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Filed Pursuant to Rule No. 424(b)(5)
Registration No. 333-00365
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 24, 1998
$379,380,000
LOGO COMPASS AUTO RECEIVABLES TRUST 1998-A
$127,235,000 CLASS A-1 5.659% ASSET BACKED NOTES
$81,700,000 CLASS A-2 5.709% ASSET BACKED NOTES
$170,445,000 CLASS A-3 5.900% ASSET BACKED NOTES
COMPASS BANK,
an Alabama state banking corporation,
Seller and Servicer
COMPASS BANK,
a Texas state bank,
Seller
ASSET BACKED SECURITIES CORPORATION,
Company
The Compass Auto Receivables Trust 1998-A (the "Trust") formed pursuant to a
Declaration of Trust dated as of June 24, 1998, to be amended and restated
as of the Closing Date (the "Trust Agreement"), between Asset Backed
Securities Corporation (the "Company"), Compass Auto Receivables
Corporation ("Compass Auto"), as the settlor and the initial
Certificateholder, and The Bank of New York Trust Company of Florida,
N.A., as owner trustee (the "Owner Trustee"). The Trust will issue the
Class A-1 5.659% Asset Backed Notes (the "Class A-1 Notes"), the
Class A-2 5.709% Asset Backed Notes (the "Class A-2 Notes"), and the
Class A-3 5.900% Asset Backed Notes (the "Class A-3 Notes";
together with the Class A-1 Notes and the Class A-2 Notes, the
"Notes") offered hereby. The Notes will be issued pursuant to an
Indenture, to be dated as of the Closing Date (the
"Indenture"), between the Trust and The Chase Manhattan Bank,
as indenture trustee (the "Indenture Trustee"). The Trust
will also issue $22,080,879 6.650% Asset Backed
Certificates (the "Certificates"), but the Certificates
are not offered hereby.
(continued on following page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" HEREIN
ON PAGE S-11 AND ON PAGE 14 OF THE ACCOMPANYING PROSPECTUS.
THE NOTES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE UNDERWRITERS, THE COMPANY, THE
SERVICER, THE SELLERS OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER
THE NOTES NOR THE UNDERLYING RECEIVABLES ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE
"FDIC") OR ANY OTHER GOVERNMENTAL AGENCY.
THESE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT SELLERS(1)
--------------- ------------- ---------------
<S> <C> <C> <C>
Per Class A-1 Note............... 100.0000% 0.15% 99.8500%
Per Class A-2 Note............... 100.0000% 0.35% 99.6500%
Per Class A-3 Note............... 99.8750% 0.50% 99.3750%
Total............................ $379,166,943.75 $1,329,027.50 $377,837,916.25
</TABLE>
(1) Before deducting expenses payable by the Sellers estimated to be $650,000.
The Notes are offered by the Underwriters when, as and if issued by the
Trust, delivered and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that delivery of the
Notes will be made in book-entry form only through the Same Day Funds
Settlement System of The Depository Trust Company on or about June 30, 1998.
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
COMPASS BANK
AS PLACEMENT AGENT
The date of this Prospectus Supplement is June 24, 1998.
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(continued from preceding page)
The assets of the Trust will consist primarily of a pool of simple interest
motor vehicle installment sales contracts (the "Receivables") secured by new
and used automobiles and light trucks, certain monies received on or after the
Cutoff Date, security interests in such vehicles, amounts on deposit in the
Reserve Account, if any, and certain other property as described herein. The
Receivables will be transferred to the Trust by the Company pursuant to a Sale
and Servicing Agreement, to be dated as of the Closing Date (the "Sale and
Servicing Agreement"), between the Trust, the Company and the Servicer.
Compass Auto will transfer the Receivables to the Company pursuant to a
Receivables Purchase Agreement, dated as of June 24, 1998 (the "Second Tier
Receivables Purchase Agreement"), between the Company and Compass Auto. Each
of Compass Bank, an Alabama state banking corporation ("Compass Bank"), and
Compass Bank, a Texas state bank ("Compass Bank-Texas"), will transfer the
Receivables to Compass Auto pursuant to a Receivables Purchase Agreement, to
be dated as of the Closing Date (the "First Tier Receivables Purchase
Agreement"; and together with the Second Tier Receivables Purchase Agreement,
the "Receivables Purchase Agreements"), between Compass Auto, Compass Bank and
Compass Bank-Texas. The Notes will be secured by the assets of the Trust
pursuant to the Indenture.
Interest on the Notes will accrue at the per annum interest rate specified
above for each class of Notes. Interest on the Notes will be due and payable
on the fifteenth day of each month or, if such day is not a business day, on
the next business day (each, a "Distribution Date"), commencing August 17,
1998. Principal of the Notes will be payable on each Distribution Date to the
extent described herein. No principal will be paid on the Class A-2 Notes, the
Class A-3 Notes or the Certificates until the Class A-1 Notes have been paid
in full. No principal will be paid on the Class A-3 Notes until the Class A-2
Notes have been paid in full. To the extent not previously paid, the Class A-1
Notes will be due and payable in full on July 15, 1999, the Class A-2 Notes
will be due and payable in full on August 15, 2000 and the Class A-3 Notes
will be due and payable in full on May 15, 2004.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS,
AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS IN FULL. SALES OF THE NOTES MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE NOTES, AND THERE CAN BE NO
ASSURANCE THAT ONE WILL DEVELOP. THE UNDERWRITERS EXPECT, BUT ARE NOT
OBLIGATED, TO MAKE A MARKET IN THE NOTES. THERE IS NO ASSURANCE THAT ANY SUCH
MARKET WILL DEVELOP OR CONTINUE.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE NOTES,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING" HEREIN.
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, monthly unaudited reports
containing information concerning the Receivables and the Notes will be
prepared by the Servicer and sent on behalf of the Trust only to Cede & Co.
("Cede"), as nominee of The Depository Trust Company ("DTC") and registered
holder of the Notes. See "Certain Information Regarding the Securities--Book-
Entry Registration" and "--Statements to Securityholders" in the accompanying
Prospectus (the "Prospectus"). Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting
principles. The Servicer, on behalf of the Trust, will file or caused to be
filed with the Commission such periodic reports as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations of the Commission thereunder.
S-2
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein are defined elsewhere in this Prospectus
Supplement on the pages indicated in the "Index of Terms" or, to the extent not
defined herein, have the meanings assigned to such terms in the Prospectus.
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Issuer............... Compass Auto Receivables Trust 1998-A (the "Trust" or the
"Issuer"), an Alabama business trust formed pursuant to
a Declaration of Trust dated as of June 24, 1998, to be
amended and restated as of the Closing Date, between the
Company, Compass Auto and the Owner Trustee.
Sellers.............. Compass Bank and Compass Bank-Texas (each, a "Seller" and
collectively, the "Sellers").
Servicer............. Compass Bank (the "Servicer").
Compass Auto......... Compass Auto is a special purpose Delaware corporation
owned by the Sellers and organized for the purpose of
facilitating the transfer of Receivables from the
Sellers to the Company and holding the Certificates
offered by the Trust.
Company.............. The Company is a special purpose Delaware corporation
organized for, among other things, the purpose of
causing the issuance of the Notes and other securities
issued under the Registration Statement backed by
receivables or underlying securities of various types.
It is not expected that the Company will have any
significant assets. The Company is an indirect, wholly
owned subsidiary of Credit Suisse First Boston, Inc.
Neither Credit Suisse First Boston, Inc. nor any of its
affiliates has guaranteed, will guarantee or is or will
be otherwise obligated with respect to the Notes or any
other series of securities. The Company's principal
executive office is located at 11 Madison Avenue, New
York, New York 10010, and its telephone number is (212)
325-2000.
Indenture Trustee.... The Chase Manhattan Bank, a New York banking corporation,
as indenture trustee under the Indenture (the "Indenture
Trustee").
Owner Trustee........ The Bank of New York Trust Company of Florida, N.A., a
national banking association, as owner trustee under the
Trust Agreement (the "Owner Trustee").
The Notes............ Class A-1 5.659% Asset Backed Notes (the "Class A-1
Notes") in the aggregate principal amount of
$127,235,000.
Class A-2 5.709% Asset Backed Notes (the "Class A-2
Notes") in the aggregate principal amount of
$81,700,000.
Class A-3 5.900% Asset Backed Notes (the "Class A-3
Notes"; together with the Class A-1 Notes and the Class
A-2 Notes, the "Notes") in the aggregate principal
amount of $170,445,000.
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The Notes will be available for purchase in minimum
denominations of $1,000 and integral multiples of $1,000
in excess thereof in book-entry form only. Owners of
interests in the Notes will hold such interests through
The Depository Trust Company ("DTC"), and will not be
entitled to receive Definitive Notes unless Definitive
Notes are issued in the limited circumstances described
in "Certain Information Regarding the Securities--
Definitive Securities" in the Prospectus and Annex I to
the Prospectus.
The Notes will be secured by the assets of the Trust
pursuant to the Indenture to the extent described
herein.
The Certificates..... The Trust will issue 6.650% Asset Backed Certificates
(the "Certificates"; together with the Notes, the
"Securities") with an aggregate initial Certificate
Balance of $22,080,879. The Certificates will represent
fractional undivided interests in the Trust and will be
issued pursuant to the Trust Agreement. The Certificates
will be transferred to Compass Auto and are not being
offered hereby.
Cutoff Date.......... June 1, 1998 (the "Cutoff Date").
Closing Date......... June 30, 1998 (the "Closing Date").
The Receivables...... On the Closing Date, the Company will convey to the Trust
a pool of simple interest motor vehicle installment
sales contracts (the "Receivables") secured by new and
used automobiles or light trucks, certain payments made
with respect to such Receivables on and after the Cutoff
Date, security interests in the vehicles financed
thereby (the "Financed Vehicles"), rights under Dealer
Agreements, certain deposit accounts in which
collections are held, any proceeds from claims on
insurance policies and the proceeds of the foregoing,
pursuant to the Sale and Servicing Agreement, to be
dated as of the Closing Date, between the Trust, the
Company and the Servicer. The Receivables had an
aggregate principal balance of $401,460,879.06 as of the
Cutoff Date. See "The Receivables Pool" and "Description
of the Transfer and Servicing Agreements--Sale and
Assignment of Receivables" herein and "The Receivables
Pools" in the Prospectus.
The Receivables consist of simple interest motor vehicle
installment sales contracts ("Motor Vehicle Contracts")
that are purchased from automobile dealers (the
"Dealers") that regularly originate and sell such
contracts to the Sellers pursuant to the terms of
approved dealer agreements (the "Dealer Agreements").
The Receivables have been selected from Motor Vehicle
Contracts based on the criteria described under "The
Receivables Pool" herein and "The Receivables Pools" in
the Prospectus. The Receivables will be transferred by
the Sellers to Compass Auto and by Compass Auto to the
Company pursuant to the Receivables Purchase Agreements.
As of the Cutoff Date, no Receivable will have a
maturity that, after giving effect to any permitted
extensions or deferrals, would be later than April 30,
2004. As of the Cutoff Date, the weighted average
remaining maturity of the Receivables was approximately
42 months
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S-4
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and the weighted average original maturity of the
Receivables was approximately 58 months. As of the
Cutoff Date, approximately 34.85% of the aggregate
principal balance of the Receivables represented
financing of new vehicles and the remainder represented
financing of used vehicles.
Trust Property.......... The assets of the Trust (the "Trust Property") include
(i) the Receivables, (ii) certain monies received on or
with respect to the Receivables on and after the Cutoff
Date (including payments on the Receivables allocated to
principal on and after the Cutoff Date and payments on
the Receivables allocated to interest on and after July
1, 1998), (iii) all amounts and property from time to
time held in the Note Distribution Account, the
Collection Account and the Reserve Account, in each case
excluding all investment income thereon, (iv) security
interests in the Financed Vehicles and, to the extent
permitted by law, any accessions thereto, (v) the right
to receive proceeds from claims on physical damage,
credit life and disability insurance policies covering
Financed Vehicles or Obligors, (vi) any recourse against
Dealers with respect to the Receivables, (vii) the
rights of the Issuer under the Sale and Servicing
Agreement, the Company under the Second Tier Receivables
Purchase Agreement and Compass Auto under the First Tier
Receivables Purchase Agreement and (viii) any and all
proceeds of the foregoing. See "Description of the
Transfer and Servicing Agreements--Distributions" and
"The Trust" herein.
Terms of the Notes
A. Distribution Dates. Payments of interest and principal on the Notes will be
made on the fifteenth day of each month or, if such day
is not a business day, on the next business day (each, a
"Distribution Date"), commencing August 17, 1998.
Payments will be made to holders of record (the
"Holders") of the Notes (the "Noteholders" and, together
with the Holders of the Certificates, the
"Securityholders") as of the day preceding each
Distribution Date (a "Record Date").
B. Interest Rates..... The Class A-1 Notes will bear interest at the rate of
5.659% per annum (the "Class A-1 Interest Rate").
The Class A-2 Notes will bear interest at the rate of
5.709% per annum (the "Class A-2 Interest Rate").
The Class A-3 Notes will bear interest at the rate of
5.900% per annum (the "Class A-3 Interest Rate"). The
Class A-1 Interest Rate, the Class A-2 Interest Rate and
the Class A-3 Interest Rate are collectively referred to
herein as "Interest Rates."
C. Interest........... On each Distribution Date, the Indenture Trustee will
distribute to the Noteholders accrued interest at the
applicable Interest Rate on the outstanding principal
amount of each class of Notes to the extent of funds
available therefor. To the extent there are insufficient
funds therefor on any Distribution Date, interest will
be paid on a pro rata basis to all Noteholders. With
respect to any Distribution Date,
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interest on the outstanding principal amount of each
class of Notes will accrue at the applicable Interest
Rate for such class, from and including the Closing Date
(in the case of the first Distribution Date), and
thereafter from and including the preceding Distribution
Date to but excluding such Distribution Date (each, an
"Interest Period"). With respect to any Distribution
Date, interest on the Class A-1 Notes and the Class A-2
Notes will be calculated on the basis of a 360-day year
based upon the actual number of days elapsed during the
related Interest Period. On each Distribution Date,
interest on the Class A-3 Notes will be an amount equal
to one-twelfth (or 47 days divided by 360, for the
initial Distribution Date) of the applicable Interest
Rate multiplied by the outstanding principal amount of
such class of Notes as of the close of business on the
preceding Distribution Date (or, for the initial
Distribution Date, the Closing Date). See "Description
of the Notes--Payments of Interest" herein.
Interest on the Certificates will generally only be paid
on any Distribution Date to the extent of funds
available following the payment of the Servicing Fee and
interest distributions on the Notes.
D. Principal....... Principal of the Notes will be payable on each
Distribution Date, to the extent of funds available
therefor, in an amount equal to the Noteholders'
Percentage of the Principal Distribution Amount.
On each Distribution Date until the Class A-1 Notes have
been paid in full, principal of the Class A-1 Notes will
be payable in an amount equal to the Noteholders'
Percentage of the Principal Distribution Amount. On each
Distribution Date on and after the Class A-1 Notes have
been paid in full, principal of the Class A-2 Notes will
be payable in an amount equal to the Noteholders'
Percentage of the Principal Distribution Amount (less
any portion of such amount applied on such Distribution
Date to reduce the outstanding principal amount of the
Class A-1 Notes to zero) until the Class A-2 Notes have
been paid in full. On each Distribution Date on and
after the Class A-2 Notes have been paid in full,
principal of the Class A-3 Notes will be payable in an
amount equal to the Noteholders' Percentage of the
Principal Distribution Amount (less any portion of such
amount applied on such Distribution Date to reduce the
outstanding principal amount of the Class A-2 Notes to
zero) until the Class A-3 Notes have been paid in full.
See "Description of the Transfer and Servicing
Agreements--Distributions" herein.
The Noteholders' Percentage will generally be (i) 100% on
each Distribution Date prior to the Distribution Date on
which the Class A-1 Notes are paid in full, (ii) 85% on
each Distribution Date thereafter until the Distribution
Date on which the Certificate Ratio is first reduced to
the Target Certificate Ratio, and (iii) on each
Distribution Date thereafter, a fraction, expressed as a
percentage, the numerator of which is the outstanding
principal amount of the Notes immediately prior to such
Distribution Date and the denominator of which is the
sum of the outstanding principal amount
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S-6
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of the Notes and the Adjusted Certificate Balance, each
immediately prior to such Distribution Date. See
"Description of the Notes--Payments of Principal"
herein.
The Principal Distribution Amount for any Collection
Period will generally equal the amount of collections on
the Receivables allocable to principal during such
Collection Period plus losses recognized during such
Collection Period. See "Description of the Transfer and
Servicing Agreements--Distributions" herein.
"Collection Period" means each calendar month (or, in the
case of the initial Collection Period, (i) with respect
to payments on the Receivables allocable to interest,
the period from July 1, 1998 to and including July 31,
1998, and (ii) with respect to payments on the
Receivables allocable to principal, the period from the
Cutoff Date to and including July 31, 1998).
Upon the occurrence of an Event of Default and
acceleration of the Notes and until such Event of
Default has been rescinded, (i) the Total Distribution
Amount remaining after payment of the Servicing Fee and
interest on the Notes will be deposited in the Note
Distribution Account until each class of Notes has been
paid in full and (ii) amounts deposited in the Note
Distribution Account will be paid to the Holders of the
Class A-1 Notes until the Class A-1 Notes have been paid
in full, and thereafter will be paid to the Holders of
the Class A-2 Notes and Class A-3 Notes pro rata based
on amounts owing to each such class until the Class A-2
and Class A-3 Notes have been paid in full.
The outstanding principal amount of the Class A-1 Notes,
to the extent not previously paid, will be due and
payable on July 15, 1999. The outstanding principal
amount of the Class A-2 Notes, to the extent not
previously paid, will be due and payable on August 15,
2000. The outstanding principal amount of the Class A-3
Notes, to the extent not previously paid, will be due
and payable on May 15, 2004.
E. Optional Redemp- After the Class A-1 Notes and the Class A-2 Notes have
tion................. been paid in full, the Class A-3 Notes and the
Certificates may be redeemed in whole, but not in part,
on any Distribution Date on which the Servicer exercises
its option to purchase the Receivables, which can occur
on any Distribution Date on or after the aggregate
principal balance of the Receivables (the "Pool
Balance") as of the end of the related Collection Period
has declined to 5% or less of the Pool Balance as of the
Cutoff Date. The redemption price for the Class A-3
Notes will equal the unpaid principal amount of the
Class A-3 Notes plus accrued and unpaid interest
thereon. See "Description of the Notes--Optional
Redemption" herein.
Reserve Account......... On the Closing Date, the Reserve Account will be created
with an initial deposit of $1,003,652 (the "Reserve
Account Initial Deposit"). The Reserve Account will be
funded on each Distribution Date to the extent of funds
available therefor after payment of
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interest and principal on the Notes and, on each
Distribution Date after the first Distribution Date, the
Servicing Fee and interest on the Certificates, until
the amount on deposit in the Reserve Account equals the
lesser of (i) $4,014,609, which equals 1.00% of the Pool
Balance as of the Cutoff Date and (ii) the then
outstanding principal amount of the Notes (such lesser
amount, the "Reserve Account Floor"); provided, that if
a Reserve Account Increase Condition is in effect on any
Distribution Date or was in effect on any of the three
prior Distribution Dates, the Specified Reserve Account
Balance will be equal to the greater of (i) 6% of the
Pool Balance as of the related Collection Period and
(ii) the Reserve Account Floor as of such Distribution
Date (the "Specified Reserve Account Balance"). See
"Description of the Transfer and Servicing Agreements--
Accounts" herein. Funds will be withdrawn from the
Reserve Account on any Distribution Date if, and to the
extent that, the Total Distribution Amount for the
related Collection Period is less than the sum of the
Servicing Fee payable on such Distribution Date and the
Noteholders' Distributable Amount and such difference
will be paid to the Servicer to the extent of any
shortfalls relating to the payment of the Servicing Fee
(other than shortfalls occurring on the first
Distribution Date) or deposited in the Note Distribution
Account for distribution to the Noteholders. See
"Description of the Transfer and Servicing Agreements--
Accounts" herein.
On each Distribution Date on which the amount on deposit
in the Reserve Account is less than the Specified
Reserve Account Balance, the Indenture Trustee will
deposit therein amounts, if any, remaining in the
Collection Account after payment on such date of the
Servicing Fee and interest and principal on the Notes
and, on each Distribution Date after the first
Distribution Date, interest on the Certificates, until
the amount on deposit therein equals the Specified
Reserve Account Balance. Amounts in the Reserve Account
on any Distribution Date (after giving effect to all
distributions to be made on such Distribution Date) in
excess of the Specified Reserve Account Balance for such
Distribution Date will be released to Compass Auto and
will no longer be available to the Noteholders. See
"Description of the Transfer and Servicing Agreements--
Accounts" herein. Additionally, investment earnings on
amounts on deposit in the Reserve Account will be
distributed to Compass Auto on each Distribution Date
and will not be available to make payments on the Notes.
Collection Account... The Servicer will be required to remit collections
received with respect to the Receivables within two
business days of receipt thereof to an account
established with and in the name of the Indenture
Trustee (the "Collection Account") unless and until the
Servicer satisfies certain conditions described in "The
Transfer and Servicing Agreements--Deposits to
Collection Account" herein and in "Description of the
Transfer and Servicing Agreements--Collections" in the
Prospectus, in which case the Servicer may hold
collections until the day before the Distribution Date.
Investment earnings on amounts on deposit in the
Collection Account will be
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distributed to Compass Auto on each Distribution Date
and will not be available to make payments on the Notes.
Pursuant to the Sale and Servicing Agreement, the
Indenture Trustee will withdraw funds on deposit in the
Collection Account and apply such funds on each
Distribution Date to the following (in the priority
indicated): (i) on each Distribution Date after the
first Distribution Date, the Servicing Fee for the
related Collection Period and any overdue Servicing Fees
to the Servicer, (ii) the Noteholders' Interest
Distributable Amount to the Note Distribution Account,
(iii) on each Distribution Date after the first
Distribution Date, the Certificateholders' Interest
Distributable Amount to the Certificate Distribution
Account, (iv) the Noteholders' Principal Distributable
Amount to the Note Distribution Account, (v) on the
first Distribution Date, the Servicing Fee for the
initial Collection Period to the Servicer, (vi) to the
Reserve Account until the amount on deposit therein
equals the Specified Reserve Account Balance, (vii) on
the first Distribution Date, the Certificateholders'
Interest Distributable Amount to the Certificate
Distribution Account, (viii) the Certificateholders'
Principal Distribution Amount to the Certificate
Distribution Account and (ix) the remainder, if any, to
Compass Auto. See "Description of the Transfer and
Servicing Agreements--Distributions" and "--Accounts"
herein. Notwithstanding the foregoing, on each
Distribution Date following the occurrence and during
the continuation of an Event of Default and acceleration
of the Notes, the principal amount of each class of
Notes must be paid in full prior to the distribution of
any amounts on the Certificates.
Sale and Servicing Under the Sale and Servicing Agreement, the Company will
Agreement.............. transfer the Receivables to the Trust and will transfer
its rights to require the Sellers to repurchase
Receivables in certain situations. A Seller will be
required to repurchase any Receivable if the interests
of the Trust or the Noteholders are materially and
adversely affected by a breach of any representation or
warranty made by such Seller under the First Tier
Receivables Purchase Agreement with respect to such
Receivable, if such breach has not been cured by the
last day of the Collection Period in which the 60th day
(or if such Seller elects, the 30th day) occurs after
the date on which such Seller becomes aware of, or
receives written notice of, such breach or failure.
In addition, under the Sale and Servicing Agreement, the
Servicer will agree to service, manage, maintain custody
of and make collections on the Receivables. The Servicer
will be obligated to provide to the Owner Trustee and
the Indenture Trustee written notice upon the discovery
of a breach by the Servicer of the covenants made by the
Servicer in the Sale and Servicing Agreement. The
Servicer will be required to purchase any Receivable if
the interests of the Trust or the Noteholders are
materially and adversely affected by a breach of any
covenant made by the Servicer with respect to such
Receivable, if such breach has not been cured by the
last day of the Collection
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Period in which the 60th day (or if the Servicer elects,
the 30th day) occurs after the date on which the
Servicer becomes aware of, or receives written notice
of, such breach.
As compensation for servicing the Receivables, the
Servicer will receive the Servicing Fee and the
Supplemental Servicing Fee on each Distribution Date to
the extent funds are available therefor.
See "Description of the Transfer and Servicing
Agreements--Servicing Compensation" herein and
"Description of the Transfer and Servicing Agreements--
Servicing Compensation and Payment of Expenses" in the
Prospectus.
Tax Status.............. In the opinion of Mayer, Brown & Platt, special federal
tax counsel to the Trust ("Federal Tax Counsel"), (i)
the Trust will not be an association (or publicly traded
partnership) taxable as a corporation for federal income
tax purposes and (ii) the Notes will be classified as
debt for federal income tax purposes. The Trust will
agree, and the owners of beneficial interests in the
Notes will agree by their purchase of Notes, to treat
the Notes as debt for federal tax purposes. See
"Material Federal Income Tax Consequences" herein and in
the Prospectus for additional information concerning the
application of federal income tax laws to the Trust and
the Notes.
On the Closing Date, Balch & Bingham LLP, special Alabama
tax counsel to the Trust ("Alabama Tax Counsel"), will
deliver an opinion to the effect that (i) if the
characterization of the Notes as debt is recognized for
Federal income tax purposes, the Notes will also be
recognized as debt for Alabama state tax purposes and
(ii) if the Trust is not classified for Federal income
tax purposes as an association (or publicly traded
partnership) taxable as a corporation, it will also not
be classified as such for Alabama state income tax
purposes. See "Certain State Tax Consequences" herein.
ERISA Considerations.... Subject to the considerations discussed under "ERISA
Considerations" herein and in the Prospectus, the Notes
are eligible for purchase by employee benefit plans. See
"ERISA Considerations" herein and in the Prospectus.
Legal Investment........ The Class A-1 Notes will be eligible securities for
purchase by money market funds under paragraph (a)(10)
of Rule 2a-7 under the Investment Company Act of 1940,
as amended.
Ratings of the Notes.... As a condition of issuance of any of the Notes, the Class
A-1 Notes will be rated in the highest rating category
for short-term debt obligations and the Class A-2 Notes
and Class A-3 Notes will be rated in the highest rating
category for long-term debt obligations, in each case by
at least two nationally recognized rating agencies.
A rating is not a recommendation to purchase, hold or
sell the Notes, inasmuch as such rating does not comment
as to market price or suitability for a particular
investor. A rating addresses the likelihood that
principal of and interest on a particular class of Notes
will be paid pursuant to its terms. There can be no
assurance that a rating will not be lowered or withdrawn
by a rating agency if circumstances so warrant. See
"Risk Factors--Ratings of the Notes" herein.
</TABLE>
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<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus Supplement
and the Prospectus, prospective investors should carefully consider the
following risk factors before investing in the Notes.
Security Interests in Financed Vehicles. Each Seller will transfer and
assign its security interests in the Financed Vehicles to Compass Auto, which
in turn will transfer and assign such security interests to the Company. Such
security interests will be sold and assigned by the Company to the Trust and
assigned by the Trust to the Indenture Trustee for the benefit of the
Noteholders. Except as set forth in the next paragraph, in most states, such
assignments are effective assignments of a security interest, and in the
absence of fraud, inadvertence or administrative error, the assignee succeeds
thereby to the assignor's rights as secured party. In most states, in the
absence of fraud or forgery by the vehicle owner or of fraud, forgery,
negligence or error by the Seller or administrative error by state or local
agencies, the notation of the Seller's lien on the certificates of title or
ownership and/or possession of such certificates with such notation will be
sufficient to protect the Trust against the rights of subsequent purchasers of
a Financed Vehicle or subsequent lenders who take a security interest in a
Financed Vehicle.
Because of the administrative burden and expense that would be entailed in
doing so, no steps will be taken to cause new certificates of title for the
Financed Vehicles to be issued identifying Compass Auto, the Company, the
Trust or the Indenture Trustee as the secured party. In the absence of such
action, the Trust and the Indenture Trustee may not have a perfected security
interest in the Financed Vehicles and other secured parties, bankruptcy
trustees and/or debtors, receivers, judgment creditors and subsequent
purchasers (among others) might acquire rights in such Financed Vehicle prior
to the rights of the Trust and the Indenture Trustee. By not identifying the
Indenture Trustee as the secured party on the certificates of title for the
Financed Vehicles, any person without notice of the assignment of the security
interest would be protected in dealing with the lienholder of record as the
holder of the security interest.
Insolvency Laws Affecting Transfers by Sellers. Pursuant to the First Tier
Receivables Purchase Agreement, each Seller will transfer to Compass Auto all
of its right, title and interest in and to the Receivables owned by such
Seller, including its security interests in the related Financed Vehicles, and
will represent and warrant that such transfer is either a valid transfer and
assignment of the Receivables to Compass Auto or the grant to the Trust of a
security interest in the Receivables.
To the extent that a Seller has granted a security interest in the
Receivables and that security interest was validly perfected before the
appointment of the FDIC as conservator or receiver and before such Seller's
insolvency, and certain other conditions are satisfied, including that such
security interest was not taken in contemplation of the insolvency of such
Seller, was not taken with the intent to hinder, delay or defraud such
Seller or the creditors of such Seller and was not granted for the benefit of
any affiliate of such Seller, such security interest should be enforceable (to
the extent of the secured party's "actual direct compensatory damages") and
should not be subject to avoidance by the FDIC, as receiver or conservator for
such Seller, and, therefore, in such circumstances, payments to the secured
party with respect to the Receivables (up to the amount of such damages)
should not be subject to recovery by a conservator or receiver for such
Seller. Because Compass Auto is an affiliate of each of the Sellers, it is not
clear that if the transfer by the Sellers to Compass Auto under the First Tier
Receivables Purchase Agreement were deemed to be a security interest in the
Receivables, such security interest would be enforced to the extent described
above. Therefore, to provide additional protection to the Noteholders and to
carry out the intent of the parties, each Seller will grant a security
interest directly to the Indenture Trustee for the benefit of the Noteholders
pursuant to a security agreement (the "Security Agreement"), which security
interest should be enforceable as described in the second preceding sentence.
The foregoing conclusions are based on FDIC general counsel opinions and
policy statements regarding the application of certain provisions of the
Federal Deposit Insurance Act (as amended, the "FDIA"). However,
S-11
<PAGE>
such opinions and policy statements are not necessarily binding on the FDIC.
The FDIC, if appointed as the conservator or receiver for a Seller, has the
power under the FDIA to repudiate contracts, including secured contracts. The
FDIA provides that a claim for such a repudiation is limited to "actual direct
compensatory damages." While a Policy Statement of the Resolution Trust
Company (the "RTC"), a former (now defunct) sister agency of the FDIC,
indicates that "actual direct compensatory damages" would include outstanding
principal plus interest accrued to the date of payment, in one case a federal
district court held that such damages constituted the fair market value of the
repudiated bonds as of the date of repudiation, which, with respect to the
Notes, depending upon circumstances existing on the date of repudiation, could
be an amount less than the outstanding principal plus interest accrued to the
date of repudiation. The FDIC has not adopted a policy statement on payment of
interest on collateralized borrowings of banks.
Notwithstanding the foregoing, a tax or government lien on property of a
Seller where notice of such lien has been filed before Receivables are
transferred to Compass Auto, pursuant to the First Tier Receivables Purchase
Agreement, or the Indenture Trustee, pursuant to the Security Agreement, may
have priority over Compass Auto's and the Indenture Trustee's interest in such
Receivables, and if the FDIC were appointed conservator or receiver of such
Seller, certain administrative expenses of the conservator, receiver or the
Alabama State Banking Department, in the case of Compass Bank, and the
Department of Banking of the State of Texas, in the case of Compass Bank-
Texas, may have priority over Compass Auto's and the Indenture Trustee's
interest in the Receivables.
If (i) a Seller were to become subject to a conservatorship or receivership,
or a conservatorship or receivership proceeding were to be commenced involving
such Seller, and (ii) the conservator or receiver for such Seller were to
assert that Compass Auto's or the Indenture Trustee's interest in the
Receivables should not be enforceable or should be subject to avoidance or
were to require Compass Auto or the Indenture Trustee to establish its right
to those payments by submitting to and completing the administrative claims
procedure under the FDIA, or the conservator or receiver were to request a
stay of proceedings with respect to such Seller as provided under the FDIA,
delays in payments or distributions on the Notes and possible reductions in
the amount of those payments or distributions could occur. In addition, the
appointment of a receiver or conservator could result in administrative
expenses of the receiver or conservator having priority over the interest of
Compass Auto or the Indenture Trustee in the Receivables.
In addition, while Compass Bank is the Servicer, cash collections held by
Compass Bank may, subject to certain conditions, be commingled and used for
the benefit of Compass Bank prior to the date on which such collections are
required to be deposited in the Collection Account. In the event of the
conservatorship or receivership of Compass Bank or, in certain circumstances,
the lapse of certain time periods, Compass Auto and the Indenture Trustee may
not have a perfected interest in such collections and, in such event, Compass
Auto and the Indenture Trustee may suffer a loss of all or part of such
collections which may result in a loss to the Holders of the Notes. In
addition, in the event of a Servicer Default relating to the insolvency of the
Servicer, if no Servicer Default other than such conservatorship or
receivership or insolvency exists, the conservator or receiver for the
Servicer may have the power to prevent the appointment of a successor
Servicer. The appointment of a receiver or conservator could adversely affect
Compass Bank's ability to repurchase ineligible Receivables from the Trust and
could result in administrative expenses of the receiver or conservator having
priority over the interest of Compass Auto or the Indenture Trustee in the
Receivables.
Insolvency Laws Affecting Transfers by Compass Auto and the Company. Each of
Compass Auto and the Company has taken steps in structuring the transactions
contemplated hereby that are intended to make it unlikely that the voluntary
or involuntary application for relief by its respective parent company
("Parent"), under the United States Bankruptcy Code or similar applicable
state laws ("Insolvency Laws") will result in the consolidation of the assets
and liabilities of Compass Auto or the Company, as applicable, with those of
its Parent. These steps include the creation of each of Compass Auto and the
Company as a separate, limited-purpose entity pursuant to such entity's
organizational documents, which contain limitations (including restrictions on
the nature of such entity's business) and a restriction on its ability to
commence a voluntary case or proceeding under any Insolvency Law without the
unanimous affirmative vote of all of the members of the board of directors of
such entity. Pursuant to the Receivables Purchase Agreements and the Sale and
Servicing
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<PAGE>
Agreement, the Servicer, each Seller and the Indenture Trustee will each agree
not to invoke the Insolvency Laws with respect to Compass Auto, the Company or
the Trust until the date which is one year and one day following the payment
in full of all amounts due in respect of the Notes.
Each of Compass Auto and the Company believes that a court would conclude
that its assets and liabilities would not be consolidated with the assets and
liabilities of its Parent in the event of the application of the federal
bankruptcy laws to its Parent. If a court concluded otherwise, or a filing
were made under any Insolvency Law by or against Compass Auto or the Company,
or if an attempt were made to litigate any of the foregoing issues, delays in
payments on the Notes (and possible reductions in the amount of such payments)
could occur. In a 1993 case, the United States Court of Appeals for the Tenth
Circuit found that accounts sold prior to a bankruptcy should be treated as
part of the bankruptcy estate of the seller of such accounts. If Compass Auto,
the Company or either of their Parents were to become a debtor in a bankruptcy
proceeding and a court applied the reasoning of the Circuit Court reflected in
the case described above to chattel paper, delays in payments to Noteholders
could occur or reductions in the amounts of such payments could result.
Each of Compass Auto and the Company intends that the transfers of
Receivables under the Second Tier Receivables Purchase Agreement and the Sale
and Servicing Agreement, respectively, will constitute sales, rather than
pledges of the Receivables to secure indebtedness of Compass Auto or the
Company, as applicable. However, if either of Compass Auto or the Company were
to become a debtor under any Insolvency Laws, a creditor or trustee in
bankruptcy of such entity as debtor-in-possession might argue that such sales
of Receivables by such entity were pledges of Receivables rather than sales,
and if such position--that the transfer of Receivables were pledges rather
than sales or otherwise should be treated as part of the bankruptcy estate of
such entity--were presented to or accepted by a court, then delays in payments
to Noteholders could occur or reductions in the amounts of such payments could
result. In addition, if the transfer of any Receivables is recharacterized as
a pledge, then a tax lien, governmental lien or other lien created by
operation of law on the property of such entity could have priority over the
Indenture Trustee's security interest in such Receivables.
Geographic Concentration of Receivables. Obligors relating to approximately
38.98%, 20.29% and 17.90% of the Pool Balance as of the Cutoff Date were
located in Texas, Arkansas and Alabama, respectively. No other state in which
Obligors were located as of the Cutoff Date accounted for more than 10% of the
Pool Balance as of the Cutoff Date. See "The Receivables Pool" herein.
Accordingly, adverse economic conditions or other factors particularly
affecting any of these regions could adversely affect the performance of the
Receivables.
Litigation. Due to the consumer-oriented nature of the automobile financing
industry and the application of applicable laws and regulations, industry
participants, which could in the future include the Sellers, are from time to
time named as defendants in litigation alleging, among other things,
violations of federal and state laws and regulations. As of the date hereof,
neither Seller is subject to any such litigation with respect to its
automobile loan portfolio.
Trust's Limited Relationship to the Company, the Sellers, Compass Auto and
the Servicer. None of the Company, the Sellers, Compass Auto nor the Servicer
is generally obligated to make any payments in respect of the Notes or the
Receivables. Each of the Sellers has made certain limited representations and
warranties regarding the characteristics of the Receivables and is required
under the First Tier Receivables Purchase Agreement to repurchase Receivables
under certain circumstances if a representation or warranty with respect
thereto has been breached. See "Description of the Transfer and Servicing
Agreements--Sale and Assignment of Receivables" herein.
Priority of Payments on Notes. Upon the occurrence of an Event of Default
and acceleration of the Notes, principal payments will be made first on the
Class A-1 Notes until the Class A-1 Notes have been paid in full, and
thereafter on the Class A-2 Notes and Class A-3 Notes pro rata based on the
amount outstanding under each such class. Consequently, even after an Event of
Default and acceleration of all Notes, the Class A-2 Noteholders and Class A-3
Noteholders will not receive payments on principal until the Class A-1 Notes
have been paid in full.
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<PAGE>
Prepayment of the Receivables. All the Receivables are prepayable at any
time. The rate of prepayments on the Receivables may be influenced by a
variety of economic, social and other factors, including changes in interest
rates and the fact that an Obligor generally may not sell or transfer the
Financed Vehicle securing a Receivable without the consent of the secured
party, which generally results in the repayment of the remaining principal
balance of the Receivable. If an Obligor pays more than one scheduled payment
at a time, the entire amount of the additional payment (less any accrued
interest on the Receivable through the date of payment) will be distributed as
part of the Total Distribution Amount on the Distribution Date following the
month of receipt. Additionally, under certain circumstances, the Sellers are
obligated to repurchase, and the Servicer is obligated to purchase,
Receivables as a result of certain uncured breaches of representations and
warranties under the First Tier Receivables Purchase Agreement, in the case of
the Sellers, and certain uncured breaches of covenants under the Sale and
Servicing Agreement, in the case of the Servicer. See "Description of the
Transfer and Servicing Agreements--Sale and Assignment of Receivables" herein.
In addition, the Total Distribution Amount for each Distribution Date includes
the payments on Receivables allocable to interest which will be available to
make payment of principal on the Notes. Accordingly, under certain
circumstances it is likely that the Notes will be repaid before their final
scheduled distribution date. Any reinvestment risks resulting from a faster or
slower incidence of prepayment of Receivables will be borne entirely by the
Noteholders.
Inability of Indenture Trustee to Liquidate Receivables. Although the Trust
will covenant to sell the Receivables if directed to do so by the Indenture
Trustee in accordance with the Indenture following an acceleration of the
Notes upon an Event of Default, there is no assurance that the market value of
such Receivables will at any time be equal to or greater than the outstanding
principal amount of the Notes. Therefore, upon an Event of Default with
respect to the Notes, there can be no assurance that sufficient funds will be
available to repay the Noteholders in full. In addition, the amount of
principal required to be distributed to Noteholders under the Indenture is
generally limited to amounts available to be deposited in the Note
Distribution Account. Therefore, the failure to pay principal on a class of
the Notes may not result in the occurrence of an Event of Default until the
final scheduled distribution date for such class of Notes.
Limited Liquidity of Notes. There is currently no secondary market for the
Notes. The Underwriters currently intend to make a market in the Notes, but
are under no obligation to do so. There can be no assurance that a secondary
market will develop or, if a secondary market does develop, that it will
provide Noteholders with liquidity of investment or that it will continue for
the life of the Notes.
Limited Assets of Trust. The Trust will not have any significant assets or
sources of funds other than the Trust Property, including the Receivables, the
proceeds thereof and funds in the Reserve Account, if any. Noteholders must
rely on payments on the Receivables and, if and to the extent available,
amounts on deposit in the Reserve Account. Although any funds available in the
Reserve Account on each Distribution Date will be applied to cover shortfalls
in distribution of the Servicing Fee and interest and principal on the Notes,
the funds to be deposited in the Reserve Account are limited in amount. If the
Reserve Account is exhausted, the Trust will depend solely on current
distributions on the Receivables to make payments on the Notes. See "The
Trust" and "Description of the Transfer and Servicing Agreements--Accounts"
herein.
Ratings of the Notes. As a condition of issuance of any of the Notes, the
Class A-1 Notes will be rated in the highest rating category for short-term
debt obligations and the Class A-2 Notes and Class A-3 Notes will be rated in
the highest rating category for long-term debt obligations, in each case by at
least two nationally recognized rating agencies (the rating agencies rating
the Notes being the "Rating Agencies"). A rating is not a recommendation to
purchase, hold or sell Notes, inasmuch as such rating does not comment as to
market price or suitability for a particular investor. The ratings of the
Notes address the likelihood of the timely payment of interest on, and the
ultimate repayment of principal of, the Notes pursuant to their terms. There
can be no assurance that a rating will be retained for any given period of
time or that a rating will not be lowered or withdrawn entirely by a Rating
Agency if in its judgment circumstances in the future so warrant. In the event
that a rating is subsequently lowered or withdrawn, no person or entity will
be required to provide any additional credit enhancement. The ratings of the
Notes are based primarily on the credit quality of the Receivables, the
subordination provided by the Certificates and the availability of funds in
the Reserve Account.
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<PAGE>
THE TRUST
GENERAL
The Issuer, Compass Auto Receivables Trust 1998-A, is a business trust
formed under the laws of the State of Alabama pursuant to the Trust Agreement
for the transactions described in this Prospectus Supplement. After its
formation, the Trust will not engage in any activity other than (i) acquiring,
holding and managing the Receivables and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Notes and the Certificates, (iii) making
payments on the Notes and the Certificates, and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The Trust initially will be capitalized with equity equal to $22,080,879.
The proceeds from the initial sale of the Notes and Certificates will be used
by the Trust to purchase the Receivables from the Company pursuant to the Sale
and Servicing Agreement. The Servicer will service the Receivables pursuant to
the Sale and Servicing Agreement and will be compensated for acting as
Servicer. See "Description of the Transfer and Servicing Agreements--Servicing
Compensation" herein.
If the protection provided to the Noteholders by the subordination of the
Certificates and the Reserve Account is insufficient, the Trust will look only
to the Obligors on the Receivables and the proceeds from the repossession and
sale of Financed Vehicles that secure defaulted Receivables to fund
distributions of principal and interest on the Notes. In such event, certain
factors, such as the Trust's not having a first priority perfected security
interest in some of the Financed Vehicles, may affect the Trust's ability to
realize on the collateral securing the Receivables and thus may reduce the
proceeds to be distributed to Noteholders with respect to the Notes. See
"Description of the Transfer and Servicing Agreements--Distributions" and "--
Accounts" herein and "Certain Legal Aspects of the Receivables" herein and in
the Prospectus.
The Trust's principal offices are located in Florida, in care of The Bank of
New York Trust Company of Florida, N.A., as Owner Trustee, at the address
listed below under "--The Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Notes and the Certificates had
taken place on such date:
<TABLE>
<S> <C>
Class A-1 Notes.............................................. $127,235,000
Class A-2 Notes.............................................. 81,700,000
Class A-3 Notes.............................................. 170,445,000
Certificates................................................. 22,080,879
------------
Total.................................................... $401,460,879
============
</TABLE>
THE OWNER TRUSTEE
The Bank of New York Trust Company of Florida, N.A., is the Owner Trustee
under the Trust Agreement. The Bank of New York Trust Company of Florida,
N.A., is a national banking association and its principal offices are located
at 10161 Centurion Parkway, Jacksonville, Florida 32256. The Owner Trustee's
liability in connection with the issuance and sale of the Notes is limited
solely to the express obligations of the Owner Trustee set forth in the Trust
Agreement and the Sale and Servicing Agreement. The Sellers, Compass Auto, the
Company and their respective affiliates may maintain normal commercial banking
relations with the Owner Trustee and its affiliates.
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<PAGE>
THE RECEIVABLES POOL
ORIGINATION AND SERVICING OF MOTOR VEHICLE CONTRACTS
Each Seller has a portfolio that is principally comprised of Motor Vehicle
Contracts secured by new or used automobiles and light trucks that are
purchased from Dealers pursuant to the terms of Dealer Agreements. The Sellers
perform financial evaluations of the Dealers, both initially to determine
whether to enter into a Dealer Agreement with a particular Dealer and
periodically to determine whether to continue a relationship with a Dealer.
Such evaluations typically consist of a review of the Dealer's financial
statements, the Dealer's reputation and the Seller's past experience with the
Dealer.
The Sellers' portfolios of Motor Vehicle Contracts consist of Motor Vehicle
Contracts purchased from Dealers in Alabama, Arizona, Arkansas, Colorado,
Florida, Georgia, Kansas, Maryland, Mississippi, Missouri, North Carolina,
Oklahoma, South Carolina, Tennessee, Texas and Virginia (the "Dealer States").
In the Dealer Agreements, each Dealer makes representations and warranties to
the respective Seller with respect to the Motor Vehicle Contracts, the
obligors on the Motor Vehicle Contracts and the security interests in the
Financed Vehicles relating thereto, which representations and warranties
typically include, among other things, that: (i) the Dealer has satisfied all
applicable federal, state, local and other laws and regulations applicable to
motor vehicle installment sales, the extension of credit and consumer
protection; (ii) all registered owners of the vehicles have signed the Motor
Vehicle Contract as buyers or as parties agreeing to the security interest in
favor of the Dealer or the Seller as its assignee; (iii) each payment due
under each Motor Vehicle Contract is and will be free and clear of any and all
disputes, set-offs, claims or counterclaims, and all obligations to pay are
and will be legal, valid and enforceable against the Obligor shown in the
Motor Vehicle Contract; and (iv) the Dealer will comply in full with all
requirements relating to the sale of vehicles and the perfection of security
interests in vehicles contained in the applicable certificate of title laws
and will apply, within the time permitted by law to benefit from any
retroactive perfection provision, for a certificate of title showing a first
and sole lien in the Seller's name, will cause the perfection of the Seller's
lien within the time limits for perfection established by state law and will
indemnify the Seller for all losses, damages and penalties, including
attorneys' fees and expenses, incurred or threatened because of Dealer's
failure to comply with such requirements. After the sale of a Motor Vehicle
Contract to a Seller, the Dealer will advise the Obligor to make all payments
directly to such Seller, and the Dealer agrees not to accept payments without
such Seller's prior consent. Generally, these representations and warranties
do not relate to the creditworthiness of the Obligors or to the collectibility
of the Motor Vehicle Contracts.
