Transition Auto Finance II, Inc. 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 Transition Auto Finance II, Inc.
has completed investing its funds in vehicles and leases. In addition,
Transition Leasing has committed that once Transition Auto Finance II, Inc. has
fully invested its funds in vehicles and leases, all vehicle lease contracts
purchased or originated by Transition Leasing 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 Transition Auto Finance II, Inc. to
acquire vehicle lease contracts and vehicles with proceeds from repossession of
its leased vehicles or prepayments of its lease contracts. Transition Leasing
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 Transition Leasing and of Transition Auto Finance
II, Inc.. There are real and on-going conflicts of interest between us and one
or both of these two entities. There are and will be conflicts of interest with
respect to allocation of management time, services, overhead expenses and
functions. Management of Transition Leasing intends to resolve any such
conflicts in a manner that is fair and equitable to us. You could be subject to
the risk that any particular conflict might be resolved in a manner that
adversely affects you and the other noteholders.
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<PAGE> 10
In addition, we anticipate having a conflict of interest with respect to
the decisions as to which lease customers and lease contracts originated by
Transition Leasing are to be acquired by us or by parties other than us,
including Transition Leasing and affiliates, which may include future
subsidiaries. To minimize these conflicts, Transition Leasing has determined
that, once Transition Auto Finance II, Inc. has fully invested its funds in
vehicles and leasing, any future lease contracts originated by Transition
Leasing 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 Transition Auto Finance II, Inc. 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 Transition Leasing 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 Transition Leasing'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 Transition Leasing,
including the marketing fee, are reasonable based on comparable fees paid to
other lease brokers (or facilitators) in automobile leasing transactions
involving customers with non-prime credit ratings.
SALE OF ONLY A SMALL AMOUNT OF NOTES MAY INCREASE THE POTENTIAL ADVERSE EFFECT
OF AN INDIVIDUAL LEASE DEFAULT AND, BECAUSE A PORTION OF OUR EXPENSES ARE FIXED,
MAY OTHERWISE REDUCE OUR ABILITY TO GENERATE THE FUNDS NECESSARY TO REPAY THE
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 November 9, 1999,
and as adjusted to reflect the sale of the minimum amount of notes offered
hereby.
<TABLE>
<CAPTION>
AS OF NOVEMBER 9, 1999
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AS ADJUSTED
MINIMUM
ACTUAL OFFERING
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<S> <C> <C>
LIABILITIES
11% Secured Notes Due December 31, 2004................... $250,000
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>
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, 2000, 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. The costs of ongoing operations will be borne by
Transition Leasing and will be reimbursed to Transition Leasing through payment
of monthly servicing and administration fees.
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 2.0% of the aggregate principal amount of the
notes sold; and
- we will use up to 2.0% 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 Transition Leasing, and we
will reimburse Transition Leasing an amount not to exceed such 2.0%.
Transition Leasing has agreed to pay expenses of the offering in excess
of 2.0% 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 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.
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<PAGE> 12
Our use of the proceeds of this offering is set forth in the table
following this paragraph and in the pie charts below the table. In calculating
the amount of commissions to be paid to the underwriters of our offering, the
table assumes that we will pay to the underwriters the maximum amount of due
diligence reimbursement permitted under the terms of the underwriting agreement.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
($250,000) ($20,000,000)
---------- -------------
<S> <C> <C>
Offering and Organizational Expenses........................ $ 5,000 $ 400,000
Broker/Dealer Commissions................................... 20,000 1,600,000
Purchase of Contracts and Leased Vehicles................... 225,000 18,000,000
Total............................................. 250,000 20,000,000
</TABLE>
We will pay the offering and organizational expenses to our parent,
Transition Leasing, as reimbursement for a portion of such expenses it has paid
on our behalf.
PIE CHARTS
Minimum - $250,000
Purchase of Contracts and Leased Vehicles ($225,000)
Broker/Dealer Commissions ($20,000)
Offering and Organizational Expenses ($5,000)
Maximum - $20,000,000
Purchase of Contracts and Leased Vehicles ($18,000,000)
Broker/Dealer Commissions ($1,600,000)
Offering and Organizational Expenses ($400,000)
-8-
<PAGE> 13
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> 14
DESCRIPTION OF THE NOTES
The notes will be issued pursuant to an Indenture between ourselves and
Trust Management, Inc., who will serve as Trustee. Transition Leasing 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, Transition Leasing 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 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 December 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. You will have no contractual recourse
against Transition Leasing 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> 15
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
- 18% per annum; or
- 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, December 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.
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<PAGE> 16
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 a function of a number of
factors. 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.
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. 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 June 30, 2001, 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;
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<PAGE> 17
- the name and address of the paying agent;
- 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.
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.
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<PAGE> 18
THE CONTRACTS
Each of the contracts will be a vehicle lease contract that is
- purchased from an independent third party or
- acquired in a transaction originated by Transition Leasing. Each lease
contract will lease a new vehicle or a late model vehicle that is not
more than four model years old at the time of lease (including passenger
cars, minivans, sport/utility vehicles, light trucks and motorcycles).
We will purchase or acquire 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. To minimize conflicts of interest among
potential buyers with respect to lease contracts originated by Transition
Leasing, Transition Leasing has determined that, after Transition Auto Finance
II, Inc. 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 Transition Auto Finance II, Inc. to acquire vehicles with proceeds from
repossession of its leased vehicles or prepayment of its lease contracts.
We will take the following steps to assure the priority and perfection of
the Trustee's security interest in each lease contract and vehicle:
- we will deliver each lease contract we acquire to the Trustee and label
it with a notice indicating the Trustee's security interest;
- we will file a UCC financing statement listing such lease contract, and
also covering the proceeds therefrom, in the appropriate public office;
and
- we will have each vehicle's certificate of title issued to reflect us as
the owner and the Trustee as the 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.