Upon breach of any representation or warranty made by a Dealer, the
respective Seller has a right to demand from that Dealer (i) with respect to
all Motor Vehicle Contracts that relate to such breach, the unpaid balance and
all unearned finance charges, premiums and other prepaid items under such
Motor Vehicle Contracts and (ii) all of such Seller's losses and expenses,
including reasonable attorneys' fees, related to the breach. Generally, in
determining whether to exercise such rights, the particular Seller will
consider the prior performance of the Dealer and other business and commercial
factors. Pursuant to the First Tier Receivables Purchase Agreement, each
Seller will assign its rights against the Dealers and its rights to unpaid
principal and interest received upon such enforcement to Compass Auto, which
in turn will assign such rights to the Company. The Company will assign such
rights to the Trust pursuant to the Sale and Servicing Agreement, and Compass
Bank, as Servicer, will be obligated to enforce such rights on behalf of the
Trust with respect to Dealer Agreements relating to the Motor Vehicle
Contracts in accordance with Compass Bank's customary practices. Since Compass
Bank has ongoing relationships with each Dealer that may influence its
decision whether to enforce the Trust's rights under the Dealer Agreements, in
instances in which a third-party servicer might choose to enforce such rights,
it is possible that Compass Bank, in accordance with its customary practices,
may choose not to enforce such rights. Compass Bank makes no representations
as to the financial condition of the Dealers as to which Compass Bank, as
Servicer, will have such rights, and there can be no assurance as to the
ability of any such Dealer to perform its obligations under a Dealer
Agreement.
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<PAGE>
Pursuant to the Sale and Servicing Agreement, Compass Bank will be
responsible for servicing all the Motor Vehicle Contracts. The servicing
functions performed by Compass Bank on a predominantly centralized basis
include customer service, document file keeping, computerized account record
keeping, vehicle title processing and automated collections as well as certain
aspects of Dealer liaison, Dealer sales, credit underwriting, documentation
reviews and other support services. The servicing policies and practices of
Compass Bank may change over time in accordance with Compass Bank's business
judgment.
Compass Bank may delegate all or part of its servicing duties to any
majority-owned direct or indirect subsidiary of Compass Bancshares, Inc.,
Compass Bank's parent, or may delegate specific duties to subcontractors that
are in the business of performing such duties. Notwithstanding any such
delegation, Compass Bank will remain liable under the Sale and Servicing
Agreement for such duties as if it were still performing such duties. Compass
Bank has currently delegated certain collections duties to a subcontractor
specializing in collections activities as more fully described in "--
Collection Procedures" below. In addition, Compass Bank may from time to time
delegate to Compass Bank-Texas certain servicing duties with respect to
Receivables originated by Compass Bank-Texas.
UNDERWRITING OF MOTOR VEHICLE CONTRACTS
The Sellers evaluate applicants for Motor Vehicle Contracts in accordance
with their established underwriting standards and procedures. These
underwriting standards and procedures are intended to assess the ability of a
loan applicant ("Applicant") to repay the Motor Vehicle Contract and the
adequacy of the financed vehicle as collateral based upon factors such as (i)
credit experience and credit payment history, (ii) occupation, length of
employment, length of residence in any one area and whether an Applicant rents
or owns his or her residence, (iii) income and various payment to income
ratios, and (iv) mileage, vehicle type and ability to repossess the financed
vehicle. To obtain the information necessary to make these underwriting
assessments, each Seller requires that the Applicant complete a loan
application that lists, among other things, the Applicant's income, credit
references, employment history and homeowner status. The related Seller also
orders at least one credit bureau report on every Applicant.
Each Applicant is assigned a credit score by the credit bureau issuing the
credit report with respect to such Applicant. Although the credit scoring
process provides a basis for lending decisions, it does not conclusively
determine whether an Applicant is accepted or rejected. The information
contained in the loan application and the credit bureau report, including the
credit score of the Applicant, are reviewed by a loan officer who makes the
determination of whether to accept or reject the Applicant. An Applicant with
a low credit score may nonetheless be approved if strong compensating factors
exist that in the judgment of the loan officer make the Applicant an
acceptable credit risk.
The amount advanced under any Motor Vehicle Contract for a financed vehicle
is dependent upon the "assigned value" of such financed vehicle. The assigned
value of a new vehicle is the dealer invoice of that vehicle. A used vehicle's
assigned value is the wholesale price of such vehicle as reported in the most
recent edition of the National Auto Research Black Book Official Used Car
Market Guide Monthly, the NADA Used Car guide or the Kelly Blue Book guide,
depending on which guide is typically used in a geographic region. The maximum
amount advanced under a Motor Vehicle Contract is generally 120% of the
assigned value of the related financed vehicle. Maximum advance guidelines are
differentiated by risk grade as reflected by the credit score of the
Applicant. Advances in excess of these standards are permitted only after
review by a superior of the loan officer. However, the maximum amount advanced
for Motor Vehicle Contracts is often less than the maximum permitted amount
depending on a number of factors, including the term of the Motor Vehicle
Contract, the model and year of the financed vehicle and the amount of the
down payment. These adjustments are intended to assure that the financed
vehicle constitutes adequate collateral to secure the Motor Vehicle Contract.
In addition, whether a financed vehicle is new or used, the Sellers may also
finance credit life/accident/health insurance and service warranties under a
Motor Vehicle Contract.
S-17
<PAGE>
INSURANCE
Each Motor Vehicle Contract requires the obligor to obtain insurance with
respect to the financed vehicle. The Dealer Agreements provide that the Seller
must be protected as loss payee against physical damage, fire, theft or
collision. The Dealer Agreements provide that the particular Seller will only
purchase the Motor Vehicle Contract upon receipt of a statement by the obligor
that such obligor has or will obtain such insurance for the financed vehicle.
If an obligor fails to maintain the required insurance, a Seller will not, and
is not obligated to, purchase limited collision and comprehensive insurance to
protect the interests of that Seller.
COLLECTION PROCEDURES
Collection activities with respect to delinquent Motor Vehicle Contracts
will be performed by Compass Bank, as Servicer, or persons to whom it
delegates such activities in accordance with the terms of the Sale and
Servicing Agreement. Collection activities include prompt investigation and
evaluation of the causes of any delinquency. An obligor is deemed current if
an amount equal to at least 95% of a scheduled monthly payment is paid.
An automated collection system is utilized to assist in collection efforts.
The automated collection system provides relevant obligor information (for
example, current addresses, phone numbers and loan information), records of
all contacts with obligors and automated dialing. The system also records an
obligor's promise to pay and allows supervisor review of collection personnel
activity, permits supervisors to modify priorities as to which obligors should
be contacted and provides extensive reports concerning Motor Vehicle Contract
delinquencies. Under current practices, contact by telephone is initiated with
an obligor whose Motor Vehicle Contract has become 11 days delinquent. Since
May of this year, this initial contact has been made by a subcontractor
specializing in collection activities collecting for Compass Bank. The
subcontractor continues to work with an obligor via telephone calls and
mailings until the Motor Vehicle Contract becomes 60 days delinquent, at which
point the account is assigned back to a Compass Bank representative for
resolution. Generally, after three consecutive payments on a Motor Vehicle
Contract are delinquent, the collector will implement repossession procedures
or alternative actions to cure the delinquency. However, if a Motor Vehicle
Contract is deemed uncollectible, if the financed vehicle is deemed by
collection personnel to be in danger of being damaged, destroyed or made
unavailable for repossession or if the obligor voluntarily surrenders the
financed vehicle, a repossession may occur without regard to length or
existence of payment delinquency. Repossessions are generally conducted by
third parties who are engaged in the business of repossessing vehicles for
secured parties. After repossession, the obligor has an additional time period
to redeem the financed vehicle before that vehicle is resold. Most repossessed
vehicles are sold at auctions after proper notice has been given to the
obligor. Upon repossession and sale of the financed vehicle, Compass Bank, as
Servicer, will pursue any deficiency remaining to the extent deemed practical
and to the extent permitted by law. The collection policies and practices of
Compass Bank, as Servicer, may change over time in accordance with Compass
Bank's business judgment.
Losses may occur in connection with delinquent Motor Vehicle Contracts and
can arise in several ways, including inability to locate the financed vehicle
or the obligor or because of a discharge of the obligor in a bankruptcy
proceeding. The current policy of the Sellers is to recognize losses upon the
earlier to occur of (x) a financed vehicle being repossessed, (y) an account
being deemed uncollectible and (z) an account becoming 120 days past due (at
which time the related Receivable becomes a "Defaulted Receivable"). The
Sellers recognize a loss in the full outstanding amount of a Receivable if
such Receivable becomes a Defaulted Receivable under the circumstances
described in clauses (y) and (z) of the definition of "Defaulted Receivable."
If a Receivable becomes a Defaulted Receivable pursuant to clause (x) of the
definition of "Defaulted Receivable," a partial loss will be recognized during
the month after repossession based on the excess of the outstanding principal
amount owed on such Receivable over the estimated value of such Financed
Vehicle in accordance with the collection policies of the Sellers. This
estimated loss is adjusted after the sale of the financed vehicle. The loss
recognition policies and practices of the Sellers may change over time in
accordance with their business judgment.
Compass Bank periodically permits an obligor extensions on payment due
dates. These extensions are generally available to an obligor only once on any
monthly installment during any 12 month period throughout
S-18
<PAGE>
the term of such Motor Vehicle Contract. Generally, these extensions are
offered only when: (i) the obligor's financial difficulty has been resolved or
will no longer impact the ability to make future payments; (ii) the extension
will result in the obligor's payments being brought current; (iii) the obligor
has made at least six payments; (iv) except for situations involving the
bankruptcy of the obligor, the total period of all credit-related extensions
granted on a Motor Vehicle Contract will not exceed the number of months equal
to the number of whole years comprising the original term of the Motor Vehicle
Contract; and (v) the obligor has obtained proper insurance on the financed
vehicle. Any deviation from this policy requires the concurrence of a credit
officer or a senior manager. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures" in the Prospectus for certain additional
conditions on extensions that must be satisfied with respect to Receivables in
the Trust.
YEAR 2000 ISSUES
The Sellers are wholly owned subsidiaries of Compass Bancshares, Inc.
("CBI"). CBI has initiated a program to study its computer systems in order to
be Year 2000 compliant. This study involves identifying any necessary
modifications or replacements of hardware and software maintained by CBI and
the Sellers. The study also involves receiving assurance from vendors that the
appropriate actions have or are being taken by them to remedy their Year 2000
issues for computer systems that the vendors are responsible for maintaining
and that are relied upon by CBI and the Sellers. In addition, CBI is also
taking appropriate actions to receive assurance that its customers,
principally, commercial lending customers, are taking necessary steps to
remedy their Year 2000 issues due to the fact that noncompliance could
adversely effect their ability to repay borrowings to CBI and the Sellers.
Under this program, CBI has identified computer systems that will require
either modification, upgrade or replacement. CBI anticipates that in-house
personnel will be primarily responsible for testing and implementing systems
renovations and, although outside contractors will be used, the costs will not
be significant. As such, CBI believes that the planned modifications, upgrades
and replacement of existing systems, along with third party confirmation, will
be completed in a timely fashion to assure Year 2000 compliance, and any
related costs will not have a material impact on the results of operations,
cash flows or financial condition of CBI or the Sellers.
DELINQUENCY AND LOAN LOSS INFORMATION
The following tables set forth, on a combined basis, information with
respect to delinquencies, loan losses and recoveries for the entire portfolio
of installment sale contracts purchased by the Sellers. Substantially all of
such portfolio consists of Motor Vehicle Contracts; however, less than 1% of
the outstanding balance of receivables in such portfolio consists of
installment sales contracts relating to heavy truck and boat financings (which
receivables will not be sold to the Trust). These tables set forth information
for the fiscal quarters ended March 31, 1998 and March 31, 1997, and fiscal
years ended December 31, 1997, 1996, 1995, 1994 and 1993. Delinquency, loan
loss and recovery experience may be influenced by a variety of social,
economic and other factors. There can be no assurance that the delinquency,
loan loss and recovery experience on the Receivables will be similar to that
set forth below.
S-19
<PAGE>
COMBINED MOTOR VEHICLE CONTRACT PORTFOLIO
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF MARCH 31,
1998 1997
----------------- ---------------
NUMBER NUMBER
OF OF
DOLLARS LOANS DOLLARS LOANS
---------- ------ -------- ------
<S> <C> <C> <C> <C>
Outstanding
Principal Amount... $1,087,294 94,153 $910,378 84,603
Delinquencies(1)(2)
30-59 Days........ $ 11,320 1,092 $ 4,205 398
60-89 Days........ 3,224 314 480 57
90 Days or More... 3,166 352 166 27
---------- ------ -------- ------
Total
Delinquencies... $ 17,710 1,758 $ 4,851 482
========== ====== ======== ======
Repossession
Inventory.......... $ 195 $ 198
Total
Delinquencies &
Repossession
Inventory....... $ 17,905 $ 5,049
PERCENTAGES:
Delinquencies(1)(2)(3)
30-59 Days........ 1.04% 0.46%
60-89 Days........ 0.30% 0.05%
90 Days or More... 0.29% 0.02%
Total
Delinquencies(3)(4). 1.63% 0.53%
Repossession
Inventory(3)....... 0.02% 0.02%
Total
Delinquencies &
Repossession
Inventory(3)(4). 1.65% 0.55%
<CAPTION>
AS OF YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- --------------- --------------- --------------- ---------------
NUMBER NUMBER NUMBER NUMBER NUMBER
OF OF OF OF OF
DOLLARS LOANS DOLLARS LOANS DOLLARS LOANS DOLLARS LOANS DOLLARS LOANS
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding
Principal Amount... $1,053,731 93,741 $847,875 80,306 $872,582 84,402 $795,818 80,294 $752,283 76,417
Delinquencies(1)(2)
30-59 Days........ $ 13,166 1,242 $ 4,986 452 $ 3,537 409 $ 3,169 393 $ 1,495 226
60-89 Days........ 3,836 369 675 73 482 82 346 76 235 39
90 Days or More... 2,347 258 260 34 261 43 183 39 142 17
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total
Delinquencies... $ 19,349 1,869 $ 5,921 559 $ 4,280 534 $ 3,698 508 $ 1,872 282
========== ====== ======== ====== ======== ====== ======== ====== ======== ======
Repossession
Inventory.......... $ 140 $ 195 $ 108 $ 63 $ 108
Total
Delinquencies &
Repossession
Inventory....... $ 19,489 $ 6,116 $ 4,388 $ 3,761 $ 1,980
PERCENTAGES:
Delinquencies(1)(2)(3)
30-59 Days........ 1.25% 0.59% 0.41% 0.40% 0.20%
60-89 Days........ 0.36% 0.08% 0.06% 0.04% 0.03%
90 Days or More... 0.22% 0.03% 0.03% 0.02% 0.02%
Total
Delinquencies(3)(4). 1.84% 0.70% 0.49% 0.46% 0.25%
Repossession
Inventory(3)....... 0.01% 0.02% 0.01% 0.01% 0.01%
Total
Delinquencies &
Repossession
Inventory(3)(4). 1.85% 0.72% 0.50% 0.47% 0.26%
</TABLE>
- ----
(1)Delinquencies include principal amounts.
(2)The period of delinquency is based on the number of days payments are
contractually past due.
(3)As a percent of outstanding principal in dollars.
(4)Percentages representing Total Delinquencies and Total Delinquencies &
Repossession Inventory may not equal the sum of the components thereof due
to rounding.
S-20
<PAGE>
COMBINED MOTOR VEHICLE CONTRACT PORTFOLIO
LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, MARCH 31, AS OF YEAR ENDED DECEMBER 31,
---------- --------- ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- --------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Loans(1)...... 94,153 84,603 93,741 80,306 84,402 80,294 76,417
Period End Outstanding
Principal Amount....... $1,087,294 $910,378 $1,053,731 $847,875 $872,582 $795,818 $752,283
Average Outstanding
Principal Amount (2)... $1,083,456 $869,716 $988,958 $851,934 $846,568 $760,202 $737,218
Gross Charge-Offs(3).... $2,094 $1,361 $3,951 $3,534 $2,304 $1,913 $2,201
Gross Charge-Offs as a %
of Period End
Outstanding Principal
Amount(3)(6)........... 0.78% 0.61% 0.37% 0.42% 0.26% 0.24% 0.29%
Gross Charge-Offs as a %
of Average Outstanding
Principal Amount(3)(6). 0.78% 0.63% 0.40% 0.41% 0.27% 0.25% 0.30%
Recoveries(4)........... $310 $337 $1,339 $1,166 $1,337 $1,245 $1,161
Net Charge-Offs(5)...... $1,784 $1,024 $2,612 $2,368 $967 $668 $1,040
Net Charge-Offs as a %
of Period End
Outstanding Principal
Amount(5)(6)........... 0.67% 0.46% 0.25% 0.28% 0.11% 0.08% 0.14%
Net Charge-Offs as a %
of Average Outstanding
Principal Amount(5)(6). 0.67% 0.48% 0.26% 0.28% 0.11% 0.09% 0.14%
</TABLE>
- --------
(1) Number of loans as of period end.
(2) The average for each period presented was computed by taking a simple
daily average of the outstanding principal amounts for such period.
(3) Amount charged off is (x) in the case of accounts with respect to which
the related financed vehicle has been repossessed, remaining principal
balance less estimated value of the repossessed vehicle, which chargeoff
is adjusted, if necessary, at the time of the sale of the repossessed
vehicle and (y) in the case of the bankruptcy of the related obligor, the
entire outstanding principal amount.
(4) Recoveries generally include amounts received with respect to loans
previously charged-off, except for proceeds realized in connection with
the sale of the repossessed vehicles.
(5) Net Charge-Offs mean gross charge-offs minus recoveries of loans
previously charged-off. Net Charge-Offs may not equal the difference of
the components thereof due to rounding.
(6) Annualized.
S-21
<PAGE>
POOL COMPOSITION
The Receivables represent Motor Vehicle Contracts that were purchased by a
Seller from Dealers in the ordinary course of business in accordance with such
Seller's underwriting standards and that:
(a) are secured by a new or used automobile or light truck;
(b) have a remaining maturity, as of the Cutoff Date, of at least 6
months and not more than 60 months;
(c) are secured by either new Financed Vehicles that had an original
maturity of at least 12 months and not more than 84 months or used Financed
Vehicles that had an original maturity of at least 12 months and not more
than 84 months;
(d) are fixed rate simple interest installment sales contracts that
provide for level monthly payments over their respective remaining terms
(except for the last payment that may be different from the level payments)
and have a simple interest contract rate (a "Contract Rate") of at least
8.00% and not more than 20.00%;
(e) are secured by Financed Vehicles that, as of the Cutoff Date, had not
been repossessed without reinstatement;
(f) have not been identified on the computer files of any of the Sellers
as relating to Obligors who were in bankruptcy proceedings as of the Cutoff
Date;
(g) were not delinquent for more than 30 days as of the Cutoff Date;
(h) have remaining principal balances, as of the Cutoff Date, of at least
$500.00 and not more than $50,000.00;
(i) are secured by Financed Vehicles that were not as of the Cutoff Date
insured by property insurance purchased by a Seller upon the failure of the
related Obligor to purchase such insurance as required; and
(j) were acquired from or through a Dealer who does not have any right to
receive proceeds from the Receivables.
The Receivables were selected from the Motor Vehicle Contracts in the
portfolios of the Sellers that met the above criteria utilizing no selection
procedures believed by the Sellers to be adverse to the Noteholders.
Approximately 34.85% of the aggregate principal balance of the Receivables, as
of the Cutoff Date, were secured by new Financed Vehicles and approximately
65.15% of the aggregate principal balance of the Receivables, as of the Cutoff
Date, were secured by used Financed Vehicles. Approximately 91.43% of the
aggregate principal balance of the Receivables, as of the Cutoff Date,
represented Motor Vehicle Contracts with level payments on each scheduled due
date, and approximately 8.57% of the aggregate principal balance of the
Receivables, as of the Cutoff Date, represented Motor Vehicle Contracts with a
balloon payment on the final scheduled due date. None of the Receivables
provide for recourse to the Dealer in the event of default by the Obligor,
except for breaches of the Dealer's representations and warranties that do not
relate to the creditworthiness of the Obligor. The Sellers may not substitute
other Motor Vehicle Contracts from their portfolios or any other motor vehicle
receivables for the Receivables at any time during the term of the First Tier
Receivables Purchase Agreement.
All of the Receivables are simple interest contracts. Payments under the
Motor Vehicle Contracts are generally applied first to accrued interest,
second to costs and expenses and finally to the unpaid principal. Accordingly,
if an Obligor pays the fixed monthly installment in advance of the date on
which a payment is due, the portion of the payment allocable to interest for
the period since the preceding payment will be less than it would be if the
payment were made on the due date, and the portion of the payment allocable to
reduce the principal will be correspondingly greater. If the obligor pays the
fixed monthly installment after its due date, the portion of the payment
allocable to interest for the period since the last payment will be greater
than it would be if the payment were made on the due date, and the portion of
the payment allocable to reduce principal will be correspondingly smaller.
When necessary, an adjustment is made at the maturity of the loan to the
scheduled final payment to reflect the larger or smaller, as the case may be,
allocations of payments to principal under the Receivable as a result of early
or late payments, as the case may be.
S-22
<PAGE>
In the case of the liquidation of a Receivable or repossession of a Financed
Vehicle, amounts recovered will be applied first to the expenses of
repossession, second to unpaid principal and interest and third to other
unpaid fees as provided in the Motor Vehicle Contract. Compass Bank reserves
the right to change its policy with respect to the application of amounts
recovered from a liquidated Receivable or a repossessed Financed Vehicle.
The composition of the Receivables, distribution by contract rate of the
Receivables, geographic distribution of the Receivables, and certain other
variables, as of the Cutoff Date are set forth in the following tables.
COMPOSITION OF THE RECEIVABLES
<TABLE>
<S> <C>
Aggregate Remaining Principal Balance.......................... $401,460,879.06
Number of Receivables.......................................... 35,744
Average Remaining Principal Balance............................ $ 11,231.56
Aggregate Original Principal Balance........................... $564,308,624.88
Average Original Principal Balance............................. $ 15,787.51
Weighted Average Contract Rate (1)............................. 9.84%
Contract Rate (Range).......................................... 8.00 to 19.50%
Weighted Average Original Term (1)............................. 57.78 months
Original Term (Range).......................................... 12 to 84 months
Weighted Average Remaining Term (1)............................ 42.27 months
Remaining Term (Range)......................................... 6 to 60 months
</TABLE>
- --------
(1) Weighted by remaining principal balance as of the Cutoff Date.
S-23
<PAGE>
DISTRIBUTION BY CONTRACT RATE OF THE RECEIVABLES
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
REMAINING PERCENTAGE OF
RANGE OF PRINCIPAL REMAINING NUMBER OF PERCENTAGE OF NUMBER
CONTRACT RATES BALANCE PRINCIPAL BALANCE(1) RECEIVABLES OF RECEIVABLES(1)
-------------- --------------- -------------------- ----------- --------------------
<S> <C> <C> <C> <C>
8.000% to 8.999%...... $ 95,704,270.53 23.84% 8,386 23.46%
9.000 to 9.999........ 134,539,803.65 33.51 11,820 33.07
10.000 to 10.999........ 112,617,102.24 28.05 9,940 27.81
11.000 to 11.999........ 44,625,137.34 11.12 4,106 11.49
12.000 to 12.999........ 10,800,179.21 2.69 1,111 3.11
13.000 to 13.999........ 1,918,964.91 0.48 238 0.67
14.000 to 14.999........ 861,357.95 0.21 101 0.28
15.000 to 15.999........ 197,054.98 0.05 22 0.06
16.000 to 16.999........ 86,669.31 0.02 11 0.03
17.000 to 17.999........ 57,221.65 0.01 6 0.02
18.000 to 18.999........ 38,129.18 0.01 2 0.01
19.000 to 19.999........ 14,988.11 0.00 1 0.00
--------------- ------ ------ ------
Total............... $401,460,879.06 100.00% 35,744 100.00%
=============== ====== ====== ======
- --------
(1) Percentages may not add to 100.00% due to rounding.
GEOGRAPHIC DISTRIBUTION OF THE RECEIVABLES
AS OF THE CUTOFF DATE
<CAPTION>
REMAINING PERCENTAGE OF
PRINCIPAL REMAINING NUMBER OF PERCENTAGE OF NUMBER
STATE(1) BALANCE PRINCIPAL BALANCE(2) RECEIVABLES OF RECEIVABLES(2)
- -------- --------------- -------------------- ----------- --------------------
<S> <C> <C> <C> <C>
Alabama................. $ 71,848,712.58 17.90% 6,852 19.17%
Arkansas................ 81,473,516.68 20.29 6,563 18.36
Florida................. 6,440,492.71 1.60 664 1.86
Georgia................. 19,260,190.76 4.80 1,727 4.83
Mississippi............. 14,116,683.08 3.52 1,419 3.97
Missouri................ 18,442,307.27 4.59 1,907 5.34
Oklahoma................ 16,704,288.59 4.16 1,372 3.84
Tennessee............... 4,989,397.68 1.24 484 1.35
Texas................... 156,484,542.69 38.98 13,582 38.00
Other(3)................ 11,700,747.02 2.91 1,174 3.28
--------------- ------ ------ ------
Total............... $401,460,879.06 100.00% 35,744 100.00%
=============== ====== ====== ======
</TABLE>
- --------
(1) Based on the billing addresses of the Obligors on the Receivables as of
the Cutoff Date.
(2) Percentages may not add to 100.00% due to rounding.
(3) Includes 40 other states and the District of Columbia (none of which have
a concentration of Receivables in excess of 0.51% of the aggregate Pool
Balance as of the Cutoff Date).
WEIGHTED AVERAGE LIFE OF THE NOTES
Information regarding certain maturity and prepayment considerations with
respect to the Securities is set forth under "Weighted Average Life of
Securities" in the Prospectus. Distributions of principal on the Class A-2
Notes, Class A-3 Notes and the Certificates will not be made until the Class
A-1 Notes have been paid in full. Distributions of principal on the Class A-3
Notes will not be made until the Class A-2 Notes have been paid
S-24
<PAGE>
in full. See "Description of the Transfer and Servicing Agreements--
Distributions" herein. As the rate of payment of principal of each class of
Notes depends primarily on the rate of payment (including prepayments) of the
principal balance of the Receivables, final payment of any class of the Notes
could occur significantly earlier than the applicable final scheduled
distribution date. Reinvestment risk associated with early payment of the
Notes will be borne exclusively by the Noteholders. It is expected that final
payment of the Notes will occur on or prior to the applicable final scheduled
distribution date. However, if sufficient funds are not available to pay the
Notes in full on or prior to the applicable final scheduled distribution date,
a default would occur and final payment of the Notes could occur later than
such date.
Prepayments on motor vehicle receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement,
the Absolute Prepayment Model ("ABS"), represents an assumed rate of
prepayment each month relative to the original number of receivables in a pool
of receivables. ABS further assumes that all the receivables are the same size
and amortize at the same rate and that each receivable in each month of its
life will either be paid as scheduled or be prepaid in full. For example, in a
pool of receivables originally containing 10,000 receivables, a 1% ABS rate
means that 100 receivables prepay each month. ABS does not purport to be an
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of receivables, including the
Receivables.
As the rate of payment of principal of each class of Notes will depend on
the rate of payment (including prepayments) of the principal balance of the
receivables, final payment of any class of Notes could occur significantly
earlier than the applicable final scheduled distribution date for such class
of Notes. Reinvestment risk associated with early payment of the Notes will be
borne exclusively by the Noteholders.
The tables captioned "Percent of Initial Class A-1 Note and Class A-2 Note
Principal Balances at Various ABS Percentages" and "Percent of Initial Class
A-3 Note Principal Balance at Various ABS Percentages" (the "ABS Tables") have
been prepared on the basis of the characteristics of the Receivables. The ABS
Tables assume that (a) the Receivables prepay in full at the specified
constant percentage of ABS monthly, with no defaults, losses or repurchases,
(b) each scheduled monthly payment on the Receivables is made on the last day
of each month and each month has 30 days, (c) payments on the Notes are made
on each Distribution Date (and each such date is assumed to be the 15th day of
each applicable month) and (d) the Servicer exercises its option to purchase
the Receivables and cause a redemption of the Class A-3 Notes. The ABS Tables
indicate the projected weighted average life of each class of Notes and set
forth the percent of the initial principal amount of each class of Notes that
is projected to be outstanding after each of the Distribution Dates shown at
various constant ABS percentages.
The ABS Tables also assume that the Receivables have been aggregated into
hypothetical pools with all of the Receivables within each such pool having
the following characteristics and that the level of scheduled monthly payment
for each of the pools (which is based on its aggregate principal balance,
Contract Rate, original number of scheduled payments and remaining number of
scheduled payments as of the Cutoff Date) will be such that each pool will be
fully amortized by the end of its remaining term to maturity. Each
hypothetical pool has an assumed cutoff date of the Cutoff Date.
<TABLE>
<CAPTION>
REMAINING TERM TO
AGGREGATE MATURITY SEASONING
POOL PRINCIPAL BALANCE CONTRACT RATE (IN MONTHS) (IN MONTHS)
---- ----------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
1 $ 44,731,192.04 9.819% 20 34
2 $ 78,186,093.97 9.876% 30 25
3 $125,250,888.37 9.889% 43 14
4 $153,292,704.68 9.793% 54 7
</TABLE>
The actual characteristics and performance of the Receivables will differ
from the assumptions used in constructing the ABS Tables. The assumptions used
are hypothetical and have been provided only to give a general sense of how
the principal cash flows might behave under varying prepayment scenarios. For
example, it
S-25
<PAGE>
is very unlikely that the Receivables will prepay at a constant level of ABS
until maturity or that all of the Receivables will prepay at the same level of
ABS. Moreover, the diverse terms of Receivables within each of the
hypothetical pools could produce slower or faster principal distributions than
indicated in the ABS Tables at the various constant percentages of ABS
specified, even if the original and remaining terms to maturity of the
Receivables are as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Receivables, or actual
prepayment experience, will affect the percentages of initial balances
outstanding over time and the weighted average lives of each class of Notes.
THE FOLLOWING ABS TABLES HAVE BEEN PREPARED BASED ON THE ASSUMPTIONS
DESCRIBED ABOVE (INCLUDING THE ASSUMPTIONS REGARDING THE CHARACTERISTICS AND
PERFORMANCE OF THE RECEIVABLES, WHICH WILL DIFFER FROM THE ACTUAL
CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN CONJUNCTION
THEREWITH.
S-26
<PAGE>
PERCENT OF INITIAL CLASS A-1 NOTE AND CLASS A-2 NOTE PRINCIPAL BALANCES AT
VARIOUS ABS PERCENTAGES
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
---------------------------- ----------------------------
DISTRIBUTION DATE 0.5% 1.0% 1.4% 1.7% 2.0% 0.5% 1.0% 1.4% 1.7% 2.0%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date............ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
August 15, 1998......... 82 78 75 71 66 100 100 100 100 100
September 15, 1998...... 74 68 62 57 50 100 100 100 100 100
October 15, 1998........ 65 57 50 43 35 100 100 100 100 100
November 15, 1998....... 56 47 38 30 20 100 100 100 100 100
December 15, 1998....... 47 37 26 17 5 100 100 100 100 100
January 15, 1999........ 39 27 15 4 0 100 100 100 100 88
February 15, 1999....... 30 17 4 0 0 100 100 100 90 70
March 15, 1999.......... 21 7 0 0 0 100 100 91 74 53
April 15, 1999.......... 13 0 0 0 0 100 96 77 59 36
May 15, 1999............ 4 0 0 0 0 100 84 63 44 20
June 15, 1999........... 0 0 0 0 0 94 71 49 30 3
July 15, 1999........... 0 0 0 0 0 83 59 36 15 0
August 15, 1999......... 0 0 0 0 0 72 47 24 0 0
September 15, 1999...... 0 0 0 0 0 61 35 10 0 0
October 15, 1999........ 0 0 0 0 0 49 24 0 0 0
November 15, 1999....... 0 0 0 0 0 38 11 0 0 0
December 15, 1999....... 0 0 0 0 0 27 0 0 0 0
January 15, 2000........ 0 0 0 0 0 15 0 0 0 0
February 15, 2000....... 0 0 0 0 0 3 0 0 0 0
March 15, 2000.......... 0 0 0 0 0 0 0 0 0 0
April 15, 2000.......... 0 0 0 0 0 0 0 0 0 0
May 15, 2000............ 0 0 0 0 0 0 0 0 0 0
June 15, 2000........... 0 0 0 0 0 0 0 0 0 0
July 15, 2000........... 0 0 0 0 0 0 0 0 0 0
August 15, 2000......... 0 0 0 0 0 0 0 0 0 0
September 15, 2000...... 0 0 0 0 0 0 0 0 0 0
October 15, 2000........ 0 0 0 0 0 0 0 0 0 0
November 15, 2000....... 0 0 0 0 0 0 0 0 0 0
December 15, 2000....... 0 0 0 0 0 0 0 0 0 0
January 15, 2001........ 0 0 0 0 0 0 0 0 0 0
February 15, 2001....... 0 0 0 0 0 0 0 0 0 0
March 15, 2001.......... 0 0 0 0 0 0 0 0 0 0
April 15, 2001.......... 0 0 0 0 0 0 0 0 0 0
May 15, 2001............ 0 0 0 0 0 0 0 0 0 0
June 15, 2001........... 0 0 0 0 0 0 0 0 0 0
July 15, 2001........... 0 0 0 0 0 0 0 0 0 0
August 15, 2001......... 0 0 0 0 0 0 0 0 0 0
September 15, 2001...... 0 0 0 0 0 0 0 0 0 0
October 15, 2001........ 0 0 0 0 0 0 0 0 0 0
November 15, 2001....... 0 0 0 0 0 0 0 0 0 0
December 15, 2001....... 0 0 0 0 0 0 0 0 0 0
January 15, 2002........ 0 0 0 0 0 0 0 0 0 0
February 15, 2002....... 0 0 0 0 0 0 0 0 0 0
March 15, 2002.......... 0 0 0 0 0 0 0 0 0 0
April 15, 2002.......... 0 0 0 0 0 0 0 0 0 0
May 15, 2002............ 0 0 0 0 0 0 0 0 0 0
June 15, 2002........... 0 0 0 0 0 0 0 0 0 0
July 15, 2002........... 0 0 0 0 0 0 0 0 0 0
August 15, 2002......... 0 0 0 0 0 0 0 0 0 0
September 15, 2002...... 0 0 0 0 0 0 0 0 0 0
October 15, 2002........ 0 0 0 0 0 0 0 0 0 0
November 15, 2002....... 0 0 0 0 0 0 0 0 0 0
December 15, 2002....... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)(1)............. 0.48 0.41 0.35 0.31 0.27 1.33 1.15 1.00 0.88 0.77
</TABLE>
- --------
(1) The weighted average life of a Note is determined by (a) multiplying the
amount of each principal payment of such Note by the number of years from
the date of the issuance of such Note to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the related initial
principal amount of such Note.
S-27
<PAGE>
PERCENT OF INITIAL CLASS A-3 NOTE PRINCIPAL BALANCE AT VARIOUS ABS PERCENTAGES
<TABLE>
<CAPTION>
CLASS A-3 NOTES
----------------------------
DISTRIBUTION DATE 0.5% 1.0% 1.4% 1.7% 2.0%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Closing Date...................................... 100% 100% 100% 100% 100%
August 15, 1998................................... 100 100 100 100 100
September 15, 1998................................ 100 100 100 100 100
October 15, 1998.................................. 100 100 100 100 100
November 15, 1998................................. 100 100 100 100 100
December 15, 1998................................. 100 100 100 100 100
January 15, 1999.................................. 100 100 100 100 100
February 15, 1999................................. 100 100 100 100 100
March 15, 1999.................................... 100 100 100 100 100
April 15, 1999.................................... 100 100 100 100 100
May 15, 1999...................................... 100 100 100 100 100
June 15, 1999..................................... 100 100 100 100 100
July 15, 1999..................................... 100 100 100 100 94
August 15, 1999................................... 100 100 100 100 87
September 15, 1999................................ 100 100 100 93 80
October 15, 1999.................................. 100 100 98 87 73
November 15, 1999................................. 100 100 92 81 68
December 15, 1999................................. 100 99 86 75 62
January 15, 2000.................................. 100 93 80 69 57
February 15, 2000................................. 100 88 75 64 52
March 15, 2000.................................... 97 83 70 59 47
April 15, 2000.................................... 92 78 66 55 43
May 15, 2000...................................... 88 74 61 50 38
June 15, 2000..................................... 83 69 57 46 34
July 15, 2000..................................... 78 65 53 42 31
August 15, 2000................................... 74 60 49 39 28
September 15, 2000................................ 69 56 45 35 25
October 15, 2000.................................. 65 52 41 32 22
November 15, 2000................................. 60 48 37 29 19
December 15, 2000................................. 56 44 34 26 17
January 15, 2001.................................. 52 41 31 23 14
February 15, 2001................................. 49 38 29 21 12
March 15, 2001.................................... 46 36 26 18 0
April 15, 2001.................................... 43 33 24 16 0
May 15, 2001...................................... 40 30 21 14 0
June 15, 2001..................................... 37 28 19 13 0
July 15, 2001..................................... 34 25 17 0 0
August 15, 2001................................... 31 22 15 0 0
September 15, 2001................................ 28 20 13 0 0
October 15, 2001.................................. 25 18 11 0 0
November 15, 2001................................. 22 15 0 0 0
December 15, 2001................................. 19 13 0 0 0
January 15, 2002.................................. 16 0 0 0 0
February 15, 2002................................. 14 0 0 0 0
March 15, 2002.................................... 13 0 0 0 0
April 15, 2002.................................... 11 0 0 0 0
May 15, 2002...................................... 0 0 0 0 0
June 15, 2002..................................... 0 0 0 0 0
July 15, 2002..................................... 0 0 0 0 0
August 15, 2002................................... 0 0 0 0 0
September 15, 2002................................ 0 0 0 0 0
October 15, 2002.................................. 0 0 0 0 0
November 15, 2002................................. 0 0 0 0 0
December 15, 2002................................. 0 0 0 0 0
Weighted Average
Life (years) (1)................................. 2.74 2.48 2.25 2.03 1.79
</TABLE>
- --------
(1) The weighted average life of a Note is determined by (a) multiplying the
amount of each principal payment of such Note by the number of years from
the date of the issuance of such Note to the related Distribution Date,
(b) adding the results and (c) dividing the sum by the related initial
principal amount of such Note.
S-28
<PAGE>
THE SELLERS AND THE SERVICER
Compass Bank, a Seller and the initial Servicer, is a state chartered
banking corporation under the Alabama Banking Code with branches in Alabama
and Florida and is a member of the Federal Reserve System. As such, it is
subject to the primary supervision of the Alabama State Banking Department and
the Board of Governors of the Federal Reserve System (the "FRB"). Compass Bank
is a wholly-owned subsidiary of Compass Bancshares, Inc, and is engaged in a
general commercial banking and asset management business, offering a full
range of consumer, commercial, corporate, motor vehicle and fiduciary banking
services, to corporations, governments, institutions and individuals. Compass
Bank also provides correspondent banking services including loan
participations, investment services and audit services to financial
institutions. As of December 31, 1997, the total assets and total common
stockholders' equity of Compass Bank were $8.0 billion and $575 million,
respectively. The executive offices of Compass Bank are located at 15 South
20th Street, Birmingham, Alabama 35233.
Compass Bank-Texas, a Seller, is a state chartered bank under the Texas
Banking Code of 1943, as amended, and is a member of the Federal Reserve
System. Compass Bank-Texas is subject to the primary supervision of the
Department of Banking of the State of Texas and the FRB. Compass Bank-Texas is
a wholly-owned indirect subsidiary of Compass Bancshares, Inc. and is engaged
in a general commercial banking business. This business includes performing
such services as the receipt of demand and time deposit accounts, the making
of personal and commercial loans and the furnishing of personal and commercial
checking accounts. As of December 31, 1997, the total assets and total common
stockholders equity of Compass Bank-Texas were $5.5 billion and $491 million,
respectively. The executive offices of Compass Bank-Texas are located at 24
Greenway Plaza, Houston, Texas 77046.
USE OF PROCEEDS
The Trust will use the net proceeds from the sale of the Notes and the
Certificates to purchase the Receivables from the Company. The Company will
use the net proceeds paid to the Company by the Trust to purchase the
Receivables from Compass Auto, which in turn will use such proceeds to make
the initial deposit into the Reserve Account and to purchase the Receivables
from the Sellers.
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the Indenture, a form of which has been
filed as an exhibit to the Registration Statement. A copy of the Indenture
will be filed with the Commission following the issuance of the Securities.
The following summary describes certain terms of the Notes and the Indenture.
The summary does not purport to be a complete description of the Notes and the
Indenture and therefore is subject to, and is qualified in its entirety by
reference to, all the provisions of the Notes and the Indenture. The following
summary supplements the description of the general terms and provisions of the
Notes of any given series and the related Indenture set forth under the
headings "Description of the Notes" and "Certain Information Regarding the
Securities" in the Prospectus, to which description reference is hereby made.
The Chase Manhattan Bank will be the Indenture Trustee under the Indenture.
The address of the Indenture Trustee at which information regarding the Trust
and Notes may be obtained is set forth below under "--Indenture Trustee".
The Notes will be available for purchase in minimum denominations of $1,000
and integral multiples of $1,000 in excess thereof in book-entry form only.
Owners of interests in the Notes will hold such interests through DTC, and
will not be entitled to receive Definitive Notes unless Definitive Notes are
issued in the limited circumstances described in "Certain Information
Regarding the Securities--Definitive Securities" in the Prospectus and Annex I
to the Prospectus.
S-29
<PAGE>
The Notes will be secured by the assets of the Trust pursuant to the
Indenture to the extent described herein.
PAYMENTS OF INTEREST
Interest on the principal balances of each class of the Notes will accrue at
the respective Interest Rate for such class and will be due and payable to the
Noteholders monthly on each Distribution Date, commencing August 17, 1998.
With respect to any Distribution Date, interest on the outstanding principal
amount of the Class A-1 Notes and Class A-2 Notes will accrue at the Class A-1
Interest Rate and Class A-2 Interest Rate, respectively, for the related
Interest Period and will be calculated on the basis of a 360-day year based
upon the actual number of days elapsed during the related Interest Period. On
each Distribution Date, interest on the Class A-3 Notes will be an amount
equal to one-twelfth (or 47 days divided by 360, for the initial Distribution
Date) of the applicable Interest Rate multiplied by the principal amount of
such class of Notes as of the close of business on the preceding Distribution
Date (or, for the initial Distribution Date, the Closing Date). Interest
distributions due for any Distribution Date but not distributed on such
Distribution Date will be due on the next Distribution Date increased by an
amount equal to interest on such amount at the applicable Interest Rate (to
the extent lawful). See "Description of the Transfer and Servicing
Agreements--Distributions" herein and in the Prospectus.
Interest payments to the holders of each class of Notes will have the same
priority. Under certain circumstances, the amount available for interest
payments could be less than the amount of interest due and payable on the
Notes on any Distribution Date, in which case each class of holders of Notes
will receive their ratable share (based upon the aggregate amount of interest
due to each class of Notes) of the aggregate amount available to be
distributed in respect of interest on the Notes.
PAYMENTS OF PRINCIPAL
Principal payments will be made to the Noteholders on each Distribution Date
in an amount generally equal to the Noteholders' Percentage of the Principal
Distribution Amount. Principal payments on the Notes will generally be derived
from the Total Distribution Amount remaining after the payment of the
Servicing Fee and payment of interest on the Notes and the Certificates. See
"Description of the Transfer and Servicing Agreements--Distributions" herein
and in the Prospectus.
On each Distribution Date until the Class A-1 Notes have been paid in full,
principal of the A-1 Notes will be payable, in an amount equal to the
Noteholders' Percentage of the Principal Distribution Amount. On each
Distribution Date on which the Class A-1 Notes have been paid in full,
principal of the Class A-2 Notes will be payable in an amount equal to the
Noteholders' Percentage of the Principal Distribution Amount (less any portion
of such amount applied on such Distribution Date to reduce the outstanding
principal amount of the Class A-1 Notes to zero) until the Class A-2 Notes
have been paid in full. On each Distribution Date on which the Class A-2 Notes
have been paid in full, principal of the Class A-3 Notes will be payable in an
amount equal to the Noteholders' Percentage of the Principal Distribution
Amount (less any portion of such amount applied on such Distribution Date to
reduce the outstanding principal amount of the Class A-2 Notes to zero) until
the Class A-3 Notes have been paid in full.
"Noteholders' Percentage" means (i) on each Distribution Date through the
Distribution Date on which the outstanding principal amount of the Class A-1
Notes has not been reduced to zero, 100%; provided, that on the Distribution
Date on which the outstanding principal amount of the Class A-1 Notes would be
reduced to zero, the Noteholders' Percentage will equal a fraction, expressed
as a percentage, the numerator of which is the sum of (x) (1) an amount
necessary to reduce the outstanding principal amount of the Class A-1 Notes to
zero and (2) an amount equal to the product of 85% and the Principal
Distribution Amount on such Distribution Date (after giving effect to the
allocation of the Principal Distribution Amount pursuant to clause (x)(1)
above) and the denominator of which is (y) the Principal Distribution Amount
for such Distribution Date, (ii) on each Distribution Date thereafter through
the Distribution Date on which the Certificate Ratio is reduced to the Target
Certificate Ratio, 85%; provided, that on the Distribution Date on which the
Certificate Ratio would be reduced
S-30
<PAGE>
to the Target Certificate Ratio, the Noteholders' Percentage will equal a
fraction, expressed as a percentage, the numerator of which is (x) the
Principal Distribution Amount for such Distribution Date less an amount
necessary to reduce the Certificate Ratio to the Target Certificate Ratio and
the denominator of which is (y) the Principal Distribution Amount for such
Distribution Date and (iii) on each Distribution Date thereafter, will equal a
fraction, expressed as a percentage, the numerator of which is (x) the
outstanding principal amount of the Notes immediately prior to such
Distribution Date and the denominator of which is (y) the sum of the
outstanding principal amount of the Notes and the Adjusted Certificate
Balance, each immediately prior to such Distribution Date; provided, that on
each Distribution Date occurring (x) during the continuation of an Event of
Default and an acceleration of the Notes and (y) after the Distribution Date
on which the Adjusted Certificate Balance has been reduced to zero, the
Noteholders' Percentage will be 100% until the Notes have been paid in full.
"Certificate Ratio" means, with respect to each Distribution Date, a
fraction, expressed as a percentage, the numerator of which is (x) the
Adjusted Certificate Balance immediately prior to such Distribution Date and
the denominator of which is (y) the sum of the outstanding principal amount of
the Notes and the Adjusted Certificate Balance, each immediately prior to such
Distribution Date.
"Target Certificate Ratio" means, with respect to any Distribution Date,
5.5% of the sum of the outstanding principal amount of the Notes and the
Adjusted Certificate Balance as of such Distribution Date.
Upon the occurrence of an Event of Default and acceleration of the Notes and
until such Event of Default has been rescinded, (i) the Total Distribution
Amount remaining after payment of the Servicing Fee and the Noteholders'
Interest Distributable Amount will be deposited in the Note Distribution
Account until each class of Notes has been paid in full and (ii) amounts
deposited in the Note Distribution Account in respect of principal will be
paid to the Holders of the Class A-1 Notes until the Class A-1 Notes have been
paid in full, and thereafter will be paid to the Holders of the Class A-2
Notes and Class A-3 Notes pro rata based on amounts owing to each such class
until the Class A-2 and Class A-3 Notes have been paid in full.
The outstanding principal amount of the Class A-1 Notes, to the extent not
previously paid, will be due and payable on July 15, 1999. The outstanding
principal amount of the Class A-2 Notes, to the extent not previously paid,
will be due and payable on August 15, 2000. The outstanding principal amount
of the Class A-3 Notes, to the extent not previously paid, will be due and
payable on May 15, 2004.
RIGHTS UPON EVENT OF DEFAULT
Upon an Event of Default, the Noteholders will have the rights set forth in
the Prospectus under "Description of the Notes--Provisions of the Indenture."
The Indenture Trustee may sell the Receivables subject to certain conditions
set forth in the Indenture following an Event of Default, including a default
in the payment of any principal of or a default for five days or more in the
payment of any interest on any Note. In the case of an Event of Default not
involving any such default in payment, the Indenture Trustee is prohibited
from selling the Receivables unless one of the conditions set forth in the
Prospectus under "Description of the Notes--Provisions of the Indenture" has
been satisfied and, in addition, either (i) the holders of all outstanding
Certificates consent to such sale or (ii) the proceeds of such sale are
sufficient to pay in full the principal of and accrued interest on all of the
outstanding Notes and Certificates on the date of such sale. In the event of a
sale of the Receivables by the Indenture Trustee following an Event of
Default, the Noteholders and Certificateholders will receive notice and an
opportunity to submit a bid in respect of such sale.
OPTIONAL REDEMPTION
On any Distribution Date after the Class A-1 Notes and the Class A-2 Notes
have been paid in full, the Class A-3 Notes will be redeemed in whole, but not
in part, if the Servicer exercises its option to purchase the Receivables. The
Servicer may purchase the Receivables on any Distribution Date on or after the
Pool Balance as of the end of the related Collection Period has declined to 5%
or less of the Pool Balance as of the Cutoff Date, as described in the
Prospectus under "Certain Matters Regarding the Servicer--Termination." The
redemption price for the Class A-3 Notes will be equal to the unpaid principal
amount of the Class A-3 Notes, plus accrued and unpaid interest thereon.
S-31
<PAGE>
THE INDENTURE TRUSTEE
The Chase Manhattan Bank is the Indenture Trustee under the Indenture. The
Chase Manhattan Bank is a New York banking corporation and its principal
offices are located at 450 W. 33rd Street, New York, New York 10001. The
Indenture Trustee's liability in connection with the issuance and sale of the
Notes is limited solely to the express obligations of the Indenture Trustee
set forth in the Indenture and the Sale and Servicing Agreement. The Sellers,
Compass Auto, the Company and their respective affiliates may maintain normal
commercial banking relations with the Indenture Trustee and its affiliates.
Pursuant to the Trust Indenture Act of 1939, as amended, the Indenture
Trustee may be deemed to have a conflict of interest and be required to resign
as trustee for either the Class A-1 Notes, on the one hand, or the Class A-2
Notes and the Class A-3 Notes (collectively, the "Pro Rata Notes"), on the
other hand, if a default occurs under the Indenture. The Indenture will
provide for a successor trustee to be appointed for the Class A-1 Notes, the
Pro Rata Notes or both in these circumstances, so that there will be separate
trustees for the Class A-1 Notes and the Pro Rata Notes. In these
circumstances, the Class A-1 Noteholders, the Class A-2 Noteholders and the
Class A-3 Noteholders will continue to vote as a single group. So long as any
amounts remain unpaid with respect to the Class A-1 Notes, only the trustee
for the Class A-1 Noteholders will have the right to exercise remedies under
the Indenture (but the Holders of the Pro Rata Notes will be entitled to their
share of any proceeds of enforcement, subject to the subordination of the Pro
Rata Notes to the Class A-1 Notes as described herein). See "Description of
the Transfer and Servicing Agreements--Distributions" herein. Upon repayment
of the Class A-1 Notes in full, all rights to exercise remedies under the
Indenture will transfer to the trustee for the Pro Rata Notes. Any resignation
of the original Indenture Trustee as described above with respect to any class
of Notes will become effective only upon the appointment of a successor
trustee for such class of Notes and such successor's acceptance of such
appointment.
DESCRIPTION OF THE CERTIFICATES
The Certificates are not being offered hereby. The Certificates will be
issued pursuant to the Trust Agreement, a form of which has been filed as an
exhibit to the Registration Statement, and will be transferred to Compass
Auto. A copy of the Trust Agreement will be filed with the Commission
following the issuance of the Securities. The following summary, together with
the description in the Prospectus under the heading "Description of the
Certificates," describes certain terms of the Certificates and the Trust
Agreement. The summary describes the material terms of the Certificates and
the Trust Agreement, but it does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of the
Certificates and the Trust Agreement. The following summary supplements the
description of the general terms and provisions of the Certificates of any
given series and the related Trust Agreement set forth in the Prospectus, to
which description reference is hereby made.
On each Distribution Date, commencing August 17, 1998, the Owner Trustee
will distribute pro rata to the Certificateholders, accrued interest at a rate
of 6.650% per annum on the Adjusted Certificate Balance to the extent of the
Total Distribution Amount remaining after payment of the Servicing Fee and
payment of the Noteholders' Interest Distributable Amount. On each
Distribution Date, interest on the Certificates will be an amount equal to
one-twelfth (or 47 days divided by 360, for the initial Distribution Date)
multiplied by 6.650% multiplied by the Adjusted Certificate Balance as of the
close of business on the preceding Distribution Date (or, for the initial
Distribution Date, the Closing Date).
No distribution of principal will be made on the Certificates until the
Class A-1 Notes have been paid in full, and thereafter will only be paid to
the extent funds are available therefor after payment of the Servicing Fee,
the Noteholders' Interest Distributable Amount, the Certificateholders'
Interest Distributable Amount, the Noteholders' Principal Distributable Amount
and deposits required to be made to the Reserve Account on such Distribution
Date. The amount of principal payable on any Distribution Date after payment
of the Class A-1 Notes in full will be the Certificateholders' Percentage of
the Principal Distribution Amount. The
S-32
<PAGE>
"Certificateholders' Percentage" means, for any Distribution Date, a
percentage equal to the remainder of 100% minus the Noteholders' Percentage as
of such Distribution Date. In addition, the Adjusted Certificate Balance will
be reduced on each Distribution Date by the Writeoff Amount, if any, on such
Distribution Date. See "Description of the Transfer and Servicing Agreements--
Distributions" herein and in the Prospectus.
"Adjusted Certificate Balance" means, as of any Distribution Date, an amount
(not less than zero) equal to the remainder of $22,080,879 minus the sum of
(i) the aggregate amount of principal payments made on the Certificates on and
prior to such Distribution Date plus (ii) the aggregate of all Writeoff
Amounts allocated to the Certificates on and prior to such Distribution Date.
"Writeoff Amount" means, for each Distribution Date, an amount equal to the
excess (if any) of the sum of the Noteholders' Principal Distributable Amount
and the Certificateholders' Principal Distributable Amount on such
Distribution Date over the amount actually paid to Noteholders and
Certificateholders with respect to principal on such Distribution Date.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the material terms of the Sale and Servicing
Agreement, the Receivables Purchase Agreements and the Trust Agreement
(collectively, the "Transfer and Servicing Agreements"). Forms of the Transfer
and Servicing Agreements have been filed as exhibits to the Registration
Statement. A copy of the Transfer and Servicing Agreements will be filed with
the Commission following the issuance of the Securities. This summary does not
purport to be a complete description of all terms of the Transfer and
Servicing Agreements and therefore is subject to, and is qualified in its
entirety by reference to, all the provisions of the Transfer and Servicing
Agreements. The following summary supplements the description of the general
terms and provisions of Transfer and Servicing Agreements (as such term is
used in the Prospectus) set forth under the heading "Description of the
Transfer and Servicing Agreements" in the Prospectus, to which description
reference is hereby made.
SALE AND ASSIGNMENT OF RECEIVABLES
Certain information with respect to the conveyance of the Receivables by the
Sellers, Compass Auto and the Company is set forth under "Description of the
Transfer and Servicing Agreements--Sale and Assignment of Primary Assets" in
the Prospectus. See also "The Receivables Pool" herein and "The Receivables
Pools" in the Prospectus for additional information regarding the Receivables
and certain obligations of the Sellers and the Servicer with respect to the
Receivables.
On or prior to the Closing Date, each Seller will transfer and assign to
Compass Auto pursuant to the First Tier Receivables Purchase Agreement all of
its right, title and interest in and to Receivables in the outstanding
principal amount of $401,460,879.06, including its security interests in the
related Financed Vehicles. Each Receivable will be identified in a schedule
appearing as an exhibit to the First Tier Receivables Purchase Agreement (the
"Schedule of Receivables"). Concurrently with or after the transfer and
assignment of the Receivables, Compass Auto will transfer and assign the
Receivables to the Company pursuant to the Second Tier Receivables Purchase
Agreement, which in turn will transfer and assign the Receivables to the Trust
pursuant to the Sale and Servicing Agreement. On the Closing Date, the Owner
Trustee will execute, authenticate and deliver the Notes and the Certificates.
Each Seller, Compass Auto and the Company will transfer the Receivables under
the applicable Transfer and Servicing Agreement to Compass Auto, the Company
or the Trust, as applicable, in each case, without recourse, except that, each
Seller will be required to repurchase Receivables under the First Tier
Receivables Purchase Agreement with respect to which it is in breach of a
representation or warranty, if the interests of the Trust or the Noteholders
are materially and adversely affected by a breach of any such representation
or warranty with respect to such Receivable, and such breach has not been
cured by the last day of the Collection Period in which the 60th day (or if
the applicable Seller elects, the 30th day) occurs after the date on which the
applicable Seller becomes aware of, or receives written notice of, such
breach. The right
S-33
<PAGE>
to enforce the repurchase obligation of the Sellers under the First Tier
Receivables Purchase Agreement will be assigned by Compass Auto to the Company
pursuant to the Second Tier Purchase Agreement, which will in turn assign such
right to the Trust pursuant to the Sale and Servicing Agreement.
In the First Tier Receivables Purchase Agreement, the related Seller will
represent and warrant, among other things, that: (i) the information set forth
in the Schedule of Receivables is correct in all material respects as of the
Cutoff Date; (ii) the Obligor on each Receivable is contractually required to
maintain physical damage insurance covering the related Financed Vehicle in
accordance with the applicable Seller's normal requirements; (iii) on the
Closing Date, the Receivables are free and clear of all security interests,
liens, charges and encumbrances, and no offsets, defenses or counterclaims
have been asserted or threatened (other than those created pursuant to the
Transfer and Servicing Agreements); (iv) at the Closing Date, each of the
Receivables is or will be secured by a perfected, first-priority security
interest in the related Financed Vehicle in favor of the related Seller; and
(v) each Receivable, at the time it was originated, complied and, on the
Closing Date complies, in all material respects with applicable federal and
state laws, including, without limitation, consumer credit, truth-in-lending,
equal credit opportunity and disclosure laws.
ACCOUNTS
In addition to the Collection Account, the Noteholders' Distribution Account
and the Certificate Distribution Account referred to under "Description of the
Transfer and Servicing Agreements--Accounts" in the Prospectus, the Servicer
will also establish and maintain the Reserve Account with the Indenture
Trustee, in the name of the Indenture Trustee on behalf of the Noteholders.
Investment earnings on amounts on deposit in the Collection Account and the
Reserve Account will be distributed to Compass Auto on each Distribution Date
and will not be available to make payments on the Notes.
On the Closing Date, the Reserve Account will be created with an initial
deposit by Compass Auto of the Reserve Account Initial Deposit of $1,003,652.
The Reserve Account will be funded on each Distribution Date to the extent of
funds available therefor after payment of the Servicing Fee and interest and
principal on the Notes and, on each Distribution Date after the first
Distribution Date, interest on the Certificates, until the amount on deposit
in the Reserve Account equals the Specified Reserve Account Balance. Funds
will be withdrawn from the Reserve Account on any Distribution Date if, and to
the extent that, the Total Distribution Amount for the related Collection
Period is less than the sum of the Servicing Fee payable on such Distribution
Date and the Noteholders' Distributable Amount and such difference will be
paid to the Servicer to the extent of any shortfalls relating to the payment
of the Servicing Fee (other than shortfalls occurring on the first
Distribution Date) or deposited into the Note Distribution Account for
distribution to the Noteholders.
On each Distribution Date on which the amount on deposit in the Reserve
Account is less than the Specified Reserve Account Balance, the Indenture
Trustee will deposit therein amounts, if any, remaining in the Collection
Account after payment on such date of the Servicing Fee, interest and
principal on the Notes and, on each Distribution Date after the first
Distribution Date, interest on the Certificates, until the amount on deposit
therein equals the Specified Reserve Account Balance. Amounts in the Reserve
Account on any Distribution Date (after giving effect to all distributions to
be made on such Distribution Date) in excess of the Specified Reserve Account
Balance for such Distribution Date will be released to Compass Auto and will
no longer be available to the Noteholders.
The "Specified Reserve Account Balance" means, with respect to any
Distribution Date, the lesser of (i) $4,014,609, which equals 1.00% of the
Pool Balance as of the Cutoff Date and (ii) the then outstanding principal
amount of the Notes; provided, that if a Reserve Account Increase Condition is
in effect for any Distribution Date or was in effect on any of the three prior
Distribution Dates, the Specified Reserve Account Balance will be equal to the
greater of (i) 6% of the Pool Balance as of the last day of the related
Collection Period and (ii) the Reserve Account Floor as of such Distribution
Date.
"Average Delinquency Ratio" means, with respect to any Distribution Date,
the average of the Delinquency Ratios for the preceding three Collection
Periods.
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"Cumulative Net Loss Ratio" means, with respect to any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the aggregate
of net losses on the Receivables incurred during the period from the Cutoff
Date to and including the last day of the related Collection Period and the
denominator of which is the Pool Balance as of the Cutoff Date.
"Delinquency Ratio" means, with respect to any Collection Period, a
fraction, expressed as a percentage, the numerator of which is the sum of (i)
the outstanding principal amount of all Receivables (other than Defaulted
Receivables or Receivables repurchased by a Seller or purchased by the
Servicer during such Collection Period) that are 60 or more days delinquent as
of the last day of such Collection Period, determined in accordance with the
Servicer's customary practices, and the denominator of which is the Pool
Balance as of the last day of such Collection Period.
A "Reserve Account Increase Condition" will be in effect on any Distribution
Date as of which (a) the Average Delinquency Ratio exceeds 1.25% or (b) the
Cumulative Net Loss Ratio exceeds (i) 0.75% for any Distribution Date
occurring on or before December 15, 1998, (ii) 1.0% for any Distribution Date
occurring after December 15, 1998 and on or before June 15, 1999, (iii) 1.25%
for any Distribution Date occurring after June 15, 1999 and on or before
December 15, 1999, (iv) 1.5% for any Distribution Date occurring after
December 15, 1999 and on or before June 15, 2000 or (v) 1.75% for any
Distribution Date occurring after June 15, 2000.
DEPOSITS TO COLLECTION ACCOUNT
Pursuant to the Sale and Servicing Agreement, the Servicer is required to
deposit in the Collection Account all payments received with respect to the
Receivables (other than amounts constituting Supplemental Servicing Fees)
within two business days of receipt thereof. Notwithstanding the foregoing, if
Compass Bank is the Servicer, it may retain collections received during any
Collection Period and deposit such amounts in the Collection Account on the
business day immediately preceding the Distribution Date for such Collection
Period if the following conditions are met: (i) (A) its short term deposit
obligations are rated at least "A-1" by Standard & Poor's and at least "P-1"
by Moody's or (B) the Rating Agencies notify the Indenture Trustee that the
then outstanding rating on the Notes would not be lowered or withdrawn as a
result of such retention of collections; and (ii) no Servicer Default has
occurred and is continuing. The short term debt of Compass Bank is currently
rated "A-2" by Standard & Poor's and "P-1" by Moody's.
SERVICING COMPENSATION
The Servicing Fee Rate will be 1.0% per annum, calculated on the basis of a
360-day year consisting of twelve 30-day months. The Servicing Fee, with
respect to any Distribution Date, will be an amount equal to the product of
(a) one-twelfth of the Servicing Fee Rate, multiplied by (b) the Pool Balance
as of the first day of the related Collection Period (which, for purposes of
calculating the Servicing Fee is the Cutoff Date for the initial Collection
Period). The Servicing Fee will be paid on each Distribution Date to the
extent of the Total Distribution Amount and amounts, if any, available for
withdrawal from the Reserve Account. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment of Expenses" in the
Prospectus.
The Servicer will also collect and retain any late fees, extension fees,
prepayment charges and certain non-sufficient funds charges and other
administrative fees or similar charges (the "Supplemental Servicing Fee")
allowed by applicable law with respect to the Receivables. Payments by or on
behalf of Obligors will be allocated to scheduled payments and late fees and
other charges in accordance with the Servicer's normal practices and
procedures.
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WAIVER OF PAST SERVICER DEFAULTS
Holders of Notes evidencing at least a majority in principal amount of the
then outstanding Notes (or the holders of the Certificates evidencing not less
than a majority of the Adjusted Certificate Balance, in the case of any
Servicer Default that does not adversely affect the Indenture Trustee or the
Noteholders) may, on behalf of all such Noteholders and Certificateholders,
waive any Servicer Default by the Servicer in the performance of its
obligations under the Sale and Servicing Agreement and its consequences,
except a Servicer Default in making any required deposits to or payments from
any of the Trust Accounts in accordance with the Sale and Servicing Agreement.
No such waiver will impair a Noteholder's rights with respect to subsequent
defaults. See "Certain Matters Regarding the Servicer--Servicer Defaults" and
"--Rights upon Servicer Default" in the Prospectus.
DISTRIBUTIONS
Deposits to Collection Account. Prior to each Distribution Date, the
Servicer will provide the Indenture Trustee with certain information with
respect to the related Collection Period, including the aggregate amount of
collections on the Receivables, Repurchase Amounts, the Total Distribution
Amount and the Principal Distribution Amount.
On or before each Distribution Date, the Servicer will cause the Total
Distribution Amount to be deposited into the Collection Account. The "Total
Distribution Amount" for a Distribution Date will equal the sum of the
Collected Funds received by the Servicer during the related Collection Period
and all Repurchase Amounts in respect of all Receivables that are repurchased
by the Sellers or purchased by the Servicer under an obligation that arose
during the related Collection Period.
"Collected Funds" means, with respect to any Determination Date, the amount
of funds in the Collection Account representing collections on the Receivables
received during the related Collection Period, including all Liquidation
Proceeds collected during the related Collection Period (but excluding any
Repurchase Amounts and any amounts constituting Supplemental Servicing Fees)
and any amounts received from recourse against Dealers with respect to the
Receivables during the related Collection Period.
"Liquidation Proceeds" means, with respect to any Defaulted Receivable, (i)
insurance proceeds received by the Servicer with respect to any applicable
insurance policies, (ii) amounts received by the Servicer pursuant to the
exercise of rights under such Defaulted Receivable and (iii) monies collected
by the Servicer, from whatever source, on such Defaulted Receivable, net of
any expenses incurred by the Servicer in connection therewith and any payments
required by law to be remitted to the related Obligor.
Deposits to the Distribution Accounts. So long as no Event of Default has
occurred and the Notes have not been accelerated, on each Distribution Date,
the Servicer will instruct the Indenture Trustee to make the following
deposits and distributions, to the extent of the Total Distribution Amount, in
the following order of priority:
(i) on each Distribution Date after the first Distribution Date, to the
Servicer, from the Total Distribution Amount, the Servicing Fee and all
unpaid Servicing Fees from prior Collection Periods;
(ii) to the Note Distribution Account, from the Total Distribution Amount
remaining after the application of clause (i), the Noteholders' Interest
Distributable Amount;
(iii) on each Distribution Date after the first Distribution Date, to the
Certificate Distribution Account, from the Total Distribution Amount
remaining after the application of clauses (i) and (ii), the
Certificateholders' Interest Distributable Amount;
(iv) to the Note Distribution Account, from the Total Distribution Amount
remaining after the application of clauses (i) through (iii), the
Noteholders' Principal Distributable Amount;
(v) on the first Distribution Date, to the Servicer, from the Total
Distribution Amount remaining after the application of clauses (i) through
(iv), the Servicing Fee;
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(vi) to the Reserve Account, the Total Distribution Amount remaining
after the application of clauses (i) through (v), until the amount on
deposit therein equals the Specified Reserve Account Balance;
(vii) on the first Distribution Date, to the Certificate Distribution
Account, from the Total Distribution Amount remaining after the application
of clauses (ii), (iv), (v) and (vi), the Certificateholders' Interest
Distributable Amount;
(viii) to the Certificate Distribution Account, from the Total
Distribution Amount remaining after the application of clauses (i) through
(vii), the Certificateholders' Principal Distributable Amount; and
(ix) the remainder, if any, to Compass Auto.
In addition, on each Distribution Date, if the Total Distribution Amount is
insufficient to make payments pursuant to clauses (i), (ii) or (iv) above,
funds will be withdrawn from the Reserve Account to the extent of available
amounts on deposit therein to make such payments in the same priority in
clauses (i), (ii) and (iv) as set forth above. See "Description of the
Transfer and Servicing Agreements--Accounts" herein.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
and acceleration of the Notes and until such Event of Default has been
rescinded, (i) the Total Distribution Amount remaining after payments pursuant
to clauses (i) and (ii) above will be deposited in the Note Distribution
Account until each class of Notes has been paid in full and (ii) amounts
deposited in the Note Distribution Account will be paid to the Holders of the
Class A-1 Notes until the Class A-1 Notes have been paid in full, and
thereafter will be paid to the Holders of the Class A-2 Notes and Class A-3
Notes pro rata based on amounts owing to each such class until the Class A-2
and Class A-3 Notes have been paid in full.
For purposes hereof, the following terms have the following meanings:
"Certificateholders' Interest Carryover Shortfall" means, with respect to
any Distribution Date, the excess of the Certificateholders' Monthly
Interest Distributable Amount for the preceding Distribution Date and any
outstanding Certificateholders' Interest Carryover Shortfall on such
preceding Distribution Date, over the amount in respect of interest that
was actually deposited into the Certificate Distribution Account on such
preceding Distribution Date, plus interest on such excess, to the extent
permitted by law, at the rate of 6.650% per annum from such preceding
Distribution Date to but excluding such current Distribution Date.
"Certificateholders' Interest Distributable Amount" means, with respect
to any Distribution Date, the sum of (i) the Certificateholders' Monthly
Interest Distributable Amount for such Distribution Date and (ii) the
Certificateholders' Interest Carryover Shortfall for such Distribution
Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, the product of one-twelfth (or, in the
case of the first Distribution Date, 47 days divided by 360) multiplied by
6.650% multiplied by the Adjusted Certificate Balance on the preceding
Distribution Date, after giving effect to all Writeoff Amounts allocated to
the Certificates and payments in respect of principal to the Holders of the
Certificates in either case on or prior to such preceding Distribution Date
(or, in the case of the first Distribution Date, the initial Certificate
Balance on the Closing Date).
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to each Distribution Date, the Certificateholders' Percentage of
the Principal Distribution Amount.
"Certificateholders' Principal Carryover Shortfall" means, with respect
to any Distribution Date, the excess of the Certificateholders' Monthly
Principal Distributable Amount and any outstanding Certificateholders'
Principal Carryover Shortfall from the preceding Distribution Date, over
the amount in respect of principal of the Certificates that was actually
deposited into the Certificate Distribution Account on such preceding
Distribution Date.
"Certificateholders' Principal Distributable Amount" means, with respect
to any Distribution Date, the sum of (i) the Certificateholders' Monthly
Principal Distributable Amount for such Distribution Date and (ii) the
Certificateholders' Principal Carryover Shortfall as of the close of the
preceding Distribution Date; provided, that the Certificateholders'
Principal Distributable Amount shall not exceed the Adjusted
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Certificate Balance. In addition, on the final scheduled distribution date
for the Certificates, the principal required to be distributed to
Certificateholders will include the lesser of (a) any principal due and
remaining unpaid on each Receivable in the Trust as of April 30, 2004, and
(b) the amount that is necessary (after giving effect to the other amounts
to be deposited into the Certificate Distribution Account on such
Distribution Date and allocable to principal) to reduce the Adjusted
Certificate Balance to zero.
"Class A-1 Noteholders' Interest Carryover Shortfall" means, with respect
to any Distribution Date, the excess of the Class A-1 Noteholders' Monthly
Interest Distributable Amount for the preceding Distribution Date and any
outstanding Class A-1 Noteholders' Interest Carryover Shortfall on such
preceding Distribution Date, over the amount in respect of interest on the
Class A-1 Notes that was actually paid to Holders of the Class A-1 Notes on
the preceding Distribution Date, plus interest on the amount of interest
due but not paid to Holders of the Class A-1 Notes on the preceding
Distribution Date, to the extent permitted by law, in an amount equal to
the product of (i) the quotient of the number of days elapsed in the
related Interest Period divided by 360 multiplied by (ii) the Class A-1
Interest Rate multiplied by (iii) the amount of such interest due but not
paid in respect of the Class A-1 Notes.
"Class A-1 Noteholders' Interest Distributable Amount" means, the sum of
(i) the Class A-1 Noteholders' Monthly Interest Distributable Amount and
(ii) the Class A-1 Noteholders' Interest Carryover Shortfall, in each case
for such Distribution Date.
"Class A-1 Noteholders' Monthly Interest Distributable Amount" means,
with respect to any Distribution Date, the product of (i) the quotient of
the number of days elapsed during the related Interest Period divided by
360 multiplied by (ii) the Class A-1 Interest Rate multiplied by (iii) the
outstanding principal amount of the Class A-1 Notes on the preceding
Distribution Date after giving effect to all payments of principal to the
Holders of the Class A-1 Notes on or prior to such preceding Distribution
Date (or, in the case of the first Distribution Date, the outstanding
principal amount of the Class A-1 Notes on the Closing Date).
"Class A-1 Noteholders' Monthly Principal Distributable Amount" means,
with respect to each Distribution Date through the Distribution Date on
which the outstanding principal amount of the Class A-1 Notes has been
reduced to zero, the Noteholders' Percentage of the Principal Distribution
Amount for such Distribution Date.
"Class A-1 Noteholders' Principal Carryover Shortfall" means, with
respect to any Distribution Date, the excess of the Class A-1 Noteholders'
Principal Distributable Amount for the preceding Distribution Date over the
amount that was actually deposited into the Note Distribution Account in
respect of principal of the Class A-1 Notes on such preceding Distribution
Date.
"Class A-1 Noteholders' Principal Distributable Amount" means, with
respect to any Distribution Date, the sum of (i) the Class A-1 Noteholders'
Monthly Principal Distributable Amount for such Distribution Date, and (ii)
the Class A-1 Noteholders' Principal Carryover Shortfall for such
Distribution Date; provided, that the sum of clauses (i) and (ii) shall not
exceed the outstanding principal amount of the Class A-1 Notes, and, on
July 15, 1999, the Class A-1 Noteholders' Principal Distributable Amount
will include the amount, to the extent of available funds, necessary (after
giving effect to the other amounts to be deposited into the Note
Distribution Account on such Distribution Date and allocable to principal)
to reduce the outstanding principal amount of the Class A-1 Notes to zero.
"Class A-2 Noteholders' Interest Carryover Shortfall" means, with respect
to any Distribution Date, the excess of the Class A-2 Noteholders' Monthly
Interest Distributable Amount for the preceding Distribution Date and any
outstanding Class A-2 Noteholders' Interest Carryover Shortfall on such
preceding Distribution Date, over the amount in respect of interest on the
Class A-2 Notes that was actually paid to Holders of the Class A-2 Notes on
the preceding Distribution Date, plus interest on the amount of interest
due but not paid to Holders of the Class A-2 Notes on the preceding
Distribution Date, to the extent permitted by law, in an amount equal to
the product of (i) the quotient of the number of days elapsed in the
related Interest Period divided by 360 multiplied by (ii) the Class A-2
Interest Rate multiplied by (iii) the amount of such interest due but not
paid in respect of the Class A-2 Notes.
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"Class A-2 Noteholders' Interest Distributable Amount" means, with
respect to any Distribution Date, the sum of (i) the Class A-2 Noteholders'
Monthly Interest Distributable Amount and (ii) the Class A-2 Noteholders'
Interest Carryover Shortfall, in each case for such Distribution Date.
"Class A-2 Noteholders' Monthly Interest Distributable Amount" means,
with respect to any Distribution Date, the product of (i) the quotient of
the number of days elapsed during the related Interest Period divided by
360 multiplied by (ii) the Class A-2 Interest Rate multiplied by (iii) the
outstanding principal amount of the Class A-2 Notes on the preceding
Distribution Date after giving effect to all payments of principal to the
Holders of the Class A-2 Notes on or prior to such preceding Distribution
Date (or, in the case of the first Distribution Date, the outstanding
principal amount of the Class A-2 Notes on the Closing Date).
"Class A-2 Noteholders' Monthly Principal Distributable Amount" means,
with respect to any Distribution Date on and after the Distribution Date on
which the outstanding principal amount of the Class A-1 Notes has been
reduced to zero, the Noteholders' Percentage of the Principal Distribution
Amount for such Distribution Date (less the portion thereof, if any,
applied to reduce the outstanding principal amount of the Class A-1 Notes
to zero on such Distribution Date).
"Class A-2 Noteholders' Principal Carryover Shortfall" means, with
respect to any Distribution Date, the excess of the Class A-2 Noteholders'
Principal Distributable Amount for the preceding Distribution Date over the
amount that was actually deposited into the Note Distribution Account in
respect of principal of the Class A-2 Notes on such preceding Distribution
Date.
"Class A-2 Noteholders' Principal Distributable Amount" means, with
respect to any Distribution Date, the sum of (i) the Class A-2 Noteholders'
Monthly Principal Distributable Amount for such Distribution Date, and (ii)
the Class A-2 Noteholders' Principal Carryover Shortfall for such
Distribution Date; provided, that the sum of clauses (i) and (ii) will not
exceed the outstanding principal amount of the Class A-2 Notes, and, on
August 15, 2000, the Class A-2 Noteholders' Principal Distributable Amount
will include the amount, to the extent of available funds, necessary (after
giving effect to the other amounts to be deposited into the Note
Distribution Account on such Distribution Date and allocable to principal)
to reduce the outstanding principal amount of the Class A-2 Notes to zero.
"Class A-3 Noteholders' Interest Carryover Shortfall" means, with respect
to any Distribution Date, the excess of the Class A-3 Noteholders' Monthly
Interest Distributable Amount for the preceding Distribution Date and any
outstanding Class A-3 Noteholders' Interest Carryover Shortfall on such
preceding Distribution Date, over the amount in respect of interest on the
Class A-3 Notes that was actually paid to Holders of the Class A-3 Notes on
the preceding Distribution Date, plus interest on the amount of interest
due but not paid to Holders of the Class A-3 Notes on the preceding
Distribution Date, to the extent permitted by law, in an amount equal to
the product of one-twelfth multiplied by the Class A-3 Interest Rate
multiplied by the amount of such interest due but not paid in respect of
the Class A-3 Notes.
"Class A-3 Noteholders' Interest Distributable Amount" means, with
respect to any Distribution Date, the sum of (i) the Class A-3 Noteholders'
Monthly Interest Distributable Amount and (ii) the Class A-3 Noteholders'
Interest Carryover Shortfall, in each case for such Distribution Date.
"Class A-3 Noteholders' Monthly Interest Distributable Amount" means,
with respect to any Distribution Date, the product of one-twelfth (or, in
the case of the first Distribution Date, 47 days divided by 360) multiplied
by the Class A-3 Interest Rate multiplied by the outstanding principal
amount of the Class A-3 Notes on the preceding Distribution Date after
giving effect to all payments of principal to the Holders of the Class A-3
Notes on or prior to such preceding Distribution Date (or, in the case of
the first Distribution Date, the outstanding principal amount of the Class
A-3 Notes on the Closing Date).
"Class A-3 Noteholders' Monthly Principal Distributable Amount" means,
with respect to any Distribution Date on and after the Distribution Date on
which the outstanding principal amount of the Class A-2 Notes has been
reduced to zero, the Noteholders' Percentage of the Principal Distribution
Amount for such Distribution Date (less the portion thereof, if any,
applied to reduce the outstanding principal amount of the Class A-2 Notes
to zero on such Distribution Date).
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"Class A-3 Noteholders' Principal Carryover Shortfall" means, with
respect to any Distribution Date, the excess of the Class A-3 Noteholders'
Principal Distributable Amount for the preceding Distribution Date over the
amount that was actually deposited into the Note Distribution Account in
respect of principal of the Class A-3 Notes on such preceding Distribution
Date.
"Class A-3 Noteholders' Principal Distributable Amount" means, with
respect to any Distribution Date, the sum of (i) the Class A-3 Noteholders'
Monthly Principal Distributable Amount for such Distribution Date, and (ii)
the Class A-3 Noteholders' Principal Carryover Shortfall for such
Distribution Date; provided, that the sum of clauses (i) and (ii) will not
exceed the outstanding principal amount of the Class A-3 Notes, and, on May
15, 2004, the Class A-3 Noteholders' Principal Distributable Amount will
include the amount, to the extent of available funds, necessary (after
giving effect to the other amounts to be deposited into the Note
Distribution Account on such Distribution Date and allocable to principal)
to reduce the outstanding principal amount of the Class A-3 Notes to zero.
"Disposition Adjustment Amount" means, with respect to any Receivable
that became a Defaulted Receivable pursuant to clause (x) of the definition
of "Defaulted Receivable", the remainder of (i) the outstanding principal
amount of such Receivable as of the date such Receivable became a Defaulted
Receivable minus (ii) the Initial Chargeoff Amount related to such
Receivable.
"Initial Chargeoff Amount" means, with respect to any Receivable that
becomes a Defaulted Receivable pursuant to clause (x) of the definition of
"Defaulted Receivable," the principal amount charged off by the Servicer
prior to the disposition of the related Financed Vehicle in accordance with
the collection policy in effect on the date of such chargeoff.
"Noteholders' Distributable Amount" means, for any Distribution Date, the
sum of the Noteholders' Principal Distributable Amount and the Noteholders'
Interest Distributable Amount.
"Noteholders' Interest Distributable Amount" means, for any Distribution
Date, the sum of (i) the Class A-1 Noteholders' Interest Distributable
Amount, (ii) the Class A-2 Noteholders' Interest Distributable Amount and
(iii) the Class A-3 Noteholders' Interest Distributable Amount.
"Noteholders' Principal Distributable Amount" means, for any Distribution
Date, the sum of (i) the Class A-1 Noteholders' Principal Distributable
Amount, (ii) the Class A-2 Noteholders' Principal Distributable Amount and
(iii) the Class A-3 Noteholders' Principal Distributable Amount, in each
case as of such Distribution Date.
"Principal Distribution Amount" means, with respect to any Distribution
Date, the sum (without duplication) of (i) the principal portion of all
Collected Funds for such Distribution Date (other than Liquidation Proceeds
received with respect to Defaulted Receivables), (ii) the outstanding
principal balance of all Receivables that became Defaulted Receivables
during the related Collection Period (other than Receivables that became
Defaulted Receivables pursuant to clause (x) of the definition of
"Defaulted Receivables" and Receivables repurchased by the Sellers or
purchased by the Servicer) as determined on the respective dates such
Receivables became Defaulted Receivables, (iii) the aggregate of the
Initial Chargeoff Amounts of all Receivables that became Defaulted
Receivables pursuant to clause (x) of the definition of "Defaulted
Receivable" during the Collection Period relating to the previous
Distribution Date, (iv) the Disposition Adjustment Amount with respect to
all Receivables that became Defaulted Receivables pursuant to clause (x) of
the definition of "Defaulted Receivable," the related Financed Vehicles of
which were disposed of by Servicer during the related Collection Period,
and (v) the principal portion of the Repurchase Amount of all Receivables
that were repurchased by the Sellers or purchased by the Servicer during
the related Collection Period.
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On each Distribution Date, all amounts on deposit in the Note Distribution
Account will generally be paid in the following order of priority:
(i) without regard to class, to the applicable Noteholders, accrued and
unpaid interest on the outstanding principal balance of the applicable
class of Notes at the applicable Interest Rate;
(ii) to the Class A-1 Noteholders in reduction of principal until the
principal balance of the Class A-1 Notes has been reduced to zero;
(iii) to the Class A-2 Noteholders in reduction of principal until the
principal balance of the Class A-2 Notes has been reduced to zero; and
(iv) to the Class A-3 Noteholders in reduction of principal until the
principal balance of the Class A-3 Notes has been reduced to zero.
Notwithstanding the foregoing, on any Distribution Date occurring during the
continuation of an Event of Default and acceleration of the Notes, payments
will be made in accordance with clauses (i) and (ii) above, and then will be
made to the Class A-2 Noteholders and Class A-3 Noteholders pro rata based on
the outstanding principal amount of the Class A-2 Notes and Class A-3 Notes
until the Class A-2 Notes and Class A-3 Notes have been paid in full.
On each Distribution Date, all amounts on deposit in the Certificate
Distribution Account will be distributed to the Certificateholders.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
GENERAL
The Receivables are "chattel paper" as defined in the Uniform Commercial
Code (the "UCC"). Pursuant to the UCC, the sale of chattel paper is treated in
a manner similar to perfection of a security interest in chattel paper. In
order to protect Compass Auto's, the Company's, the Trust's and the Indenture
Trustee's respective interests in the Receivables, each Seller, Compass Auto,
the Company, the Trust and the Indenture Trustee as applicable, will file or
cause to be filed UCC-1 financing statements with the appropriate governmental
authorities as required to perfect Compass Auto's, the Company's, the Trust's
and the Indenture Trustee's respective interests in the Receivables and their
proceeds. Under the First Tier Receivables Purchase Agreement, the Sellers
will be obligated to maintain the perfection of Compass Auto's ownership
interest in the Receivables, which in turn will be obligated to maintain the
perfection of the Company's ownership interest in the Receivables under the
Second Tier Receivables Purchase Agreement. Under the Sale and Servicing
Agreement, the Servicer will be obligated to maintain the perfection of
Trust's ownership in the Receivables. It should be noted, however, that a
purchaser of, or a secured party that takes a security interest in, chattel
paper who gives new value and takes possession of it in the ordinary course of
such purchaser's or secured party's business has priority over a security
interest in the chattel paper that is perfected by filing UCC-1 financing
statements and not by possession by the original secured party, if such
purchaser or secured party acts without knowledge that the specific chattel
paper is subject to a security interest. Any such purchaser or secured party
would not be deemed to have such knowledge merely because of Compass Auto's,
the Company's, the Trust's or the Indenture Trustee's UCC filings and would
not learn of the sale of the Receivables from a review of the Receivables
since they would not be segregated, stamped or otherwise marked to show such
sale, although the Sellers' master computer records will evidence such sale.
See "Description of the Transfer and Servicing Agreements--Sale and Assignment
of the Receivables" herein. Generally, the rights held by assignees of the
Receivables (including, without limitation, the Trust and the Indenture
Trustee) will be subject to (i) all the terms of the related Motor Vehicle
Contract and (ii) any other defense or claim of the obligor against the
assignor of such Receivable which accrues before the obligor receives
notification of the assignment. Because it is not anticipated that any of the
obligors would receive notice of the assignment of any of the Receivables, the
Trust and the Indenture Trustee will be subject to defenses or claims of the
obligor against the assignor even if such claims are unrelated to the Motor
Vehicle Contract.
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SECURITY INTERESTS IN THE FINANCED VEHICLES
Each Seller will transfer and assign its security interests in the Financed
Vehicles to Compass Auto, which in turn will transfer and assign such security
interests to the Company. Such security interests will be sold and assigned by
the Company to the Trust and assigned by the Trust to the Indenture Trustee
for the benefit of the Noteholders. Except as set forth in the next paragraph,
in most states, such assignments are effective assignments of a security
interest, and in the absence of fraud, inadvertence or administrative error,
the assignee succeeds thereby to the assignor's rights as secured party. In
most states, in the absence of fraud or forgery by the vehicle owner or of
fraud, forgery, negligence or error by the Seller or administrative error by
state or local agencies, the notation of the Seller's lien on the certificates
of title or ownership and/or possession of such certificates with such
notation will be sufficient to protect the Trust against the rights of
subsequent purchasers of a Financed Vehicle or subsequent lenders who take a
security interest in a Financed Vehicle.
Because of the administrative burden and expense that would be entailed in
doing so, no steps will be taken to cause new certificates of title for the
Financed Vehicles to be issued identifying Compass Auto, the Company, the
Trust or the Indenture Trustee as the secured party. In the absence of such
action, the Trust and the Indenture Trustee may not have a perfected security
interest in the Financed Vehicles and other secured parties, bankruptcy
trustees and/or debtors, receivers, judgment creditors and subsequent
purchasers (among others) might acquire rights in such Financed Vehicle prior
to the rights of the Trust and the Indenture Trustee. By not identifying the
Indenture Trustee as the secured party on the certificates of title for the
Financed Vehicles, any person without notice of the assignment of the security
interest would be protected in dealing with the lienholder of record as the
holder of the security interest.
If a Financed Vehicle is moved to a state other than the state in which such
Financed Vehicle initially is registered, under the laws of most states,
including Alabama, Arkansas and Texas, the perfected security interest in the
Financed Vehicle would continue for four months after such relocation and
thereafter until the owner re-registers the Financed Vehicle in such state
but, in any event, not beyond the surrender of the certificate of title. A
majority of states generally require surrender of a certificate of title to
re-register a vehicle. Accordingly, the respective Seller must surrender
possession if it holds the certificate of title to such Financed Vehicle or,
in the case of Financed Vehicles originally registered in a state which
provides for notation of lien but not possession of the certificate of title
by the holder of the security interest in the related motor vehicle, such
Seller who is listed as lienholder on the certificate of title would receive
notice of surrender if the security interest in the Financed Vehicle is noted
on the certificate of title. Accordingly, such Seller would have the
opportunity to maintain notation of the lien on the reissued certificate of
title for the Financed Vehicle in the state of relocation. In states that do
not require a certificate of title for registration of a motor vehicle, re-
registration could defeat perfection. In the ordinary course of servicing its
portfolio of motor vehicle installment sales contracts, each Seller takes
steps to maintain notation of the lien on the reissued certificate of title
upon receipt of notice of re-registration or information from the Obligor as
to relocation. Similarly, when an obligor under a Receivable sells a Financed
Vehicle, the respective Seller must generally surrender possession of the
certificate of title and, if noted as the lienholder on the relevant
certificate of title, will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of
the related Receivable before release of the lien.
Under the laws of many states, certain possessory liens for repairs
performed on a motor vehicle and storage, as well as certain rights arising
from the use of a motor vehicle in connection with illegal activities, may
take priority even over a perfected security interest. Certain state and
federal tax liens may have priority over the lien of a secured party. Each
Seller will represent in the Agreement that it has no knowledge of any such
liens or adverse rights with respect to any Financed Vehicle. However, such
liens or adverse rights could arise at any time during the term of a
Receivable. No notice will be given to the Trustee if such a lien or adverse
right arises.
ENFORCEMENT OF SECURITY INTERESTS IN VEHICLES
The Servicer on behalf of the Trust may take action to enforce its security
interest by repossession and resale of the Financed Vehicles securing the
Receivables. The actual repossession may be contracted out to third party
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contractors. Under the UCC and laws applicable in Alabama, Arkansas, Texas and
most other states, a creditor can repossess a motor vehicle securing a loan by
voluntary surrender, "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) and, in the absence of voluntary surrender and
the ability to repossess without breach of the peace, by judicial process. The
UCC and consumer protection laws in Alabama, Arkansas, Texas and most other
states place restrictions on repossession sales, including, among other
things, requiring reasonable prior notice to the debtor of the date, time and
place of any public sale or the date after which any private sale will be held
and commercial reasonableness in effecting such a sale. In the event of such a
repossession and resale of a Financed Vehicle, the proceeds of a resale of a
Financed Vehicle would be applied first to the expenses of repossession and
resale and then the Trust generally would be entitled to be paid (up to the
amount owing under the related Receivable) out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, released to the debtor.
Under the UCC and laws applicable in Alabama, Arkansas, Texas and most other
states, a creditor is entitled to obtain a deficiency judgment from a debtor
for any deficiency on repossession and resale of the motor vehicle securing
such debtor's loan as long as all aspects of the repossession complied with
applicable law and the resale was commercially reasonable. However, some
states impose prohibitions or limitations on deficiency judgments. In Alabama,
commercially unreasonable behavior by a creditor disposing of repossessed
collateral will not result in forfeiture of a creditor's right to recover an
outstanding deficiency. Instead, the damages suffered by the debtor due to the
commercially unreasonable conduct will be offset against the outstanding
deficiency owing to such creditor. In general, a defaulting obligor may not
have sufficient assets to make the pursuit of a deficiency judgment
worthwhile.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws, consumer protection laws, and general equitable
principles may limit or delay the ability of a lender to repossess and resell
collateral or enforce a deficiency judgment. To the extent applicable, such
limits or delays could cause affect payments on the Notes.