To date, Transition Leasing has done business only in Texas but it is in
the process of expanding its operations to other states. The first such state
will be Louisiana. We have formed a subsidiary, Transition Auto Finance III LA,
L.L.C. to execute leases with Louisiana customers. We may form subsidiaries to
do business in other states as Transition Leasing expands its operations,
depending upon the legal requirements of doing business in those states.
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 Transition Leasing. 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 Transition Leasing. 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
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<PAGE> 19
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 Transition Leasing), 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.
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 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.
Transition Leasing, 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
Transition Leasing's possession or control are held by Transition Leasing
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 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
Transition Leasing certify to the Trustee as being eligible under the
lease contract criteria specified in the Indenture.
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<PAGE> 20
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 Transition Leasing 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.
"Allowed expenses" will be limited to:
- the expenses and fees of the Trustee under the Indenture;
- fees charged by Transition Leasing 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 Transition
Leasing 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 Transition Leasing 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).
Transition Leasing will pay all other general administrative and overhead
expenses incurred by us. The following table summarizes our estimates of the
anticipated allowed expenses:
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<PAGE> 21
SUMMARY OF ESTIMATED ALLOWED EXPENSES
<TABLE>
<CAPTION>
ALLOWED EXPENSES ESTIMATED AMOUNT
---------------- ----------------
<S> <C>
Servicing Fees
Contract Servicing Fee (paid to Transition
Leasing)................................... $20 per month per lease contract
Purchase Administration Fee (paid to
Transition Leasing)........................ $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 Transition Leasing)...... 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
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 Transition Leasing 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 Transition Leasing)...... 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 or 1/4 of 1%
of taxable capital
</TABLE>
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<PAGE> 22
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 state law.
- Vehicles. The vehicles will be automobiles, trucks or motorcycles subject
to the state law in which such vehicle has been leased. Generally, state
laws require that liens on vehicles be evidenced either on the title for
such vehicles or by a filing under the Uniform Commercial Code in effect
in such state. In Texas, for instance, 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.
Under Louisiana law, however, a financing statement setting forth
specified information converting the vehicle must be filed to perfect a
security interest in a vehicle subject to the Vehicle Certificate of
Title law. 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. The Uniform Commercial Code in effect in both Texas and Louisiana
defines such lease contracts as "chattel paper." The UCC provides that a
security interest in chattel paper may be perfected by filing a financing
statement, and further 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 and Master Purchasing Agreement. The Servicing
Agreement and Master Purchasing Agreement are contractual agreements and
are considered "general intangibles" under the UCC in effect in both
Texas and Louisiana. Security 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 the UCC, except with respect to
proceeds (Section 9.306 of the UCC) 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 or
to a security interest 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
in effect in Texas and Louisiana, and the Trustee's lien in such proceeds
is perfected by perfection of the security interest underlying property
as noted above, subject to Section 9.306 of the UCC in effect in Texas
and Louisiana.
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.
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<PAGE> 23
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
The gross proceeds in the final stage of the above flow chart are applied
in the following order:
- First, interest is paid by Trustee from transfers to the sinking fund
account.
- Second, trustee's fees and expenses are paid from the operating account.
- Third, if we are not then in default under the Indenture, other allowed
expenses are paid from the operating account.
- Fourth, if we are not then in default under the Indenture:
- After the sinking fund trigger date, any remaining proceeds are
deposited into the sinking fund account and held by Trustee for payment
of notes.
- Before the sinking fund trigger date, any remaining proceeds are used to
purchase or acquire additional eligible lease contracts.
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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
Transition Leasing. Our principal offices are located at 8144 Walnut Hill Lane,
#680, Dallas, Texas 75231 and our telephone number is (214) 360-9966.
We have formed a Louisiana subsidiary which will own the vehicles leased in
Louisiana and be a party to the lease contracts originated by Transition Leasing
with Louisiana residents. As of the date of this Prospectus, Transition Leasing
has two other subsidiaries -- Transition Auto Finance, Inc. and Transition Auto
Finance II, Inc. Although Transition Auto Finance, Inc. no longer conducts
operations, both Transition Auto Finance II, Inc. and Transition Auto Finance,
Inc. 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). Transition Auto Finance, Inc. sold all of its vehicles and
lease contracts to Transition Auto Finance II, Inc. and repaid its noteholders
entirely, prior to the maturity of their notes. Both Transition Auto Finance,
Inc. and Transition Auto Finance II, Inc. have made all interest payments in
accordance with the terms of the notes they issued.
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, Transition Leasing 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 to new and late model
Harley-Davidson motorcycles, with consumer retail prices averaging approximately
$18,500. We expect that most of the lease contracts will be originated by
Transition Leasing. Transition Leasing 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. Transition
Leasing anticipates that most motorcycle leases will be originated from sources
other than Harley-Davidson dealers, such as independent dealers and other
sellers located on the internet, and internally from Transition Leasing's own
efforts. Transition Leasing
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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 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, Transition Leasing 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. Transition Leasing 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, Transition Leasing seeks customers that have stable
employment providing regular income and possess a strong need to acquire
transportation. Transition Leasing 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 Transition Leasing 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. Transition Leasing'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 which are:
- (i) at the end of their original lease period;
- (ii) designated as "Program Cars" by dealers; or
- (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 Transition Leasing are subject to regulation under federal, state
and local laws and regulations concerning many aspects of their respective
businesses.
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 Transition
Leasing. 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. Transition Leasing has been issued a license as a lessor under the
legislation and, as such, Transition Leasing is deemed to be licensed as a lease
facilitator as well. We and Transition Leasing 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
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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 Transition Leasing
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.
The Texas 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.