CERTAIN MATTERS RELATING TO RECEIVERSHIP
Insolvency Laws Affecting Transfers by Sellers. Compass Bank, a Seller and
the initial Servicer, is an Alabama state banking corporation and is subject
to regulation and supervision by the Alabama State Banking Department. Compass
Bank-Texas, a Seller, is a Texas state bank and is subject to regulation and
supervision by the Department of Banking of the State of Texas. If either
Seller becomes insolvent or is in an unsound condition or if certain other
circumstances occur, the Alabama State Banking Department, in the case of
Compass Bank, or the Department of Banking of the State of Texas, in the case
of Compass Bank-Texas, may request to apply to a court for an order appointing
a conservator or receiver for Compass Bank or Compass Bank-Texas, as
applicable. Since Compass Bank is a FDIC-insured bank, Alabama law requires
the conservator or receiver to be the Alabama State Banking Department and
permits the Alabama State Banking Department to request that the FDIC be
appointed conservator or receiver. Similarly, as Compass Bank-Texas is also a
FDIC-insured bank, Texas law requires the conservator or receiver to be the
Department of Banking of the State of Texas and permits the Department of
Banking of the State of Texas request that the FDIC be appointed conservator
or receiver. In addition, the FDIC may appoint itself as conservator or
receiver for a Seller if the FDIC determines that one or more of certain
conditions exist (such as, but not limited to, such Seller's assets being
insufficient for obligations, substantial dissipation of assets or earnings,
the existence of unsafe or unsound conditions, the willful violation of a
cease and desist order, concealment of records or assets, inability to meet
obligations, the incurrence (or likelihood) of losses resulting in depletion
of substantially all of its capital, violations of law likely to cause
financial deterioration, cessation of insured status or undercapitalization of
such Seller).
The FDIA sets forth certain powers that the FDIC in its capacity as
conservator or receiver for a Seller could exercise. To the extent that a
Seller has granted a security interest in the Receivables and that security
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interest was validly perfected before the appointment of the FDIC as
conservator or receiver and before such Seller's insolvency, and certain other
conditions are satisfied, including that such security interest was not taken
in contemplation of the insolvency of such Seller, was not taken with the
intent to hinder, delay or defraud such Seller or the creditors of such Seller
and was not granted for the benefit of any affiliate of such Seller, such
security interest should be enforceable (to the extent of the secured party's
"actual direct compensatory damages") and should not be subject to avoidance
by the FDIC, as receiver or conservator for such Seller, and, therefore, in
such circumstances, payments to the secured party with respect to the
Receivables (up to the amount of such damages) should not be subject to
recovery by a conservator or receiver for such Seller. Because Compass Auto is
an affiliate of each of the Sellers, it is not clear that if the transfer by
the Sellers to Compass Auto under the First Tier Receivables Purchase
Agreement were deemed to be a security interest in the Receivables, such
security interest would be enforced to the extent described above. Therefore,
to provide additional protection to the Noteholders and to carry out the
intent of the parties, each Seller will grant a security interest directly to
the Indenture Trustee for the benefit of the Noteholders pursuant to a
security agreement (the "Security Agreement"), which security interest should
be enforceable as described in the second preceding sentence.
The foregoing conclusions are based on FDIC general counsel opinions and
policy statements regarding the application of certain provisions of the
Federal Deposit Insurance Act (as amended, the "FDIA"). However, such opinions
and policy statements are not necessarily binding on the FDIC. The FDIC, if
appointed as the conservator or receiver for a Seller, has the power under the
FDIA to repudiate contracts, including secured contracts. The FDIA provides
that a claim for such a repudiation is limited to "actual direct compensatory
damages". On April 10, 1990, the RTC, formerly a sister agency of the FDIC,
adopted a statement of policy (the "RTC Policy Statement") with respect to the
payment of interest on direct collateralized borrowings of savings
associations. The RTC Policy Statement states that interest on such borrowings
will be payable at the contract rate up to the date of the redemption or
payment by the conservator, receiver, or the trustee of an amount equal to the
principal owed plus the contract rate of interest up to the date of such
payment or redemption, plus any expenses of liquidation if provided for in the
contract to the extent secured by the collateral. However, in a case involving
zero-coupon bonds issued by a savings association which were repudiated by the
RTC, a federal district court in the Southern District of New York held, in
1993, that the RTC was obligated to pay holders the fair market value of
repudiated bonds as of the date of repudiation. The FDIC itself has not
adopted a policy statement on payment of interest on collateralized borrowings
of banks. The FDIC, as conservator or receiver, would also have the rights and
powers conferred under state law.
Notwithstanding the foregoing, a tax or government lien on property of a
Seller where notice of such lien has been filed before Receivables are
transferred to Compass Auto, pursuant to the First Tier Receivables Purchase
Agreement, or the Indenture Trustee, pursuant to the Security Agreement, may
have priority over Compass Auto's and the Indenture Trustee's interest in such
Receivables, and if the FDIC were appointed conservator or receiver of such
Seller, certain administrative expenses of the conservator, receiver or the
Alabama State Banking Department, in the case of Compass Bank, and the
Department of Banking of the State of Texas, in the case of Compass Bank-
Texas, may have priority over Compass Auto's and the Indenture Trustee's
interest in the Receivables.
If (i) a Seller were to become subject to a conservatorship or receivership,
or a conservatorship or receivership proceeding were to be commenced involving
such Seller, and (ii) the conservator or receiver for such Seller were to
assert that Compass Auto's or the Indenture Trustee's interest in the
Receivables should not be enforceable or should be subject to avoidance or
were to require Compass Auto or the Indenture Trustee to establish its right
to those payments by submitting to and completing the administrative claims
procedure under the FDIA, or the conservator or receiver were to request a
stay of proceedings with respect to such Seller as provided under the FDIA,
delays in payments or distributions on the Notes and possible reductions in
the amount of those payments or distributions could occur. In addition, the
appointment of a receiver or conservator could result in administrative
expenses of the receiver or conservator having priority over the interest of
Compass Auto or the Indenture Trustee in the Receivables.
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In addition, while Compass Bank is the Servicer, cash collections held by
Compass Bank may, subject to certain conditions, be commingled and used for
the benefit of Compass Bank prior to the date on which such collections are
required to be deposited in the Collection Account. In the event of the
conservatorship or receivership of Compass Bank or, in certain circumstances,
the lapse of certain time periods, Compass Auto and the Indenture Trustee may
not have a perfected interest in such collections and, in such event, Compass
Auto and the Indenture Trustee may suffer a loss of all or part of such
collections which may result in a loss to the Holders of the Notes. In
addition, in the event of a Servicer Default relating to the insolvency of the
Servicer, if no Servicer Default other than such conservatorship or
receivership or insolvency exists, the conservator or receiver for the
Servicer may have the power to prevent the appointment of a successor
Servicer. The appointment of a receiver or conservator could adversely affect
Compass Bank's ability to repurchase ineligible Receivables from the Trust and
could result in administrative expenses of the receiver or conservator having
priority over the interest of Compass Auto or the Indenture Trustee in the
Receivables.
Insolvency Laws Affecting Transfers by Compass Auto and the Company. Each of
Compass Auto and the Company has taken steps in structuring the transactions
contemplated hereby that are intended to make it unlikely that the voluntary
or involuntary application for relief by its Parent under an Insolvency Law
will result in the consolidation of the assets and liabilities of Compass Auto
or the Company, as applicable, with those of its Parent. These steps include
the creation of each of Compass Auto and the Company as a separate, limited-
purpose entity pursuant to such entity's organizational documents, which
contain limitations (including restrictions on the nature of such entity's
business) and a restriction on its ability to commence a voluntary case or
proceeding under any Insolvency Law without the unanimous affirmative vote of
all of the members of the board of directors of such entity. Pursuant to the
Receivables Purchase Agreements and the Sale and Servicing Agreement, the
Servicer, each Seller and the Indenture Trustee will each agree not to invoke
the Insolvency Laws with respect to Compass Auto, the Company or the Trust
until the date which is one year and one day following the payment in full of
all amounts due in respect of the Notes.
Each of Compass Auto and the Company believes that a court would conclude
that its assets and liabilities would not be consolidated with the assets and
liabilities of its Parent in the event of the application of the federal
bankruptcy laws to its Parent. If a court concluded otherwise, or a filing
were made under any Insolvency Law by or against Compass Auto or the Company,
or if an attempt were made to litigate any of the foregoing issues, delays in
payments on the Notes (and possible reductions in the amount of such payments)
could occur. In a 1993 case, the United States Court of Appeals for the Tenth
Circuit found that accounts sold prior to a bankruptcy should be treated as
part of the bankruptcy estate of the seller of such accounts. If Compass Auto,
the Company or either of their Parents were to become a debtor in a bankruptcy
proceeding and a court applied the reasoning of the Circuit Court reflected in
the case described above to chattel paper, delays in payments to Noteholders
could occur or reductions in the amounts of such payments could result.
Each of Compass Auto and the Company intends that the transfers of
Receivables under the Second Tier Receivables Purchase Agreement and the Sale
and Servicing Agreement, respectively, will constitute sales, rather than
pledges of the Receivables to secure indebtedness of Compass Auto or the
Company, as applicable. However, if either of Compass Auto or the Company were
to become a debtor under any Insolvency Laws, a creditor or trustee in
bankruptcy of such entity as debtor-in-possession might argue that such sales
of Receivables by such entity were pledges of Receivables rather than sales,
and if such position--that the transfer of Receivables were pledges rather
than sales or otherwise should be treated as part of the bankruptcy estate of
such entity--were presented to or accepted by a court, then delays in payments
to Noteholders could occur or reductions in the amounts of such payments could
result. In addition, if the transfer of any Receivables is recharacterized as
a pledge, then a tax lien, governmental lien or other lien created by
operation of law on the property of such entity could have priority over the
Indenture Trustee's security interest in such Receivables.
OTHER MATTERS
Numerous federal and state consumer protection laws may impose requirements
applicable to the origination of and lending pursuant to the Receivables (and
liability on the Dealers, the relevant Seller or their assignees,
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including the Trust, for failure to comply with those requirements),
including, but not limited to, the Truth in Lending Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Magnuson-Moss Warranty-
Federal Trade Commission Improvement Act, and the Federal Trade Commission
Act.
The Federal Trade Commission rule regarding the preservation of consumer
claims and defenses (the "FTC Rule"), other state statutes and/or the common
law in certain states have the effect of subjecting any assignee of a consumer
credit contract (which would include the relevant Seller, the Company and the
Trust) to all claims and defenses which the obligor in the transaction could
assert against the seller of the goods obtained pursuant to, or with the
proceeds of, the contract. Liability of a subsequent holder under the FTC Rule
is limited to the amounts paid by the obligor under the contract, and a
subsequent holder of the contract may also be unable to collect any balance
remaining due thereunder from the obligor. The Uniform Consumer Credit Code
and similar statutes applicable in certain states contain provisions which
generally duplicate all or a portion of this rule. However, in some states
these statutes may contain liability provisions different from those in the
FTC Rule. For example, in Alabama an assignee's liability in a consumer credit
transaction may not exceed the amount owing to the assignee at the time the
claim or defense is asserted against the assignee.
The First Tier Receivables Purchase Agreement will set forth criteria that
must be satisfied by each Receivable, and such criteria will provide, among,
other things, that each Receivable complies with all requirements of law in
all material respects. Accordingly, if an obligor has a claim against the
Trust for violation of any law and such claim materially and adversely affects
the Trust's interest in a Receivable, such violation would result in the
failure to satisfy a criterion in the Agreement and would create an obligation
of the related Seller to repurchase the Receivable unless such failed
criterion is cured. See "Description of the Transfer and Servicing
Agreements--Sale and Assignment of the Receivables" herein.
REPURCHASE OBLIGATION
Under the First Tier Receivables Purchase Agreement, each Receivable must
satisfy certain criteria, and such criteria relate to, among other things, the
validity, perfection and priority of the security interest of the Trust in
each Financed Vehicle (subject to the possible limitations on the ability to
assign a perfected security interest in a Financed Vehicle governed by Texas
law). See "--Security Interest in the Financed Vehicles" above. Accordingly,
if any defect exists in the perfection of the security interest of the Trust
in any Financed Vehicle and such defect materially and adversely affects the
Trust's interest in a Receivable, such defect would result in the failure to
satisfy a criterion in the First Tier Receivables Purchase Agreement and would
create an obligation of the related Seller to repurchase such Receivable
unless such failed criterion is cured. See "Description of the Transfer and
Servicing Agreements--Sale and Assignment of the Receivables" herein.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material Federal income tax
consequences of the purchase, ownership and disposition of the Notes. The
summary does not purport to deal with Federal income tax consequences
applicable to all categories of holders, some of which may be subject to
special rules. For example, it does not discuss the tax treatment of
Noteholders that are insurance companies, regulated investment companies or
dealers in securities. This discussion is directed to prospective purchasers
who purchase Notes in the initial distribution thereof and who hold the Notes
as "capital assets" within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code"). Prospective investors are urged to
consult their own tax advisors in determining the Federal, state, local,
foreign and any other tax consequences to them of the purchase, ownership and
disposition of the Notes.
The following summary is based upon current provisions of the Code, the
Treasury regulations promulgated thereunder, judicial authority, and ruling
authority, all of which are subject to change, which change may be
retroactive. The Trust will be provided with an opinion of Federal Tax Counsel
regarding certain Federal income tax matters discussed below. An opinion of
Federal Tax Counsel, however, is not binding on the Internal
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Revenue Service (the "IRS") or the courts. Moreover, there are no cases or IRS
rulings on similar transactions involving both debt and equity interests
issued by a trust with terms similar to those of the Notes. As a result, the
IRS may disagree with all or a part of the discussion below. No ruling on any
of the issues discussed below will be sought from the IRS.
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
Federal income tax purposes. This opinion will be based upon the assumption of
compliance by all parties with the terms of the Trust Agreement and related
documents.
If the Trust were taxable as a corporation for Federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the Receivables,
possibly reduced by its interest expense on the Notes. Any such corporate
income tax could materially reduce cash available to make payments on the
Notes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Company will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for Federal, state and local income and franchise tax purposes. Federal Tax
Counsel will advise the Trust that the Notes will be classified as debt for
Federal income tax purposes. The discussion below assumes this
characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all payments
on the Notes are denominated in U.S. dollars, and that the Notes are not
Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under Treasury regulations (the "OID Regulations") relating to
original issue discount ("OID"), and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) is a de
minimis amount (i.e., less than 0.25% of their principal amount multiplied by
the weighted average maturity of such Notes), all within the meaning of the
OID Regulations.
Interest Income on the Notes. Based upon the above assumptions, except as
discussed below, the Notes will not be considered issued with OID. The stated
interest thereon will be taxable to a Noteholder as ordinary interest income
when received or accrued in accordance with such Noteholder's method of tax
accounting. Under the OID Regulations, a holder of a Note issued with a de
minimis amount of OID must include such OID in income, on a pro rata basis, as
principal payments are made on the Note. A purchaser who buys a Note for more
or less than its principal amount will generally be subject, respectively, to
the premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. Under the OID Regulations, all stated interest will be treated
as OID. An accrual basis holder of a Short-Term Note (and certain cash basis
holders, including regulated investment companies, as set forth in Section
1281 of the Code) generally would be required to report interest income as OID
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to
report interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a Short-
Term Note reporting interest income as it is paid may be required to defer a
portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the
Code to accrue interest income on all nongovernment debt obligations with a
term of one year or less, in which case the taxpayer would include OID on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than
its principal amount.
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Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, OID and gain
previously included by such Noteholder in income with respect to the Note and
decreased by the amount of premium (if any) previously amortized and by the
amount of principal payments previously received by such Noteholder with
respect to such Note. Any such gain or loss will generally be capital gain or
loss, except for gain representing accrued interest (including OID) and
accrued market discount not previously included in income. Capital losses
generally may be used by a corporate taxpayer only to offset capital gains,
and by an individual taxpayer only to the extent of capital gains plus $3,000
of other income. In the case of an individual taxpayer, any capital gain on
the sale of a Note will be taxed at a maximum rate of 39.6% if the Note is
held for not more than 12 months, at 28% if the Note is held for more than 12
months, but not more than 18 months, and at 20% if the Note is held for more
than 18 months.
Foreign Holders. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest," and
generally will not be subject to United States Federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent
shareholder" of the Trust or the Seller (including a holder of 10% of the
outstanding Certificates) or a "controlled foreign corporation" with respect
to which the Trust or the Seller is a "related person" within the meaning of
the Code and (ii) satisfies the statement requirement set forth in section
871(h) and section 881(c) of the Code and the regulations thereunder. To
satisfy this requirement, the foreign person, or a financial institution
holding the Note on behalf of such foreign person, must provide, in accordance
with specified procedures, a paying agent of the Trust with a statement to the
effect that the foreign person is not a United States person. Currently these
requirements will be met if (x) the foreign person provides his name and
address, and certifies, under penalties of perjury, that he is not a United
States person (which certification may be made on an IRS Form W-8) or (y) a
financial institution holding the Note on behalf of the foreign person
certifies, under penalties of perjury, that such statement has been received
by it and furnishes a paying agent with a copy thereof. Under recently
finalized Treasury regulations (the "Final Regulations"), the statement
requirement may also be satisfied with other documentary evidence with respect
to an offshore account or through certain foreign intermediaries. The Final
Regulations will generally be effective for payments made after December 31,
1999.
If such interest is not "portfolio interest," then it will be subject to a
30% withholding tax unless the foreign person provides the Trust or its paying
agent, as the case may be, with a properly executed (i) IRS Form 1001 (or
successor form) claiming an exemption from withholding tax or a reduction in
withholding tax under the benefit of a tax treaty or (ii) IRS Form 4224 (or
successor form) stating that interest paid on the Note is not subject to
withholding tax because it is effectively connected with the foreign person's
conduct of a trade or business in the United States. Under the Final
Regulations, a foreign person will generally be required to provide IRS Form
W-8 (as revised to conform with the requirements of the Final Regulations) in
lieu of IRS Form 1001 and IRS Form 4224, although alternative or additional
documentation may be applicable in certain situations. All Noteholders should
consult their tax advisors regarding the application of the Final Regulations.
If a foreign person is engaged in a trade or business and interest on the
Note is effectively connected with the conduct of such trade or business in
the United States, the foreign person, although exempt from the withholding
tax discussed above, will be subject to United States federal income tax on
such interest on a net income basis in the same manner as if it were a United
States person. In addition, if such foreign person is a foreign corporation,
it may be subject to a branch profits tax equal to 30% (or lower treaty rate)
of its effectively connected earnings and profits for the taxable year,
subject to adjustments.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States Federal income and withholding tax; provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person
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and (ii) in the case of an individual foreign person, the foreign person is
not present in the United States for 183 days or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-
sharing trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide,
under penalties of perjury, a certificate containing the holder's name,
address, correct Federal taxpayer identification number and a statement that
the holder is not subject to backup withholding. Should a nonexempt Noteholder
fail to provide the required certification, the Trust will be required to
withhold 31% of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's Federal income tax
liability. The Final Regulations make certain modifications to the backup
withholding and information reporting rules. Prospective investors are urged
to consult their own tax advisors regarding the Final Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion of
Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for Federal income tax purposes, the Notes might
be treated as equity interests in the Trust. In such a case, the Trust would
be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain holders. For
example, income to foreign holders might be subject to U.S. tax and U.S. tax
return filing and withholding requirements, individual holders might be
subject to certain limitations on their ability to deduct their share of Trust
expenses and tax-exempt holders might have unrelated business taxable income.
CERTAIN STATE TAX CONSEQUENCES
Alabama Tax Counsel will deliver its opinion to the effect that (i) if the
characterization of the Notes as debt is recognized for Federal income tax
purposes, the Notes will also be recognized as debt for Alabama state tax
purposes and (ii) if the Trust is not classified for Federal income tax
purposes as an association (or publicly traded partnership) taxable as a
corporation, it will also not be classified as such for Alabama state income
tax purposes. If the Trust were taxable as a corporation for Alabama state
income tax purposes, the Trust would be subject to Alabama corporate income
tax on its taxable income. Any such corporate income tax could materially
reduce cash available to make payments on the Notes.
Prospective investors are urged to consult their own tax advisors in
determining the Alabama state and any other state tax consequences to them of
the purchase, ownership and disposition of the Notes.
ERISA CONSIDERATIONS
Subject to the following discussion the Notes may be acquired by pension,
profit-sharing or other employee benefit plans, as well as individual
retirement accounts and Keogh plans (each a "Benefit Plan"). Section 406 of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
Section 4975 of the Code prohibit a Benefit Plan from engaging in certain
transactions with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons
or the fiduciaries of the Benefit Plan. In addition, Title I of ERISA also
requires fiduciaries of a Benefit Plan subject to ERISA to make investments
that are prudent, diversified and in accordance with the governing plan
documents.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit
Plan that purchased Notes if assets of the Trust were deemed to be assets of
the Benefit Plan. Under a regulation issued by the United States Department of
Labor (the "Regulation"), the
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<PAGE>
assets of the Trust would be treated as plan assets of a Benefit Plan for the
purposes of ERISA and the Code only if the Benefit Plan acquired an "equity
interest" in the Trust and none of the exceptions to plan assets contained in
the Regulation was applicable. An equity interest is defined under the
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Although there is little guidance on the subject, the Sellers
believe that, at the time of their issuance, the Notes should not be treated
as an equity interest in the Trust for purposes of the Regulation. This
determination is based in part upon the traditional debt features of the
Notes, including the reasonable expectation of purchasers of Notes that the
Notes will be repaid when due, as well as the absence of conversion rights,
warrants and other typical equity features. The debt treatment of the Notes
for ERISA purposes could change if the Trust incurred losses.
However, without regard to whether the Notes are treated as an equity
interest for purposes of the Regulation, the acquisition or holding of Notes
by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Trust, Compass Auto, the Indenture Trustee or
the Owner Trustee is or becomes a party in interest or a disqualified person
with respect to such Benefit Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of Notes by
a Benefit Plan depending on the type and circumstances of the plan fiduciary
making the decision to acquire such Notes. Included among these exemptions
are: Prohibited Transaction Class Exemption ("PTCE") 96-23, regarding
transactions effected by "in-house asset managers"; PTCE 95-60, regarding
investments by insurance company general accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 90-1, regarding
investments by insurance company pooled separate accounts; and PTCE 84-14,
regarding transactions effected by "qualified professional asset managers."
Unless otherwise set forth in the Indenture, by acquiring a Note, each
purchaser will be deemed to represent that either (i) it is not acquiring the
Notes with the assets of a Benefit Plan; or (ii) the acquisition and holding
of the Notes will not give rise to a nonexempt prohibited transaction under
Section 406(a) of ERISA or Section 4975 of the Code.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements, however governmental plans may
be subject to comparable state law restrictions.
A plan fiduciary considering the purchase of Notes should consult its legal
advisors regarding whether the assets of the Trust would be considered plan
assets, the possibility of exemptive relief from the prohibited transaction
rules and other issues and their potential consequences.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to cause the Trust to
sell to Credit Suisse First Boston Corporation and Goldman, Sachs & Co. (the
"Underwriters"), and each Underwriter has agreed to purchase, the principal
amount of the Notes set forth opposite its name below:
<TABLE>
<CAPTION>
CLASS A-1
UNDERWRITERS NOTES CLASS A-2 NOTES CLASS A-3 NOTES
- ------------ ------------ --------------- ---------------
<S> <C> <C> <C>
Credit Suisse First Boston
Corporation...................... $ 63,618,000 $40,850,000 $ 85,223,000
Goldman, Sachs & Co............... $ 63,617,000 $40,850,000 $ 85,222,000
------------ ----------- ------------
Total......................... $127,235,000 $81,700,000 $170,445,000
============ =========== ============
</TABLE>
Compass Bank may directly place Notes (the "Seller Placed Notes") at the
price to the public set forth on the cover page of this Prospectus Supplement.
With respect to any Seller Placed Notes actually placed by Compass Bank,
Compass Bank will be entitled to a commission from the Issuer in an amount
equal to the initial concessions referred to below. Payment and delivery of
such Seller Placed Notes will occur on the date of delivery of the Notes
underwritten by the underwriters (the "Underwritten Notes"). The purchase and
sale of
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<PAGE>
the Seller Placed Notes will not be subject to conditions, except that (i) the
purchase by the purchaser of the Seller Placed Notes is not on the date of the
delivery thereof prohibited under the laws of any jurisdiction in the United
States to which such purchaser is subject, and (ii) the Underwritten Notes
have been sold to the Underwriters.
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Notes offered hereby,
if any are taken.
The Underwriters propose to offer the Notes in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and in part to certain securities dealers at such price less a
concession not in excess of 0.050% per Class A-1 Note, 0.125% per Class A-2
Note and 0.250% per Class A-3 Note. The amounts of the concessions allowed may
vary from dealer to dealer. After the initial public offering, the public
offering price and such concessions may be changed.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the Notes originally sold by such syndicate member are
purchased in a syndicate covering transactions and penalty bids may cause the
prices of the Notes to be higher than they would otherwise be in the absence
of such transactions. These transactions, if commenced, may be discontinued at
any time.
The Notes are a new issue of securities with no established trading market.
The Trust has been advised by the Underwriters that they intend to make a
market in the Notes, but neither Underwriter is obligated to make such a
market and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the
Notes. Compass Bank will not make a market in the Notes.
The Sellers have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL OPINIONS
The validity of the Certificates will be passed upon for the Sellers by
Jerry W. Powell, General Counsel and Secretary of Compass Bank, and certain
other legal matters will be passed upon for the Trust and the Sellers by Balch
& Bingham LLP, and by Mayer, Brown & Platt. Certain legal matters will be
passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, New York,
New York.
S-51
<PAGE>
GLOSSARY OF TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
ABS.................................................................... S-25
ABS Table.............................................................. S-25
Adjusted Certificate Balance........................................... S-33
Alabama Tax Counsel.................................................... S-10
Applicant.............................................................. S-17
Average Delinquency Ratio.............................................. S-34
Benefit Plan........................................................... S-49
CBI.................................................................... S-19
Cede................................................................... S-2
Certificate Ratio...................................................... S-31
Certificateholders' Interest Carryover Shortfall....................... S-37
Certificateholders' Interest Distributable Amount...................... S-37
Certificateholders' Monthly Interest Distributable Amount.............. S-37
Certificateholders' Monthly Principal Distributable Amount............. S-37
Certificateholders' Percentage......................................... S-33
Certificateholders' Principal Carryover Shortfall...................... S-37
Certificateholders' Principal Distributable Amount..................... S-37
Certificates........................................................... S-1, S-4
Class A-1 Interest Rate................................................ S-5
Class A-1 Noteholders' Interest Carryover Shortfall.................... S-38
Class A-1 Noteholders' Interest Distributable Amount................... S-38
Class A-1 Noteholders' Monthly Interest Distributable Amount........... S-38
Class A-1 Noteholders' Monthly Principal Distributable Amount.......... S-38
Class A-1 Noteholders' Principal Carryover Shortfall................... S-38
Class A-1 Noteholders' Principal Distributable Amount.................. S-38
Class A-1 Notes........................................................ S-1, S-3
Class A-2 Interest Rate................................................ S-5
Class A-2 Noteholders' Interest Carryover Shortfall.................... S-38
Class A-2 Noteholders' Monthly Principal Distributable Amount.......... S-39
Class A-2 Noteholders' Principal Carryover Shortfall................... S-39
Class A-2 Noteholders' Principal Distributable Amount.................. S-39
Class A-2 Noteholders' Interest Distributable Amount................... S-39
Class A-2 Noteholders' Monthly Interest Distributable Amount........... S-39
Class A-2 Notes........................................................ S-1, S-3
Class A-3 Interest Rate................................................ S-5
Class A-3 Noteholders' Interest Carryover Shortfall.................... S-39
Class A-3 Noteholders' Interest Distributable Amount................... S-39
Class A-3 Noteholders' Monthly Interest Distributable Amount........... S-39
Class A-3 Noteholders' Monthly Principal Distributable Amount.......... S-39
Class A-3 Noteholders' Principal Carryover Shortfall................... S-40
Class A-3 Noteholders' Principal Distributable Amount.................. S-40
Class A-3 Notes........................................................ S-1, S-3
Closing Date........................................................... S-4
Code................................................................... S-46
Collected Funds........................................................ S-36
Collection Account..................................................... S-8
Collection Period...................................................... S-7
Company................................................................ S-1
Compass Auto........................................................... S-1
</TABLE>
S-52
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Compass Bank......................................................... S-2
Compass Bank-Texas................................................... S-2
Contract Rate........................................................ S-22
Cumulative Net Loss Ratio............................................ S-35
Cutoff Date.......................................................... S-4
Dealer Agreements.................................................... S-4
Dealer States........................................................ S-16
Dealers.............................................................. S-4
Defaulted Receivable................................................. S-18
Delinquency Ratio.................................................... S-35
Disposition Adjustment Amount........................................ S-40
Distribution Date.................................................... S-2, S-5
DTC.................................................................. S-2, S-4
ERISA................................................................ S-49
Exchange Act......................................................... S-2
FDIA................................................................. S-11, S-44
FDIC................................................................. S-1
Federal Tax Counsel.................................................. S-10
Final Regulations.................................................... S-48
Financed Vehicles.................................................... S-4
First Tier Receivables Purchase Agreement............................ S-2
foreign person....................................................... S-48
FRB.................................................................. S-29
FTC Rule............................................................. S-46
Holders.............................................................. S-5
Indenture............................................................ S-1
Indenture Trustee.................................................... S-1, S-3
Initial Chargeoff Amount............................................. S-40
Insolvency Laws...................................................... S-12
Interest Period...................................................... S-6
Interest Rates....................................................... S-5
IRS.................................................................. S-47
Issuer............................................................... S-3
Liquidation Proceeds................................................. S-36
Motor Vehicle Contracts.............................................. S-4
Net Charge-Offs...................................................... S-21
Noteholders.......................................................... S-5
Noteholders' Interest Distributable Amount........................... S-40
Noteholders' Percentage.............................................. S-30
Noteholders' Principal Distributable Amount.......................... S-40
Noteholders' Distributable Amount.................................... S-40
Notes................................................................ S-1, S-3
OID.................................................................. S-47
OID Regulations...................................................... S-47
Owner Trustee........................................................ S-1, S-3
Parent............................................................... S-12
Pool Balance......................................................... S-7
Principal Distribution Amount........................................ S-40
Pro Rata Notes....................................................... S-32
Prospectus........................................................... S-2
PTCE................................................................. S-50
</TABLE>
S-53
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Rating Agencies...................................................... S-14
Receivables.......................................................... S-2, S-4
Receivables Purchase Agreements...................................... S-2
Record Date.......................................................... S-5
Reserve Account Floor................................................ S-8
Reserve Account Increase Condition................................... S-35
Reserve Account Initial Deposit...................................... S-7
RTC.................................................................. S-12
RTC Policy Statement................................................. S-44
Sale and Servicing Agreement......................................... S-2
Schedule of Receivables.............................................. S-33
Second Tier Receivables Purchase Agreement........................... S-2
Securities........................................................... S-4
Security Agreement................................................... S-11, S-44
Securityholders...................................................... S-5
Seller............................................................... S-3
Seller Placed Notes.................................................. S-50
Sellers.............................................................. S-3
Servicer............................................................. S-3
Short-Term Note...................................................... S-47
Specified Reserve Account Balance.................................... S-8
Supplemental Servicing Fee........................................... S-35
Target Certificate Ratio............................................. S-31
Total Distribution Amount............................................ S-36
Transfer and Servicing Agreements.................................... S-33
Trust................................................................ S-1, S-3
Trust Agreement...................................................... S-1
Trust Property....................................................... S-5
UCC.................................................................. S-41
Underwriters......................................................... S-50
Underwriting Agreement............................................... S-50
Underwritten Notes................................................... S-50
Writeoff Amount...................................................... S-33
</TABLE>
S-54
<PAGE>
PROSPECTUS
CREDIT SUISSE FIRST BOSTON AUTO RECEIVABLES AND
RECEIVABLES SECURITIES TRUSTS
Asset Backed Notes
Asset Backed Certificates
-----------
Asset Backed Securities Corporation
Company
-----------
The Asset Backed Notes (the "Notes") and the Asset Backed Certificates (the
"Certificates" and, collectively with the Notes, the "Securities") described
herein may be sold from time to time in one or more series (each, a "Series"),
in amounts, at prices and on terms to be determined at the time of sale and to
be set forth in a supplement to this Prospectus (a "Prospectus Supplement").
Each Series of Securities will be issued by a trust (each, a "Trust") to be
formed with respect to such Series and may include one or more classes of
Notes and/or one or more classes of Certificates. The property of each Trust
will include assets composed of (a) Primary Assets, which may include (A) (i)
one or more pools of motor vehicle installment loan agreements or motor
vehicle retail installment sale contracts secured by new and used automobiles,
recreational vehicles (including motor homes, van campers and travel
trailers), vans and light duty trucks (the "Receivables"), and security
interests in the vehicles financed thereby or (ii) Collateral Certificates (as
defined herein), (B) Government Securities (as defined herein), and (C)
Private Label Custody Receipt Securities (as defined herein), (b) certain
monies due or received under the terms of the Primary Assets, on or after the
applicable cutoff date, (c) the rights to certain credit and cash flow
enhancement as described herein and (d) a de minimis amount of certain other
property ancillary thereto, in each case as more fully described herein and in
the related Prospectus Supplement. The Primary Assets either will be sold to a
Trust by Asset Backed Securities Corporation, a Delaware corporation (the
"Company"), or the Company will transfer funds to a Trust in exchange for the
Certificates. Such Trust will use such funds to purchase the Primary Assets,
in each case as described in the related Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, each class of
Securities of any Series will represent the right to receive a specified
amount of payments of principal and interest on the related Primary Assets, at
the rates, on the dates and in the manner described herein and in the related
Prospectus Supplement. As more fully described herein and in the related
Prospectus Supplement, distributions on any class of Securities may be senior
or subordinate to distributions on one or more other classes of Securities of
the same Series, and payments on the Certificates of a Series may be
subordinated in priority to payments on the Notes of such Series. If provided
in the related Prospectus Supplement, a Series of Securities may include one
or more classes of Securities entitled to principal distributions with
disproportionate, nominal or no distributions in respect of interest, or to
interest distributions with disproportionate, nominal or no distributions in
respect of principal.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" ON
PAGE 14 OF THIS PROSPECTUS AND IN THE RELATED PROSPECTUS SUPPLEMENT.
THE NOTES OF A SERIES WILL REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES
OF A SERIES WILL REPRESENT BENEFICIAL INTERESTS IN, THE RELATED TRUST
ONLY, AND WILL NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN, AND
ARE NOT GUARANTEED OR INSURED BY, CREDIT SUISSE FIRST BOSTON
CORPORATION, THE COMPANY, ANY OF THEIR RESPECTIVE
AFFILIATES, OR ANY GOVERNMENTAL AGENCY.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE LIMITATIONS DISCUSSED UNDER "ERISA
CONSIDERATIONS" HEREIN AND IN THE PROSPECTUS SUPPLEMENT. THESE SECURITIES
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of Securities of any Series unless accompanied by a
Prospectus Supplement.
CREDIT SUISSE FIRST BOSTON
This date of this Prospectus is June 24, 1998.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to each Class of
such Securities: (i) the interest rate and authorized denominations, as
applicable, of each Class of such Securities; (ii) certain information
concerning the Primary Assets and the related Seller and Servicer, as
applicable; (iii) the terms of any Credit or Cash Flow Enhancement applicable
to any Class or Classes of such Securities; (iv) information concerning any
other assets in the related Trust; (v) the expected date or dates on which the
principal amount, if any, of each Class of such Securities will be paid to
holders of such Securities; (vi) the extent to which any Class within such
Series is subordinated to any other Class of such Series; and (vii) additional
information with respect to the plan of distribution of such Securities.
REPORTS TO SECURITYHOLDERS
With respect to each Series of Securities, the Servicer (as defined in the
related Prospectus Supplement) of the related Primary Assets will prepare for
distribution to the related Securityholders certain monthly and annual reports
concerning such Securities and the related Trust. See "Certain Information
Regarding the Securities--Statements to Securityholders."
AVAILABLE INFORMATION
The Company, as originator of the Trusts, has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities being offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the
rules and regulations of the Commission. In addition, Company is subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith files reports and
other information with the Commission. Such Registration Statement, reports
and other information are available for inspection without charge at the
public reference facilities of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the regional offices of the
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of such information can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an
obligation to deliver a Prospectus Supplement and Prospectus, the Underwriter
will promptly deliver, or cause to be delivered, without charge, to such
investor a paper copy of the Prospectus Supplement and Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Company on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the Securities
offered by such Trust shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the dates of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that
2
<PAGE>
a statement contained herein (or in the accompanying Prospectus Supplement) or
in any subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company on behalf of any Trust will provide without charge to each
person to whom a copy of this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents incorporated
herein by reference, except the exhibits to such documents. Requests for such
copies should be directed to: Secretary, Asset Backed Securities Corporation,
11 Madison Avenue, New York, New York 10010, telephone, (212) 325-2000.
3
<PAGE>
SUMMARY OF TERMS
This Summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and by reference to the
information with respect to each Series of Securities contained in the related
Prospectus Supplement to be prepared and delivered in connection with the
offering of such Securities. Capitalized terms used in this summary are defined
elsewhere in this Prospectus on the pages indicated in the "Index of Terms".
Issuer.................... With respect to any Series of Securities, a trust
(each, a "Trust") formed pursuant to either (i)
either (a) a pooling and servicing agreement (a
"Pooling and Servicing Agreement") among the
Company, the Servicer and the Trustee for such
Trust or (b) a trust agreement (a "Trust
Agreement") between the Company and the Trustee
for such Trust (each such Trust being referred to
herein as a "Grantor Trust") or (ii) a Trust
Agreement between the Company and/or the Seller or
one of its affiliates and the Trustee for such
Trust (each such Trust being referred to herein as
an "Owner Trust").
Company................... The Company is a special purpose Delaware
corporation organized for the purpose of issuing
the Securities and other securities issued under
the Registration Statement backed by receivables
or underlying securities of various types and, if
specified in the related Prospectus Supplement,
acting as settlor or depositor with respect to
trusts, custody accounts or similar arrangements
or as general or limited partner in partnerships
formed to issue securities. It is not expected
that the Company will have any significant assets.
The Company is an indirect, wholly owned
subsidiary of Credit Suisse First Boston, Inc.
Neither Credit Suisse First Boston, Inc. nor any
of its affiliates has guaranteed, will guarantee
or is or will be otherwise obligated with respect
to any Series of Securities.
The Company's principal executive office is located
at 11 Madison Avenue, New York, New York 10010,
and its telephone number is (212) 325-2000.
Trustee................... With respect to each Owner Trust and each Grantor
Trust, the trustee specified in the related
Prospectus Supplement (the "Trustee").
Servicer.................. With respect to each Owner Trust and each Grantor
Trust, the servicer, if any, specified in the
related Prospectus Supplement (the "Servicer").
Indenture Trustee......... With respect to any Series of Securities that is
issued by an Owner Trust and includes one or more
classes of Notes, the indenture trustee specified
in the related Prospectus Supplement (the
"Indenture Trustee").
Securities Offered........ Each Series of Securities issued by an Owner Trust
will include one or more classes of Certificates
and may also include one or more classes of Notes.
Each Series of Securities issued by a Grantor
Trust will include one or more classes of
Certificates, but will not include any Notes. Each
class of Notes will be issued pursuant to an
4
<PAGE>
indenture (each, an "Indenture") between the
related Owner Trust and the Indenture Trustee
specified in the related Prospectus Supplement.
Each class of Certificates will be issued pursuant
to the related Trust Agreement (in the case of
Certificates issued by an Owner Trust) or the
related Pooling and Servicing Agreement or Trust
Agreement (in the case of Certificates issued by a
Grantor Trust). The related Prospectus Supplement
will specify which class or classes of Notes
and/or Certificates of the related Series are
being offered thereby.
The Notes................. As specified in the related Prospectus Supplement,
each class of Notes will have a stated principal
amount or no principal amount and will bear
interest at a specified rate or rates (with
respect to each class of Notes, the "Interest
Rate") or will not bear interest. Each class of
Notes may have a different Interest Rate, which
may be a fixed, variable or adjustable Interest
Rate or any combination of the foregoing. The
related Prospectus Supplement will specify the
Interest Rate, or the method for determining the
Interest Rate, for each class of Notes.
A Series of Securities issued by an Owner Trust may
include two or more classes of Notes that differ
as to timing and priority of payments, seniority,
allocations of losses, Interest Rate or amount of
payments of principal or interest. Additionally,
payments of principal or interest in respect of
any such class or classes may or may not be made
upon the occurrence of specified events or on the
basis of collections from designated portions of
the Primary Assets. If specified in the related
Prospectus Supplement, one or more classes of
Notes ("Strip Notes") may be entitled to (i)
principal payments with disproportionate, nominal
or no interest payments or (ii) interest payments
with disproportionate, nominal or no principal
payments. See "Description of the Notes--
Distributions of Principal and Interest".
Notes will be available for purchase in
denominations of $1,000 or such other minimum
denominations as shall be specified in the related
Prospectus Supplement and integral multiples
thereof and will be available in book-entry form,
or such other form as shall be specified in the
related Prospectus Supplement. If the related
Prospectus Supplement provides that the Notes will
be available in book-entry form only, Noteholders
will be able to receive Definitive Notes only in
the limited circumstances described herein or in
the related Prospectus Supplement. See "Certain
Information Regarding the Securities--Definitive
Securities".
If the Servicer exercises its option to purchase
the Primary Assets of a Trust (or if not and, if
and to the extent provided in the related
Prospectus Supplement, satisfactory bids for the
purchase of such Primary Assets are received), in
the manner and on the respective terms and
conditions described under "Certain Matters
Regarding the Servicer--Termination", the
outstanding Notes will be redeemed as set forth in
the related Prospectus Supplement.
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The Certificates.......... As specified in the related Prospectus Supplement,
each class of Certificates will have a stated
certificate balance (the "Certificate Balance") or
no stated principal balance and will accrue
interest on such Certificate Balance at a
specified rate or will not bear interest (with
respect to each class of Certificates, the
"Certificate Pass-Through Rate"). Each class of
Certificates may have a different Certificate
Pass-Through Rate, which may be a fixed, variable
or adjustable Certificate Pass-Through Rate, or
any combination of the foregoing. The related
Prospectus Supplement will specify the Certificate
Pass-Through Rate, or the method for determining
the applicable Pass-Through Rate, for each class
of Certificates.
A Series of Securities may include two or more
classes of Certificates that differ as to timing
and priority of distributions, seniority,
allocations of losses, Certificate Pass-Through
Rate or amount of distributions in respect of
principal or interest. Additionally, distributions
in respect of principal or interest in respect of
any such class or classes may or may not be made
upon the occurrence of specified events or on the
basis of collections from designated portions of
the related Primary Assets. If specified in the
related Prospectus Supplement, one or more classes
of Certificates ("Strip Certificates") may be
entitled to (i) principal distributions with
disproportionate, nominal or no interest
distributions or (ii) interest distributions with
disproportionate, nominal or no principal
distributions. See "Description of the
Certificates--Distributions of Principal and
Interest". If a Series of Securities issued by an
Owner Trust includes classes of Notes,
distributions in respect of the Certificates will
be subordinated in priority of payment to payments
on the Notes to the extent specified in the
related Prospectus Supplement.
Certificates will be available for purchase in a
minimum denomination of $10,000 or such other
minimum denomination as shall be specified in the
related Prospectus Supplement and in integral
multiples of $1,000 in excess thereof and will be
available in book-entry form or such other form as
shall be specified in the related Prospectus
Supplement. If the related Prospectus Supplement
provides that the Certificates will be available
in book-entry form only, Certificateholders will
be able to receive Definitive Certificates only in
the limited circumstances described herein or in
the related Prospectus Supplement. See "Certain
Information Regarding the Securities--Definitive
Securities".
If the Servicer or the Company exercises its option
to purchase the Primary Assets of a Trust (or if
not and, if and to the extent provided in the
related Prospectus Supplement, satisfactory bids
for the purchase of such Primary Assets are
received), in the manner and on the respective
terms and conditions described under "Certain
Matters Regarding the Servicer--Termination", the
Certificates will be prepaid as set forth in the
related Prospectus Supplement.
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Risk Factors.............. For a discussion of risk factors that should be
considered with respect to an investment in the
Securities, see "Risk Factors" herein and in the
related Prospectus Supplement.
The Trust Property
General................ On or prior to the date of issuance of a Series of
Securities specified in the related Prospectus
Supplement (the "Closing Date"), either (i) the
Company will own and will sell or (ii) the seller
or sellers specified in the related Prospectus
Supplement, which seller or sellers may also be
the Servicer (the "Seller"), will sell either
directly, or indirectly through a special purpose
entity, to the Company and Company will sell, in
each such case, Primary Assets having the
aggregate principal balance specified in such
Prospectus Supplement as of the date specified
therein (the "Cutoff Date") to the Trust being
formed on such date pursuant to either (i) a
Pooling and Servicing Agreement (in the case of a
Grantor Trust) or (ii) a Sale and Servicing
Agreement (in the case of an Owner Trust).
The property of each Trust also will include
amounts on deposit in certain trust accounts,
including the related Collection Account and any
other account identified in the applicable
Prospectus Supplement. See "Description of the
Transfer and Servicing Agreements--Trust
Accounts".
Receivables............ Receivables consist of Motor Vehicle Installment
Contracts secured by new or used automobiles,
recreational vehicles (including motor homes, van
campers and travel trailers), vans or light duty
trucks and the right to receive certain payments
made with respect to such Receivables, security
interests in the vehicles financed thereby (the
"Financed Vehicles"), certain accounts and the
proceeds thereof, and any proceeds from claims
under certain related insurance policies, in each
case as described in the related Prospectus
Supplement.
Receivables arise or will arise, from motor vehicle
installment loan agreements originated by either
the Seller or Sellers specified in the related
Prospectus Supplement (collectively, the "Seller")
or motor vehicle retail installment sale contracts
acquired by the Seller (collectively, the "Motor
Vehicle Installment Contracts"), in each case
secured by new or used automobiles, recreational
vehicles, vans or light duty trucks purchased by
the obligors on such Receivables (each, an
"Obligor") from motor vehicle dealers (the
"Dealers"). The Receivables for any given
Receivables Pool will be selected from the Motor
Vehicle Installment Contracts owned by a Seller
based on the criteria specified in the related
Receivables Purchase Agreement, and described
herein under "The Receivables Pools" and
"Description of the Transfer and Servicing
Agreements--Sale and Assignment of Primary Assets"
and in the related Prospectus Supplement under
"The Receivables Pool".
Collateral The Collateral Certificates, if any, consist of
Certificates.......... certain asset backed certificates or notes, each
issued pursuant to a pooling and servicing
agreement, sale and servicing agreement, trust
agreement or
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indenture (each, an "Underlying Agreement"). Each
"Collateral Certificate" represents an interest in
a trust fund (an "Underlying Trust Fund") created
pursuant to such Underlying Agreement. The assets
of each Underlying Trust Fund consist primarily of
a pool of motor vehicle installment loan
agreements and motor vehicle retail installment
sale contracts secured by new or used automobiles,
recreational vehicles, vans and light duty trucks,
certain monies due or received thereunder,
security interests in the vehicles financed
thereby, and a de minimis amount of certain other
property ancillary thereto. Holders of a
Collateral Certificate are entitled to receive
distributions of interest and principal in respect
thereof as described herein. The Collateral
Certificates, if any, will be more particularly
described in the related Prospectus Supplement.
Government Securities.. The Government Securities, if any, consist of any
combination of (i) receipts or other instruments
created under the Department of the Treasury's
Separate Trading of Registered Interest and
Principal of Securities, or STRIPS, program
("Treasury Strips"), which interest and/or
principal strips evidence ownership of specific
interest and/or principal payments to be made on
certain United States Treasury Bonds ("Treasury
Bonds"), (ii) Treasury Bonds and (iii) certain
other debt securities ("GSE Bonds") of United
States government sponsored enterprises ("GSEs")
("GSE Bonds"; and together with Treasury Strips
and Treasury Bonds, collectively, "Government
Securities"). The specific terms of the Government
Securities, if any, included in a Trust will be
more particularly described in the related
Prospectus Supplement.
Private Label Custody
Receipt Securities....
The Private Label Custody Receipt Securities, if
any, consist of any combination of (i) receipts or
other instruments (other than Treasury Strips)
evidencing ownership of specific interest and/or
principal payments to be made on certain Treasury
Bonds held by a custodian ("Private Label Custody
Strips") and (ii) receipts or other instruments
evidencing ownership of specific interest and/or
principal payments to be made on certain
Resolution Funding Corporation ("REFCO") bonds
("REFCO Strips"; and, together with Private Label
Custody Strips, "Private Label Custody Receipt
Securities"). The specific terms of the Private
Label Custody Receipt Securities, if any, included
in a Trust will be set forth in the applicable
Prospectus Supplement.
Pre-Funding............ If so specified in the related Prospectus
Supplement, a portion of the issuance proceeds of
the Securities of a particular Series (such
amount, the "Pre-Funded Amount") will be deposited
in an account (the "Pre-Funding Account") to be
established with the Trustee, which will be used
to acquire additional Receivables from time to
time during the period specified in the related
Prospectus Supplement (the "Pre-Funding Period").
Prior to the investment of the Pre-Funded Amount
in additional Receivables, such Pre-Funded Amount
may be invested in one or more Eligible
Investments. Any
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<PAGE>
Eligible Investment must mature no later than the
Business Day prior to the next Distribution Date.
See "Description of the Transfer and Servicing
Agreements--Pre-Funding".
During any Pre-Funding Period, the Seller or such
other party specified in the related Prospectus
Supplement will be obligated (subject only to the
availability thereof) to transfer to the related
Trust Fund additional Receivables from time to
time during such Pre-Funding Period. Such
additional Receivables will be required to satisfy
certain eligibility criteria more fully set forth
in the related Prospectus Supplement, which
eligibility criteria will be consistent with the
eligibility criteria of the Receivables included
in the Trust Fund as of the Closing Date, subject
to such exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-Funding
Account with respect to any issuance of Securities
will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-
Funding Period will not exceed 90 days from the
related Closing Date; (b) the additional
Receivables to be acquired during the Pre-Funding
Period will be subject to the same representations
and warranties as the Receivables included in the
related Trust Fund on the Closing Date (although
additional criteria may also be required to be
satisfied, as described in the related Prospectus
Supplement); and (c) that the Pre-Funded Amount
will not exceed 25% of the principal amount of the
Securities issued pursuant to a particular
offering.
Credit and Cash Flow
Enhancement...........
If and to the extent specified in the related
Prospectus Supplement, credit enhancement with
respect to a Trust or any class or classes of
Securities may include any one or more of the
following: subordination of one or more other
classes of Securities of the same Series, reserve
funds, spread accounts, yield supplement accounts,
surety bonds, insurance policies, letters of
credit, credit or liquidity facilities, cash
collateral accounts, over-collateralization,
guaranteed investment contracts, swaps or other
interest rate protection agreements, repurchase
obligations, other agreements with respect to
third party payments or other support, cash
deposits, or other arrangements that are
incidental to or related to the Primary Assets
included in a Trust. To the extent specified in
the related Prospectus Supplement, a form of
credit enhancement with respect to a Trust or
class or classes of Securities will be subject to
certain limitations and exclusions from coverage
thereunder.
Transfer and Servicing The Primary Assets either will be sold to the Trust
Agreements............... by the Company or the Company will transfer funds
to the Trust which will purchase the related
Receivables, if any, Collateral Certificates, if
any, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, with
such funds. If the Primary Assets are sold to the
Trust by the Company, the Seller will sell the
related Receivables, if any, to the Company
pursuant to a Receivables Purchase Agreement. The
Company will (i) sell or transfer such
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<PAGE>
Receivables, if any, and will assign certain
rights and benefits received under such
Receivables Purchase Agreement, (ii) sell or
transfer the related Collateral Certificates, if
any, (iii) sell or transfer the related Government
Securities, if any, and (iv) sell or transfer the
related Private Label Custody Receipt Securities,
if any, in any case to a Trust pursuant to a Sale
and Servicing Agreement or a Pooling and Servicing
Agreement, as applicable. The rights and benefits
of an Owner Trust under any such agreement will be
assigned to the related Indenture Trustee as
collateral for the Notes, if any of the related
Series.
A Servicer will agree with a Trust pursuant to the
related Pooling and Servicing Agreement (in the
case of a Grantor Trust) or pursuant to a sale and
servicing agreement (a "Sale and Servicing
Agreement") (in the case of an Owner Trust) to be
responsible for servicing, managing, maintaining
custody of and making collections on Receivables.
To the extent provided in the related Prospectus
Supplement, the Servicer may advance scheduled
payments under each Precomputed Receivable that
are not timely made (a "Precomputed Advance") to
the extent that the Servicer, in its sole
discretion, expects to recoup the Precomputed
Advance from subsequent payments on or with
respect to such Receivable or from other
Precomputed Receivables in accordance with the
terms of the related Pooling and Servicing
Agreement or Sale and Servicing Agreement, as
applicable. In addition, with respect to Simple
Interest Receivables, the Servicer may advance any
interest shortfall (a "Simple Interest Advance").
As used herein, "Advance" means any Precomputed
Advance or Simple Interest Advance. The Servicer
will be entitled to reimbursement of Advances from
subsequent payments on or with respect to the
Receivables to the extent described in the related
Prospectus Supplement.
To the extent provided in the related Prospectus
Supplement, the Seller will be obligated to
repurchase any Receivable in which the interest of
the applicable Trust is material and adversely
affected as a result of a breach of any
representation or warranty made by the Seller in
the related Receivables Purchase Agreement if such
breach is not cured in a timely manner following
the discovery by or notice to the Seller thereof.
To the extent specified in the related Prospectus
Supplement, the Servicer will be obligated under
the Receivables Purchase Agreement to purchase or
make Advances with respect to any Receivable if,
among other things, it extends the date for final
payment by the Obligor thereon beyond the final
scheduled maturity date for the related
Receivables Pool specified in the related
Prospectus Supplement (the "Final Scheduled
Maturity Date"), changes the annual percentage
rate (the "APR") or the amount of the scheduled
monthly payments on such Receivable or fails to
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maintain a perfected security interest in the
Financed Vehicle related to such Receivable.
As specified in the related Prospectus Supplement,
the Servicer will receive a fee for servicing the
Receivables of each Trust equal to the percentage
specified in the related Prospectus Supplement of
the aggregate outstanding principal balance of the
related Receivables Pool, plus certain late fees,
prepayment charges and other administrative fees
or similar charges. See "Description of the
Transfer and Servicing Agreements--Servicing
Compensation and Payment of Expenses" herein.
Certain Legal Aspects of
Receivables; Repurchase
Obligations..............
To the extent specified in the related Prospectus
Supplement, the Seller will be obligated to
repurchase any Receivable sold to a Trust as to
which a first perfected security interest in the
name of the Seller in the Financed Vehicle
securing such Receivable does not exist as of the
date such Receivable is purchased by such Trust,
if such breach materially adversely affects the
interest of such Trust in such Receivable and if
such failure or breach is not cured by the Seller
by the grace period specified in the related
Prospectus Supplement.
In connection with the sale of Receivables to a
Trust, security interests in the Financed Vehicles
securing such Receivables will be assigned by the
Seller to such Trust. Due to administrative burden
and expense, however, the certificates of title to
such Financed Vehicles will not be amended to
reflect such assignment to the Trust. In the
absence of such an amendment, the Trust may not
have a perfected security interest in the Financed
Vehicles securing the Receivables in some states.
If a Trust does not have a perfected security
interest in a Financed Vehicle, its ability to
realize on such Financed Vehicle in the event of a
default may be adversely affected.
To the extent the security interest is perfected,
such Trust will have a prior claim over subsequent
purchasers of such Financed Vehicle and holders of
subsequently perfected security interests.
However, as against liens for repairs of Financed
Vehicles or for taxes unpaid by the related
Obligor, or through fraud or negligence, a Trust
could lose its security interest, or the priority
of its security interest, in a Financed Vehicle.
Neither the Seller nor the Servicer will be
obligated to repurchase a Receivable with respect
to which a Trust loses its security interest or
the priority of its security interest in the
related Financed Vehicle for any such cause after
the Closing Date.
Federal and state consumer protection laws impose
requirements on creditors in connection with
extensions of credit and collections of retail
installment loans, and certain of these laws make
an assignee of such a loan liable to the obligor
thereon for any violation by the lender. To the
extent specified in the related Prospectus
Supplement, the Seller will be obligated to
repurchase any Receivable that fails to comply
with such requirements. See "Certain Legal Aspects
of the Receivables".
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Tax Consequences.......... If a Prospectus Supplement specifies that the
related Trust will be an Owner Trust, upon the
issuance of the related Series of Securities,
Federal Tax Counsel will deliver an opinion to the
effect that, for federal income tax purposes: (i)
any Notes of such Series, when issued, will be
characterized as debt and (ii) such Trust will not
be characterized as an association or a publicly
traded partnership taxable as a corporation. In
respect of any such Series, each holder of a Note
(each, a "Noteholder"), by the acceptance of a
Note of such Series, will agree to treat such Note
as indebtedness, and each holder of a Certificate
(each, a "Certificateholder"), by the acceptance
of a Certificate of such Series, will agree to
treat such Trust as a partnership in which such
Certificateholder is a partner for federal income
tax purposes or, if there is only one
Certificateholder, to treat itself as the owner of
the assets of the Trust and to treat such Trust as
a disregarded entity for federal income tax
purposes.
If a Prospectus Supplement specifies that the
related Trust will be a Grantor Trust, upon the
issuance of the related Series of Certificates
Federal Tax Counsel to such Trust will deliver an
opinion to the effect that such Trust will be
treated as a grantor trust for federal income tax
purposes and will not be subject to federal income
tax.
See "Material Federal Income Tax Consequences" and
"State and Local Tax Considerations" for
additional information regarding the application
of tax laws.
ERISA Considerations...... Subject to the considerations discussed under
"ERISA Considerations" herein and in the related
Prospectus Supplement and if so specified in the
related Prospectus Supplement (i) the Notes of any
Series issued by an Owner Trust and (ii) any
Certificates issued by a Grantor Trust that are
not subordinated to any other Security and that
meet certain other requirements may be eligible
for purchase by employee benefit plans.
As specified in the related Prospectus Supplement,
the Certificates of any Series that are
subordinated to any other Security of that Series
may not be acquired by any "employee benefit plan"
as defined in and subject to the Employee
Retirement Income Security Act of 1974, as
amended, or by any "plan" as defined in Section
4975 of the Code. See "ERISA Considerations"
herein and in the related Prospectus Supplement.
Persons investing assets of employee benefit plans
subject to the Employee Retirement Income Security
Act of 1974, as amended, or of plans as defined in
Section 4975 of the Code should read "ERISA
Considerations" herein and consult their own legal
advisors to determine whether and to what extent
the Notes and Certificates that are not
subordinated to any other Certificates constitute
permissible investments for such employee benefit
plans and whether the purchase or holding of Notes
or Certificates could give rise to transactions
prohibited under ERISA or Section 4975 of the
Code.
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Legal Investment.......... Investors whose investment authority is subject to
legal restrictions should consult their own legal
advisors to determine whether and to what extent
the Certificates or Notes constitute legal
investments for them.
Ratings................... It is a condition to the issuance of the Securities
to be offered hereunder that they be rated in one
of the four highest rating categories by at least
one nationally recognized statistical rating
organization. A rating is not a recommendation to
purchase, hold or sell Securities inasmuch as such
rating does not comment as to market price or
suitability for a particular investor. Ratings of
Securities will address the likelihood of the
payment of principal and interest thereon pursuant
to their terms. There can be no assurance that a
rating will remain for a given period of time or
that a rating will not be lowered or withdrawn
entirely by a rating agency if in its judgment
circumstances in the future so warrant. For more
detailed information regarding the ratings
assigned to any class of a particular Series of
Securities, see "Summary of Terms--Ratings of the
Notes" and "Risk Factors--Ratings of the Notes" in
the related Prospectus Supplement.
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RISK FACTORS
In addition to the other information contained in this Prospectus and in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of any Series of Securities, prospective investors should
carefully consider the following risk factors before investing in any class or
classes of Securities of any such Series.
Certain Legal Aspects--Lack of Security Interests in Financed Vehicles.
Security interests in the Financed Vehicles securing Receivables will be
assigned to the related Trust. Due to administrative burden and expense,
however, the certificates of title to the Financed Vehicles will not be
amended to reflect such assignment to the Trust unless otherwise specified in
the Prospectus Supplement. In the absence of such amendments, a Trust may not
have a perfected security interest in the Financed Vehicles securing the
Receivables in some states.
If a Trust does not have a perfected security interest in a Financed
Vehicle, its ability to realize in the event of a default on such Financed
Vehicle may be adversely affected. To the extent the security interest is
perfected, the Trust will have a prior claim over subsequent purchasers of
such Financed Vehicle and holders of subsequently perfected security
interests. However, such Trust could lose its security interest or the
priority of its security interest as against liens for repairs to Financed
Vehicles or for taxes unpaid by an Obligor under a Receivable or through fraud
or negligence. Should the Trust lose its security interest or the priority of
its security interest as against liens for repairs to Financed Vehicles or for
taxes unpaid by an Obligor under a Receivable or through fraud or negligence,
then neither the Seller nor the Servicer will have any obligation to
repurchase such Receivable. See "Certain Legal Aspects of the Receivables--
Security Interests in Financed Vehicles".
To the extent provided in the related Prospectus Supplement, the Seller will
be obligated to repurchase any Receivable sold to a Trust as to which a
perfected security interest in the name of the Seller in the Financed Vehicle
securing such Receivable does not exist as of the date such Receivable is
transferred to such Trust, if such breach materially adversely affects the
interest of the Trust in such Receivable and if such failure or breach is not
timely cured following discovery by or notice thereof to the Seller.
Certain Legal Aspects--Consumer Protection Laws. Federal and state consumer
protection laws impose requirements on creditors in connection with extensions
of credit and collections of retail installment obligations, and certain of
these laws make an assignee of such a loan (such as a Trust) liable to the
obligor thereon for any violation by the lender. To the extent specified
herein and in the related Prospectus Supplement, the Seller will be obligated
to repurchase any Receivable that fails to comply with such requirements. See
"Certain Legal Aspects of the Receivables--Consumer Protection Laws".
Certain Legal Aspects--Insolvency Considerations and the Characterization of
the Transfer of Receivables. Each Seller and the Company intend that the
transfer of the Receivables by it under the applicable Transfer and Servicing
Agreement constitute a sale. Notwithstanding the foregoing, if such Seller is
not a bank and such Seller were to become a debtor in a bankruptcy case, a
court could take the position that the sale of Receivables to the Company or
the Trust, as applicable, should be treated as a pledge of such Receivables to
secure a borrowing by such Seller or the Company, as applicable. If the
transfer to the Company or the Trust were to be characterized as a secured
loan, to the extent that the Seller or the Company, as applicable, would be
deemed to have granted a security interest in the Receivables to the Trust,
and that interest had been validly perfected before the Seller's or Company's
insolvency, as applicable, and had not been taken in contemplation of
insolvency, that security interest should not be subject to avoidance, and
payments to be with respect to the Receivables should not be subject to
recovery by a receiver of the Seller or the Company, as applicable. However,
in such a case, delays in payments on the Notes and the Certificates and
possible reductions in the amount of those payments could occur. The risks
related to a Seller that is a bank will be discussed in the related Prospectus
Supplement.
Recent Legal Developments Regarding the Sale of Accounts Receivables. The
U.S. Court of Appeals for the Tenth Circuit in its decision in Octagon Gas
Systems, Inc. v. Rimmer (In re Meridian Reserve, Inc.) (decided
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<PAGE>
May 27, 1993) concluded (noting that its position is in contrast to that taken
by another court) that accounts receivable sold by the debtor prior to the
filing for bankruptcy remain property of the debtor's bankruptcy estate. The
Seller will warrant in each Receivables Purchase Agreement that the sale of
Receivables to the related Trust is a valid sale of such Receivables to such
Trust. For a discussion of certain consequences of characterization of a
transaction as a sale or a pledge, see "--Certain Legal Aspects--Insolvency
Considerations and the Characterization of the Transfer of Receivables" above.
Subordination of Certain Classes of Securities; Limited Assets of a Trust.
To the extent specified in the related Prospectus Supplement, distributions of
interest and principal on one or more classes of Certificates of a Series may
be subordinated in priority of payment to interest and principal due on the
Notes, if any, of such Series or one or more classes of Certificates of such
Series. Moreover, none of the Trusts will have, nor will any such Trust be
permitted or expected to have, any significant assets or sources of funds
other than the Primary Assets and, to the extent provided in the related
Prospectus Supplement, access to funds in the Reserve Account or other form of
credit enhancement. The Notes, if any, of any Series will represent
obligations solely of, and the Certificates of any such Series will represent
interests solely in, the related Trust, and neither the Notes nor the
Certificates of any such Series will represent obligations of or interests in,
or be insured or guaranteed by, the Company, related Seller, Servicer, Trustee
or Indenture Trustee, or any other entity. Consequently, holders of the
Securities of any Series must rely for repayment upon payments on the related
Primary Assets and, if and to the extent available, amounts payable under any
available form of credit enhancement, as specified in the related Prospectus
Supplement.
Maturity and Prepayment Considerations--Receivables. All of the Receivables
are prepayable at any time. When used herein with respect to any Receivable,
the term "prepayment"--includes prepayments in full, partial prepayments
(including those related to rebates of extended warranty contract costs and
insurance premiums) and liquidation due to default, as well as receipts of
proceeds from physical damage, credit life and disability insurance policies
and Repurchase Amounts (as defined herein) with respect to certain other
Receivables repurchased for administrative reasons. The rate of prepayments on
the Receivables may be influenced by a variety of economic, social and other
factors, including the fact that an Obligor generally may not sell or transfer
the Financed Vehicle securing a Receivable without the consent of the Seller.
The rate of prepayment on the Receivables may also be influenced by the
structure of the underlying loans. See "Weighted Average Life of the
Securities". In addition, pursuant to each Receivables Purchase Agreement, the
Seller will be obligated to repurchase Receivables in respect of which it is
in breach of certain representations, warranties or covenants. See
"Description of the Transfer and Servicing Agreements--Sale and Assignment of
Primary Assets". Any reinvestment risks resulting from a faster or slower
incidence of prepayment of Receivables held by a Trust will be borne entirely
by the Holders of the related Series of Securities. See also "Certain Matters
Regarding the Servicer--Termination" regarding the Servicer's option to
purchase the Receivables of a given Receivables Pool.
Maturity and Prepayment Considerations--Collateral Certificates, Government
Securities and Private Label Custody Receipt Securities. The rate of payment
of principal of Securities, and the aggregate amount of each distribution on
and the yield to maturity of all Securities will depend on a number of
factors, including the performance of (i) the Collateral Certificates, if any,
and the rate of payment of principal (including prepayments) thereof, (ii) the
Government Securities, if any, and the rate of payment of principal thereof
and (iii) the Private Label Custody Receipt Securities, if any, and the rate
of payment of principal thereof. Each of the Collateral Certificates is
subject to prepayment, which may result from the occurrence of the events
described herein and in the prospectus used in connection with the offering of
such Collateral Certificates.
The rate of payment of principal of the Securities may also be affected by
the repurchase of the underlying receivables, and the corresponding retirement
of the Collateral Certificates. In such event, the amount paid in respect of
the Collateral Certificates held by the Trust would be treated as prepayment
of principal and accrued interest of the Collateral Certificates and thus
would be passed through to the Securityholders.
Risk of Commingling. With respect to each Trust the assets of which consist
of Receivables, the Servicer will deposit all payments on the related Primary
Assets (from whatever source) and all proceeds of such Primary
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Assets collected during the period specified in the related Prospectus
Supplement (a "Collection Period") into the related Collection Account within
two business days of receipt thereof. However, if a Servicer satisfies certain
requirements for monthly or less frequent remittances and the Rating Agencies
(as such term is defined in the related Prospectus Supplement) affirm their
initial rating of the related Securities, then for so long as such Servicer is
the Servicer and provided that (i) no Servicer Default exists and (ii) each
other condition to making monthly or less frequent deposits as may be
specified by the Rating Agencies and described in the related Prospectus
Supplement is satisfied, the Servicer will not be required to deposit such
amounts into the Collection Account of such Trust until the business day
preceding each Distribution Date. The Servicer will deposit the aggregate
Repurchase Amount for Receivables purchased by the Servicer during the related
Collection Period into the applicable Collection Account on or before the
business day preceding each Distribution Date. Pending deposit into such
Collection Account, collections may be invested by the Servicer at its own
risk and for its own benefit and will not be segregated from funds of the
Servicer. If the Servicer were unable to remit such funds, the applicable
Securityholders might incur a loss. To the extent set forth in the related
Prospectus Supplement, the Servicer may, in order to satisfy the requirements
described above, obtain a letter of credit or other security for the benefit
of the related Trust to secure timely remittances of collections on the
related Primary Assets or payment of the aggregate Repurchase Amount with
respect to Receivables purchased by the Servicer.
Removal of a Servicer After a Servicer Default. The related Prospectus
Supplement may provide that with respect to a Series of Securities issued by
an Owner Trust, upon the occurrence of a Servicer Default, the related
Indenture Trustee or Noteholders may remove the Servicer without the consent
of the related Trustee or any Certificateholders. The Trustee or the
Certificateholders with respect to such Series may not have the ability to
remove the Servicer if a Servicer Default occurs. In addition, the Noteholders
with respect to such Series have the ability, with certain specified
exceptions, to waive defaults by the Servicer, including defaults that could
materially adversely affect the Certificateholders of such Series. See
"Certain Matters Regarding the Servicer--Waiver of Past Defaults".
Limitation on Exercise of Rights due to Book-Entry Registration. The related
Prospectus Supplement may specify that one or more classes of the Securities
of a given Series initially will be represented by one or more certificates
registered in the name of Cede & Co. ("Cede"), or any other nominee of The
Depository Trust Company ("DTC") set forth in the related Prospectus
Supplement, and will not be registered in the names of the holders of the
Securities of such Series or their nominees. Because of this, unless and until
Definitive Securities for such Series are issued, holders of such Securities
will not be recognized by the applicable Trustee or Indenture Trustee as
"Certificateholders", "Noteholders" or "Securityholders", as the case may be
(as such terms are used herein or in the related Pooling and Servicing
Agreement or the related Sale and Servicing Agreement, Indenture and Trust
Agreement, as applicable). Hence, until Definitive Securities are issued,
holders of such Securities will be able to exercise the rights of
Securityholders only indirectly through DTC and its participating
organizations. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities".
THE TRUSTS
With respect to each Series of Securities, the Company and/or the Seller or
one of its affiliates will establish a separate Trust pursuant to a Trust
Agreement or Pooling and Servicing Agreement, as applicable, for the
transactions described herein and in the related Prospectus Supplement. The
property of each Trust will include Primary Assets and all payments due
thereunder on and after the applicable Cutoff Date in the case of Precomputed
Receivables and all payments received thereunder on and after the applicable
Cutoff Date or Closing Date, as specified in the related Prospectus
Supplement, in the case of Simple Interest Receivables, Collateral
Certificates, Government Securities and Private Label Custody Receipt
Securities. On the applicable Closing Date, after the issuance of the Notes
and/or Certificates of a given Series, the Company will transfer or sell
Primary Assets to the Trust in the outstanding principal amount specified in
the related Prospectus Supplement. The property of each Trust may also
include: (i) such amounts as from time to time may be held in separate trust
accounts established and maintained pursuant to the related Trust Agreement,
Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, and the proceeds of such accounts, as described
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herein and in the related Prospectus Supplement; (ii) security interests in
Financed Vehicles and any other interest of a Seller in such Financed
Vehicles; (iii) the rights to proceed from claims on certain physical damage,
credit life and disability insurance policies covering Financed Vehicles or
the Obligors, as the case may be; (iv) any property that has secured a
Receivable and that has been acquired by the applicable Trust; and (v) any and
all proceeds of the Primary Assets or the foregoing. To the extent specified
in the related Prospectus Supplement, a Reserve Account or other form of
credit enhancement may be a part of the property of a given Trust or may be
held by the Trustee for the benefit of holders of the related Securities.
The Servicer specified in the related Prospectus Supplement, as servicer
under the Pooling and Servicing Agreement or Sale and Servicing Agreement, as
applicable, will service the Receivables held by each Trust and will receive
fees for such services. See "Description of the Transfer and Servicing
Agreements--Servicing Compensation and Payment of Expenses" herein and
"Description of the Transfer and Sale and Servicing Agreement--Servicing
Compensation" in the related Prospectus Supplement. To facilitate the
servicing of Receivables, each Seller and each Trustee will authorize the
Servicer to retain physical possession of the Receivables held by each Trust
and other documents relating thereto as custodian for each such Trust. Due to
the administrative burden and expense, the certificates of title to the
Financed Vehicles will not be amended to reflect the sale and assignment of
the security interest in the Financed Vehicles to a Trust. In the absence of
such an amendment, a Trust may not have a perfected security interest in
certain of the Financed Vehicles in some states. See "Certain Legal Aspects of
the Receivables" and "Description of the Transfer and Servicing Agreements--
Sale and Assignment of Primary Assets". In the case of Primary Assets
consisting of Collateral Certificates, Government Securities and/or Private
Label Custody Receipt Securities, the Trustee specified in the related
Prospectus Supplement will manage such Collateral Certificates, Government
Securities and/or Private Label Custody Receipt Securities.
If the protection provided to (i) holders of Notes issued by an Owner Trust
by the subordination of the related Certificates and by the Reserve Account,
if any, or any other available form of credit enhancement for such Series or
(ii) Certificateholders by any such Reserve Account or other form of credit
enhancement is insufficient, such Noteholders or Certificateholders, as the
case may be, will have to look to payments by or on behalf of Obligors on
Receivables or on the Collateral Certificates, the Government Securities, and
the Private Label Custody Receipt Securities, as applicable, and the proceeds
from the repossession and sale of Financed Vehicles that secure defaulted
Receivables for distributions of principal and interest on the Securities. In
such event, certain factors, such as the applicable Trust's not having
perfected security interests in all of the Financed Vehicles, may limit the
ability of a Trust to realize on the collateral securing the related Primary
Assets, or may limit the amount realized to less than the amount due under
Motor Vehicle Installment Contracts. Securityholders may be subject to delays
in payment on, or may incur losses on their investment in, such Securities as
a result of defaults or delinquencies by Obligors and depreciation in the
value of the related Financed Vehicles. See "Description of the Transfer and
Servicing Agreements--Credit and Cash Flow Enhancement" and "Certain Legal
Aspects of the Receivables".
The principal offices of each Trust and the related Trustee will be
specified in the applicable Prospectus Supplement.
THE TRUSTEE
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale
of the related Securities is limited solely to the express obligations of such
Trustee set forth in the related Trust Agreement and Sale and Servicing
Agreement or the related Pooling and Servicing Agreement, as applicable. A
Trustee may resign at any time, in which event the Servicer will be obligated
to appoint a successor trustee. The Servicer may also remove the related
Trustee if such Trustee ceases to be eligible to continue as Trustee under the
related Trust Agreement or Pooling and Servicing Agreement, as applicable, and
will be obligated to appoint a successor trustee. Any resignation or removal
of a Trustee and appointment of a successor trustee will not become effective
until the acceptance of the appointment by the successor trustee.
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THE RECEIVABLES POOLS
GENERAL
The Receivables in a Receivables Pool have been or will be originated or
acquired by a Seller in the ordinary course of business, in accordance with
its credit and underwriting standards as described in the related Prospectus
Supplement.
The Receivables to be sold to each Trust will be selected from a Seller's
portfolio for inclusion in a Receivables Pool based on several criteria, which
criteria include that (subject to certain limitations which, if applicable,
will be specified in the related Prospectus Supplement) each Receivable (i) is
secured by a new or used vehicle, (ii) was originated or acquired (either from
a motor vehicle dealer or a financial institution) by the Seller, (iii)
provides for level monthly payments (except for the last payment, which may be
different from the level payments) that, unless otherwise provided in the
related Prospectus Supplement, amortize the amount financed over the original
term to maturity of the related Motor Vehicle Installment Contract, (iv) is a
Precomputed Receivable or a Simple Interest Receivable and (v) satisfies the
other criteria, if any, set forth in the related Prospectus Supplement. No
selection procedures believed by the Seller to be adverse to Securityholders
were or will be used in selecting the Receivables.
"Precomputed Receivables" consist of either (i) monthly actuarial
receivables ("Actuarial Receivables") or (ii) receivables that provide for
allocation of payments according to the "sum of periodic balances" or "sum of
monthly payments" method, similar to the "Rule of 78s" ("Rule of 78s
Receivables"). An Actuarial Receivable provides for amortization of the loan
over a series of fixed level monthly installment payments. Each monthly
installment, including the monthly installment representing the final payment
on the Receivable, consists of (x) an amount of interest equal to 1/12 of the
stated contract interest rate under the related Motor Vehicle Installment
Contract multiplied by the unpaid principal balance of such loan, plus (y) an
amount allocable to principal equal to the remainder of the monthly payment. A
Rule of 78s Receivable provides for the payment by the obligor of a specified
total amount of payments, payable in equal monthly installments on each due
date, which total represents the principal amount financed plus add-on
interest in an amount calculated at the stated contract interest rate under
the related Motor Vehicle Installment Contract for the term of the receivable.
The rate at which such amount of add-on interest is earned and,
correspondingly, the amount of each fixed monthly payment allocated to
reduction of the outstanding principal amount are calculated in accordance
with the Rule of 78s.
"Simple Interest Receivables" are receivables that provide for the
amortization of the amount financed thereunder over a series of fixed level
monthly payments. However, unlike the monthly payment under an Actuarial
Receivable, each monthly payment consists of an installment of interest that
is calculated on the basis of the outstanding principal balance of the
receivable multiplied by the stated contract interest rate under the related
Motor Vehicle Installment Contract and further multiplied by the period
elapsed (as a fraction of a calendar year) since the preceding payment of
interest was made. As payments are received under a Simple Interest
Receivable, the amount received generally is applied first to interest accrued
to the date of payment and the balance is applied to reduce the unpaid
principal balance. Accordingly, if an obligor pays a fixed monthly installment
before its scheduled due date, the portion of the payment allocable to
interest for the period since the preceding payment was made will be less than
it would have been had the payment been made as scheduled, and the portion of
the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if an obligor pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be
greater than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly less. In either case, the obligor is obligated to pay a
fixed monthly installment until the final scheduled payment date, at which
time the amount of the final installment may be increased or decreased as
necessary to repay the then outstanding principal balance.
In the event of the prepayment in full (voluntarily or by acceleration) of a
Rule of 78s Receivable, under the terms of the contract a "refund" or "rebate"
will be made to the Obligor of the portion of the total amount
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of payments then due and payable allocable to "unearned" add-on interest,
calculated in accordance with a method equivalent to the Rule of 78s. If an
Actuarial Receivable is prepaid in full, with minor variations based upon
state law, the Actuarial Receivable requires that the rebate be calculated on
the basis of a constant interest rate. If a Simple Interest Receivable is
prepaid, rather than receive a rebate, the obligor is required to pay interest
only to the date of prepayment. The amount of a rebate under a Rule of 78s
Receivable generally will be less than the amount of a rebate on an Actuarial
Receivable and generally will be less than the remaining scheduled payments of
interest that would have been due under a Simple Interest Receivable for which
all payments were made on schedule.
To the extent provided in the related Prospectus Supplement, each Trust will
account for the Rule of 78s Receivables as if such Receivables were Actuarial
Receivables. Amounts received upon prepayment in full of a Rule of 78s
Receivable in excess of the then outstanding principal balance of such
Receivable and accrued interest thereon (calculated pursuant to the actuarial
method) will not be paid to Noteholders or passed through to
Certificateholders of the applicable Series, but will be paid to the Servicer
as additional servicing compensation.
Information with respect to each Receivables Pool will be set forth in the
related Prospectus Supplement, including, to the extent appropriate, the
composition and distribution by APR and by states of origination of the
Receivables, the portion of such Receivables Pool consisting of Precomputed
Receivables and of Simple Interest Receivables, and the portion of such
Receivables Pool secured by new vehicles and by used vehicles.
DELINQUENCIES, REPOSSESSIONS AND NET LOSSES
Certain information concerning the experience of a Seller pertaining to
delinquencies, repossessions and net losses with respect to Motor Vehicle
Installment Contracts will be set forth in each Prospectus Supplement. There
can be no assurance that the delinquency, repossession and net loss experience
on any Receivables Pool will be comparable to prior experience or to such
information.
NEW AND USED FINANCED VEHICLES
The extension of credit to an Obligor on a Receivable is based on an
assessment of an applicant's ability to repay the amounts due on such
Receivable and the adequacy of the related Financed Vehicle. Such assessment
generally does not distinguish between new or used vehicles. Rather, the
amount advanced under a motor vehicle loan generally will not exceed 100% of
the value of the collateral unless otherwise specified in the related
Prospectus Supplement. For new motor vehicles, the value equals the dealer
invoice for the motor vehicle that serves as collateral, plus sales tax,
license fee, title fee, the cost of service and warranty contracts, and any
premium for credit life and disability insurance obtained in connection with
the loan. For used motor vehicles, the value equals the wholesale price
reported in the most recent edition of the National Automotive Dealers
Association Used Car Guide, the National Auto Research Division Black Book or
such other industry guide as specified in the related Prospectus Supplement,
plus sales tax, license fee, title fee, the cost of service and warranty
contracts, and any premium for credit life and disability insurance obtained
in connection with the loan. The maximum age of any used motor vehicle
acceptable as collateral generally is ten model years. Additional information
with respect to delinquencies, repossessions and net losses with respect to
Motor Vehicle Installment Contracts secured by new or used Financed Vehicles
will be set forth in each Prospectus Supplement.
THE COLLATERAL CERTIFICATES
GENERAL
Primary Assets for a Series may consist, in whole or in part, of Collateral
Certificates, which include certificates evidencing an undivided interest in,
or notes or loans secured by, motor vehicle installment loan agreements and
motor vehicle retail installment sale contracts. Such Collateral Certificates
will have previously been offered and distributed to the public pursuant to an
effective registration statement or are being registered
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under the Securities Act in connection with the offering of a Series of
Securities (which offering, distribution and registration may have been
undertaken, or may be undertaken, by the Company and/or one or more affiliates
of the Company), in each case, subject to certain exceptions which, if
applicable, will be described in the related Prospectus Supplement. Collateral
Certificates will have been issued pursuant to a pooling and servicing
agreement, a sale and servicing agreement, a trust agreement, an indenture or
similar agreement (an "Underlying Trust Agreement"). The servicer (the
"Underlying Servicer") of such underlying motor vehicle installment loans or
sale contracts will have entered into the Underlying Trust Agreement with a
trustee (the "Underlying Trustee").
The issuer of the Collateral Certificates (the "Underlying Issuer") will be
(i) a financial institution, corporation or other entity engaged generally in
the business of purchasing or originating motor vehicle installment loan
agreements and motor vehicle retail installment sale contracts, or (ii) a
limited purpose corporation organized for the purpose of, among other things,
establishing trusts, acquiring and selling receivables to such trusts and
selling beneficial interests in such trusts, or (iii) one of such trusts. If
so specified in the related Prospectus Supplement, the Underlying Issuer may
be the Company and/or one or more affiliates of the Company. The obligations
of the Underlying Issuer will generally be limited to certain representations
and warranties with respect to the assets conveyed by it to the related trust.
The related Prospectus Supplement will (subject to certain exceptions which,
if applicable, will be described in the related Prospectus Supplement) provide
that the Underlying Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Collateral Certificates issued under the
Underlying Trust Agreement.
Distributions of principal and interest will be made on the Collateral
Certificates on the dates specified in the related Prospectus Supplement. The
Collateral Certificates may be entitled to receive nominal or no principal
distribution or nominal or no interest distributions. Principal and interest
distributions will be made on the Collateral Certificates by the Underlying
Trustee or the Underlying Servicer. The Underlying Issuer or the Underlying
Servicer may have the right to repurchase assets underlying the Collateral
Certificates after a certain date or under other circumstances specified in
the related Prospectus Supplement.
ENHANCEMENT RELATING TO COLLATERAL CERTIFICATES
Enhancement in the form of reserve funds, subordination of other Securities
issued in connection with the Collateral Certificates, guarantees, letters of
credit, cash collateral accounts, insurance policies or other types of
enhancement may be provided with respect to the Receivables underlying the
Collateral Certificates or with respect to the Collateral Certificates
themselves. The type, characteristics and amount of enhancement will be a
function of certain characteristics of the Receivables and other factors and
will have been established for the Collateral Certificates on the basis of
requirements of rating agencies.
ADDITIONAL INFORMATION
The related Prospectus Supplement for a Series for which the Primary Assets
include Collateral Certificates will specify, to the extent relevant and to
the extent such information is reasonably available to the Company and the
Company reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Collateral Certificates to be
included in the Primary Assets; (ii) certain characteristics of the
receivables which comprise the underlying assets for the Collateral
Certificates; (iii) the expected and final maturity of the Collateral
Certificates; (iv) the interest rate of the Collateral Certificates; (v) the
Underlying Issuer, the Underlying Servicer (if other than the Underlying
Issuer) and the Underlying Trustee for such Collateral Certificates; (vi)
certain characteristics of the enhancement, if any, such as reserve funds,
insurance funds, insurance policies, letters of credit or guarantees relating
to the receivables underlying the Collateral Certificates or to such
Collateral Certificates themselves; (vii) the terms on which the underlying
receivables for such Collateral Certificates may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the
Collateral Certificates; and (viii) the terms on which receivables may be
substituted for those originally underlying the Collateral Certificates.
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THE GOVERNMENT SECURITIES
GENERAL
Primary Assets for a Series may include any combination of (i) receipts or
other instruments created under the Department of the Treasury's Separate
Trading of Registered Interest and Principal of Securities, or STRIPS, program
("Treasury Strips"), which interest and/or principal strips evidence ownership
of specific interest and/or principal payments to be made on certain United
States Treasury Bonds ("Treasury Bonds"), (ii) Treasury Bonds and (iii)
certain other debt securities ("GSEs Bonds") of United States government
sponsored enterprises ("GSEs"; and together with Treasury Strips and Treasury
Bonds, collectively, "Government Securities"). The Government Securities, if
any, included in a Trust are intended to assure investors that funds are
available to make certain specified payments of principal and/or interest due
on the related Securities. As such, the Government Securities, if any,
included in a Trust are intended both to (i) support the ratings assigned to
such Securities, and (ii) perform a function similar to that described herein
under "Description of the Transfer and Servicing Agreements--Credit and Cash
Flow Enhancement". A description of the respective general features of
Treasury Bonds, Treasury Strips and GSE Bonds is set forth below.
The Prospectus Supplement for each Series of Securities the Trust with
respect to which contains Government Securities will contain information as
to: (i) the title and series of each such Government Security, the aggregate
principal amount, denomination and form thereof; (ii) the limit, if any, upon
the aggregate principal amount of such Government Security; (iii) the dates on
which, or the range of dates within which, the principal of (and premium, if
any, on) such Government Security will be payable; (iv) the rate or rates, or
the method of determination thereof, at which such Government Security will
bear interest, if any, the date or dates from which such interest will accrue,
and the dates on which such interest will be payable; (v) whether such
Government Security was issued at a price lower than the principal amount
thereof; (vi) material events of default or restrictive covenants provided for
with respect to such Government Security; (vii) the rating thereof, if any;
(viii) the issuer of each Government Security; (ix) the material risks, if
any, posed by any such Government Securities and issuers thereof (which risks,
if appropriate, will be described in the "Risk Factors" section of the related
Prospectus Supplement); and (x) any other material terms of such Government
Security. With respect to a Trust which includes a pool of Government
Securities, the related Prospectus Supplement will, to the extent applicable,
describe the composition of the Government Securities' pool, certain material
events of default or restrictive covenants common to the Government
Securities, and, on an aggregate, percentage or weighted average basis, as
applicable, the characteristics of the pool with respect to the terms set
forth in (iii), (iv) and (v) of the preceding sentence and any other material
terms regarding such pool. The Government Securities included in a Trust will
be senior, unsecured, nonredeemable obligations of the issuer thereof, will be
denominated in United States dollars and, if rated, will be rated at least
investment grade by at least one nationally recognized rating agency. In
addition, the inclusion of Government Securities in a Trust with respect to a
Series of Securities is conditioned upon their characteristics being in form
and substance satisfactory to the Rating Agency rating the related Series of
Securities.
TREASURY BONDS
Treasury Bonds are issued by and are the obligations of the United States of
America. As such, the payment of principal and interest on each Treasury Bond
will be guaranteed by the full faith and credit of the United States of
America. Interest is typically payable on the Bonds semiannually. Treasury
Bonds are issued in registered form in denominations of $1,000, $5,000,
$10,000, $100,000 and $1,000,000 and in book-entry form in integral multiples
thereof.
TREASURY STRIPS
In general, Treasury Strips are created by separating, or stripping, the
principal and interest components of Treasury Bonds that have an original
maturity of 10 or more years from the date of issue. A particular Treasury
Strip evidences ownership of the principal payment or one of the periodic
interest payments (generally semiannual) due on the Treasury Bond to which
such Treasury Strip relates.
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In 1985 the Department of the Treasury announced that all new issues of
Treasury Bonds with maturities of 10 years or more would be transferable in
their component pieces on the Federal Reserve wire system. In so doing, the
Treasury created a generic, book-entry Treasury Strip named STRIPS (Separate
Trading of Registered Interest and Principal of Securities) which, unlike
private label Treasury Strips, can be issued without the need for a custodial
arrangement. The STRIPS program has eclipsed the private sector programs
(which are described below under "--Private Label Custody Receipt
Securities"), and investment banks no longer sponsor new issues of custodial
receipts.
Treasury Strips may be either "serial" or "callable". A serial Treasury
Strip evidences ownership of one of the periodic interest payments to be made
on a Treasury Bond. No payments are made on such Treasury Strip, nor is it
redeemable, prior to its maturity, at which time the holder becomes entitled
to receive a single payment of the face amount thereof. Callable Treasury
Strips relate to payments scheduled to be made after the related Treasury
Bonds have become subject to redemption. Such Treasury Strips evidence
ownership of both principal of the related Treasury Bonds and each of the
related interest payments commencing, typically, on the first interest payment
date following the first optional redemption date. If the underlying Treasury
Bonds are actually redeemed, holders of callable Treasury Strips generally
receive a payment equal to the principal portion of the total face amount of
such Treasury Strips plus the interest payment represented by the Treasury
Strips maturing on the redemption date. No callable Treasury Strips will be
included in a Trust. The face amount of any Treasury Strip is the aggregate of
all payments scheduled to be received thereon. Treasury Strips are available
in registered form and generally may be transferred and exchanged by the
holders thereof in accordance with procedures applicable to the particular
issue of such Treasury Strips.
A holder of a private label Treasury Strip (as opposed to a STRIP) cannot
enforce payment on such Treasury Strip against the Treasury. Instead, such
holder must look to the custodian for payment. Such custodian (and such holder
of a Treasury Strip that obtains ownership of the underlying Treasury Bond)
can enforce payment of the underlying Treasury Bond against the Treasury. If
any private label Treasury Strips are included in a Trust with respect to any
Series of Securities, the Prospectus Supplement for such Series will include
the identity and a brief description of each custodian that issued such
Treasury Strips. If the Company knows that the depositor of the Treasury Bonds
underlying such Treasury Strips is the Company or any of its affiliates, the
Company will disclose such fact in such Prospectus Supplement.
GSE BONDS
As specified in the applicable Prospectus Supplement, the obligations of one
or more of the following GSEs may be included in a Trust: Federal National
Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Association
("Freddie Mac"), Student Loan Marketing Association ("Sallie Mae"), REFCO,
Tennessee Valley Authority ("TVA"), Federal Home Loan Banks ("FHLB") (to the
extent such obligations represent the joint and several obligations of the
twelve Federal Home Loan Banks) and Federal Farm Credit Banks ("FFCB"). GSE
debt securities are exempt from registration under the Securities Act pursuant
to Section 3(a)(2) of the Securities Act (or are deemed by statute to be so
exempt) and are not required to be registered under the Exchange Act. The
securities of any GSE (including a GSE Guaranteed Bond) will be included in a
Trust only to the extent that (i) its obligations are supported by the full
faith and credit of the United States government or (ii) such organization
makes publicly available its annual report which shall include financial
statements or similar financial information with respect to such organization
(a "GSE Issuer"). Unless otherwise specified in the related Prospectus
Supplement, the GSE Bonds will not be guaranteed by the United States and do
not constitute a debt or obligation of the United States or of any agency or
instrumentality thereof other than the related GSE.
Unless otherwise specified in the related Prospectus Supplement, none of the
GSE Bonds will have been issued pursuant to an indenture, and no trustee is
provided for with respect to any GSE Bonds. There will generally be a fiscal
agent ("Fiscal Agent") for an issuer of GSE Bonds whose actions will be
governed by a fiscal agency agreement. A Fiscal Agent is not a trustee for the
holders of the GSE Bonds and does not have the same responsibilities or duties
to act for the holders as would a trustee.
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GSE Bonds may be subject to certain contractual and statutory restrictions
which may provide some protection to securityholders against the occurrence or
effects of certain specified events. Unless otherwise specified in the related
Prospectus Supplement, each GSE is limited to such activities as will promote
its statutory purposes as set forth in the publicly available information with
respect to such issuer. A GSE's promotion of its statutory purposes, as well
as its statutory, structural and regulatory relationships with the federal
government, may cause or require such GSE to conduct its business in a manner
that differs from what an enterprise which is not a GSE might employ.
The Federal National Mortgage Association
Fannie Mae is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act. It is the largest investor in home mortgage loans in the United States.
Fannie Mae originally was established in 1938 as a corporation wholly owned by
the United States government to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder owned and privately managed
corporation by legislation enacted in 1968 and 1970. Fannie Mae provides funds
to the mortgage market by purchasing mortgage loans from lenders, thereby
replenishing their funds for additional lending. Fannie Mae acquires funds to
purchase loans from many capital market investors that ordinarily may not
invest in mortgage loans, thereby expanding the total amount of funds
available for housing. Operating nationwide, Fannie Mae helps to redistribute
mortgage funds from capital-surplus to capital-short areas. Fannie Mae also
issues mortgage-backed securities ("MBS"). Fannie Mae receives guaranty fees
for its guaranty of timely payment of principal of and interest on MBS. Fannie
Mae issues MBS primarily in exchange for pools of mortgage loans from lenders.