Under Louisiana law, any person engaged in the business of leasing or
renting automobiles or trucks must first obtain a license from the Louisiana
Motor Vehicle Commission. In determining qualifications and eligibility of an
applicant for a license, the Motor Vehicle Commission must consider the extent
to which the applicant meets the criteria and policies established in applicable
Louisiana statutes and the regulations promulgated by the Louisiana Motor
Vehicle Commission, which include requirements that applicants have an adequate
place of business, permanently affixed sign, useable telephone with a listed
number, minimum required liability and garage liability insurance, post a bond
in the amount of $10,000, and demonstrate business integrity based on the
applicant's experience, business history and intention to devote full or part
time to the business. In addition, persons employed by licensed motor vehicle
lessors whose duties include the leasing or offering for lease of motor vehicles
on behalf of the licensee must have a license issued by the Louisiana Motor
Vehicle Commission, and must carry this license when engaged in such business.
The licenses issued by the Motor Vehicle Commission are for a period of one
year. Prior to carrying out any vehicle leasing business in Louisiana, our
Louisiana subsidiary will obtain the required licenses from the Motor Vehicle
Commission.
Under Louisiana statutes and the regulations promulgated by the Louisiana
Used Motor Vehicle and Parts Commission, lessors of motorcycles are required to
obtain a license from the Louisiana Used Motor Vehicle and Parts Commission. In
determining qualifications and eligibility of an applicant for a license to
lease motorcycles, the Used Motor Vehicle and Parts Commission must consider the
extent to which the applicant meets the criteria and policies established in the
law and regulations, which require that applicants have an adequate place of
business, permanently affixed sign, useable telephone with a listed number,
minimum required liability insurance, and demonstrated business integrity based
on the applicant's experience, business history and intention to devote full or
part time to the business. The licenses issued by the Used Motor Vehicle and
Parts Commission are for a period of one year. Prior to carrying out any
motorcycle leasing business in Louisiana, our Louisiana subsidiary will obtain
the required license from the Used Motor Vehicle and Parts Commission.
We must qualify for a license as a lessor in Texas and Louisiana, and, as
mentioned above, we have applied for such licenses. In order to qualify for such
licenses, 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. We have received opinions of
counsel (in Texas, from the law firm of Brown, McCarroll & Oaks Hartline and, in
Louisiana, from the law firm of King, LeBlanc & Bland) to the effect that our
intended method of business is in compliance with applicable state statutory and
regulatory requirements. A copy of these opinions have been filed as exhibits to
the Registration Statement of which this Prospectus is a part.
While we believe that we and Transition Leasing will be able to comply with
the requirements of Texas and Louisiana statutes and regulations, we are unable
to predict the extent to which the terms of future regulations promulgated in
these states and/or the administration of the legislation by their respective
motor vehicle commissions will make the operation of our business and the
business of Transition Leasing significantly more difficult and/or costly or
otherwise have a material adverse effect on us.
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<PAGE> 28
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 Transition Leasing'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 Transition Leasing's
activities. 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 Transition Leasing's
activities.
PRIOR PERFORMANCE OF SUBSIDIARIES
Prior to our commencing this offering, Transition Leasing 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, Transition Auto
Finance, Inc., was organized in 1994, and in 1996 sold variable rate promissory
notes in an aggregate principal amount of $2,883,000. Transition Auto Finance
II, Inc., Transition Leasing'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
Transition Auto Finance, Inc. and Transition Auto Finance II, Inc. have been
timely paid by those entities. Transition Auto Finance, Inc.'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). Transition Auto Finance II, Inc.'s portfolio, which through
August 2, 1999, consisted of 235 leases and vehicles, included 13 leases which
resulted in early terminations. Transition Auto Finance, Inc.'s and Transition
Auto Finance II, Inc.'s experience with respect to early terminations is set
forth below:
EARLY TERMINATION RESULTS -- TRANSITION AUTO FINANCE, INC. AND TRANSITION AUTO
FINANCE II, INC.
JUNE 1, 1997-AUGUST 2, 1999
<TABLE>
<CAPTION>
TRANSITION AUTO FINANCE, INC. TRANSITION AUTO FINANCE II, INC.
---------------------------------- ----------------------------------
NO. OF PERCENTAGE PROFIT 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>
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<PAGE> 29
As set forth above, 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:
- the 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 Transition Auto Finance II,
Inc., as compared to Transition Auto Finance, Inc. 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
Transition Auto Finance II, Inc.'s lease portfolio consists of "seasoned" leases
purchased from Transition Auto Finance, Inc. 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 February 1999, Transition Auto Finance II, Inc. purchased from
Transition Auto Finance, Inc. all of the vehicles and lease contracts which
Transition Auto Finance, Inc. then held. Transition Auto Finance, Inc. 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 Transition Auto Finance II, Inc.
Transition Leasing, which is the parent company of both Transition Auto Finance,
Inc. and Transition Auto Finance II, Inc., determined to cause Transition Auto
Finance II, Inc.'s purchase of Transition Auto Finance, Inc.'s leased vehicles
and the redemption of Transition Auto Finance, Inc.'s notes for a number of
reasons, the most significant of which were:
- A desire on the part of Transition Leasing to reduce the interest rate
risk associated with Transition Auto Finance, Inc.'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 Transition Auto Finance II, Inc.
- Eliminate the duplication of fees associated with two different portfolio
programs. This problem exists whenever a sponsor has more than one
finance subsidiary but was exacerbated by the relatively small size of
Transition Auto Finance, Inc.'s offering. The smaller offering size made
the annual fees a much larger percent of Transition Auto Finance, Inc.'s
income and assets than might otherwise have been the case.
We will not purchase assets from Transition Auto Finance II, Inc. or any
other party related to us.
We caution you that the past performance of lease contracts entered into by
Transition Auto Finance, Inc. or Transition Auto Finance II, Inc., may not be
reliable indicators of the future performance of the lease contracts we will
execute.