The issuance of MBS enables Fannie Mae to further its statutory purpose of
increasing the liquidity of residential mortgage loans.
Fannie Mae prepares an Information Statement annually which describes Fannie
Mae, its business and operations and contains Fannie Mae's audited financial
statements. From time to time Fannie Mae prepares supplements to its
Information Statement which include certain unaudited financial data and other
information concerning the business and operations of Fannie Mae. Unless
otherwise specified in the applicable Prospectus Supplement, these documents
can be obtained without charge from the Office of Investor Relations, Fannie
Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016, telephone (202) 752-
7115. Fannie Mae is not subject to the periodic reporting requirements of the
Exchange Act.
The Federal Home Loan Mortgage Corporation
Freddie Mac is a publicly held government-sponsored enterprise created on
July 24, 1970 pursuant to the Federal Home Loan Mortgage Corporation Act,
Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). Freddie Mac's statutory mission is to provide stability in the
secondary market for home mortgages, to respond appropriately to the private
capital market and to provide ongoing assistance to the secondary market for
home mortgages (including mortgages secured by housing for low- and moderate-
income families involving a reasonable economic return to Freddie Mac) by
increasing the liquidity of mortgage investments and improving the
distribution of investment capital available for home mortgage financing. The
principal activity of Freddie Mac consists of the purchase of conventional
residential mortgages and participation interests in such mortgages from
mortgage lending institutions and the sale of guaranteed mortgage securities
backed by the mortgages so purchased. Freddie Mac generally matches and
finances its purchases of mortgages with sales of guaranteed securities.
Mortgages retained by Freddie Mac are financed with short- and long-term debt,
cash temporarily held pending disbursement to security holders, and equity
capital.
Freddie Mac prepares an Information Statement annually which describes
Freddie Mac, its business and operations and contains Freddie Mac's audited
financial statements. From time to time Freddie Mac prepares supplements to
its Information Statement which include certain unaudited financial data and
other information concerning the business and operations of Freddie Mac.
Unless otherwise specified in the applicable Prospectus Supplement, these
documents can be obtained from Freddie Mac by writing or calling Freddie Mac's
Investor
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Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia, 22102;
outside Washington, D.C. metropolitan area, telephone (800) 336-3672; within
Washington, D.C. metropolitan area, telephone (703) 759-8160. Freddie Mac is
not subject to the periodic reporting requirements of the Exchange Act.
The Student Loan Marketing Association
Sallie Mae is a stockholder-owned corporation established by the 1972
amendments to the Higher Education Act of 1965, as amended, to provide
liquidity, primarily through secondary market and warehousing activities, for
lenders participating in federally sponsored student loan programs, primarily
the Federal Family Education Loan ("FFEL") program and the Health Education
Assistance Loan Program. Under the Higher Education Act, Sallie Mae is
authorized to purchase, warehouse, sell and offer participations or pooled
interests in, or otherwise deal in, student loans, including, but not limited
to, loans insured under the FFEL program, and to make commitments for any of
the foregoing. Sallie Mae is also authorized to buy, sell, hold, underwrite
and otherwise deal in obligations of eligible lenders, if such obligations are
issued by such eligible lenders for the purpose of making or purchasing
federally guaranteed student loans under the Higher Education Act. As a
federally chartered corporation, Sallie Mae's structure and operational
authorities are subject to revision by amendments to the Higher Education Act
or other federal enactments.
Sallie Mae prepares an Information Statement annually which describes Sallie
Mae, its business and operations and contains Sallie Mae's audited financial
statements. From time to time Sallie Mae prepares supplements to its
Information Statement which include certain unaudited financial data and other
information concerning the business and operations of Sallie Mae. Unless
otherwise specified in the applicable Prospectus Supplement, these documents
can be obtained without charge upon written request to the Corporate and
Investor Relations Division of Sallie Mae at 1050 Thomas Jefferson Street,
N.W., Washington, D.C. 20007, telephone (202) 298-3010. Sallie Mae is not
subject to the periodic reporting requirements of the Exchange Act.
The Resolution Funding Corporation
REFCO is a mixed-ownership government corporation established by Title V of
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"). The sole purpose of REFCO is to provide financing for the
Resolution Trust Corporation (the "RTC"). REFCO is to be dissolved, as soon as
practicable, after the maturity and full payment of all obligations issued by
it. REFCO is subject to the general oversight and direction of the Oversight
Board, which is comprised of the Secretary of the Treasury, the Chairman of
the Board of Governors of the Federal Reserve System, the Secretary of Housing
and Urban Development and two independent members to be appointed by the
President with the advice and consent of the Senate. The day-to-day operations
of REFCO are under the management of a three-member Directorate comprised of
the Director of the Office of Finance of the FHLB and two members selected by
the Oversight Board from among the presidents of the twelve FHLB.
The RTC was established by FIRREA to manage and resolve cases involving
failed savings and loan institutions pursuant to policies established by the
Oversight Board. The RTC was granted authority to issue nonvoting capital
certificates to REFCO in exchange for the funds transferred from REFCO to the
RTC. Pursuant to FIRREA, the net proceeds of these obligations are used to
purchase nonvoting capital certificates issued by the RTC or to retire
previously issued REFCO obligations.
Information concerning REFCO may be obtained from the Secretary/Treasurer,
Resolution Funding Corporation, Suite 1000, 11921 Freedom Drive, Reston,
Virginia 22090; telephone (703) 487-9517. REFCO is not subject to the periodic
reporting requirements of the Exchange Act.
The Federal Home Loan Banks
The Federal Home Loan Banks constitute a system of twelve federally
chartered corporations (collectively, the "FHLB"), each wholly owned by its
member institutions. The mission of the FHLB is to enhance the
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availability of residential mortgage credit by providing a readily available,
low-cost source of funds to their member institutions. A primary source of
funds for the FHLB is the proceeds from the sale to the public of debt
instruments issued as consolidated obligations, which are the joint and
several obligations of all the FHLB. The FHLB are supervised and regulated by
the Federal Housing Finance Board, which is an independent federal agency in
the executive branch of the United States government, but obligations of the
FHLB are not obligations of the United States government.
The Federal Home Loan Bank System produces annual and quarterly financial
reports in connection with the original offering and issuance by the Federal
Housing Finance Board of consolidated bonds and consolidated notes of the
FHLB. Unless otherwise specified in the applicable Prospectus Supplement,
questions regarding such financial reports should be directed to the Deputy
Director, Financial Reporting and Operations Division, Federal Housing Finance
Board, 1777 F Street, N.W., Washington, D.C. 20006; telephone (202) 408-2901.
Unless otherwise specified in the applicable Prospectus Supplement, copies of
such reports may be obtained by written request to Capital Markets Division,
Office of Finance, Federal Home Loan Banks, Suite 1000, 11921 Freedom Drive,
Reston, Virginia 22090, telephone (703) 487-9500. The FHLB are not subject to
the periodic reporting requirements of the Exchange Act.
Tennessee Valley Authority
TVA is a wholly owned corporate agency and instrumentality of the United
States of America established pursuant to the Tennessee Valley Authority Act
of 1933, as amended (the "TVA Act"). TVA's objective is to develop the
resources of the Tennessee Valley region in order to strengthen the regional
and national economy and the national defense. The programs of TVA consist of
power and nonpower programs. For the fiscal year ending September 30, 1995,
TVA received $139 million in congressional appropriations from the federal
government for the nonpower programs. The power program is required to be
self-supporting from revenues it produces. The TVA Act authorizes TVA to issue
evidences of indebtedness that may be serviced only from proceeds of its power
program. TVA bonds are not obligations of or guaranteed by the United States
government.
TVA prepares an Information Statement annually which describes TVA, its
business and operations and contains TVA's audited financial statements. From
time to time TVA prepares supplements to its Information Statement which
include certain unaudited financial data and other information concerning the
business and operations of TVA. Unless otherwise specified in the applicable
Prospectus Supplement, these documents can be obtained by writing or calling
Tennessee Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee
37902-1499, Attention: Vice President and Treasurer, telephone (423) 632-3366.
TVA is not subject to the periodic reporting requirements of the Exchange Act.
Federal Farm Credit Banks
The Farm Credit System is a nationwide system of lending institutions and
affiliated service and other entities (the "System"). Through its Banks
("FCBs") and related associations, the System provides credit and related
services to farmers, ranchers, producers and harvesters of aquatic products,
rural homeowners, certain farm-related businesses, agricultural and aquatic
cooperatives and rural utilities. System institutions are federally chartered
under the Farm Credit Act of 1971, as amended (the "Farm Credit Act"), and are
subject to regulation by a Federal agency, the Farm Credit Administration (the
"FCA"). The FCBs and associations are not commonly owned or controlled. They
are cooperatively owned, directly or indirectly, by their respective
borrowers. Unlike commercial banks and other financial institutions that lend
to the agricultural sector in addition to other sectors of the economy, under
the Farm Credit Act the System institutions are restricted solely to making
loans to qualified borrowers in the agricultural sector, to certain related
businesses and to rural homeowners. Moreover, the System is required to make
credit and other services available in all areas of the nation. In order to
fulfill its broad statutory mandate, the System maintains lending units in all
50 states and the Commonwealth of Puerto Rico.
The System obtains funds for its lending operations primarily from the sale
of debt securities issued under Section 4.2(d) of the Farm Credit Act
("Systemwide Debt Securities"). The FCBs are jointly and severally liable
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on all Systemwide Debt Securities. Systemwide Debt Securities are issued by
the FCBs through the Federal Farm Credit Banks Funding Corporation, as agent
for the FCBs (the "Funding Corporation").
Information regarding the FCBs and the Farm Credit System, including
combined financial information, is contained in disclosure information made
available by the Funding Corporation. This information consists of the most
recent Farm Credit System Annual Information Statement and any Quarterly
Information Statements issued subsequent thereto and certain press releases
issued from time to time by the Funding Corporation. Unless otherwise
specified in the applicable Prospectus Supplement, such information and the
Farm Credit System Annual Report to Investors for the current and two
preceding fiscal years are available for inspection at the Federal Farm Credit
Banks Funding Corporation, Investment Banking Services Department, 10 Exchange
Place, Suite 1401, Jersey City, New Jersey 07302, telephone (201) 200-8000.
Upon request, the Funding Corporation will furnish, without charge, copies of
the above information. The FCBs are not subject to the periodic reporting
requirements of the Exchange Act.
PRIVATE LABEL CUSTODY RECEIPT SECURITIES
General
If so specified in the applicable Prospectus Supplement, the Trust for a
Series may include any combination of (i) receipts or other instruments (other
than Treasury Strips) evidencing ownership of specific interest and/or
principal payments to be made on certain Treasury Bonds held by a custodian
("Private Label Custody Strips") and (ii) receipts or other instruments
evidencing ownership of specific interest and/or principal payments to be made
on certain Resolution Funding Corporation ("REFCO") bonds ("REFCO Strips"; and
together with Private Label Custody Strips, "Private Label Custody Receipt
Securities"). The Private Label Custody Receipt Securities, if any, included
in a Trust are intended to assure investors that funds are available to make
certain specified payments of principal and/or interest due on the related
Securities. As such, the Private Label Custody Receipt Securities, if any,
included in a Trust are intended both to (i) support the ratings assigned to
such Securities, and (ii) perform a function similar to that described herein
under "Description of the Transfer and Servicing Agreements--Credit and Cash
Flow Enhancement". A description of the respective general features of Private
Label Custody Strips and REFCO Strips is set forth below.
The Prospectus Supplement for each Series of Securities the Trust with
respect to which contains Private Label Custody Receipt Securities will
contain information as to: (i) the title and series of each such Private Label
Custody Receipt Security, the aggregate principal amount, denomination and
form thereof; (ii) the limit, if any, upon the aggregate principal amount of
such Private Label Custody Receipt Security; (iii) the dates on which, or the
range of dates within which, the principal of (and premium, if any, on) such
Private Label Custody Receipt Security will be payable; (iv) the rate or
rates, or the method of determination thereof, at which such Private Label
Custody Receipt Security will bear interest, if any, the date or dates from
which such interest will accrue, and the dates on which such interest will be
payable; (v) whether such Private Label Custody Receipt Security was issued at
a price lower than the principal amount thereof; (vi) material events of
default or restrictive covenants provided for with respect to such Private
Label Custody Receipt Security; (vii) the rating thereof, if any: (viii) the
issuer of such Private Label Custody Receipt Security; (ix) the material
risks, if any, posed by such Private Label Custody Receipt Security and the
issuer thereof (which risks, if appropriate, will be described in the "Risk
Factors" section of the related Prospectus Supplement); and (x) any other
material terms of such Private Label Custody Receipt Security. With respect to
a Trust which includes a pool of Private Label Custody Receipt Securities, the
related Prospectus Supplement will, to the extent applicable, describe the
composition of the Private Label Custody Receipt Securities' pool, certain
material events of default or restrictive covenants common to the Private
Label Custody Receipt Securities, and, on an aggregate, percentage or weighted
average basis, as applicable, the characteristics of the pool with respect to
the terms set forth in (iii), (iv) and (v) of the preceding sentence and any
other material terms regarding such pool.
The Private Label Custody Receipt Securities included in a Trust will be
senior, unsecured, nonredeemable obligations of the issuers thereof, will be
denominated in United States dollars and, if rated, will be rated at least
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investment grade by at least one nationally recognized rating agency. In
addition, the inclusion of Private Label Custody Receipt Securities in a Trust
with respect to a Series of Securities is conditioned upon their
characteristics being in form and substance satisfactory to the Rating Agency
rating the related Series of Securities. Each Trust will be provided with an
opinion of Federal Tax Counsel to the effect that the Private Label Custody
Receipt Securities included in such Trust are exempt from the registration
requirements of the Securities Act. A copy of such opinion will be filed with
the SEC in a Current Report on Form 8-K or in a post-effective amendment to
the Registration Statement.
Private Label Custody Strips
The first "stripping" of Treasury Bonds occurred in the 1970s when
government securities dealers physically separated coupons from definitive
certificates and offered them to investors as tax-deferred investments.
Investors were able to purchase the "strip" at a deep discount and pay no
federal income tax until resale or maturity. This tax treatment was limited in
1982 by the Tax Equity and Fiscal Responsibility Act ("TEFRA") which required
holders of such strips to accrue a portion of the discount toward par annually
and report such accrual, even though unrealized, as taxable income. TEFRA also
required that all new Treasury issues be made available only in book-entry
form.
The shift to "book-entry only" Treasury Bonds created a shortage of the
physical certificates needed for stripping. In response, various dealers
created custodial receipt programs in which Treasury Bonds in book-entry form
were deposited with custodians who would thereupon issue certificates
evidencing rights in principal and interest payments. Some of the better known
programs first came to market in 1982 and 1983. Although available eventually
in denominations as small as $1,000, these custodial receipts lacked the
liquidity of the physical strips. While physical strips had multiple market-
makers, custodial receipts were proprietary and, as such, the sole market-
maker would usually be an affiliate of the program's sponsor. As a result, the
market that developed for such receipts was segmented.
In early 1984, a group of dealers sought to enhance the liquidity of
custodial receipts by developing a generic, multiple market-maker security
known as a TR (Treasury Receipt). A large secondary market quickly developed
in these generic Treasury Strips.
Treasury Receipts, physical strips and the proprietary receipts trade at
varying discounts from STRIPS which reflect, among other things, lower levels
of liquidity and the structuring difference discussed above.
A holder of a Private Label Custody Strip (as opposed to a STRIP) cannot
enforce payment on such Treasury Strip against the Treasury, instead, such
holder must look to the custodian for payment. Such custodian (and such holder
of a Private Label Custody Strip that obtains ownership of the underlying
Treasury Bond) can enforce payment of the underlying Treasury Bond against the
Treasury. If any Private Label Custody Strips are included in a Trust with
respect to any Series of Securities, the Prospectus Supplement for such Series
will include the identity and a brief description of each custodian that
issued such Private Label Custody Strips. If the Company knows that the
depositor of the Treasury Bonds underlying such Private Label Custody Strips
is the Company or any of its affiliates, the Company will disclose such fact
in such Prospectus Supplement.
REFCO Strips
A REFCO Bond may be divided into its separate components, consisting of: (i)
each future semiannual interest distribution (an "Interest Component"); and
(ii) the principal payment (the "Principal Component") (each component
individually hereinafter referred to as a "REFCO Strip"). REFCO Strips are not
created by REFCO. Instead, third parties such as investment banking firms
create them. Each REFCO Strip has an identifying designation and CUSIP number.
REFCO Strips generally trade in the market for Treasury Strips at yields of a
few basis points over Treasury Strips of similar maturities. REFCO Strips are
viewed generally by the market as liquid investments.
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For a REFCO Bond to be separated into its components, the par amount of the
REFCO Bond must be in an amount which, based on the stated interest rate of
the REFCO Bond, will produce a semiannual interest payment of $1,000 or an
integral multiple thereof. REFCO Bonds may be separated into their components
at any time from the issue date until maturity. Once created, REFCO Strips are
maintained and transferred in integral multiples of $1,000.
A holder of a REFCO Strip cannot enforce payment on such REFCO Strip against
REFCO. Instead, such holder must look to the custodian for payment . Such
custodian (and such holder of a REFCO Strip that obtains ownership of the
underlying REFCO Bond) can enforce payment of the underlying REFCO Bond
against REFCO. The identity and a brief description of each custodian that has
issued any REFCO Strip included in a Trust will be set forth in the related
Prospectus Supplement. If the Company knows that the depositor of the REFCO
Bonds underlying the REFCO Strips included in the Trust is the Company or any
of its affiliates, the Company will disclose such fact in such Prospectus
Supplement.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the Notes, if any, and the Certificates of any
Series generally will be influenced by the rate at which the principal
balances of the related Primary Assets are paid, which payment may be in the
form of scheduled amortization or prepayments. With respect to Securities
backed by Receivables and to receivables underlying Collateral Certificates,
the term "prepayments" includes prepayments in full, partial prepayments
(including those related to rebates of extended warranty contract costs and
insurance premiums), liquidations due to defaults, as well as receipts of
proceeds from physical damage, credit life and disability insurance policies,
or the Repurchase Amount of Receivables and/or Collateral Certificates
repurchased by the Company or a Seller or purchased by a Servicer for
administrative reasons. With respect to Securities backed by Government
Securities and/or Private Label Custody Receipt Securities, as applicable, the
term "prepayments" means the Repurchase Amount of such Government Securities
and/or Private Label Custody Receipt Securities repurchased by the Company or
purchased by a Servicer for administrative reasons. Substantially all of the
Receivables and receivables underlying Collateral Certificates are prepayable
at any time without penalty to the Obligor. The rate of prepayment of
automotive receivables is influenced by a variety of economic, social and
other factors, including the fact that an Obligor generally may not sell or
transfer the Financed Vehicle securing a receivable without the consent of the
related seller. The rate of prepayment on receivables may also be influenced
by the structure of the loan. In addition, under certain circumstances, the
related Seller will be obligated to repurchase Receivables from a given Trust
pursuant to the related Receivables Purchase Agreement as a result of breaches
of representations and warranties, and the Servicer will be obligated to
purchase Receivables from such Trust pursuant to the Sale and Servicing
Agreement or Pooling and Servicing Agreement as a result of breaches of
certain covenants. See "Description of the Transfer and Servicing Agreements--
Sale and Assignment of Primary Assets" and "Servicing Procedures". See also
"Certain Matters Regarding the Servicer--Termination" regarding the Servicer's
option to purchase Primary Assets from a given Trust.
In light of the above considerations, there can be no assurance as to the
amount of principal payments to be made on the Notes and/or Certificates of a
Series on each Distribution Date since such amount will depend, in part, on
the amount of principal collected on the related Primary Assets during the
applicable Collection Period. Any reinvestment risks resulting from a faster
or slower incidence of payment of Primary Assets will be borne entirely by the
Noteholders and Certificateholders. The related Prospectus Supplement may set
forth certain additional information with respect to the maturity and
prepayment considerations applicable to particular Primary Assets and the
related Series of Securities.
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POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each class of Notes will be a seven-digit decimal
which the Servicer or Trustee will compute prior to each distribution with
respect to such class of Notes indicating the remaining outstanding principal
balance of such class of Notes, as of the applicable Distribution Date (after
giving effect to payments to be made on such Distribution Date), as a fraction
of the initial outstanding principal balance of such class of Notes. The
"Certificate Pool Factor" for each class of Certificates will be a seven-digit
decimal which the Servicer or Trustee will compute prior to each distribution
with respect to such class of Certificates indicating the remaining
Certificate Balance of such class of Certificates, as of the applicable
Distribution Date (after giving effect to distributions to be made on such
Distribution Date), as a fraction of the initial Certificate Balance of such
class of Certificates. Each Note Pool Factor and each Certificate Pool Factor
will be 1.0000000 as of the related Closing Date, and thereafter will decline
to reflect reductions in the outstanding principal balance of the applicable
class of Notes or the reduction of the Certificate Balance of the applicable
class of Certificates. A Noteholder's portion of the aggregate outstanding
principal balance of the related class of Notes will be the product of (i) the
original denomination of such Noteholder's Note and (ii) the applicable Note
Pool Factor at the time of determination. A Certificateholder's portion of the
aggregate outstanding Certificate Balance for the related class of
Certificates will be the product of (a) the original denomination of such
Certificateholder's Certificate and (b) the applicable Certificate Pool Factor
at the time of determination.
As provided in the related Prospectus Supplement, the Noteholders, if any,
and the Certificateholders will receive reports on or about each Distribution
Date concerning payments received on the Receivables, the Pool Balance and
each Note Pool Factor or Certificate Pool Factor, as applicable. In addition,
Securityholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date
permitted by law. See "Certain Information Regarding the Securities--
Statements to Securityholders".
THE SELLER AND THE SERVICER
Certain information with respect to the Seller and the Servicer will be set
forth in the related Prospectus Supplement.
USE OF PROCEEDS
If so provided in the related Prospectus Supplement, the net proceeds from
the sale of the Securities of a Series will be applied by the applicable Trust
to the purchase of the Primary Assets from the Company or the Seller, as
applicable. The Company will use the portion of such proceeds paid to it to
purchase the Primary Assets.
DESCRIPTION OF THE NOTES
GENERAL
Each Owner Trust will issue one or more classes of Notes pursuant to an
Indenture, a form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The following summary
describes the material provisions of each Indenture which are anticipated to
be common to any Notes included in a Series of Securities. The following
summary does not purport to be a complete description of all terms of the
related Notes or Indenture and therefore is subject to, and is qualified in
its entirely by reference to, the provisions of the related Notes and
Indenture.
If so specified in the related Prospectus Supplement, each class of Notes
will initially be represented by one or more certificates registered in the
name of the nominee of DTC (together with any successor depository selected by
the Trust, the "Depository"). The Notes will be available for purchase in
minimum denominations
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of $1,000 or such other minimum denomination as shall be specified in the
related Prospectus Supplement and integral multiples thereof in book-entry
form or such other form as shall be specified in the related Prospectus
Supplement. If the Notes are available in book-entry form only, the Company
has been informed by DTC that DTC's nominee will be Cede unless another
nominee is specified in the related Prospectus Supplement. Accordingly, such
nominee is expected to be the holder of record of the Notes of each class. If
the Notes are available in book-entry form only, unless and until Definitive
Notes are issued under the limited circumstances described herein or in the
related Prospectus Supplement, no Noteholder will be entitled to receive a
physical certificate representing a Note. If the Notes are available in book-
entry form only, all references herein and in the related Prospectus
Supplement to actions by Noteholders refer to action taken by DTC upon
instructions from it participating organizations, and all references herein
and in the related Prospectus Supplement to distributions, notices, reports
and statements to Noteholders refer to distributions, notices, reports and
statements to DTC or its nominee, as registered holder of the Notes, for
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities".
DISTRIBUTION OF PRINCIPAL AND INTEREST
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each class of Notes of a Series will be described in the related
Prospectus Supplement. The right of holders of any class of Notes to receive
payments of principal and interest may be senior or subordinate to the rights
of holders of one or more other class or classes of Notes of such Series, as
described in the related Prospectus Supplement. The related Prospectus
Supplement may provide that payments of interest on the Notes will be made
prior to payments of principal thereon. If so provided in the related
Prospectus Supplement, a Series of Notes may include one or more classes of
Strip Notes entitled to (i) principal payments with disproportionate, nominal
or no interest payments or (ii) interest payments with disproportionate,
nominal or no principal payments. Each class of Notes may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate (and
which may be zero for certain classes of Strip Notes), or any combination of
the foregoing. The related Prospectus Supplement will specify the Interest
Rate for each class of Notes of a Series or the method for determining such
Interest Rate. One or more classes of Notes of a Series may be redeemable in
whole or in part under the circumstances specified in the related Prospectus
Supplement, including as a result of the exercise by the Servicer of its
option to purchase the related Receivable Pool. See "Certain Matters Regarding
the Servicer--Termination".
To the extent specified in any Prospectus Supplement, one or more classes of
Notes of a given Series may have fixed principal payment schedules, as set
forth in such Prospectus Supplement. Holders of any Notes will be entitled to
receive payments of principal on any given Distribution Date in the applicable
amount set forth on such schedule with respect to such Notes, in the manner
and to the extent set forth in the related Prospectus Supplement.
The related Prospectus Supplement may also provide that payment of interest
to Noteholders of all classes within a Series will have the same priority.
Under certain circumstances, the amount available for such payments could be
less than the amount of interest payable on the Notes on a Distribution Date,
in which case each class of Notes will receive its ratable share (based upon
the aggregate amount of interest due to such class of Notes) of the aggregate
amount available to be distributed on such date as interest on the Notes of
such Series. See "Description of the Transfer and Servicing Agreements--
Distributions" and "--Credit and Cash Flow Enhancement".
In the case of a Series of Securities issued by an Owner Trust that includes
two or more classes of Notes, the sequential order and priority of payment in
respect of principal and interest, and any schedule or formula or other
provisions applicable to the determination thereof, of each such class will be
set forth in the related Prospectus Supplement. Payments in respect of
principal of and interest on any class of Notes will be made on a pro rata
basis among all the Noteholders of such class or by such other method as is
specified in the Prospectus Supplement.
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PROVISIONS OF THE INDENTURE
Events of Default; Rights upon Event of Default. "Events of Default" in
respect of a Series of Notes under the related Indenture will consist of: (i)
a default for five days or more in the payment of any interest on any such
Note: (ii) a default in the payment of the principal of, or any installment of
the principal of, any such Note when the same becomes due and payable; (iii) a
default in the observance or performance of any material covenant or agreement
of the related Trust made in such Indenture and the continuation of any such
default for a period of 30 days (or for such longer period, not in excess of
90 days, as may be reasonably necessary to remedy such default; provided that
such default is capable of remedy within 90 days or less and Servicer on
behalf of the related Trustee delivers an Officer's Certificate to the related
Indenture Trustee to the effect that such Trustee has commenced, or will
promptly commence and diligently pursue, all reasonable efforts to remedy such
default) after notice thereof is given to the related Trust by the applicable
Indenture Trustee or to such Trust and the related Indenture Trustee by the
holders of 25% of the aggregate outstanding principal amount of such Notes;
(iv) any representation or warranty made by such Trust in the related
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, if
such breach is not cured with 30 days (or for such longer period, not in
excess of 90 days, as may be reasonably necessary to remedy such default;
provided that such default is capable of remedy within 90 days or less and
Servicer on behalf of the related Trustee delivers an Officer's Certificate to
the related Indenture Trustee to the effect that such Trustee has commenced,
or will promptly commence and diligently pursue, all reasonable efforts to
remedy such default) after notice thereof is given to such Trust by the
applicable Indenture Trustee or to such Trust and such Indenture Trustee by
the holder of 25% of the aggregate outstanding principal amount of such Notes;
(v) certain events of bankruptcy, insolvency, receivership or liquidation with
respect to such Trust or a substantial part of the property of such Trust and
(vi) such other events as may be specified in the Prospectus Supplement. The
amount of principal required to be paid to Noteholders of each Series under
the related Indenture on any Distribution Date generally will be limited to
amounts available to be deposited in the applicable Note Distribution Account.
Therefore, the failure to pay principal on a class of Notes generally will not
result in the occurrence of an Event of Default until the applicable final
scheduled Distribution Date for such class of Notes.
If an Event of Default should occur and be continuing with respect to the
Notes of any Series, the related Indenture Trustee or holders of a majority in
principal amount of such Notes may declare the principal of such Notes to be
immediately due and payable. Such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount
of such Notes then outstanding.
If the Notes of any Series are declared due and payable following an Event
of Default, the related Indenture Trustee may institute proceedings to collect
amounts due thereon, foreclose on the property of the Trust, exercise remedies
as a secured party, sell the related Primary Assets or elect to have the
applicable Trust maintain possession of such Primary Assets and continue to
apply collections on such Primary Assets as if there had been no declaration
of acceleration. Subject to certain limitations that, if applicable, will be
specified in the related Prospectus Supplement, the Indenture Trustee will be
prohibited from selling the Primary Assets following an Event of Default,
other than a default in the payment of any principal of, or a default for five
days or more in the payment of any interest on, any Note of such Series,
unless (i) the holders of all such outstanding Notes consent to such sale,
(ii) the proceeds of such sale are sufficient to pay in full the principal of
and the accrued interest on such outstanding Notes at the date of such sale or
(iii) such Indenture Trustee determines that the proceeds of the Primary
Assets would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such obligations had not
been declared due and payable, and such Indenture Trustee obtains the consent
of the holders of 66 2/3% of the aggregate outstanding principal amount of
such Notes.
Subject to the provisions of the applicable Indenture relating to the duties
of the related Indenture Trustee, if an Event of Default occurs and is
continuing with respect to a Series of Notes, such Indenture Trustee will be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of such Notes if
it reasonably believes it will not be adequately indemnified against the
costs,
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expenses and liabilities that might be incurred by it in complying with such
request. Subject to the provisions for indemnification and certain limitations
contained in the related Indenture, the holders of a majority of the aggregate
outstanding principal amount of the Notes of a Series will have the right to
direct the time, method and place of conducting any proceeding or exercising
any remedy available to the related Indenture Trustee. In addition, the
holders of Notes representing a majority of the aggregate outstanding
principal amount of such Notes may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal of or interest
on any Note or a default in respect of a covenant or provision of such
Indenture that cannot be modified or amended without the waiver or consent of
the holders of all the outstanding Notes of such Series.
Except to the extent provided in the related Prospectus Supplement, no
holder of a Note will have the right to institute any proceeding with respect
to the related Indenture, unless: (i) such holder previously has given to the
applicable Indenture Trustee written notice of a continuing Event of Default;
(ii) the holders of not less than 25% of the outstanding principal amount of
such Notes have made written request to such Indenture Trustee to institute
such proceeding in its own name as Indenture Trustee; (iii) such holder or
holders have offered such Indenture Trustee reasonable indemnity; (iv) such
Indenture Trustee has for 60 days failed to institute such proceeding; and (v)
no direction inconsistent with such written request has been given to such
Indenture Trustee during such 60-day period by the holders of a majority of
the outstanding principal amount of the Notes of such Series.
With respect to any Owner Trust, none of the related Indenture Trustee in
its individual capacity, the related Trustee in its individual capacity, any
holder of a Certificate representing an ownership interest in such Trust, or
any of their respective beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the related Notes or for the agreements of such Trust contained in
the applicable Indenture.
No Trust may engage in any activity other than as described herein or in the
related Prospectus Supplement. No Trust will incur, assume or guarantee any
indebtedness other than indebtedness incurred pursuant to the related Notes
and the related Indenture, pursuant to any Advances made to it by the Servicer
or otherwise in accordance with the Related Documents (as defined herein).
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the
laws of the United States, any state or the District of Columbia; (ii) such
entity expressly assumes such Trust's obligation to make due and punctual
payments upon the Notes of the related Series and to perform or observe every
agreement and covenant of such Trust under the Indenture; (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation; (iv) such Trust has been advised by each Rating Agency that
such merger or consolidation will not result in the qualification, reduction
or withdrawal of its then-current rating of any class of the Notes or
Certificates of such Series; (v) such Trust has received an opinion of counsel
to the effect that such consolidation or merger would have no material adverse
tax consequence to the Trust or to any related Noteholder or
Certificateholder; (vi) any action as is necessary to maintain the lien and
security interest created by the Indenture has been taken; and (vii) such
Trust has delivered to the related Indenture Trustee an Officer's Certificate
and an opinion of counsel that the merger complies with the requirements and
conditions precedent of the Indenture.
No Owner Trust will (i) except as expressly permitted by the applicable
Indenture, the applicable Transfer and Servicing Agreements or certain other
documents with respect to such Trust (the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of such Trust;
(ii) claim any credit on or make any deduction from the principal and interest
payment in respect to the related Notes (other than amounts withheld under the
Code or applicable state tax laws) or assert any claim against any present or
former holder of such Notes because of the payment of taxes levied or assessed
upon such Trust; (iii) dissolve or liquidate in whole or in part; (iv) permit
the validity or effectiveness of the related Indenture to be impaired or
permit any person to be released from any covenants or obligations with
respect to the related Notes under such Indenture except as may be expressly
permitted thereby; (v) permit any lien, charge, excise, claim, security
interest, mortgage or other encumbrance to be created on or extent to or
otherwise arise upon or burden the assets of
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such Trust or any part thereof, or any interest therein or the proceeds
thereof; or (vi) permit the lien of the related Indenture not to constitute a
valid first priority security interest (other than with respect to a tax,
mechanics' or similar lien) in the asset of such Trust.
Each Indenture Trustee and the related Noteholders, by accepting the related
Notes, will covenant that they will not at any time institute against the
applicable Trust any bankruptcy, reorganization or other proceeding under any
federal or state bankruptcy or similar law.
Modification of Indenture. Each Trustee and the related Indenture Trustee
may, with the consent of the holders of a majority of the aggregate
outstanding principal amount of the Notes of the related Series, execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the related Indenture, or modify (except as provided below)
in any manner the rights of the related Noteholders. Except as otherwise
provided in the related Indenture, without the consent of the holder of each
outstanding Note affected thereby, no supplemental indenture will: (i) change
the due date of any installment of principal of or interest on any such Note
or reduce the principal amount thereof, the interest rate specified thereon or
the redemption price with respect thereto, change the provisions of the
related Indenture relating to the application of collections on, or the
proceeds of the sale of, the property of the related Trust to payment of
principal or interest on the Notes of such Series, or change any place of
payment where or the coin or currency in which any such Note or any interest
thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the related Indenture; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes of such Series,
the consent of the holders of which is required for any such supplemental
indenture or for any waiver of compliance with certain provisions of the
related Indenture or of certain defaults thereunder and their consequences as
provided for in such Indenture; (iv) modify or alter the provisions of the
related Indenture regarding the voting of Notes held by the applicable Owner
Trust, any other obligor on such Notes, the Seller or an affiliate of any of
them; (v) reduce the percentage of the aggregate outstanding amount of such
Notes, the consent of the holders of which is required to direct the related
Indenture Trustee to sell or liquidate the Primary Assets if the proceeds of
such sale would be insufficient to pay the principal amount and accrued and
unpaid interest on the outstanding Notes of such Series; (vi) decrease the
percentage of the aggregate principal amount of such Notes required to amend
the sections of the related Indenture that specify the percentage of the
aggregate principal amount of the Notes of such Series necessary to amend such
Indenture or certain other related agreements; or (vii) permit the creation of
any lien ranking prior to or on a parity with the lien of the related
Indenture with respect to any of the collateral for such Notes or, except as
otherwise permitted or contemplated in such Indenture, terminate the lien of
such Indenture on any such collateral or deprive the holder of any such Note
of the security afforded by the lien of such Indenture.
An Owner Trust and the related Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of the Noteholders of
the related Series, (i) to cure any ambiguity; (ii) to correct or supplement
any provisions in the Indenture; or (iii) for the purpose of, among other
things, adding any provisions to or changing in any manner or eliminating any
of the provisions of the related Indenture; provided that such action referred
to in clause (iii) above will not materially and adversely affect the interest
of any such Noteholder.
Annual Compliance Statement. Each Owner Trust will be required to file
annually with the related Indenture Trustee a written statement as to the
fulfillment of its obligations under the Indenture.
Indenture Trustee's Annual Report. If required by the Trust Indenture Act,
the Indenture Trustee for each Owner Trust will mail each year to all related
Noteholders a brief report relating to its eligibility and qualification to
continue as Indenture Trustee under the related Indenture, any amounts
advanced by it under the Indenture, the amount, interest rate and maturity
date of certain indebtedness, if any, owing by such Owner Trust to the
applicable Indenture Trust in its individual capacity, the property and funds
physically held by such Indenture Trustee as such and any action taken by it
that materially affects the related Notes that has not been previously
reported.
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Satisfaction and Discharge of Indenture. Each Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee for any Series may resign at any
time, in which event the related Owner Trust will be obligated to appoint a
successor indenture trustee for such Series. Additionally, the Holders of a
majority of the outstanding amount of the Notes of a Series may remove the
related Indenture Trustee and appoint a successor Indenture Trustee. An Owner
Trust may also remove the related Indenture Trustee if such Indenture Trustee
ceases to be eligible to continue as such under the related Indenture, if
certain insolvency events occur with respect to such Indenture Trustee or if
such Indenture Trustee otherwise becomes incapable of acting as Indenture
Trustee. In such circumstances, such Owner Trust will be obligated to appoint
a successor Indenture Trustee for the applicable Series of Notes. No
resignation or removal of the Indenture Trustee and appointment of a successor
indenture trustee for a Series of Notes will become effective until the
acceptance of the appointment by the successor indenture trustee for such
Series and payment of all fees and expenses owed to the outgoing Indenture
Trustee.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Trust will issue one or more classes of Certificates pursuant to a
Trust Agreement or Pooling and Servicing Agreement, as applicable. A form of
each of the Trust Agreement and the Pooling and Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. The following summary describes the material provisions of the
Trust Agreement and the Pooling and Servicing Agreement, in each case, which
are anticipated to be common to any Certificates included in a Series of
Securities. The following summary does not purport to be a complete
description of all terms of the related Notes, Trust Agreement or Pooling and
Servicing Agreement and therefore is subject to, and is qualified in its
entirety by reference to, the provisions of the related Certificates and Trust
Agreement or Pooling and Servicing Agreement, as applicable.
If so specified in the related Prospectus Supplement and except for the
Certificates, if any, of a Series purchased by the Company, a Seller or any of
their respective affiliates, each class of Certificates will initially be
represented by one or more certificates registered in the name of the
Depository. The Certificates will be available for purchase in minimum
denominations of $10,000 or such other minimum denomination as shall be
specified in the related Prospectus Supplement and integral multiples of
$1,000 in excess thereof in book-entry form only (or such other form as shall
be specified in the related Prospectus Supplement). If the Certificates are
available in book-entry form only, the Company has been informed by DTC that
DTC's nominee will be Cede. Accordingly, such nominee is expected to be the
holder of record of the Certificates of any Series. If the Certificates are
available in book-entry form only, unless and until Definitive Certificates
are issued under the limited circumstances described herein or in the related
Prospectus Supplement, no Certificateholder (other than the Company, a Seller
or any of their respective affiliates) will be entitled to receive a physical
certificate representing a Certificate. If the Certificates are available in
book-entry form only, all references herein and in the related Prospectus
Supplement to actions by Certificateholders refer to actions taken by DTC upon
instructions from the Participants, and all references herein and in the
related Prospectus Supplement to distributions, notices, reports and
statements to Certificateholders refer to distributions, notices, reports and
statements to DTC or its nominee, as the case may be, as the registered holder
of the Certificates, for distribution to Certificateholders in accordance with
DTC's procedures with respect thereto. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Definitive Securities". Any
Certificate of a Series
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owned by the Company, a Seller or any of their respective affiliates will be
entitled to equal and proportionate benefits under the applicable Trust
Agreement or Pooling and Servicing Agreement, as applicable, except that,
unless otherwise provided in the related Trust Agreement, such Certificates
will be deemed not to be outstanding for the purpose of determining whether
the requisite percentage of Certificateholders has given any request, demand,
authorization, direction, notice, or consent or taken any other action under
the Related Documents.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of losses,
Certificate Pass-Through Rate and amount of or method of determining
distributions with respect to principal and interest on each class of
Certificates of a Series will be described in the related Prospectus
Supplement. Distributions of interest on such Certificates will be made on the
dates specified in the related Prospectus Supplement (the "Distribution Date")
and will be made prior to distributions with respect to principal of such
Certificates. To the extent provided in the related Prospectus Supplement, a
Series of Certificates may include one or more classes of Strip Certificates
entitled to (i) principal distributions with disproportionate, nominal or no
interest distributions or (ii) interest distributions with disproportionate,
nominal or no principal distributions. Each class of Certificates may have a
different Certificate Pass-Through Rate, which may be a fixed, variable or
adjustable Certificate Pass-Through Rate (and which may be zero for certain
classes of Strip Certificates) or any combination of the foregoing. The
related Prospectus Supplement will specify the Certificate Pass-Through Rate
for each class of Certificates of a Series or the method for determining such
Certificate Pass-Through Rate.
In the case of a Series of Securities that includes two or more classes of
Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of interest and principal, and any schedule or
formula or other provisions applicable to the determination thereof, of each
such class will be as set forth in the related Prospectus Supplement. In the
case of Certificates issued by an Owner Trust, distributions in respect of
such Certificates will be subordinated to payments in respect of the Notes of
such Series and to the extent described in the related Prospectus Supplement.
Distributions in respect of interest on and principal of any class of
Certificates will be made on a pro rata basis among all holders of
Certificates of such class.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, DTC will act as
securities depository for each class of Securities offered hereby. Each class
of Securities initially will be represented by one or more certificates
registered in the name of Cede, the nominee of DTC. As such, it is anticipated
that the only "Noteholder" and/or "Certificateholder" with respect to a Series
of Securities will be Cede, as nominee of DTC. Beneficial owners of the
Securities ("Security Owners") will not be recognized as "Noteholders" by the
related Indenture Trustee, as such term is used in each Indenture, or as
"Certificateholders" by the related Trustee, as such term is used in each
Trust Agreement or Pooling and Servicing Agreement, as applicable, and
Security Owners will be permitted to exercise the rights of Noteholders or
Certificateholders only indirectly through DTC and its participating members
("Participants").
DTC is a limited purpose trust company organized under the laws of the State
of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code (the "UCC") in effect in the
State of New York, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for the Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-
entries, thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust companies
and clearing corporations. Indirect access to the DTC system also is available
to banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Participant, either directly or indirectly
(the "Indirect Participants").
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Security Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or an interest
in, the Securities may do so only through Participants and Indirect
Participants. In addition, all Security Owners will receive all distributions
of principal and interest from the related Indenture Trustee or the related
Trustee, as applicable, through Participants or Indirect Participants. Under a
book-entry format, Security Owners may experience some delay in their receipt
of payments, since such payments will be forwarded by the applicable Trustee
or Indenture Trustee to DTC's nominee. DTC will then forward such payments to
the Participants, which thereafter will forward them to Indirect Participants
or Security Owners.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and
to receive and transmit distributions of principal of and interest on the
Securities. Participants and Indirect Participants with which Security Owners
have accounts with respect to the Securities similarly are required to make
book-entry transfers and to receive and transmit such payments on behalf of
their respective Security Owners. Accordingly, although Security Owners will
not possess physical certificates representing the Securities, the Rules
provide a mechanism by which Participants and Indirect Participants will
receive payments and transfer or exchange interests, directly or indirectly,
on behalf of Security Owners.
Because DTC can act only on behalf of Participants, who in turn may act on
behalf of Indirect Participants, the ability of a Security Owner to pledge
Securities to persons or entities that do not participate in the DTC system,
or otherwise take actions with respect to such Securities, may be limited due
to the lack of a physical certificate representing such Securities.
DTC has advised the Company that it will take any action permitted to be
taken by a Security Owner under the Indenture, Trust Agreement or Pooling and
Servicing Agreement, as applicable, only at the direction of one or more
Participants to whose account with DTC the Securities are credited. DTC may
take conflicting actions with respect to other undivided interests to the
extent that such actions are taken on behalf of Participants whose holdings
include such undivided interests.
Except as required by law, none of Credit Suisse First Boston, the Company,
the related Seller, the related Servicer, or related Indenture Trustee, if
any, or the related Trustee will have any liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of Securities of any Series held by DTC's nominee, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
DEFINITIVE SECURITIES
If so stated in the related Prospectus Supplement, the Notes and/or
Certificates of a given Series will be issued in fully registered,
certificated form ("Definitive Notes" and "Definitive Certificates",
respectively, and, collectively, "Definitive Securities") to Noteholders or
Certificateholders or their respective nominees, rather than to DTC or its
nominee, only if (i) the related Trustee of a Grantor Trust or the related
Indenture Trustee in the case of an Owner Trust, as applicable, determines
that DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to the related Securities and such
Indenture Trustee or Trustee, as applicable, is unable to locate a qualified
successor, (ii) the Indenture Trustee or Trustee, as applicable, elects, at
its option, to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default or Servicer Default, Security Owners
representing at least a majority of the outstanding principal amount of the
Notes or Certificates, as applicable, of such Series, advise the related
Trustee through DTC that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of the related
Security Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the related Trustee or Indenture Trustee, as applicable,
will be required to notify the related Security Owners, through Participants,
of the availability of Definitive Securities. Upon surrender by DTC of the
certificates representing
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all Securities of any affected class and the receipt of instructions for re-
registration, the Trustee will issue Definitive Securities to the related
Security Owners. Distributions on the related Definitive Securities will be
made thereafter by the related Trustee or Indenture Trustee, as applicable,
directly to the holders in whose name the related Definitive Securities are
registered at the close of business on the applicable record date, in
accordance with the procedures set forth herein and in the related Indenture
or the related Trust Agreement or Pooling and Servicing Agreement, as
applicable. Distributions will be made by check mailed to the address of such
holders as they appear on the register specified in the related Indenture,
Trust Agreement or Pooling and Servicing Agreement, as applicable; however,
the final payment on any Securities (whether Definitive Securities or
Securities registered in the name of a Depository or its nominee) will be made
only upon presentation and surrender of such Securities at the office or
agency as specified in the notice of final distribution to Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the related Trustee or Indenture Trustee (or any security registrar
appointed thereby), as applicable. No service charge will be imposed for any
registration of transfer or exchange, but such Trustee or Indenture Trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
STATEMENTS TO SECURITYHOLDERS
With respect to each Series of Securities, on or prior to each Distribution
Date, the related Servicer will prepare and forward to the related Indenture
Trustee or Trustee to be included with the distribution to each Securityholder
of record a statement setting forth for the related Collection Period the
following information (and any other information specified in the related
Prospectus Supplement):
(i) the amount of the distribution allocable to principal of each class
of Securities of such Series;
(ii) the amount of the distribution allocable to interest on each class
of Securities of such Series;
(iii) if applicable, the amount of the Servicing Fee paid to the related
Servicer with respect to the related Collection Period;
(iv) the outstanding principal balance and Note Pool Factor for each
class of Notes, if any, and the Certificate Balance and Certificate Pool
Factor for each class of Certificates of such Series as of the related
record date;
(v) the balance of any Reserve Account or other form of credit
enhancement, after giving effect to any additions thereto or withdrawals
therefrom or reductions thereto to be made on the following Distribution
Date; and
(vi) the aggregate amount of realized losses, if any, in respect of
Receivables and any other loss, delinquency or other ratios set forth in
the related Prospectus Supplement for the related Collection Period.
Items (i), (ii) and (iv) above with respect to the Notes or Certificates of a
Series will be expressed as a dollar amount per $1,000 of initial principal
balance of such Notes or the initial Certificate Balance of such Certificates,
as applicable.
In addition, within the prescribed period of time for tax reporting purposes
after the end of each calendar year during the term of each Trust, the related
Trustee or Indenture Trustee, as applicable, will mail to each person who at
any time during such calendar year shall have been a registered Securityholder
a statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Material
Federal Income Tax Consequences".
LIST OF SECURITYHOLDERS
Three or more holders of the Notes of any Series or one or more holders of
such Notes evidencing not less than 25% of the aggregate outstanding principal
balance thereof may, by written request to the related Indenture Trustee,
obtain access to the list of all Noteholders maintained by such Indenture
Trustee for the purpose of
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communicating with other Noteholders with respect to their rights under the
related Indenture or under such Notes. Such Indenture Trustee may elect not to
afford the requesting Noteholders access to the list of Noteholders if it
agrees to mail the desired communication or proxy, on behalf of and at the
expense of the requesting Noteholders, to all Noteholders of such Series.
Three or more holders of the Certificates of any Series or one or more
holders of such Certificates evidencing not less than 25% of the Certificate
Balance of such Certificates may, by written request to the related Trustee,
obtain access to the list of all Certificateholders maintained by such Trustee
for the purpose of communicating with other Certificateholders with respect to
their rights under the related Trust Agreement or Pooling and Servicing
Agreement, as applicable, or under such Certificates.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the material provisions (in each such case,
to the extent anticipated to be common to any Series of Securities) of: (i)
each Receivables Purchase Agreement pursuant to which the Seller will transfer
Receivables to the Company, (ii) each Trust Agreement or Pooling and Servicing
Agreement pursuant to which a Trust will be created, Collateral Certificates,
Government Securities and/or Private Label Custody Receipt Securities, as
applicable, may be sold or transferred to such Trust, Certificates will be
issued, and the Servicer will service Receivables and the Trustee will manage
Government Securities, if any and Private Label Custody Receipt Securities, if
any (in the case of a Grantor Trust), (iii) each Sale and Servicing Agreement
pursuant to which the Company will transfer Receivables to a Trust and the
Servicer will service Receivables (in the case of an Owner Trust) or (iv) in
the case of Securities backed by Collateral Certificates, each Trust Agreement
pursuant to which a Trust will be created, Collateral Certificates will be
sold or transferred to such Trust, Government Securities and Private Label
Custody Receipt Securities may be sold or transferred to such Trust and a
Trustee will manage Collateral Certificates, Government Securities, if any,
and Private Label Custody Receipt Securities, if any (collectively, the
"Transfer and Servicing Agreements"). Forms of the Transfer and Servicing
Agreements have been filed as exhibits to the Registration Statement of which
this Prospectus forms a part. The following summary does not purport to be a
complete description of all of the terms of the Transfer and Servicing
Agreements and therefore is subject to, and is qualified in its entirety by
reference to, the provisions of the related Transfer and Servicing Agreement.
SALE AND ASSIGNMENT OF PRIMARY ASSETS
In the case of Primary Assets consisting of Receivables, on or prior to the
related Closing Date, a Seller will transfer and assign to the Company,
pursuant to a Receivables Purchase Agreement, without recourse, all of its
right, title and interest in and to Receivables in the outstanding principal
amount specified in the related Prospectus Supplement, including its security
interests in the related Financed Vehicles. Each such Receivable will be
identified in a schedule appearing as an exhibit to the related Receivables
Purchase Agreement (the "Schedule of Receivables").
In each Receivables Purchase Agreement the Seller will represent and warrant
to the Company, among other things, that (i) the information set forth in the
Schedule of Receivables is correct in all material respects as of the
applicable Cutoff Date; (ii) the Obligor on each Receivable is contractually
required to maintain physical damage insurance covering the related Financed
Vehicle in accordance with the Seller's normal requirements; (iii) on the
Closing Date, the Receivables are free and clear of all security interests,
liens, charges and encumbrances, and no offsets, defenses or counterclaims
have been asserted or threatened; (iv) at the Closing Date, each of the
Receivables is secured by a perfected, first-priority security interest in the
related Financed Vehicle in favor of the Seller; (v) each Receivable, at the
time it was originated, complied and, on the Closing Date complies, in all
material respects with applicable federal and state laws, including, without
limitation, consumer credit, truth-in-lending, equal credit opportunity and
disclosure laws; and (vi) any other representations and warranties that may be
set forth in the related Prospectus Supplement.
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To the extent specified in the related Prospectus Supplement, as of the last
day of the second Collection Period (or, if the Seller so elects, the last day
of the first Collection Period) following the discovery by or notice to the
Seller of any breach of a representation and warranty of the Seller that
materially and adversely affects the interests of the related Trust in any
Receivable, the Seller will be obligated to repurchase such Receivable, unless
the Seller cures such breach in a timely fashion. The purchase price for any
such Receivable will be equal to the unpaid principal balance owed by the
Obligor on such Receivable, plus accrued and unpaid interest on such unpaid
principal balance at the applicable APR to the last day of the month of
repurchase (the "Repurchase Amount"). This repurchase obligation will
constitute the sole remedy available to the Securityholders, the related
Trustee and any related Indenture Trustee for any such uncured breach.
On the related Closing Date, the Company will transfer and assign to the
related Trust, pursuant to a Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, without recourse, all of its right, title
and interest in and to Primary Assets in the outstanding principal amount
specified in the related Prospectus Supplement. Concurrently with the transfer
and assignment of such Primary Assets to the related Trust, the related
Trustee or Indenture Trustee, as applicable, will execute, authenticate and
deliver the related Securities.
Pursuant to the terms of the Sale and Servicing Agreement or the Pooling and
Servicing Agreement, as applicable, the Company will assign to the related
Trust the representations and warranties made by the related Seller under the
related Receivables Purchase Agreement for the benefit of the related
Securityholders and will make certain limited representations and warranties
with respect to the other Primary Assets included in the Trust. To the extent
that the related Seller does not repurchase a Primary Asset in the event of a
breach of its representations and warranties with respect to such Primary
Asset, the Company will not be required to repurchase such Primary Asset
unless such breach also constitutes a breach of one of the Company's
representations and warranties under the related Sale and Servicing Agreement
or Pooling and Servicing Agreement, as applicable, with respect to such
Primary Asset, if any, and such breach materially and adversely affects the
interests of the Securityholders in any such Primary Asset. Neither the Seller
nor the Company will have any other obligation with respect to the Primary
Assets or the Securities.
TRUST ACCOUNTS
With respect to each Owner Trust, the Servicer will establish and maintain
with the related Indenture Trustee, or the Trustee will establish and
maintain, (a) one or more accounts, on behalf of the related Securityholders,
into which all payments made on or in respect of the related Primary Assets
will be deposited (the "Collection Account") and (b) an account, in the name
of the Indenture Trustee on behalf of the Noteholders, into which amounts
released from the Collection Account and any Reserve Account or other form of
credit enhancement for payment to such Noteholders will be deposited and from
which all distributions to such Noteholders will be made (the "Note
Distribution Account"). With respect to each Owner Trust and Grantor Trust,
the Servicer or the related Trustee will establish and maintain an account, in
the name of such Trustee on behalf of the Certificateholders, into which
amounts released from the Collection Account and any Reserve Account or other
form of credit enhancement for distribution to such Certificateholders will be
deposited and from which all distributions to such Certificateholders will be
made (the "Certificate Distribution Account"). With respect to any Grantor
Trust, the Servicer or the related Trustee will also establish and maintain
the Collection Account and any other Trust Account in the name of the related
Trustee on behalf of the related Certificateholders.
If so provided in the related Prospectus Supplement, the Servicer will
establish for each Series of Securities an additional account (the "Payahead
Account"), in the name of the related Indenture Trustee (in the case of an
Owner Trust) or Trustee (in the case of a Grantor Trust), into which, to the
extent required in the related Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, early payments made by or on behalf of
Obligors on Precomputed Receivables will be deposited until such time as such
payments become due. Until such time as payments are transferred from the
Payahead Account to the Collection Account, they will not constitute collected
interest or collected principal and will not be available for distribution to
Noteholders or
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Certificateholders. Any other accounts to be established with respect to a
Trust will be described in the related Prospectus Supplement.
For each Series of Securities, funds in the Collection Account, Note
Distribution Account, Certificate Distribution Account and any Reserve Account
or other accounts identified as such in the related Prospectus Supplement
(collectively, the "Trust Accounts") will be invested as provided in the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, in Eligible Investments. "Eligible Investments" will generally be
limited to investments acceptable to the Rating Agencies as being consistent
with the rating of the related Securities. Eligible Investments will generally
be limited to obligations or securities that mature on or before the date of
the next scheduled distribution to Securityholders of such Series. However, to
the extent permitted by the Rating Agencies, funds in any Reserve Account may
be invested in securities that will not mature prior to the date of such next
scheduled distribution with respect to such Notes or Certificates and will not
be sold prior to maturity to meet any shortfalls. Thus, the amount of
available funds on deposit in a Reserve Account at any time may be less than
the balance of such Reserve Account. If the amount required to be withdrawn
from a Reserve Account to cover shortfalls in collections on the related
Receivables (as provided in the related Prospectus Supplement) exceeds the
amount of available funds on deposit in such Reserve Account, a temporary
shortfall in the amounts distributed to the related Noteholders or
Certificateholders could result, which could, in turn, increase the average
life of the related Notes or Certificates. Unless otherwise and to the extent
provided in the related Prospectus Supplement, investment earnings on funds
deposited in the Trust Accounts, net of losses and investment expenses
(collectively, "Investment Earnings"), will be deposited in the applicable
Collection Account on each Distribution Date and will be treated as
collections of interest on the related Receivables.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate
trust department of a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), having corporate trust
powers and acting as trustee for funds deposited in such account, so long as
any of the securities of such depository institution have a credit rating from
each Rating Agency in one of its generic rating categories that signifies
investment grade. "Eligible Institution" means, with respect to a Trust, (a)
the corporate trust department of the related Indenture Trustee or Trustee, as
applicable, or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank) (i) that has either (A) a
long-term unsecured debt rating acceptable to the Rating Agencies or (B) a
short-term unsecured debt rating or certificate of deposit rating acceptable
to the Rating Agencies and (ii) whose deposits are insured by the FDIC.
PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Securities of a particular Series (such amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding
Account") to be established with the Trustee, which will be used to acquire
additional Receivables from time to time during the time period specified in
the related Prospectus Supplement (the "Pre-Funding Period"). Prior to the
investment of the Pre-Funded Amount in additional Receivables, such Pre-Funded
Amount may be invested in one or more Eligible Investments. Except as
otherwise provided in the applicable Agreement, an "Eligible Investment" is
any of the following, in each case as determined at the time of the investment
or contractual commitment to invest therein (to the extent such investments
would not require registration of the Trust Fund as an investment company
pursuant to the Investment Company Act of 1940): (a) negotiable instruments or
securities represented by instruments in bearer or registered or book-entry
form which evidence (i) obligations which have the benefit of the full faith
and credit of the United States of America, including depository receipts
issued by a bank as custodian with respect to any such instrument or security
held by the custodian for the benefit of the holder of such depository
receipt, (ii) demand deposits or time deposits in, or bankers' acceptances
issued by, any depositary institution or trust company incorporated under the
laws of the United States of America or any state thereof and subject to
supervision and examination by Federal or state banking or depositary
institution
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authorities; provided that at the time of the Trustee's investment or
contractual commitment to invest therein, the certificates of deposit or
short-term deposits (if any) or long-term unsecured debt obligations (other
than such obligations whose rating is based on collateral or on the credit of
a Person other than such institution or trust company) of such depositary
institution or trust company has a credit rating in the highest rating
category from each Rating Agency, (iii) certificates of deposit having a
rating in the highest rating category from each Rating Agency or (iv)
investments in money market funds which are (or which are composed of
instruments or other investments which are) rated in the highest rating
category from each Rating Agency; (b) demand deposits in the name of the
Trustee in any depositary institution or trust company referred to in clause
(a)(ii) above; (c) commercial paper (having original or remaining maturities
of no more than 270 days) having a credit rating in the highest rating
category from each Rating Agency; (d) Eurodollar time deposits that are
obligations of institutions whose time deposits carry a credit rating in the
highest rating category from each Rating Agency; (e) repurchase agreements
involving any Eligible Investment described in any of clauses (a)(i), (a)(iii)
or (d) above, so long as the other party to the repurchase agreement has its
long-term unsecured debt obligations rated in the highest rating category from
each Rating Agency; and (f) any other investment with respect to which each
Rating Agency rating such Securities indicates will not result in the
reduction or withdrawal of its then existing rating of the Securities. Except
as otherwise provided in the applicable Agreement, any Eligible Investment
must mature no later than the Business Day prior to the next Distribution
Date.
During any Pre-Funding Period, the Seller or such other party specified in
the related Prospectus Supplement will be obligated (subject only to the
availability thereof) to transfer to the related Trust Fund additional
Receivables from time to time during such Pre-Funding Period. Such additional
Receivables will be required to satisfy certain eligibility criteria more
fully set forth in the related Prospectus Supplement, which eligibility
criteria will be consistent with the eligibility criteria of the Receivables
included in the Trust Fund as of the Closing Date subject to such exceptions
as are expressly stated in such Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Securities will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
90 days from the related Closing Date; (b) that the additional loans to be
acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Receivables included in the related
Trust Fund on the Closing Date (although additional criteria may also be
required to be satisfied, as described in the related Prospectus Supplement);
and (c) the Pre-Funded Amount will not exceed 25% of the principal amount of
the Securities issued pursuant to a particular offering.
SERVICING PROCEDURES
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Company and each Trust will designate the Servicer
as custodian to maintain possession, as such Trust's agent, of the related
Motor Vehicle Installment Contracts and any other documents relating to the
Receivables. The Seller's and the Servicer's accounting records and computer
systems will be marked to reflect the sale and assignment of the related
Receivables to each Trust, and UCC financing statements reflecting such sale
and assignment will be filed.
The Servicer will make reasonable efforts to collect all payments due with
respect to the Receivables and will, consistent with the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, follow
such collection procedures as it follows with respect to comparable Motor
Vehicle Installment Contracts it services for itself and others. Consistent
with its normal procedures, the Servicer may, in its discretion, arrange with
the Obligor on a Receivable to extend or modify the payment schedule, but no
such arrangement will, for purposes of any Sale and Servicing Agreement or
Pooling and Servicing Agreement, reduce the contract rate of, the amount of
the scheduled payments under, or extend the final payment date of, any
Receivable beyond the Final Scheduled Maturity Date (as such term is defined
with respect to any Receivables Pool in the related Prospectus Supplement).
Some of such arrangements may result in the Servicer purchasing the
Receivables for the Repurchase Amount, while others may result in the Servicer
making Advances. The
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Servicer may sell the related Financed Vehicle securing any Receivable at a
public or private sale, or take any other action permitted by applicable law.
See "Certain Legal Aspects of the Receivables".
COLLECTIONS
With respect to each Trust, the Servicer or the Trustee will deposit all
payments on the related Primary Assets (from whatever source) and all proceeds
of such Primary Assets, collected during a Collection Period into the related
Collection Account not later than two business days after receipt thereof.
However, notwithstanding the foregoing, such amounts may be remitted to the
Collection Account by the Servicer on a monthly basis on or prior to the
applicable Distribution Date if no Servicer Default exists and each other
condition to making deposits less frequently than daily as may be specified by
the Rating Agencies or set forth in the related Prospectus Supplement is
satisfied. Pending deposit into the Collection Account, such collections may
be invested by the Servicer at its own risk and for its own benefit and will
not be segregated from its own funds. If the Servicer were unable to remit
such funds to the Collection Account on any Distribution Date, Securityholders
might incur a loss. To the extent set forth in the related Prospectus
Supplement, the Servicer may, in order to satisfy the requirements described
above, obtain a letter of credit or other security for the benefit of the
related Trust to secure timely remittances of collections on the related
Primary Assets and payment of the aggregate Repurchase Amount with respect to
Receivables repurchased by the Servicer.
Collections on a Precomputed Receivable during any Collection Period will be
applied first to the repayment of any outstanding Precomputed Advances made by
the Servicer with respect to such Receivable (as described below), and then to
the scheduled monthly payment due on such Receivable. Any portion of such
collections remaining after the scheduled monthly payment has been made (such
excess amounts, the "Payaheads") will, unless such remaining amount is
sufficient to prepay the Precomputed Receivable in full (and subject to
certain limitations which, if applicable, will be specified in the related
Prospectus Supplement), be transferred to and kept in the Payahead Account
until such later Distribution Date on which such Payaheads may be applied
either to the scheduled monthly payment due during the related Collection
Period or to prepay such Receivable in full.
ADVANCES
If specified in the related Prospectus Supplement, to the extent the
collections of interest and principal on a Precomputed Receivable for a
Collection Period fall short of the related scheduled payment, the Servicer
generally will make a Precomputed Advance of the shortfall. The Servicer will
be obligated to make a Precomputed Advance on a Precomputed Receivable only to
the extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent collections or recoveries on such Receivable or other
Precomputed Receivables in the related Receivables Pool. The Servicer will
deposit the Precomputed Advance in the applicable Collection Account on or
before the business day preceding the applicable Distribution Date. The
Servicer will recoup its Precomputed Advance from subsequent payments by or on
behalf of the related Obligor or from insurance or liquidation proceeds with
respect to the related Receivable and will release its right to reimbursement
in conjunction with its purchase of the Receivable as Servicer or, upon
determining that reimbursement from the preceding sources is unlikely, will
recoup its Precomputed Advance from any collections made on other Precomputed
Receivables in the related Receivables Pool.
If specified in the related Prospectus Supplement, on or before the business
day prior to each Distribution Date, the Servicer will deposit into the
related Collection Account as a Simple Interest Advance an amount equal to the
amount of interest that would have been due on the related Simple Interest
Receivables at their respective APRs for the related Collection Period
(assuming that such Simple Interest Receivables are paid on their respective
due dates) minus the amount of interest actually received on such Simple
Interest Receivables during the applicable Collection Period. If such
calculation results in a negative number, an amount equal to such amount shall
be paid to the Servicer in reimbursement of outstanding Simple Interest
Advances. In addition, if specified in the related Prospectus Supplement, if a
Simple Interest Receivable becomes a Liquidated Receivable (as such term is
defined in the related Prospectus Supplement), the amount of accrued and
unpaid interest thereon (but not including interest for the then current
collection Period) will be withdrawn from the Collection Account and paid to
the Servicer in reimbursement of outstanding Simple Interest Advances. No
advances of principal will be made with respect to Simple Interest
Receivables.
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NET DEPOSITS
For administrative convenience, unless the Servicer or the Trustee is
required to remit collections to the Collection Account on a daily basis as
described under "Collections" above, the Servicer or the Trustee will be
permitted to make deposits of collections, aggregate Advances and Repurchase
Amounts for any Trust for or in respect of each Collection Period net of
distributions to be made to the Servicer with respect to such Collection
Period. The Servicer also may cause a single, net transfer to be made from the
Collection Account to the Payahead Account, or vice versa.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
To the extent provided in the related Prospectus Supplement, with respect to
each Trust the related Servicer will be entitled to receive, out of interest
collected on or in respect of the related Primary Assets serviced by the
Servicer, a fee for each Collection Period (the "Servicing Fee") in an amount
equal to the percentage per annum specified in the related Prospectus
Supplement (the "Servicing Fee Rate") of the Pool Balance related to such
Primary Assets as of the first day of such Collection Period. Unless otherwise
provided in the related Prospectus Supplement, the Servicing Fee (together
with any portion of the Servicing Fee that remains unpaid from prior
Distribution Dates) will be paid solely to the extent of the Interest
Distribution Amount; however, the Servicing Fee will be paid prior to the
distribution of any portion of the Interest Distribution Amount to the holders
of the Notes or Certificates of any Series.
To the extent provided in the related Prospectus Supplement, the Servicer
will also collect and retain any late fees, prepayment charges and other
administrative fees or similar charges allowed by applicable law with respect
to Receivables and will be entitled to reimbursement from each Trust for
certain liabilities. Payments by or on behalf of Obligors will be allocated to
scheduled payments under the related Motor Vehicle Installment Contract and
late fees and other charges in accordance with the Servicer's normal practices
and procedures.
If applicable, the Servicing Fee will compensate the Servicer for performing
the functions of a third party servicer of motor vehicle receivables as an
agent for the related Trust, including collecting and posting all payments,
responding to inquiries of Obligors on the Receivables, investigating
delinquencies, sending payment statements and reporting the collateral. The
Servicing Fee will also compensate the Servicer for administering the
Receivables, including making Advances, accounting for collection, furnishing
monthly and annual statements to the related Indenture Trust and/or Trustee,
and generating federal income tax information for such Trust and for the
related Noteholders and/or Certificateholders as well as the Trust's
compliance with the reporting provisions under the Exchange Act. The Servicing
Fee also will reimburse the Servicer for certain taxes, the fees of the
related Indenture Trustee and/or Trustee, accounting fees, outside auditor
fees, date processing cost and other costs incurred in connection with
administering the Primary Assets.
DISTRIBUTIONS
With respect to each Series of Securities, beginning on the Distribution
Date specified in the related Prospectus Supplement, distributions of
principal and interest (or, where applicable, principal only or interest only)
on each class of Securities entitled thereto will be made by the related
Trustee or Indenture Trustee, as applicable, to the Certificateholders and
Noteholders of such Series. The timing, calculation, allocation, order, source
and priorities of, and requirements for, all payments to the holders of each
class of Notes and/or distributions to holders of each class of Certificates
will be set forth in the related Prospectus Supplement.
With respect to each Trust, on each Distribution Date collections on or in
respect of the related Primary Assets will be transferred from the Collection
Account to the Note Distribution Account or Certificate Distribution Account,
as applicable, for distribution to the Noteholders and Certificateholders to
the extent provided in the related Prospectus Supplement. Credit enhancement,
such as a Reserve Account, will be available to cover shortfalls in the amount
available for distribution on such date to the extent specified in the related
Prospectus Supplement. As and to the extent described in the related
Prospectus Supplement, distributions in respect of principal of a class of
Securities of a Series may be subordinate to distributions in respect of
interests
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on such class, and distributions in respect of one or more classes of
Certificates of such Series may be subordinate to payments in respect of the
Notes, if any, of such Series or other classes of Certificates. Distributions
of principal on the Securities of a Series may be based on the amount of
principal collected or due, or the amount of realized losses incurred, in a
Collection Period.
CREDIT AND CASH FLOW ENHANCEMENT
The amounts and types of any credit and cash flow enhancement arrangements
and the provider thereof, if applicable, with respect to each class of
Securities of a Series will be set forth in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement, credit or cash
flow enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, spread accounts, letters of credit, surety
bonds, insurance policies, over-collateralization, credit or liquidity
facilities, guaranteed investment contracts, swaps or other interest rate
protection agreements, repurchase obligations, other agreements with respect
to third party payments or other support, cash deposits, or such other
arrangements that are incidental to or related to the Primary Assets included
in a Trust as may be described in the related Prospectus Supplement, or any
combination of the foregoing. If specified in the applicable Prospectus
Supplement, credit or cash flow enhancement for a class of Securities may
cover one or more other classes of Securities of the same Series, and credit
enhancement for a Series of Securities may cover one or more other Series of
Securities.
The existence of a Reserve Account or other form of credit enhancement for
the benefit of any class or Series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of such class or Series of the
full amount of principal and interest due thereon and to decrease the
likelihood that such Securityholders will experience losses. The credit
enhancement for a class or Series of Securities will not (as a general rule)
provide protection against all types of loss and will not guarantee repayment
of all principal and interest thereon. If losses occur which exceed the amount
covered by such credit enhancement or which are not covered by such credit
enhancement, Securityholders will bear their allocable share of such losses,
as described in the Prospectus Supplement. In addition, if a form of credit
enhancement covers more than one Series of Securities, Securityholders of any
such Series will be subject to the risk that such credit enhancement may be
exhausted by the claims of Securityholders of other Series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Transfer and Servicing Agreement, the Company or the
Seller will establish for a Series or class or classes of Securities an
account (the "Reserve Account"), which will be maintained with the related
Indenture Trustee or Trustee, as applicable. A Reserve Account will be funded
by an initial deposit by the Company or the Seller, as applicable, on the
Closing Date in the amount set forth in the related Prospectus Supplement. As
further described in the related Prospectus Supplement, the amount on deposit
in the Reserve Account may be increased or reinstated on each Distribution
Date, to the extent described in the related Prospectus Supplement, by the
deposit there of amounts from collections on the Primary Assets. The related
Prospectus Supplement will describe the circumstances under which and the
manner in which distributions may be made out of any such Reserve Account,
either to holders of the Securities covered thereby or to the Company, the
Seller or to any other entity.
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, will provide that a firm of independent public accountants will
furnish annually to the related Trust and Indenture Trustee and/or Trustee a
statement as to compliance by the Sale and Servicer during the preceding
twelve months (or, in the case of the first such statement, during such
shorter period that shall have elapsed since the applicable Closing Date) with
certain standards relating to the servicing of the Receivables, the Servicer's
accounting records and computer files with respect thereto and certain other
matters.
Each Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, will also provide for delivery to the related Trust and Indenture
Trustee and/or Trustee each year of a certificate signed by an officer of the
Servicer stating that the Servicer has fulfilled it obligations under the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, throughout the preceding twelve months (or, in
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the case of the first such certificate, during such shorter period that shall
have elapsed since the applicable Closing Date) or, if there has been a
default in the fulfillment of any such obligation, describing each such
default. The Servicer will agree to give each Indenture Trustee and/or
Trustee, as applicable, notice of certain Servicer Defaults under the related
Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable.
Copies of the foregoing statements and certificates may be obtained by
Securityholders by a request in writing addressed to the related Trustee or
Indenture Trustee, as applicable, at the Corporate Trust Office for such
Trustee or Indenture Trustee specified in the related Prospectus Supplement.
STATEMENTS TO TRUSTEES AND THE TRUST
Prior to each Distribution Date with respect to each Series of Securities,
the Servicer will provide to the applicable Indenture Trustee, if any, and the
applicable Trustee as of the close of business on the last day of the
preceding Collection Period a statement setting forth substantially the same
information as is required to be provided in the periodic reports provided to
Securityholders of such Series as described under "Certain Information
Regarding the Securities--Statements to Securityholders".
CERTAIN MATTERS REGARDING THE SERVICER
Each Sale and Servicing Agreement and Pooling and Servicing Agreement will
provide that the Servicer may not resign from its obligations and duties as
Servicer thereunder, except upon determination that such Servicer's
performance of such duties is no longer permissible under applicable law or if
such resignation is required by regulatory authorities. No such resignation
will become effective until the related Indenture Trustee or Trustee, as
applicable, or a successor servicer has assumed the servicing obligations and
duties under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable.
Each Sale and Servicing Agreement and Pooling and Servicing Agreement will
further provide that neither the Servicer nor any of its directors, officers,
employees and agents will be under any liability to the related Trust or
Securityholders for taking any action or for refraining from taking any action
pursuant to the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, or for errors in judgment; provided, that neither
the Servicer nor any such person will be protected against any liability that
would otherwise be imposed by reason of wilful misfeasance, bad faith or gross
negligence in the performance of the Servicer's duties or by reason of
reckless disregard of its obligations and duties thereunder. In addition, each
Sale and Servicing Agreement and Pooling and Servicing Agreement will provide
that the Servicer is under no obligation to appear in, prosecute or defend any
legal action that is not incidental to its servicing responsibilities under
such Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, and that, in its opinion, may cause it to incur any expense or
liability.
Under the circumstances specified in each Sale and Servicing Agreement and
Pooling and Servicing Agreement, any entity into which the Servicer may be
merged or consolidated, or any entity resulting from any merger or
consolidation to which the Servicer is a party, or any entity succeeding to
all or substantially all of the business of the Servicer, or any corporation
which assumes the obligations of the Servicer, will be the successor to the
Servicer under the related Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable.
SERVICER DEFAULTS
A "Servicer Default" under each Sale and Servicing Agreement and Pooling and
Servicing Agreement will consist of: (i) any failure by the Servicer to
deliver to the related Trustee or Indenture Trustee, as applicable, for
deposit in any of the Trust Accounts any required payment or to direct the
related Trustee or Indenture Trust, as applicable, to make any required
distributions therefrom, which failure continues unremedied for five business
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days after discovery by an officer of the Servicer or written notice of such
failure is given (a) to the Servicer by the related Trustee or Indenture
Trustee, as applicable, or (b) to the Servicer and to the related Trustee or
Indenture Trustee, as applicable, by holders of Notes, if any, evidencing not
less that 25% of the aggregate outstanding principal amount thereof or, in the
event a Series of Securities includes no Notes or if such Notes have been paid
in full, by holders of Certificates evidencing not less that 25% of the
Certificate Balance; (ii) any failure by the Servicer duly to observe or
perform in any material respect any covenant or agreement in the related Sale
and Servicing Agreement or Pooling and Servicing Agreement, as applicable,
which failure materially and adversely affects the rights of the related
Securityholders and which continues unremedied for 60 days after written
notice of such failure is given to the Servicer in the same manner described
in clause (i) above; (iii) certain events of bankruptcy, insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings and certain actions by the Servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations; and (iv) such other events as may be set forth in the related
Prospectus Supplement.
RIGHTS UPON SERVICER DEFAULT
Generally, in the case of an Owner Trust, as long as a Servicer Default
under the related Sale and Servicing Agreement remains unremedied, the related
Indenture Trustee or holders of Notes of the related Series evidencing not
less than 25% of the aggregate principal amount of such Notes then outstanding
may terminate all the rights and obligations of the Servicer under such Sale
and Servicing Agreement, whereupon such Indenture Trustee or a successor
servicer appointed by such Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Sale and
Servicing Agreement and will be entitled to similar compensation arrangements.
Generally, in the case of any Grantor Trust, as long as a Servicer Default
under the related Pooling and Servicing Agreement remains unremedied, the
related Trustee or holders of Certificates of the related Series evidencing
not less than 25% of the Certificate Balance may terminate all the rights and
obligations of the Servicer under such Pooling and Servicing Agreement,
whereupon such Trustee or a successor servicer appointed by such Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Pooling and Servicing Agreement and will be entitled to similar
compensation arrangements. If, however, a bankruptcy trustee or similar
official has been appointed for the Servicer, and no Servicer Default other
than such appointment has occurred, such trustee or official may have the
power to prevent any Indenture Trustee or the related Noteholders or such
Trustee or the related Certificateholders from effecting a transfer of
servicing. If the related Indenture Trustee, if any, or the related Trustee is
unwilling or unable to act as successor to the Servicer, such Indenture
Trustee or Trustee, as applicable, may appoint, or may petition a court of
competent jurisdiction to appoint, a successor with a net worth of at least
$100,000,000 and whose regular business includes the servicing of motor
vehicle receivables. The Indenture Trustee, if any, or the Trustee may arrange
for compensation to be paid to such successor servicer, which in no event may
be greater than the compensation payable to the Servicer under the related
Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable.
WAIVER OF PAST DEFAULTS
To the extent provided in the related Prospectus Supplement, (i) in the case
of each Owner Trust, holders of the related Notes evidencing not less than a
majority of the aggregate outstanding principal amount of the Notes (or of
Certificates evidencing not less than a majority of the outstanding
Certificate Balance, in the case of any default that does not adversely affect
the Indenture Trustee or Noteholders) and (ii) in the case of each Grantor
Trust, holders of Certificates evidencing not less than a majority of the
Certificate Balance, may, on behalf of all such Noteholders and
Certificateholders, waive any default by the Servicer in the performance of
its obligations under the related Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, and its consequences, except a default in
making any required deposits to or payments from any Trust Account or in
respect of a covenant or provision in the Sale and Servicing Agreement or
Pooling and Servicing Agreement, as applicable, that cannot be modified or
amended without the consent of each Securityholder (in which event the related
waiver will require the approval of holders of all of the Securities of such
Series). No such waiver will impair the Securityholders' right with respect to
any subsequent Servicer Default.
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AMENDMENT
Unless otherwise provided in the related Prospectus Supplement, each of the
Transfer and Servicing Agreements may be amended by the parties thereto
without the consent of the related Noteholders or Certificateholders: (i) to
cure any ambiguity, (ii) to correct or supplement any provisions in such
Transfer and Servicing Agreement, or (iii) for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, such Transfer and Servicing Agreement; provided, that any such action in
this clause (iii) will not, in the opinion of counsel satisfactory to the
related Trustee or Indenture Trustee, as applicable, adversely affect in any
material respect the interests of the Company or any such Noteholder.
The Transfer and Servicing Agreements may also be amended from time to time
by the parties thereto with the consent of the holders of Notes evidencing at
least a majority of the aggregate principal amount of the then outstanding
Notes, if any, and with the consent of the holders of Certificates evidencing
at least a majority of the aggregate principal amount of the then outstanding
Certificates, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of such Transfer and Servicing
Agreement or of modifying in any manner the rights of such Noteholders or
Certificateholders, as applicable; provided that no such amendment may (i)
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments on or in respect of the related Primary
Assets or distributions that are required to be made for the benefit of such
Noteholders or Certificateholders or (ii) reduce the aforesaid percentage of
the Notes or Certificates of such Series the holders of which are required to
consent to any such amendment, without the consent of the holders of all of
the outstanding Notes or Certificates, as the case may be, of such Series.
PAYMENT IN FULL OF THE NOTES
Upon the payment in full of all outstanding Notes of a given Series and the
satisfaction and discharge of the related Indenture, the related Trustee will
succeed to all the rights of the Indenture Trustee, and the Certificateholders
of such Series generally will succeed to the rights of the Noteholders of such
Series under the related Sale and Servicing Agreement.
TERMINATION
The obligations of the related Servicer, the related Trustee and the related
Indenture Trustee, if any, with respect to a Trust pursuant to the related
Transfer and Servicing Agreement will terminate upon the earliest to occur of
(i) the maturity or other liquidation of the last Primary Asset and the
disposition of any amounts received upon liquidation of any such remaining
Primary Asset, (ii) the payment to Noteholders, if any, and Certificateholders
of all amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements and (iii) the occurrence of either event described below.
In order to avoid excessive administrative expenses, the related Servicer
will be permitted, at its option, to purchase from a Trust all remaining
Primary Assets as of the end of any Collection Period, if the then outstanding
Pool Balance is 10% (or, if any Seller is a bank, 5%) or less of the Pool
Balance as of the related Cutoff Date, at a purchase price equal to the price
specified in the related Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement, the
Indenture Trustee or Trustee, as applicable, will, within ten days following a
Distribution Date as of which the Pool Balance is equal to or less than the
percentage of the original Pool Balance specified in the related Prospectus
Supplement, solicit bids for the purchase of the Primary Assets remaining in
such Trust, in the manner and subject to the terms and conditions set forth in
such Prospectus Supplement. If such Indenture Trustee or Trustee receives
satisfactory bids as described in such Prospectus Supplement, then the Primary
Assets remaining in such Trust will be sold to the highest bidder.
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTERESTS IN FINANCED VEHICLES
In states in which retail installment contracts such as the Receivables
evidence the credit sale of automobiles, recreational vehicles, vans and light
duty trucks by dealers to obligors, the contracts also constitute personal
property security agreements and include grants of security interests in the
vehicles under the UCC as in effect in such states. Perfection of security
interests in the automobiles, recreational vehicles, vans and light duty
trucks financed, directly or indirectly, by a Seller is generally governed by
the motor vehicle registration laws of the state in which the vehicle is
located. In general, a security interest in automobiles, recreational
vehicles, vans and light-duty trucks is perfected by obtaining the certificate
of title to the financed vehicle or notation of the secured party's lien on
the vehicles' certificate of title.
All of the Motor Vehicle Installment Contracts name the Seller as obligee or
assignee and as the secured party. The Seller will take all actions necessary
under the laws of the state in which the financed vehicle is located to
perfect the Seller's security interest in such financed vehicle, including,
where applicable, having a notation of its lien recorded on such vehicle's
certificate of title. If the Seller, because of clerical error or otherwise,
has failed to take such action with respect to financed vehicle, it will not
have a perfected security interest and its security interest may be
subordinate to the interest of, among others, subsequent purchasers of the
financed vehicle that give value without notice of the Seller's security
interest and to whom a certificate of ownership is issued in such purchaser's
name, holders of perfected security interests in the financed vehicle and the
trustee in bankruptcy of the Obligor. The Seller's security interest may also
be subordinate to such third parties in the event of fraud or forgery by the
Obligor or administrative error by state recording officials or in the
circumstances noted below.
Pursuant to each Sale and Servicing Agreement and Pooling and Servicing
Agreement, the Seller will assign its interests in the Financed Vehicles
securing the related Receivables to the related Trust. However, because of
administrative burden and expense, neither the Seller nor the related Trustee
will amend any certificate of title to identify such Trust as the new secured
party on the certificates of title relating to the Financed Vehicles. The
Servicer will hold certificates of title relating to the Financed Vehicles in
its possession as custodian for the Trust pursuant to the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable. See
"Description of the Transfer and Servicing Agreements--Sale and Assignment of
Primary Assets".
In most states, assignments such as those under the related Trust Agreement
or Pooling and Servicing Agreement, as applicable, are effective conveyances
of a security interest in the related financed vehicle without amendment of
any lien noted on such vehicle's certificate of title, and the assignee
succeeds thereby to the assignor's rights as secured party. Although re-
registration of the motor vehicle is not necessary in such states to convey a
perfected security interest in the Financed Vehicles to a Trust, because the
related Trust will not be listed as legal owner on the certificates of title
to the Financed Vehicles, a Trust's security interest could be defeated
through fraud or negligence. However, in the absence of fraud or forgery by
the vehicle owner or the Servicer or administrative error by state of local
agencies, the notation of the Seller's lien on a certificate of title will be
sufficient to protect a Trust against the rights of subsequent purchasers of a
Financed Vehicle or subsequent creditors who take a security interest in a
Financed Vehicle. If there are any Financed Vehicles as to which the Seller
fails to obtain a first-priority perfected security interest, the Trust's
security interest would be subordinate to, among others, subsequent purchasers
of such Financed Vehicles and holders of perfected security interests therein.
Such a failure, however, would constitute a breach of the Seller's
representations and warranties under the related Receivables Purchase
Agreement and the Seller will be required to repurchase such Receivable from
the Trust unless the breach is cured in a timely manner. See "Description of
the Transfer and Servicing Agreements--Sale and Assignment of Primary Assets"
and "Risk Factors--Certain Legal Aspects--Lack of Security Interests in
Financed Vehicles".
Under the laws of most states, a perfected security interest in a motor
vehicle continues for four months after the vehicle is moved to a new state
from the one in which it is initially registered and thereafter until the
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owner re-registers such motor vehicle in the new state. A majority of states
require surrender of a certificate of title to re-register a vehicle.
Accordingly, a secured party must surrender possession if it holds the
certificate of title of the vehicle or, in the case of vehicles registered in
states providing for the notation of a lien on the certificate of title but
not possession by the secured party, the secured party would receive notice of
surrender from the state of re-registration if the security interest is noted
on the certificate of title. Thus, the secured party would have the
opportunity to reperfect its security interest in the vehicle in the state of
relocation. However, these procedural safeguards will not protect the secured
party if, through fraud, forgery or administrative error, an Obligor somehow
procures a new certificate of title that does not list the secured party's
lien. Additionally, in states that do not require a certificate of title for
registration of a vehicle, re-registration could defeat perfection. In the
ordinary course of servicing the Receivables, the Servicer will take steps to
effect re-perfection upon receipt of notice of re-registration or information
from the Obligor as to relocation. Similarly, when an Obligor sells a Financed
Vehicle and the purchaser thereof attempts to re-register such vehicle, the
Seller must surrender possession of the certificate of title or will receive
notice as a result of having its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related Receivable before its
lien is released. Under each Sale and Servicing Agreement and Pooling and
Servicing Agreement, the Servicer will be obligated to take appropriate steps,
at its own expense, to maintain perfection of security interests in the
related Financed Vehicles and is obligated to purchase the related Receivable
if it fails to do so.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for unpaid taxes take priority over even a perfected, first-
priority security interest in such vehicle. The Code also grants priority to
certain federal tax liens over the lien of a secured party. The laws of
certain states and federal law permit the confiscation of motor vehicles by
governmental authorities under certain circumstances if used in unlawful
activities, which may result in the loss of a secured party's perfected
security interest in a confiscated motor vehicle. In each Receivables Purchase
Agreement, the Seller will represent and warrant that, as of the date any
Receivable is sold to the Trust, the security interest in the related Financed
Vehicle is or will be prior to all other present liens (other than tax liens
and other liens that arise by operation of law) upon and security interests in
such Financed Vehicle. However, liens for repairs or taxes could arise, or the
confiscation of a Financed Vehicle could occur, at any time during the term of
a Receivable. No notice will be given to the related Trustee, the related
Indenture Trustee, if any, or related Securityholders in the event such a lien
arises or confiscation occurs. Any such lien or confiscation arising or
occurring after the Closing Date will not give rise to a repurchase obligation
of the Seller under the related Receivables Purchase Agreement.
REPOSSESSION
In the event of default by an Obligor, the holder of the related retail
installment sale contract has all the remedies of a secured party under the
UCC, except where specifically limited by other state laws. The UCC remedies
of a secured party include the right to repossession by self-help means,
unless such means would constitute a breach of the peace. Self-help
repossession is the method employed by the Servicer in most cases and is
accomplished simply by taking possession of the related motor vehicle. In
cases where the Obligor objects or raises a defense to repossession, or if
otherwise required by applicable state law, a court order must be obtained
from the appropriate state court, and the vehicle must then be recovered in
accordance with that order. In some jurisdictions, the secured party is
required to notify an Obligor debtor of the default and the intent to
repossess the collateral and to give such Obligor a period of time within
which to cure the default prior to repossession. Generally, such right to cure
may only be exercised on a limited number of occasions during the term of the
related contract.
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and other state laws require the secured party to provide the
Obligor with reasonable notice of the date, time and place of any public sale
and/or the date after which any private sale of the collateral may be held.
The Obligor has the right to redeem the collateral prior to actual sale by
paying the secured party the unpaid principal balance of the obligation,
accrued interest thereon, plus reasonable expenses for repossessing, holding
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and preparing the collateral for disposition and arranging for its sale, plus,
in some jurisdictions, reasonable attorneys' fees or, in some states, by
payment of delinquent installments or the unpaid principal balance of the
related obligation.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of the resale of any Financed Vehicle generally will be applied
first to the expenses of resale and repossession and then to the satisfaction
of the related indebtedness. While some states impose prohibitions or
limitations on deficiency judgments if the net proceeds from any such resale
do not cover the full amount of the indebtedness, a deficiency judgment can be
sought in certain other states that do not prohibit or limit such judgments.
However, the deficiency judgment would be a personal judgment against the
Obligor for the shortfall, and a defaulting Obligor can be expected to have
very little capital or sources of income available following repossession; in
many cases, therefore, it may not be useful to seek a deficiency judgment or,
if one is obtained, it may be settled at a significant discount or be
uncollectible. In addition to the notice requirement, the UCC requires that
every aspect of the sale or other disposition, including the method, manner,
time, place and terms, be "commercially reasonable". Generally, courts have
held that when a sale is not "commercially reasonable", the secured party
loses its right to a deficiency judgment. In addition, the UCC permits the
debtor or other interested party to recover for any loss caused by
noncompliance with the provisions of the UCC. Also, prior to a sale, the UCC
permits the debtor or other interested person to restrain the secured party
from disposing of the collateral if it is established that the secured party
is not proceeding in accordance with the "default" provisions under the UCC.
Occasionally, after the resale of a motor vehicle and payment of all related
expenses and indebtedness, there is a surplus of funds. In that case, the UCC
requires the creditor to remit the surplus to any holder of a subordinate lien
with respect to such vehicle or, if no such lienholder exists, to the former
owner of the vehicle.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon creditors and servicers involved in
consumer finance. These laws include the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B
and Z, the Soldiers' and Sailors' Relief Act, state adaptations of the
National Consumer Act and of the Uniform Consumer Credit Code, and state motor
vehicle retail installment sales acts, retail installment sales acts and other
similar laws. Also, the laws of certain states impose finance charge ceilings
and other restrictions on consumer transactions and require contract
disclosures in addition to those required under 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 the ability of an assignee, such as a Trust, to enforce
consumer finance contracts such as Receivables.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code, other statutes or the common law, has the effect
of subjecting a seller in a consumer credit transaction (and certain related
creditors and their assignees) to all claims and defenses that the obligor in
the transaction could assert against the seller of the goods. Liability under
the FTC Rule is limited to the amounts paid by the obligor under the contract,
and the holder of the contract may also be unable to collect any balance
remaining due thereunder from the obligor. Most of the Receivables will be
subject to the requirements of the FTC Rule. Accordingly, each Trust, as
holder of the related Receivables, will be subject to any claims or defenses
that the purchasers of the related Financed Vehicles may assert against the
sellers of such Financed Vehicles. If an Obligor were successful in asserting
any such claims or defenses, such claim or defense would constitute a breach
of the Seller's warranties under the related Receivables Purchase Agreement
and would create an obligation of the Seller to repurchase the Receivable
unless such breach is cured in a timely manner. See "Description of the
Transfer and Servicing Agreements--Sale and Assignment of Primary Assets".
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Courts have applied general equitable principles to secured parties pursuing
repossession and litigation involving deficiency balances. These equitable
principles may have the effect of relieving an obligor from some or all of the
legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections of the Fourteenth Amendment to the Constitution of the United
States. Courts have generally either upheld the notice provisions of the UCC
and related laws as reasonable or have found that the creditors' repossession
and resale do not involve sufficient state action to afford constitutional
protection to borrowers.
Under each Receivables Purchase Agreement the Seller will represent and
warrant that each Receivable complies in all material respects with all
applicable federal and state laws. Accordingly, if an Obligor has a claim
against a Trust for a violation of any law and such claim materially and
adversely affects the interests of such Trust in a Receivable, such violation
would constitute a breach of such representation and warranty and would create
an obligation of the Seller to repurchase such Receivable unless the breach is
cured. See "Description of the Transfer and Servicing Agreements--Sale and
Assignment of Primary Assets".