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<PAGE> 30
PURCHASE/LEASING OF VEHICLES
General
Our lease contracts will be originated by Transition Leasing under a Master
Purchasing Agreement, between us and Transition Leasing. A copy of the
Purchasing Agreement in the form we propose to execute with Transition Leasing
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 Transition Leasing to
use reasonable efforts to originate such customers, lease contracts and vehicles
as will utilize such amount of funds as we may specify to Transition Leasing
from time to time. We will be obligated to purchase all lease contracts or
vehicles originated by Transition Leasing which satisfy the lease contract and
customer criteria set forth in the Purchasing Agreement, subject only to the
funds limit that we specify to Transition Leasing. Transition Leasing 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 Transition Leasing 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.);
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<PAGE> 31
- References: (1) Five relatives; and
(2) Five personal;
- 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, Transition Leasing 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 Transition Leasing 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 Transition Leasing, 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 Transition Leasing to contract with industry-qualified third
parties to perform its obligations thereunder. The performance by any third
party will not relieve Transition Leasing from liability for its obligations
under the Purchasing Agreement.
The Purchasing Agreement and the Indenture require us and Transition
Leasing 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,
Transition Leasing is required to cure the defect or purchase the impaired lease
contract from us. At the time of any such purchase Transition Leasing 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 Transition Leasing. If dealers or leasing companies
introduce the lease customer to Transition Leasing, the purchase price will
generally be equal to 95% of manufacturer's suggested retail price ("MSRP"). If
the customer is generated by Transition Leasing's in-house marketing staff, the
purchase price will generally be less than 95% of MSRP. We will pay to
Transition Leasing a marketing fee, a purchase administration fee and a
documentary fee with respect to each lease contract.
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
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<PAGE> 32
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 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
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 us 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 our policy could result in the non-renewal of such
policy, which could have a material adverse effect on us. In addition, we 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 Transition Leasing 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 Transition Leasing's experience
that profitable resales are possible even when a contract is terminated prior to
its expiration. Transition Leasing'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
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<PAGE> 33
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, Transition Leasing
might agree to modify the terms of the contract and increase the payments to
accommodate 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
Transition Leasing 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, Transition Leasing may elect to revise the terms
of the contract (and thereby increase the customer's payment) to avoid
reoccurrence. Transition Leasing 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. 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, Transition Leasing'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 Transition Leasing or its other subsidiaries. With respect to early
termination of lease contracts and repossessions of vehicles, Transition
Leasing'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.
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Payments to Transition Leasing
In connection with each vehicle whose lease contract is originated by
Transition Leasing, without regard to the means by which the lease customer came
to Transition Leasing, we will pay Transition Leasing the following fees:
- a marketing fee of 57.5% of a customer's down payment to us;
- a purchase administration fee equal to $100;
- a documentary fee equal to $50. We will use that portion of the
customer's down payment remaining after payment of the above fees to pay
a portion of the vehicle's purchase price.
The 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 Transition Leasing;
they are intended to compensate and reimburse Transition Leasing 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 Transition Leasing 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 Transition Leasing under the Servicing
Agreement, dated as of January 25, 2000, between us and Transition Leasing. A
copy of the Servicing Agreement we propose to execute with Transition Leasing
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, Transition Leasing 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. Transition Leasing 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. Transition Leasing
has also agreed to deposit in the master collections account any payment
proceeds received directly by Transition Leasing 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.
Transition Leasing 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 Transition Leasing.
Transition Leasing is also required to document the reasons for each charge off
of any material unpaid amount from a customer under any lease contract.
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Servicing. Among its obligations under the terms of the Servicing
Agreement, Transition Leasing 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.
Transition Leasing will instruct the appropriate vehicle licensing
authorities to remit vehicle license renewal stickers to Transition Leasing, as
opposed to the lease customers. Transition Leasing will require a customer to
appear at Transition Leasing's offices to collect the licence renewal sticker,
at which time a representative of Transition Leasing 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.
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, Transition Leasing 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. If a vehicle
is re-leased, we will pay to Transition Leasing a marketing fee.
Transition Leasing 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 determined by the following formula:
- the purchase price we originally paid for the vehicle (plus applicable
sales tax and title transfer and license plate fees) minus:
the sum of
- 42.5% of the down payment made by the customer (which is that portion of
the down payment not paid to Transition Leasing as the marketing fee);
plus
- any monthly lease payments we have received under such defaulted lease
contract.
We do not expect Transition Leasing to have to purchase a significant
number of vehicles under this repurchase obligation but we can offer you no
assurances that Transition Leasing 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 Transition Leasing, it must
certify to the Trustee that the repurchase complies with the requirements of the
Indenture and this prospectus.
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Transition Leasing is required to deliver us a report certifying that all
lease contracts managed by Transition Leasing were serviced in material
accordance with the servicing agreement and that Transition Leasing 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 Transition Leasing 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 Transition Leasing under the
Servicing Agreement and to transfer servicing rights to a successor servicer. As
we are a wholly-owned subsidiary of the Transition Leasing and we have common
management, it is unlikely that we will exercise our right to terminate
Transition Leasing's rights and obligations under the Servicing Agreement. Under
the Indenture, during the continuance of a default by Transition Leasing 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 Transition Leasing under the Servicing Agreement.
Payments to Transition Leasing.
Transition Leasing 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 Transition Leasing for providing the
services required of it thereunder.
Under the Indenture, Transition Leasing 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
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 Transition Leasing 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
Transition Leasing 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.
Transition Leasing will first remarket the vehicles to the original
customers or to other related parties brought to the attention of Transition
Leasing by the lease customer (e.g., family members, friends, etc.). Transition
Leasing 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.
Transition Leasing then will generally sell the vehicle on our behalf at
wholesale through regional auctions.
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TRANSITION LEASING
We expect that substantially all of the lease contracts that we will
purchase or acquire will be originated by Transition Leasing, our sole
shareholder. Transition Leasing 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.
Transition Leasing 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 Transition Leasing provides in Texas. As we
do with Transition Leasing, our Louisiana subsidiary will purchase the vehicles
and enter into leases with the customers in its 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
Transition Leasing had Transition Leasing originated the lease customer for us
and had we paid the vehicle purchase price directly to the vehicle dealer and
the marketing fee to Transition Leasing. Transition Leasing 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.
In leasing automobiles to its customers, Transition Leasing 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, Transition Leasing
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.
Transition Leasing has determined that, once Transition Auto Finance II,
Inc. has fully invested its funds in vehicles and leases, any lease contracts
originated by Transition Leasing 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 Transition Auto Finance II, Inc. to acquire vehicles
and lease contracts with proceeds that Transition Auto Finance II, Inc. realizes
from repossessions and prepayments.
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of December 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;
- each of our officers or directors; and
- 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.
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AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
NAME OF DIRECTOR OR EXECUTIVE NUMBER OF SHARES
OFFICER OR NAME OF BENEFICIAL OWNER OUTSTANDING PERCENTAGE OF CLASS
- ----------------------------------- ---------------- -------------------
<S> <C> <C>
Transition Leasing Management, Inc.......................... 1,000 100%
8144 Walnut Hill Lane, Number 680
Dallas, Texas 75231
Kenneth C. Lowe............................................. 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 0
</TABLE>
The information in the above table as to beneficial ownership of common
stock has been furnished by the respective shareholders, directors and officers.
The directors of Transition Leasing could be deemed to share voting and
investment powers over the shares of common stock owned of record by Transition
Leasing. The sole director of Transition Leasing is Kenneth C. Lowe. The sole
owners of the common stock of Transition Leasing are Kenneth C. Lowe and Randall
K. Lowe. Transition Leasing has a number of preferred shareholders, who have
limited voting rights and who may convert their preferred shares into shares of
Transition Leasing common stock. The preferred shareholders, on a fully diluted
basis, will not own more than 20% of Transition Leasing'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 Transition Leasing from October 1994 until July 1996
and as a director, President and Secretary of Transition Leasing 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.
Randall K. Lowe, age 30, has served as our Vice President since our
inception and Vice President of Transition Leasing since July 1998. Prior to
joining us 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 us in September 1999 and serves as our
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 us in May 1999 as a Vice President and branch
office manager of our office in New Orleans, Louisiana which opened 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:
- for any breach of the director's duty of loyalty to us or our
shareholders;
- 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;
- 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
- 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
Transition Leasing owns 100% of our Common Stock. Our officers are also
officers of Transition Leasing. Mr. Kenneth Lowe is President and Secretary and
a director of Transition Leasing and a director, the President, Chief Financial
Officer and Secretary of our company and Transition Auto Finance II, Inc. 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 Transition Auto Finance II, Inc. and Transition Leasing in allocating
management time, services, overhead and functions among ourselves, Transition
Auto Finance II, Inc. and Transition Leasing. Management of Transition Auto
Finance II, Inc. and Transition Leasing intends to resolve any such conflicts in
a manner that is fair and equitable to us. However, there can be no assurance
that Transition Leasing 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 Transition Auto Finance II, Inc. nor
Transition Leasing has guaranteed or is otherwise liable for our debts and
liabilities.
Under the terms of the Servicing Agreement and the Purchasing Agreement,
Transition Leasing 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 Transition
Leasing. 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
Transition Leasing will not have been negotiated at arm's-length but will be
determined unilaterally by Transition Leasing. Transition Leasing will receive
57.5% of each customer's down payment as a marketing fee.
Transition Leasing currently provides purchase and collection services for
Transition Auto Finance II, Inc., but does not provide such services to any
other party, including affiliates. Transition Leasing, however, may agree in the
future, to purchase and service lease contracts for itself, its affiliates and
other
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<PAGE> 41
unrelated parties. We have the right to purchase additional lease contracts
originated by Transition Leasing 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. Management of Transition Leasing 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. Transition Leasing has determined that, once Transition Auto Finance
II, Inc. has fully invested its funds in vehicles and leases, all vehicle lease
contracts purchased or originated by Transition Leasing 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 Transition Auto Finance
II, Inc. to acquire vehicle lease contracts and vehicles with proceeds from
repossession of its leased vehicles or prepayments of its lease contracts.
We will use up to 2% of the gross proceeds from the sale of the notes to
reimburse Transition Leasing, our parent, for offering and organizational
expenses paid by it. The maximum reimbursement will range from $5,000 for the
minimum offering of $250,000 to $400,000 for the maximum offering of
$20,000,000. Transition Leasing has agreed to pay such expenses to the extent
they exceed 2% of the gross proceeds from the sale of the notes. It is expected
that such expenses will exceed 2% of the gross proceeds from the sale of the
notes, only if the aggregate gross proceeds from sale of the notes are less than
$20,000,000.
We believe that the transactions between us and Transition Leasing,
including the marketing fee and other fees to be paid to Transition Leasing, 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 Transition Leasing 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).
We have joined in a tax sharing agreement with Transition Leasing. In
general, under the terms of this agreement, Transition Leasing 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. Under applicable federal tax laws, however, if Transition
Leasing fails to make such payments of tax, the subsidiaries, including us,
would be responsible for making such payments.
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 Transition Leasing 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. 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.
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.
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. 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. We expect that substantially
all lease contracts and vehicles will be acquired in transactions originated by
Transition Leasing. 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
Transition Leasing, our parent, which is responsible for the acquisition and
servicing of our lease contracts, has limited operating history to date upon
which to base these assumptions. Other risks and uncertainties are set forth
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
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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. The
descriptions are not complete. We strongly recommend that you review the
Indenture.
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 Transition Leasing. 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;
- 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;
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- 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;
- Transition Leasing'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 Transition Leasing 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
- we enter into bankruptcy, or are put into bankruptcy, or become 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 Transition Leasing 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 Transition Leasing under such agreements and to cause Transition Leasing 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, 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.)
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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,
Transition Leasing 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:
- 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;
- 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;
- not to dissolve or liquidate in whole or in part; or
- merge or 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. (Indenture, Section 5.11.)
OTHER JURISDICTIONS
We will do business in Texas, primarily, but we also will lease vehicles in
Louisiana and such other jurisdictions as Transition Leasing determines to be
viable markets for our business plan. We will endeavor to do business in new
jurisdictions ourselves, without forming additional subsidiaries, but where
circumstances make it advantageous for us to do so, we may choose to form a
subsidiary to conduct our operations in a new jurisdiction. For instance, we
have chosen to form a new subsidiary to conduct our operations in Louisiana.
If we choose to expand our operations to a new jurisdiction or to utilize a
subsidiary to do so, under the terms of the Indenture, we must present evidence
to the Trustee that our operations, or those of our subsidiary, will comply with
the laws in that jurisdiction regarding vehicle leasing and conducting business
generally. If we choose to utilize a subsidiary to expand our operations to a
new jurisdiction, our subsidiary must execute and deliver to the Trustee an
agreement to be bound by the Indenture in exactly the same manner and to the
same extent as we are and to make its assets subject to the lien imposed by the
Indenture in favor of the Trustee.
COMPLIANCE STATEMENTS AND ANNUAL ACCOUNTANTS' REPORTS
We and Transition Leasing 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 Transition Leasing annually
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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 Transition
Leasing and the documents and records relating to the lease contracts and
deliver a certificate with respect to our compliance and that of Transition
Leasing, 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;
- 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:
- 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
- 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.)
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CERTAIN LEGAL ASPECTS OF THE LEASE CONTRACTS
THE LEASES AS TRUE LEASES
Under Texas Law, 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:
- 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;
- the lessee is the purchaser and owner of the personal property; and
- 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).
Under Louisiana law, leases of automobiles and motorcycles are leases of
movable property. Louisiana law applies to leases of movable property located in
Louisiana whether the property is initially located in Louisiana or subsequently
moved to Louisiana. The Louisiana statutes draw a distinction between true
leases and financed leases. In a true lease, the lessor, the owner of the
property, grants the lessee the enjoyment of the movable property for a certain
time at a stipulated price. The rights and remedies of the parties to a true
lease of movable property are governed primarily by a particular Louisiana
statute titled the Lease of Movables Act.
The determination of whether 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
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 and Louisiana 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
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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 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.
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 for
the following reasons:
- 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;
- 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
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- 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 our policies, should be equal
to or greater than the reasonably predictable fair market value of the
vehicle.
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 Transition Leasing 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.
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 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 and Louisiana, 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 in effect
in Texas and Louisiana 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
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vehicle, we will receive a warranty from Transition Leasing 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
Under Texas law, 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
Transition Leasing, will be the method usually employed by Transition Leasing
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, Transition Leasing 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 Transition Leasing, in the
absence of a probable breach of the peace, to obtain a court order before it
attempts to repossess a vehicle.
Under Louisiana law, in the event of default by a customer on a lease
contract, we will have all of the remedies of a lessor under Louisiana statutes.
Under those statutes, in the event of default by the lessee, the lessor may
either recover accelerated rental payments and additional amounts due and
outstanding or cancel the lease, recover possession of the leased property and
recover additional amounts and liquidated damages provided under the lease
agreement. These options are not cumulative in nature, and the lessee may select
one remedy or the other, notwithstanding any provision of the lease to the
contrary. If the lessee fails or refuses to surrender the leased property to the
lessor, the lessor may seek a court order for the lessee to surrender possession
of the leased property. In addition, the lessor may file a court action against
the lessee to recover amounts then due and owing under the leases as well as
liquidated damages as may be provided in the lease agreement.
In Louisiana, a lessor is prohibited from attempting to recover possession
of the lease property under any form of self-help repossession. However, under
limited conditions a lessor has the right to take possession of leased property
wherever it may be found.
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DISPOSAL OF VEHICLES AND DAMAGES AGAINST DEFAULTING CUSTOMERS
Under Texas law, 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 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, on the one hand,
and the amount realized upon the sale of the leased goods, on the other.
Vehicles we repossess will generally be re-leased to a new lessee or sold by
Transition Leasing through wholesale automobile networks or auctions that are
attended principally by dealers.
Under Louisiana law, in event of default by the lessee under a true lease,
the lessor is limited to the following alternate remedies:
- it can file an appropriate collection against the lessee to recover
accelerated rental payments and additional amounts that are then due and
outstanding and that will become due in the future over the full base
term of the lease, or
- it may cancel the lease, recover possession of the leased property and
recover additional amounts and liquidated damages as may be contractually
provided under the lease agreement. These remedies are not cumulative in
nature. The lessor may not seek to collect accelerated rental payments
under the lease and also to cancel the lease and recover possession of
the leased equipment.
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. 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
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<PAGE> 52
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 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 Holder-in-Due-Course Rule is to subject the assignee of such a
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 Holder-In-Due-Course 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 Holder-In-Due-Course 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.
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<PAGE> 53
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. This discussion has been reviewed
by, and is the subject of an opinion from, Drenner & Stuart, a professional
corporation.
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 are:
- citizens or residents of the United States;
- domestic corporations, partnerships or other entities; or
- 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.
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.
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<PAGE> 54
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 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.
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<PAGE> 55
CERTAIN FEDERAL INCOME TAX LIABILITIES OF THE COMPANY AND TRANSITION LEASING
Transition Leasing will file a consolidated federal income tax return with
us. Because of the consolidated filing and the closely-held corporation status
of Transition Leasing, additional federal income tax consequences may arise.
Certain of these are summarized below.
We and Transition Leasing 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 Transition
Leasing, Transition Leasing 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 Transition Leasing will have the ability to pay such obligations.
Under applicable federal tax laws, if Transition Leasing 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 Transition Leasing 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.
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, 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% 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 $250,000 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. We have agreed, with Transition
Leasing jointly and severally, to indemnify Great Nation against certain
liabilities, including liabilities under applicable securities laws. The
underwriting agreement provides that the
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<PAGE> 56
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 Transition Leasing up to 2% of the gross offering proceeds to
reimburse Transition Leasing for offering and organizational expenses paid by
Transition Leasing on our behalf. No part of these payments will be paid by
Transition Leasing 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.
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 March 31, 2000 (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 December 31, 2000, unless we sooner
terminate it:
- upon the failure to achieve the minimum subscription amount; or
- 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.
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.
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<PAGE> 57
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 and enforceability 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 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 its opinion as to certain
matters relative to perfection of the Trustee's security interest in such of our
assets as will be located in Texas. King, LeBlanc & Bland, a Louisiana limited
liability partnership has delivered to us its opinion as to certain compliance
matters relating to the conduct of our operations in Louisiana discussed under
"THE COMPANY -- Government Regulations" and its opinion relative to perfection
of the Trustee's security interest in such of our assets as will be located in
Louisiana. 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."
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
8144 Walnut Hill Lane
Number 680
Dallas, Texas 75231
(214) 360-9966
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<PAGE> 58
TRANSITION AUTO FINANCE III, INC.
FINANCIAL STATEMENT
AND
INDEPENDENT AUDITORS' REPORT
NOVEMBER 9, 1999
F-1
<PAGE> 59
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> 60
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 November 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 November 8, 1999, in conformity with generally accepted accounting
principles.
SPROUSE & WINN, L.L.P.
Austin, Texas
November 9, 1999
F-3
<PAGE> 61
FINANCIAL STATEMENT
F-4
<PAGE> 62
TRANSITION AUTO FINANCE III, INC.
BALANCE SHEET
NOVEMBER 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> 63
TRANSITION AUTO FINANCE III, INC.
NOTES TO FINANCIAL STATEMENT
NOVEMBER 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 November 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 November 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 December 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 8.0% 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 2.0% 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 by 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> 64
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................ 1
Risk Factors........................... 2
Capitalization......................... 7
Use of Proceeds........................ 7
Description of the Notes............... 10
Collateral for the Notes............... 13
The Company............................ 20
Security Ownership of Certain
Beneficial Owners and Management..... 34
Management............................. 35
Litigation............................. 37
Management's Discussion and Analysis of
Plan of Operation.................... 38
Additional Indenture Provisions........ 39
Certain Legal Aspects of the Lease
Contracts............................ 43
Certain Federal Income Tax
Considerations....................... 49
Plan of Distribution................... 51
Experts................................ 52
Legal Matters.......................... 53
Where You Can Get More Information..... 53
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 February 24, 2000 (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
January 25, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 65
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> 66
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
regulatory matters**
8.3 -- Opinion of Brown Maroney & Oaks Hartline, L.L.P., re
perfection of security interests**
8.4 -- Opinion of King, LeBlanc and Bland re regulatory
matters**
8.5 -- Opinion of King, LeBlanc and Bland 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.**
24.5 -- Consent of King, LeBlanc and Bland, L.L.P.**
26.1 -- Form T-1: Statement of eligibility of Trust Management,
Inc.**
</TABLE>
- ---------------
* filed electronically herewith
** previously filed
Financial Statement Schedules.
None.
II-2
<PAGE> 67
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> 68
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 January 24, 2000.
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 Randall Lowe 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 January 24, 2000
- ----------------------------------------------------- (Principal Executive
Kenneth C. Lowe Officer) and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
II-4
<PAGE> 69
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**
8.4 -- Opinion of King, LeBlanc & Bland re: perfection of
security interests**
8.5 -- Opinion of King, LeBlanc & Bland re: regulatory matters**
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.**
24.5 -- Consent of King, LeBlanc & Bland**
26.1 -- Form T-1: Statement of eligibility of Trust Management,
Inc.**
</TABLE>
- ---------------
* filed electronically herewith
** previously filed
<PAGE> 1
EXHIBIT 10.3
PROCEEDS ESCROW AGREEMENT
Agreement entered on the 25th day of January, 1999 by and among
Transition Auto Finance III, Inc. ("Issuer"), Great Nation Investment
Corporation ("Dealer"), and Texas Community Bank, a National Association, as
defined by Section 3(a)(6) of the Securities and Exchange Act of 1934, (the
"Escrow Agent").
WHEREAS, with the assistance of Dealer, the Issuer proposes to offer
and sell up to $20,000,000 aggregate principal amount of its Secured Notes (the
"Notes") to be issued under a Trust Indenture between the Issuer and Trust
Management Inc. Trustee (the "Trustee").
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. The Escrow Agent agrees to act as escrow agent in connection with the
offering and sale of Notes and, as such, to establish an appropriate account and
to receive the proceeds from the sale of the Notes for deposit therein until the
earlier of the termination of this Agreement or the termination of the offering
and sale of the Notes (the "Termination Date").
2. Checks or other items for the payment of all or a part of the purchase
price of the Notes (all such items together with all proceeds thereof, the
"Escrowed Property") shall be payable to Escrow Agent and delivered daily to
Escrow Agent. The Escrow Agent will credit the proceeds to an escrow cash
account (the "Escrow Account") to be held by it under the terms of this
Agreement subject to Rule 15c2-4 under the Securities Act of 1934. All
subscribers' checks or other items for the payment of the purchase price of
Notes shall be transmitted by Dealer to the Escrow Agent by noon of the next
business day upon receipt by Dealer.
3. The Escrowed Property, together with all interest earned thereon,
shall be held by the Escrow Agent until the earlier of (a) the time that the
Escrow Agent has received proceeds from the sale of the Notes in the aggregate
principal amount of $250,000, or more, or (b) the date of March 31, 2000 at
which time the escrow will terminate.
4. Upon termination of the escrow, the Escrow Agent shall release the
Escrowed Property, together with all interest earned thereon to be distributed
to either (a) the Issuer, or such other party or parties, as required to carry
out the purpose of the Note offering if the minimum amount of the Notes have
been sold within the required time period described above, or (b) the
subscribers if the minimum amount of Notes have not been sold within such
period.
5. If at any time to the completion of this escrow said Escrow Agent is
advised by the appropriate securities or state agency that the registration to
sell said notes has been revoked, said Escrow Agent shall thereupon return all
funds and the interest earned thereon to the respective subscribers.
6. Escrow Agent shall deposit all funds received in insured accounts such
that each Investor that deposits funds is insured to the maximum amount allowed
under FDIC regulations, irrespective of the aggregate amount of funds received
from all Investors. The Escrow Agent shall invest such collected funds deposited
in the Escrow Account in short term investments to the extent permitted by the
Texas Banking Commission, provided however, that any such funds held subject to
any minimum escrow contingency shall be invested subject to Rule 15c2-4. The
Escrow Agent shall in
<PAGE> 2
no event be liable for any loss resulting from any change in interest rates
applicable to funds so invested.
Interest on funds invested pursuant to this Section shall accrue from
the date of investment of such funds until such funds are released from escrow
pursuant to paragraph 4.
7. The Escrow Agent's and Dealer's obligations and duties in connections
herewith are confined to those specifically enumerated in this Agreement. The
Escrow Agent and Dealer shall not be in any manner liable or responsible for the
sufficiency, correctness, genuineness or validity of any instruments received by
or deposited with them or with reference to the form of execution thereof, or
the identity, authority, or rights of any person executing, delivering, or
depositing same, and neither the Escrow Agent nor the Dealer shall be liable for
any loss that may occur by reason of forgery, false representation or the
exercise of their discretion in any particular manner or for any other reason,
except for their own gross negligence or willful misconduct.
8. Escrow Agent shall receive compensation for its services as set forth
in the separate schedule of fees as made a part hereof by reference.
9. The Escrow Agent may act pursuant to the written advice of counsel
with respect to any matter relating to this Escrow Agreement and shall not be
liable for any action taken or omitted in accordance with such advice.
10. The Escrow Agent (and any other successor escrow agent) may at any
time resign as such by delivering all of the Escrowed Property to the successor
escrow agent jointly designated by the other parties hereto in writing, or to
any court of competent jurisdiction, whereupon the Escrow Agent shall be
discharged of and from any and all further obligations arising in connection
with this Escrow Agreement. The resignation of the Escrow Agent will take effect
on the earlier of (a) the appointment of a successor (including a court of
competent jurisdiction), or (b) the day which is thirty (30) days after the date
of delivery of its written notice of resignation to the other parties hereto. If
at that time the Escrow Agent has not received a designation of a successor
escrow agent, the Escrow Agent's sole responsibility after that time shall be to
safekeep the Escrowed Property until receipt of a designation of successor
escrow agent or a written disposition instruction by the Issuer and Dealer or a
final order of a court of competent jurisdiction.
11. If any controversy arises between the parties hereto or with any third
person, the Escrow Agent shall not be required to determine the same or to take
any action but may await the settlement of any such controversy by final
appropriate legal proceeding, or otherwise as the Escrow Agent may require, or
the Escrow Agent may, in its discretion, institute such appropriate interpleader
or other proceedings in connection therewith as it may deem proper,
notwithstanding anything in this Agreement to the contrary. In any such event,
the Escrow Agent shall not be liable for interest or damages to the Issuer or
subscribers. In the event Escrow Agent should institute, or be named as a party
in, any legal proceedings to determine the lawful owner of the Escrowed
Property, Escrow Agent shall be entitled to recover from the contending parties
to said legal proceedings, reasonable attorney's fees and expenses which shall
be incurred by Escrow Agent in said proceedings.
12. This Escrow Agreement shall be binding upon and inure solely to the
benefit of the parties hereto and their respective successors and assigns,
heirs, administrators, and representatives
-2-
<PAGE> 3
and shall not be enforceable by or inure to the benefit of any third party
except as provided in Section 10 with respect to a resignation by the Escrow
Agent. No party may assign any of its rights or obligations under this Escrow
Agreement without the written consent of the other parties. This Escrow
Agreement shall be construed in accordance with and governed by the laws of the
State of Texas with regard to conflict of law principals.
13. This Escrow Agreement may only be modified in writing by all of the
parties hereto, and no waiver hereunder shall be effective unless in writing
signed by the party to be charged.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the day and year first above written.
DEALER:
GREAT NATION INVESTMENT CORPORATION
By:
----------------------------------------
Date:
--------------------------------------
Attest:
-----------------------
ISSUER:
TRANSITION AUTO FINANCE III, INC.
By:
----------------------------------------
Date:
--------------------------------------
Attest:
-----------------------
ESCROW AGENT:
TEXAS COMMUNITY BANK, A National Association
By:
----------------------------------------
Date:
--------------------------------------
Attest:
-----------------------
-3-
<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 November 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
January 24, 2000