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a creditor to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
creditor from repossessing a motor vehicle and, as part of the rehabilitation
plan, may reduce the amount of the secured indebtedness to the market value of
the motor vehicle at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under the related contract or change the rate of interest and
time of repayment of the indebtedness.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material United
States federal income tax consequences of the purchase, ownership and
disposition of Securities. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of Notes ("Note Owners") or Certificates
("Certificate Owners") that are insurance companies, regulated investment
companies or dealers in securities. Moreover, there are no cases or Internal
Revenue Service ("IRS") rulings on similar transactions involving both debt
and equity interests issued by a trust with terms similar to those of the
Notes and the Certificates. As a result, the IRS might disagree with all or
part of the discussion below. Prospective investors are urged to consult their
own tax advisors in determining the federal, state, local, foreign and any
other tax consequences to them of the purchase, ownership and disposition of
the Notes and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be
provided with an opinion of tax counsel specified in the related Prospectus
Supplement ("Federal Tax Counsel") regarding certain federal income tax
matters discussed below, a copy of which will be filed with the SEC in a
Current Report on Form 8-K or in a post-effective amendment to the
Registration Statement. An opinion of Federal Tax Counsel, however, is not
binding on the IRS or the courts. No ruling on any of the issues discussed
below will be sought from the IRS. The opinion of Federal Tax Counsel
specifically addresses only those issues specifically identified below as
being covered by such opinion; however, such opinion also states that the
additional discussion set forth below accurately sets forth the advice of
Federal Tax Counsel with respect to material federal income tax issues. For
purposes of the following summary, references to the Trust, the Notes, the
Certificates and related a foreign
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terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each Trust and the Notes, Certificates and related terms,
parties and documents applicable to such Trust.
OWNER TRUSTS
Tax Characterization of the Owner Trusts. In the case of an Owner Trust,
Federal Tax Counsel will deliver its opinion that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. The opinion of Federal Tax Counsel will be based
on the assumption that the terms of the Trust Agreement and related documents
will be complied with, and on such counsel's conclusions that the nature of
the income of the Trust, or restrictions (if any) on transfers of the
Certificates, will exempt the Trust from the rule that certain publicly traded
partnerships are taxable as corporations.
If a Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all of its income on the related Primary
Assets, which might be reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments
on the Notes and distributions on the Certificates, and Certificate Owners
(and possibly Note Owners) could be liable for any such tax that is unpaid by
the Trust.
Tax Consequences to Note Owners.
Treatment of the Notes as Indebtedness. The Trust will agree, and the Note
Owners will agree by their purchase of Notes, to treat the Notes as debt for
federal tax purposes. Federal Tax Counsel will (subject to certain exceptions
which, if applicable, will be specified in the related Prospectus Supplement)
advise the Owner Trust that the Notes will be classified as debt for federal
income tax purposes, or classified in such other manner as shall be provided
in the related Prospectus Supplement. If, contrary to the opinion of Federal
Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust. If so treated, the Trust might be taxable as
a corporation with the adverse consequences described above (and the resulting
taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, the Trust might be treated as a publicly traded partnership
that would be taxable as a corporation unless it met certain qualifying income
tests. Treatment of the Notes as equity interests in a partnership could have
adverse tax consequences to certain holders, even if the Trust were not
treated as a publicly traded partnership taxable as a corporation. For
example, income allocable to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
might be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual holders might be subject to certain limitations
on their ability to deduct their share of Trust expenses. The discussion below
assumes that the Notes will be characterized as debt for federal income tax
purposes.
Interest Income on the Notes. The taxation of interest on a Note will depend
on whether the interest constitutes "qualified stated interest" (as defined
below). Interest on a Note that constitutes qualified stated interest is
includible in a Note Owner's income as ordinary interest income when actually
or constructively received, if such Note Owner uses the cash method of
accounting for federal income tax purposes, or when accrued, if such Note
Owner uses an accrual method of accounting for federal income tax purposes.
Interest that does not constitute qualified stated interest is included in a
Note Owner's income under the rules described below under "--Original Issue
Discount", regardless of such Note Owner's method of accounting, or, in
certain circumstances, under rules governing contingent payments which are set
out in regulations issued in final form on June 11, 1996 (the "1996 Contingent
Debt Regulations"). Notwithstanding the foregoing, interest that is payable on
a Note with a fixed maturity of one year or less from its issue date is
included in a Note Owner's income under the rules described below under "--
Short Term Notes".
In general, "qualified stated interest" is stated interest that, during the
entire term of the Note, is unconditionally payable at least annually at a
single fixed rate of interest or, subject to certain exceptions summarized
below, at a variable rate that is a single "qualified floating rate" or a
single "objective rate" (each
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as described below). If stated interest is unconditionally payable at two or
more qualified floating rates, a single fixed rate and one or more qualified
floating rates, or a single fixed rate and a single objective rate that is a
"qualified inverse floating rate" (as defined below), all or a portion of the
stated interest might be treated as "qualified stated interest". Under the
Treasury Regulations issued under Sections 1271-1273 and 1275 of the Code in
January, 1994, (the "OID Regulations") interest is considered unconditionally
payable only if late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Under the 1996 Contingent Debt
Regulations effective for instruments issued on or after August 13, 1996,
interest is considered unconditionally payable only if reasonable legal
remedies exist to compel timely payment or the debt instrument otherwise
contains terms and conditions that make the likelihood of late payment a
remote contingency. If stated interest is payable at a variable rate other
than in accordance with the foregoing, the interest will not be treated as
"qualified stated interest", and it is unclear whether such payments must be
treated as part of a Note's "stated redemption price at maturity" and governed
by the rules described below under
"--Original Issue Discount" or, alternatively, must be taxed as contingent
interest under the 1996 Contingent Debt Regulations.
Stated interest generally qualifies as being payable at a "qualified
floating rate" if variations in the value of the rate can reasonably be
expected to measure contemporaneous fluctuations in the cost of newly borrowed
funds in the currency in which the Note is denominated. A variable rate will
be considered a qualified floating rate if the variable rate equals (i) the
product of an otherwise qualified floating rate and a fixed multiple that is
greater than zero, or greater than 0.65 for debt instruments issued on or
after August 13, 1996, but not more than 1.35 or (ii) an otherwise qualified
floating rate (or the product described in clause (i)) plus or minus a fixed
rate. If the variable rate equals the product of an otherwise qualified
floating rate and a single multiplier greater than 1.35 or (in the case of a
debt instrument issued on or after August 13, 1996) less than or equal to
0.65, however, such rate will generally constitute an objective rate,
described more fully below.
In the case of a debt instrument issued before August 13, 1996, stated
interest generally qualifies as payable at an "objective rate" if variations
in the rate are determined using a single fixed formula and are based on (i)
one or more qualified floating rates, (ii) one or more rates where each rate
would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the Note is denominated, (iii) the
yield or changes in the price of one or more items of personal property that
are "actively traded", or (iv) a combination of rates described in the three
foregoing clauses. In the case of a debt instrument issued on or after August
13, 1996, stated interest qualifies as payable at an "objective rate" if the
rate is determined using a single fixed formula and is based on objective
financial information or economic information. However an objective rate does
not include a rate based on information that is within the control of the
issuer or that is unique to the circumstances of the issuer or a related
party. The IRS may designate other objective rates. An objective rate is a
qualified inverse floating rate if (a) the rate is equal to a fixed rate minus
a qualified floating rate and (b) the variations in the rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds (disregarding certain caps, floors, governors or similar
restrictions).
All or a portion of interest that otherwise is treated as qualified stated
interest under the rules summarized above will not be treated as qualified
stated interest if, among other circumstances: (i) the variable rate of
interest is subject to one or more minimum or maximum rate floors or ceilings
or one or more governors limiting the amount of increase or decrease in each
case which are not fixed throughout the term of the Note and which are
reasonably expected as of the issue date to cause the rate in certain accrual
periods to be significantly higher or lower than the overall expected return
on the Note determined without such floor or ceiling; (ii) it is reasonably
expected that the average value of the variable rate during the first half of
the term of the Note will be either significantly less than or significantly
greater than the average value of the rate during the final half of the term
of the Note; (iii) the "issue price" of the Note (as described below) exceeds
the total noncontingent principal payments by more than an amount equal to the
lesser of .015 multiplied by the product of the total noncontingent principal
payments and the number of complete years to maturity from the issue date (or,
in certain cases, its weighted average maturity) and 15 percent of the total
noncontingent principal, (iv) the Note does not provide that a qualified
floating rate or objective rate in effect at any time during the term of the
Note is set at the value
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of the rate on any day that is no earlier than three months prior to the first
day on which the value is in effect and no later than one year following that
first day, or (v) if interest is not unconditionally payable. In these
situations, as well as others, it is unclear whether such interest payments
constitute qualified stated interest, or must be treated either as part of a
Note's "stated redemption price at maturity" (as described below) resulting in
original issue discount, or represent contingent payments subject to taxation
under the 1996 Contingent Debt Regulations.
Original Issue Discount. Notes may be issued with "original issue discount".
Rules governing original issue discount are set forth in Sections 1271-1273
and 1275 of the Code and the OID Regulations. The discussion herein is based
in part on the OID Regulations, which generally apply to debt instruments
issued on or after April 4, 1994. Note Owners also should be aware that the
OID Regulations do not address certain issues relevant to prepayable
securities such as the Notes.
In general, a Note's original issue discount, if any, is the difference
between the "stated redemption price at maturity" of the Note and its "issue
price".
The original issue discount with respect to a Note will be considered to be
zero if it is less than a specified de minimis amount of 0.25% of the Note's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Note to its maturity date or, in the case of
Notes that have more than one principal payment or that have interest payments
that are not qualified stated interest, the weighted average maturity of the
Note. Because of the possibility of prepayments, it is not clear how the de
minimis rules will apply to the Notes. It is possible that the anticipated
rate of prepayments assumed in pricing the debt instrument (the "Prepayment
Assumption") will be required to be used in determining the weighted average
maturity of the Notes. In the absence of authority to the contrary, the
Company presently expects to apply the de minimis rule by using the Prepayment
Assumption. Generally, an original Note Owner includes de minimis original
issue discount in income as principal payments are made. The amount includable
in income with respect to each principal payment equals a pro rata portion of
the entire amount of de minimis original issue discount with respect to that
Note. Any de minimis amount of original issue discount includable in income by
a Note Owner is generally treated as a capital gain if the Note is a capital
asset in the hands of the Note Owner.
The "stated redemption price at maturity" of a Note generally will be equal
to the sum of all payments, whether denominated as principal or interest, to
be made with respect thereto other than "qualified stated interest".
In general, the "issue price" of a Note is the first price at which a
substantial amount of the Notes of such class are sold for money to the public
(excluding bond houses, brokers or similar persons or organizations acting in
the capacity of underwriters, placement agents or wholesalers).
If the Notes are determined to be issued with original issue discount, a
holder of a Note must generally include the original issue discount in
ordinary gross income for federal income tax purposes as it accrues in advance
of the receipt of any cash attributable to such income. The amount of original
issue discount, if any, required to be included in a Note Owner's ordinary
gross income for federal income tax purposes in any taxable year will be
computed in accordance with Section 1272(a) of the Code and the OID
Regulations. Under such section and the OID Regulations, original issue
discount accrues on a daily basis under a constant yield method that takes
into account the compounding of interest. The amount of original issue
discount to be included in income by a holder of a debt instrument, such as a
Note, under which principal payments may be subject to acceleration because of
prepayments of other debt obligations securing such an instrument, is computed
by taking into account the Prepayment Assumption.
The amount of original issue discount includable in income by a Note Owner
is the sum of the "daily portions" of the original issue discount for each day
during the taxable year on which the holder held the Note. The daily portions
of original issue discount are determined by allocating to each day in any
"accrual period" a pro rata portion of the excess, if any, of (A) the sum of
(i) the present value of all remaining payments to be
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made on the Note as of the close of the "accrual period" and (ii) the payments
during the accrual period of amounts included in the stated redemption price
of the Note over (B) the "adjusted issue price" of the Note at the beginning
of the accrual period. Generally, the "accrual period" for the Notes
corresponds to the intervals at which amounts are paid or compounded with
respect to such Note, beginning with their date of issuance and ending with
the maturity date. The "adjusted issue price" of a Note at the beginning of
any accrual period is the sum of the issue price and accrued original issue
discount for each prior accrual period reduced by the amount of payments other
than payments of qualified stated interest made during each prior accrual
period. The Code requires the present value of the remaining payments to be
determined on the bases of (a) the original yield to maturity (determined on
the basis of compounding at the close of each accrual period and properly
adjusted for the length of the accrual period), (b) events, including actual
prepayments, which have occurred before the close of the accrual period and
(c) the assumption that the remaining payments will be made in accordance with
the original Prepayment Assumption. Although original issue discount, if any,
will be reported to Note Owners based on the Prepayment Assumption, no
representation is made to Note Owners that the Notes will be prepaid at that
rate or at any other rate.
In general, a subsequent purchaser of a Note will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Note, unless the price paid equals or exceeds the Note's stated redemption
price at maturity. If the price paid exceeds the Note's "adjusted issue price"
(as described above), but does not equal or exceed the stated redemption price
at maturity, the amount of original issue discount to be accrued will be
reduced in accordance with a formula set forth in Section 1272(a)(7)(B) of the
Code. If the price paid is less than the Note's adjusted issue price, the
purchaser will be required to include in income any original issue discount on
the Note and, to the extent the price paid is less than the adjusted issue
price, the Note will be treated as having been purchased with "market
discount". See "--Market Discount", below.
The Company believes that the owner of a Note determined to be issued with
original issue discount will be required to include the original issue
discount in ordinary gross income for federal income tax purposes computed in
the manner described above. However, the OID Regulations either do not address
or are subject to varying interpretations with respect to several issues
concerning the computation of original issue discount for obligations such as
the Notes.
If a variable rate Note is deemed to have been issued with original issue
discount, as described above, the amount of original issue discount accrues on
a daily basis under a constant yield method that takes into account the
compounding of interest; provided, however, that the interest associated with
such a Note generally is assumed to remain constant throughout the term of the
Note at a rate that, in the case of a qualified floating rate, equals the
value of such qualified floating rate as of the issue date of the Note, or, in
the case of an objective rate, at a fixed rate that reflects the yield that is
reasonably expected for the Note. A holder of such a Note would then recognize
original issue discount during each accrual period which is calculated based
upon such Note's assumed yield to maturity. If the interest actually accrued
or paid during an accrual period exceeds (or is less than) the constant
interest assumed to be accrued or paid during the accrual period under the
foregoing rules, qualified stated interest or original issue discount
allocable to an accrual period is increased (or decreased) under rules set
forth in the OID Regulations.
The OID Regulations either do not address or are subject to varying
interpretations with respect to several issues concerning the computation of
original issue discount on the Notes, including variable rate Notes.
Additional information regarding the manner of reporting original issue
discount to the Service and to holders of variable rate Notes will be set
forth in the Prospectus Supplement relating to the issuance of such Notes.
Market Discount. Notes, whether or not issued with original issue discount,
will be subject to the market discount rules of the Code. A purchaser of a
Note who purchases the Note at a price that is less than the Note's "stated
redemption price at maturity" or, in the case of a Note issued with original
issue discount, at a price that is less than the Note's "adjusted issue price"
(as such terms are described above under "--Original Issue Discount") will be
required to recognize accrued market discount as ordinary income as payments
of principal
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are received on such Note or upon the sale or exchange of the Note. In
general, the holder of a Note may elect to treat market discount as accruing
either (i) under a constant yield method that is similar to the method for the
accrual of original issue discount or (ii) in proportion to accruals of
original issue discount (or, if there is no original issue discount, in
proportion to accruals of stated interest), in each case computed taking into
account the Prepayment Assumption. The amount of accrued market discount for
purposes of determining the amount of ordinary income to be recognized with
respect to subsequent payments on such a Note is to be reduced by the amount
previously treated as ordinary income.
The Code provides that the market discount in respect of a Note will be
considered to be zero if the amount allocable to the Note is less than a
specified de minimis amount of 0.25% of the Note's stated redemption price at
maturity multiplied by the number of complete years remaining to its maturity
after the holder acquired the Note. If market discount is treated as de
minimis under this rule, the de minimis market discount would be allocated
among the scheduled payments included in the stated redemption price at
maturity of such Note, and the portion of the discount allocable to each such
payment would be reported as income when such payment occurs or is due.
The Code grants authority to the Treasury Department to issue regulations
providing for the computation of accrued market discount on debt instruments
such as certain of the Notes. Until such time as regulations are issued, rules
described in the legislative history for these provisions of the Code will
apply. Note Owners who acquire a Note at a market discount should consult
their tax advisors concerning various methods which are available for accruing
that market discount.
In general, the Code requires a holder of a Note having market discount to
defer a portion of the interest deductions attributable to any indebtedness
incurred or continued to purchase or carry such Note. Alternatively, a holder
of a Note may elect to include market discount in gross income as it accrues
and, if the holder makes such an election, the holder will 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 other taxable disposition.
Amortizable Premium. A holder of a Note who holds the Note as a capital
asset and who purchased the Note at a price greater than its stated redemption
price at maturity will be considered to have purchased the Note at a premium.
In general, the Note Owner may elect to deduct the amortizable bond premium as
it accrues under a constant yield method. A Note Owner's tax basis in the Note
will be reduced by the amount of the amortizable bond premium deducted. In
addition, it appears that the same methods which apply to the accrual of
market discount on obligations providing for principal payments prior to
maturity are intended to apply in computing the amortizable bond premium
deduction with respect to a Note. It is not clear, however, whether the
alternatives to the constant-yield method which may be available for the
accrual of market discount are available for amortizing premium on Notes.
Although there are Treasury regulations dealing with amortizable bond
premiums, they specifically do not apply to prepayable debt instruments
subject to Section 1272(a)(6), such as the Notes. Note Owners who pay a
premium for a Note should consult their tax advisors concerning such an
election and rules for determining the method for amortizing bond premium.
Gain or Loss on Disposition. If a Note is sold, the selling Note Owner will
recognize gain or loss equal to the difference between the amount realized
from the sale and the selling Note Owner's adjusted basis in such Note. The
adjusted basis generally will equal the cost of such Note to the seller,
increased by any original issue discount and market discount on such Note
included in the seller's income and reduced (but not below zero) by any
payments on the Note other than qualified stated interest and any amortizable
premium. Except as discussed above with respect to market discount, any gain
or loss recognized upon a sale, exchange, retirement, or other disposition of
a Note will be capital gain if the Note is held as a capital asset. Special
character rules apply to debt instruments characterized as contingent debt
instruments under the 1996 Contingent Debt Regulations. In general under those
rules gain is treated as ordinary, and loss is treated as ordinary to the
extent of prior ordinary income inclusion.
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Short-Term Notes. In the case of a Note with a maturity of one year or less
from its issue date (a "Short-Term Note"), no interest is treated as qualified
stated interest, and therefore all interest is included in original issue
discount. Note Owners that report income for federal income tax purposes on an
accrual method and certain other Note Owners, including banks and dealers in
securities, are required to include original issue discount in income on such
Short-Term Notes on a straight-line basis, unless an election is made to
accrue the original issue discount according to a constant yield method based
on daily compounding.
Any other Note Owner of a Short Term Note is not required to accrue original
issue discount for federal income tax purposes, unless it elects to do so. In
the case of a Note Owner that is not required, and does not elect, to include
original issue discount in income currently, any gain realized on the sale,
exchange or retirement of a Short-Term Note is ordinary income to the extent
of the original issue discount accrued on a straight-line basis (or, if
elected, according to a constant yield method based on daily compounding)
through the date of sale, exchange or retirement. In addition, Note Owners
that are not required, and do not elect, to include original issue discount in
income currently are required to defer deductions for any interest paid on
indebtedness incurred or continued to purchase or carry a Short-Term Note in
an amount not exceeding the deferred interest income with respect to such
Short-Term Note (which includes both the accrued original issue discount and
accrued interest that are payable but that have not been included in gross
income), until such deferred interest income is realized. Such a Note Owner
may elect to apply the foregoing rules (except for the rule characterizing
gain on sale, exchange or retirement as ordinary) with respect to "acquisition
discount" rather than original issue discount. Acquisition discount is the
excess of the stated redemption price at maturity of the Short-Term Note over
the Note Owner's basis in the Short-Term Note. This election applies to all
obligations acquired by the taxpayer on or after the first day of the first
taxable year to which such election applies, unless revoked with the consent
of the IRS. A Note Owner's tax basis in a Short-Term Note is increased by the
amount included in such Owner's income on such a Note.
Taxation of Certain Foreign Note Owners. As used herein, the term "Non-
United States Person" means any corporation, individual, fiduciary or
partnership that, as to the United States, is, for United States federal
income tax purposes, (i) a nonresident alien individual, (ii) a foreign
corporation, (iii) a nonresident alien fiduciary of a foreign estate or trust,
(iv) a foreign partnership to the extent one or more of its members is, for
United States federal income tax purposes, a nonresident alien individual, a
foreign corporation or a nonresident alien fiduciary of a foreign estate or
trust or (v) a "United States Trust". A "Non-United States Holder" means a
Non-United States Person who is a Note Owner. A "United States Trust" includes
a trust if, and only if, (i) a court within the United States is able to
exercise primary supervision over the administration of the trust and (ii) one
or more United States persons have the authority to control all substantial
decisions of the trust.
On October 6, 1997, Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-
United States Holders. The 1997 Withholding Regulations are generally
effective for payments after December 31, 1999, regardless of the issue date
of the Note with respect to which such payments are made, subject to certain
transition rules. The discussion under this heading and under "--Backup
Withholding and Information Reporting", below, is not intended to include a
complete discussion of the provisions of the 1997 Withholding Regulations, and
prospective investors are urged to consult their tax advisors with respect to
the effect of the 1997 Withholding Regulation.
In general, Non-United States Holders will not be subject to United States
federal withholding tax with respect to payments of principal and interest on
Notes, provided that certain conditions are met. Under United States federal
income tax law now in effect, and subject to the discussion of backup
withholding in the following section, payments of principal and interest
(including original issue discount) with respect to a Note to any Non-United
States Holder will not be subject to United States federal withholding tax,
provided, in the case of interest (including original issue discount), that
(i) such Holder does not actually or constructively own 10% or more of the
equity of the Trust, (ii) such Holder is not for federal income tax purposes a
controlled foreign corporation related, directly or indirectly, to the Trust
through equity ownership, (iii) such Holder is not a bank receiving interest
described in Section 881(c)(3)(A) of the Code and (iv) either (A) the Note
Owner certifies, under
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penalties of perjury, to the Trust or paying agent, as the case may be, that
such Holder is a Non-United States Holder and provides such Holder's name and
address, or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "financial institution") and holds the Note, certifies,
under penalties of perjury, to the Trust or paying agent, as the case may be,
that such Certificate has been received from the beneficial owner by it or by
a financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof. A certificate described in this paragraph is
effective only with respect to payments of interest (including original issue
discount) made to the certifying Non-United States Holder after the issuance
of the certificate in the calendar year of its issuance and the two
immediately succeeding calendar years. Under temporary Treasury Regulations,
the forgoing certification may be provided by the beneficial owner of a Note
on IRS Form W-8.
The 1997 Withholding Regulations provide optional documentation procedures
designed to simplify compliance by withholding agents. The 1997 Withholding
Regulations add "intermediary certification" options for certain qualifying
withholding agents. Under one such option, a withholding agent will be allowed
to rely on IRS Form W-8 furnished by a financial institution or other
intermediary on behalf of one or more beneficial owners (or other
intermediaries) without having to obtain the beneficial owner certificate
described in the preceding paragraph, provided that the financial institution
or intermediary has entered into a withholding agreement with the IRS and is
thus a "qualified intermediary". Under another option, an authorized foreign
agent of a United States withholding agent will be permitted to act on behalf
of the United States withholding agent, provided certain conditions are met.
The 1997 Withholding Regulations also provide certain presumptions with
respect to withholding for holders not providing the required certifications
to qualify for the withholding exemption described above. In addition, the
1997 Withholding Regulations replace a number of current tax certification
forms (including IRS Form W-8, IRS Form 1001 and IRS Form 4224, discussed
below) with a single, restated form and standardize the period of time for
which withholding agents could rely on such certifications.
Notwithstanding the foregoing, interest described in Section 871(h)(4) of
the Code will be subject to United States withholding tax at a 30% rate (or
such lower rate as may be provided by an applicable treaty). In general,
interest described in Section 871(h)(4) of the Code includes (subject to
certain exceptions) any interest the amount of which is determined by
reference to receipts, sales or other cash flow of the issuer or a related
person, any income or profits of the issuer or a related person, any change in
the value of any property of the issuer or a related person or any dividends,
partnership distributions or similar payments made by the issuer or a related
person. Interest described in Section 871(h)(4) of the Code may include other
types of contingent interest identified by the IRS in future Treasury
Regulations. If the Trust issues Notes the interest on which the Trust
believes is described in Section 871(h)(4) of the Code, the United States
withholding tax consequences of any such Notes will be described in the
applicable Prospectus Supplement.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest (including original issue discount) on the Note is
effectively connected with the conduct of such trade or business, the Non-
United States Holder, although exempt from the withholding tax discussed in
the preceding paragraphs, will be subject to United States federal income tax
on such interest (including original issue discount) in the same manner as if
it were a United States person (as defined below). In lieu of the certificate
described above, such Holder will be required to provide a properly executed
IRS Form 4224 annually in order to claim an exemption from withholding tax. In
addition, if such Holder is a foreign corporation, it may be subject to a
branch profits tax equal to 30% (or such lower rate as may be specified by an
applicable treaty) of its effectively connected earnings and profits for the
taxable year, subject to adjustments. For this purpose, interest (including
original issue discount) on a Note will be included in the earnings and
profits of such Holder if such interest (including original issue discount) is
effectively connected with the conduct by such Holder of a trade or business
in the United States.
Generally, any gain or income (other than that attributable to accrued
interest, market discount or original issue discount in certain circumstances)
realized upon the sale, exchange, retirement or other disposition of a
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Note will not be subject to United States federal income tax unless (i) such
gain or income is effectively connected with a trade or business in the United
States of the Non-United States Holder or (ii) in the case of a Non-United
States Holder who is a nonresident alien individual, the Non-United States
Holder is present in the United States for 183 days or more in the taxable
year of such sale, exchange, retirement or other disposition and either (a)
such individual has a "tax home" (as defined in Section 911(d)(3) of the Code)
in the United States or (b) the gain is attributable to an office or other
fixed place of business maintained by such individual in the United States.
Backup Withholding and Information Reporting. Under current United States
federal income tax law, information reporting requirements apply to interest
(including original issue discount) and principal payments made to, and to the
proceeds of sales before maturity by, certain non-corporate Note Owners that
are United States persons. "United States person" means a citizen or resident
of the United States, a corporation, partnership or other entity treated as a
corporation or partnership for United States federal income tax purposes,
created or organized under the laws of the United States or any political
subdivision thereof, or an estate or trust the income of which is includible
in gross income for United States federal income tax purposes, without regard
to its source.
In addition, a 31% backup withholding tax will apply if such non-corporate
Note Owner (i) fails to furnish its Taxpayer Identification Number ("TIN")
(which, for an individual, would be his or her Social Security Number) to the
payor in the manner required, (ii) furnishes an incorrect TIN and the payor is
so notified by the IRS, (iii) is notified by the IRS that it has failed
properly to report payments of interest and dividends or (iv) in certain
circumstances, fails to certify, under penalties of perjury, that it has not
been notified by the IRS that it is subject to backup withholding for failure
properly to report interest and dividend payments. Backup withholding will not
apply with respect to payments made to certain exempt recipients, such as
corporations (within the meaning of Section 7701(a) of the Code) and tax-
exempt organizations.
In the case of a Non-United States Holder, under Treasury Regulations,
backup withholding and information reporting will not apply to payments of
principal and interest made by the Trust or any paying agent thereof on a Note
with respect to which such holder has provided the required certification
under penalties of perjury that it is a Non-United States Holder or has
otherwise established an exemption, provided that (i) the Trust or paying
agent, as the case may be, does not have actual knowledge that the payee is a
United States person and (ii) certain other conditions are satisfied.
Subject to the discussion below, payments to or through the United States
office of a broker will be subject to backup withholding and information
reporting unless the holder certifies under penalties of perjury as to its
status as a Non-United States Holder and certain other qualifications (and no
agent of the broker who is responsible for receiving or reviewing such
statement has actual knowledge that it is incorrect) and provides his or her
name and address or the holder otherwise establishes an exemption.
In general, if principal or interest payments on a Note are collected
outside the United States by a foreign office of a custodian, nominee or other
agent acting on behalf of a Note Owner, such custodian, nominee or other agent
will not be required to apply backup withholding to such payments made to such
owner and will not be subject to information reporting. However, if such
custodian, nominee or other agent is a United States person for United States
federal income tax purposes, a controlled foreign corporation for United
States tax purposes, or person 50% or more of whose gross income is
effectively connected with its conduct of a United States trade or business
for a specified three-year period, such custodian, nominee or other agent may
be subject to certain information reporting (but not backup withholding)
requirements with respect to such payment unless such custodian, nominee or
other agent has in its records documentary evidence that the Note Owner is not
a United States person and certain conditions are met or the Note Owner
otherwise establishes an exemption. Under proposed Treasury Regulations,
backup withholding may apply to any payment which such custodian, nominee or
other agent is required to report if such custodian, nominee or other agent
has actual knowledge that the payee is a United States person.
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Under Treasury Regulations, payments on the sale, exchange or retirement of
a Note effected by or through a foreign office of a broker will not be subject
to backup withholding. However, if such broker is a United States person, a
controlled foreign corporation for United States tax purposes, or a foreign
person 50% or more of whose gross income is effectively connected with its
conduct of a United States trade or business for a specified three-year
period, information reporting (but not backup withholding) will be required
unless such broker has in its records documentary evidence that the Note Owner
is not a United States person and certain other conditions are met or the Note
Owner otherwise establishes an exemption. Under proposed Treasury Regulations,
backup withholding may apply to any payment which such broker is required to
report if such broker has actual knowledge that the payee is a United States
person.
The 1997 Withholding Regulations alter the forgoing rules in certain
respects. In particular, the 1997 Withholding Regulations would provide
certain presumptions under which Non-United States Holders may be subject to
backup withholding in the absence of required certifications.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a Note Owner under the backup withholding rules
will be allowed as a refund or a credit against such owner's United States
federal income tax, provided that the required information is furnished to the
IRS.
Note Owners should consult their tax advisors regarding the application of
information reporting and backup withholding to their particular situations,
the availability of an exemption therefrom, and the procedure for obtaining
such an exemption, if available.
Tax Consequences to Certificates Owners.
Treatment of the Trust as a Partnership. The Trust will agree, and the
related Certificate Owners will agree by their purchase of Certificates, if
there is more than one Certificate Owner, to treat the Trust as a partnership
for purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership
being the assets held by the Trust, the partners of the partnership being the
Certificate Owners (including, to the extent relevant, the Seller in its
capacity as recipient of distributions from any Reserve Fund), and the Notes
being debt of the partnership, and if there is one Certificate Owner, to treat
the Certificate Owner as the owner of the assets of the Trust and to treat the
Trust as a disregarded entity. However, the proper characterization of the
arrangement involving the Trust, the Certificates, the Notes, the Seller, the
Company and the Servicer is not certain because there is no authority on
transactions closely comparable to that contemplated herein. A variety of
alternative characterizations are possible. For example, to the extent the
Certificates have certain features characteristic of debt, the Certificates
might be considered debt of the Seller, the Company or the Trust. As long as
such characterization did not result in the Trust being subject to tax as a
corporation, any such characterization would not result in materially adverse
tax consequences to Certificate Owners as compared to the consequences from
treatment of the Certificates as equity in a partnership, described below. On
December 17, 1996, final Treasury Regulations (the "Check-the-Box
Regulations") were issued which generally permit non-corporate entities, such
as the Trust, to elect whether to be taxed as corporations or partnerships.
The Check-the-Box Regulations are effective as of January 1, 1997. Under the
Check-the-Box Regulations, the Trust will be classified as a partnership
unless it elects to be classified as an association taxable as a corporation.
Except as expressly provided in the applicable Prospectus Supplement, the
Trust will not elect to be classified as an association taxable as a
corporation. However, the Check-the-Box Regulations would have no effect on
whether a partnership should be classified as a publicly traded partnership
taxable as a corporation.
The following discussion assumes that the Certificates represent equity
interests in a partnership, that all payments on the Certificates are
denominated in United States dollars, none of the Certificates represents
Stripped Certificates and that a Series of Securities includes a single class
of Certificates. If these conditions are not satisfied with respect to any
given Series of Certificates, additional tax considerations with respect to
such Certificates will be disclosed in the related Prospectus Supplement.
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Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificate Owner will be required to take
into account separately such Owner's allocable share of income, gains, losses,
deductions and credits of the Trust (whether or not there is a corresponding
cash distribution). Thus, cash basis holders will in effect be required to
report income from the Certificates on the accrual basis and Certificate
Owners may become liable for taxes on Trust income even if they have not
received cash from the Trust to pay such taxes. The Trust's income will
consist primarily of interest and finance charges earned on the related
Primary Assets (including appropriate adjustments for market discount,
original issue discount and bond premium) and any gain upon collection or
disposition of such Primary Assets.
The Trust's deductions will consist primarily of interest accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Primary Assets.
Any Collateral Certificates held by the Owner Trust will be subject to the
federal income tax treatment described herein depending on the terms of the
Collateral Certificates and their characterization (for example, as
indebtedness) for federal income tax purposes.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (i.e., the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificate Owners will be allocated taxable income of the
Trust for each month equal to the sum of: (i) the interest or other income
that accrues on the Certificates in accordance with their terms for such month
including, as applicable, interest accruing at the related Certificate Pass-
Through Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust income attributable to
discount on the related Primary Assets that corresponds to any excess of the
principal amount of the Certificates over their initial issue price; (iii) any
prepayment premium payable to the Certificate Owners for such month; and (iv)
any other amounts of income payable to the Certificate Owners for such month.
Such allocation will be reduced by any amortization by the Trust of premium on
Primary Assets that corresponds to any excess of the issue price of
Certificates over their principal amount.
Based on the economic arrangement of the parties, the foregoing approach for
allocating Trust income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require
a greater amount of income to be allocated to Certificate Owners. Moreover,
even under the foregoing method of allocation, Certificate Owners may be
allocated income equal to the entire Certificate Pass-Through Rate plus the
other items described above, even though the Trust might not have sufficient
cash to make current cash distributions of such amount. In addition, because
tax allocations and tax reporting will be done on a uniform basis for all
Certificate Owners, but Certificate Owners may be purchasing Certificates at
different times and at different prices, Certificate Owners may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
All of the taxable income allocated to a Certificate Owner that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer, but not interest expense) would be miscellaneous itemized
deductions and thus deductible only to the extent such expenses plus all other
Section 212 expenses exceed two percent of such individual's adjusted gross
income. An individual taxpayer will be allowed no deduction for his share of
expenses of the Trust in determining his liability for alternative minimum
tax. In addition, Section 68 of the Code provides that the amount of itemized
deductions (including those provided for in Section 212 of the Code) otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code ($121,200 in 1997 in the case
of a joint return) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the specified threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
Accordingly, such deductions might be disallowed to such individual in whole
or in part and might result in such Certificate Owner being taxed on an amount
of income that exceeds the amount of cash actually distributed to such holder
over the life of the Trust.
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The Trust intends to make all tax calculations relating to income and
allocations to Certificate Owners on an aggregate basis to the extent
relevant. If the IRS were to require that such calculations be made separately
for each Primary Asset, such calculations may result in certain timing and
character differences under certain circumstances.
Discount and Premium. The purchase price paid by the Trust for the related
Primary Assets may be greater or less than the remaining principal balance of
the Primary Assets at the time of purchase. If so, the Primary Assets will
have been acquired at a premium or market discount, as the case may be. See
"Tax Consequences to Note Owners--Market Discount" and "--Amortizable Premium"
above. (As indicated above, the Trust will make this calculation on an
aggregate basis, but it is possible that the IRS might require that it be
recomputed on a Primary Asset-by-Primary Asset basis.)
If the Trust acquires the Primary Assets at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Primary Assets or to offset any such premium
against interest income on the Primary Assets. As indicated above, a portion
of such market discount income or premium deduction may be allocated to
Certificate Owners.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a 12-
month period. If such a termination occurs, the Trust will be considered to
contribute its assets to a new Trust, which would be treated as a new
partnership, in exchange for Certificates in the new Trust. The original Trust
will then be deemed to distribute the Certificates in the new Trust to each of
the Owners of Certificates in the original Trust in liquidation of the
original Trust. The Trust will not comply with certain technical requirements
that might apply when such a constructive termination occurs. As a result, the
Trust may be subject to certain tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore, the
Trust might not be able to comply with these requirements due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificate Owner's tax basis in a Certificate will generally equal
its cost, increased by its share of Trust income allocable to such Certificate
Owner and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the
amount realized on a sale of a Certificate would include the Certificate
Owner's share (determined under Treasury Regulations) of the Notes and other
liabilities of the Trust. A Certificate Owner acquiring Certificates at
different prices will generally be required to maintain a single aggregate
adjusted tax basis in such Certificates and, upon a sale or other disposition
of some of the Certificates, allocate a portion of such aggregate tax basis to
the Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
If a Certificate Owner is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificate Owners in
proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Certificate Owner
purchasing Certificates may be allocated tax items (which will affect the
purchaser's tax liability and tax basis) attributable to periods before the
actual transaction.
The use of such a monthly convention may not be permitted by existing
Treasury Regulations. If a monthly convention is not allowed (or only applies
to transfers of less than all of the partner's interest), taxable income or
losses of the Trust might be reallocated among the Certificate Owners. The
Seller will be authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by future
regulations.
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Section 754 Election. In the event that a Certificate Owner sells its
Certificates at a profit (loss), the purchasing Certificate Owner will have a
higher (lower) basis in the Certificates than the selling Certificate Owner
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities
that would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the Trust will not
make such election. As a result, Certificate Owners might be allocated a
greater or lesser amount of Trust income than would be appropriate based on
their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep complete and
accurate books of the Trust. Such books will be maintained for financial
reporting and tax purposes on an accrual basis, and the fiscal year of the
Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificate Owner's allocable share of items of
Trust income and expense to holders and the IRS on Schedule K-1. The Trust
will provide the Schedule K-1 information to nominees that fail to provide the
Trust with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent
with the information return filed by the Trust or be subject to penalties
unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (a) the name, address and identification number of such
person, (b) whether such person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and (c) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust information as to themselves and their ownership of Certificates. A
clearing agency registered under Section 17A of the Exchange Act is not
required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described
above may be subject to penalties.
The Company will be designated as the tax matters partner for each Trust in
the related Trust Agreement and, as such, will be responsible for representing
the Certificate Owners in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust by the appropriate taxing
authorities could result in an adjustment of the returns of the Certificate
Owners, and, under certain circumstances, a Certificate Owner may be precluded
from separately litigating a proposed adjustment to the items of the Trust. An
adjustment could also result in an audit of a Certificate Owner's returns and
adjustments of items not related to the income and losses of the Trust.
The Taxpayer Relief Act of 1997 created a special audit system for
qualifying large partnerships that have elected to apply a simplified flow-
through reporting system under new sections 771 through 777. unless otherwise
specified in the applicable Prospectus Supplement, a Trust will not elect to
apply the simplified flow-through reporting system.
Taxation of Certain Foreign Certificate Owners. As used herein, the term
"Non-United States Owner" means a Certificate Owner that is not a United
States person, as defined under "Owner Trusts--Tax Consequences to Note
Owners--Backup Withholding and Information Reporting," above.
It is not clear whether the Trust would be considered to be engaged in a
trade or business in the United States for purposes of federal withholding
taxes with respect to Non-United States Owners because there is no
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clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Trust would be
engaged in a trade or business in the United States for such purposes, the
Trust will withhold as if it were so engaged in order to protect the Trust
from possible adverse consequences of a failure to withhold. The Trust expects
to withhold on the portion of its taxable income that is allocable to Non-
United States Owners pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other such Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures. In determining a Certificate Owner's withholding status, the Trust
may rely on IRS Form W-8, IRS Form W-9 or the Certificate Owner's
certification of nonforeign status signed under penalties of perjury.
Each Non-United States Owner might be required to file a U.S. individual or
corporate income tax return on its share of the Trust's income including, in
the case of a corporation, a return in respect of the branch profits tax. Each
Non-United States Owner must obtain a taxpayer identification number from the
IRS and submit that number to the Trust on Form W-8 in order to assure
appropriate crediting of the taxes withheld. Assuming the Trust is not engaged
in a U.S. trade or business, a Non-United States Owner would be entitled to a
refund with respect to all or a portion of taxes withheld by the Trust if, in
particular, such Owner's allocable share of interest from the Trust
constituted "portfolio interest" under the Code.
Such interest, however, may not constitute "portfolio interest" if, among
other reasons, the underlying obligation is not in registered form or if the
interest is determined without regard to the income of the Trust (in the later
case, such interest being properly characterized as a guaranteed payment under
Section 707(c) of the Code). If this were the case, Non-United States Owners
would be subject to a United States federal income and withholding tax at a
rate of 30 percent (without any deductions or other allowances for costs and
expenses incurred in producing such income), unless reduced or eliminated
pursuant to an applicable treaty. In such case, a Non-United States Owner
would only be entitled to a refund for that portion of the taxes in excess of
the taxes that should have been withheld with respect to such interest.
Backup Withholding. Distributions made on the Certificates and proceeds from
the sale of the Certificates will be subject to a "backup" withholding tax of
31% if, in general, the Certificate Owner fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
GRANTOR TRUSTS
Tax Characterization of the Grantor Trusts.
Characterization. In the case of a Grantor Trust, Federal Tax Counsel will
deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that such Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of Certificates (referred to herein as "Grantor Trust
Certificateholders") will be treated for federal income tax purposes as owners
of a portion of the Trust's assets as described below. The Certificates issued
by a Trust that is treated as a grantor trust are referred to herein as
"Grantor Trust Certificates".
Taxation of Grantor Trust Certificateholders--General. Subject to the
discussion below under "Stripped Certificates" and "Subordinated
Certificates", each Grantor Trust Certificateholder will be treated as the
owner of a pro rata undivided interest in the Primary Assets and other assets
of the Trust. Accordingly, and subject to the discussion below of the
recharacterization of the Servicing Fee, each Grantor Trust Certificateholder
must include in income its pro rata share of the interest and other income
from the Primary Assets (including any interest, original issue discount,
market discount, prepayment fees, assumption fees, and late payment charges
with respect to such assets), and, subject to certain limitations discussed
below, may deduct its pro rata share of
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the fees and other deductible expenses paid by the Trust, at the same time and
to the same extent as such items would be included or deducted by the Grantor
Trust Certificateholder if the Grantor Trust Certificateholder held directly a
pro rata interest in the assets of the Trust and received and paid directly
the amounts received and paid by the Trust. Any amounts received by a Grantor
Trust Certificateholder in lieu of amounts due with respect to any Primary
Asset because of a default or delinquency in payment will be treated for
federal income tax purposes as having the same character as the payments they
replace.
Under Sections 162 and 212 each Grantor Trust Certificateholder will be
entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment
charges retained by the Servicer, provided that such amounts are reasonable
compensation for services rendered to the Trust. Grantor Trust
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent such expenses plus all other
miscellaneous itemized deductions exceed two percent of the Grantor Trust
Certificateholder's adjusted gross income, and will be allowed no deduction
for such expenses in determining their liabilities for alternative minimum
tax. In addition, Section 68 of the Code provides that the amount of itemized
deductions (including those provided for in Section 212 of the Code) otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code ($121,200 in 1997 in the case
of a joint return) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the specified threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
The servicing compensation to be received by the Servicer may be questioned
by the IRS as exceeding a reasonable fee for the services being performed in
exchange therefor, and a portion of such servicing compensation could be
recharacterized as an ownership interest retained by the Servicer or other
party in a portion of the interest payments to be made pursuant to the
Contracts. In this event, a Certificate might be treated as a Stripped
Certificate subject to the stripped bond rules of Section 1286 of the Code and
the original issue discount provisions rather than to the market discount and
premium rules. See the discussion below under
"--Stripped Certificates". Except as discussed below under "--Stripped
Certificates" or "--Subordinated Certificates", this discussion assumes that
the servicing fees paid to the Servicer do not exceed reasonable servicing
compensation.
A purchaser of a Grantor Trust Certificate will be treated as purchasing an
interest in each Primary Asset in the Trust at a price determined by
allocating the purchase price paid for the Certificate among all Primary
Assets in proportion to their fair market values at the time of the purchase
of the Certificate. To the extent that the portion of the purchase price of a
Grantor Trust Certificate allocated to a Primary Asset is less than or greater
than the portion of the stated redemption price at maturity of the Primary
Asset, the interest in the Primary Asset will have been acquired at a discount
or premium. See "--Market Discount" and "--Premium", below.
The treatment of any discount on a Primary Asset will depend on whether the
discount represents original issue discount or market discount. Except as
indicated otherwise in the applicable Prospectus Supplement, it is not
expected that any Primary Asset will have original issue discount (except as
discussed below under "Stripped Certificates" or "Subordinated Certificates").
For the rules governing original issue discount, see "Owner Trusts--Tax
Consequences to Note Owners--Original Issue Discount" above. However, in the
case of Primary Assets that constitute short-term Government Securities the
rules set out above dealing with short-term obligations (see "Owner Trusts--
Tax Consequences to Note Owners--Short-Term Notes" above) are applied with
reference to acquisition discount rather than original issue discount, if such
obligations constitute "short-term Government obligations" within the meaning
of Section 1271(a)(3)(B) of the Code.
The information provided to Grantor Trust Certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Primary Asset is acquired.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Primary Assets may be subject to the market discount
rules of Sections 1276 through 1278 to the extent an undivided interest in a
Primary Asset is considered to have been purchased at a "market discount". For
a discussion of the market
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discount rules under the Code, see "Owner Trusts--Tax Consequences to Note
Owners--Market Discount" above; however, Grantor Trust Certificateholders
generally are not permitted to take into account the Prepayment Assumption in
calculating the accrual of market discount with respect to their Grantor Trust
certificates (except for Grantor Trust certificates representing interests in
Collateral Certificates that constitute indebtedness for federal income tax
purposes). See "Prepayments" below.
Premium. To the extent a Grantor Trust Certificateholder is considered to
have purchased an undivided interest in a Primary Asset for an amount that is
greater than the stated redemption price at maturity of such interest, such
Grantor Trust Certificateholder will be considered to have purchased the
interest in the Primary Asset with "amortizable bond premium" equal in amount
to such excess. For a discussion of the rules applicable to amortizable bond
premium, see "Owner Trusts--Tax Consequences to Note Owners--Amortizable
Premium" above; however, Grantor Trust Certificateholders generally are not
permitted to take into account the Prepayment Assumption in computing the
amortizable bond premium deduction with respect to their Grantor Trust
Certificates (except for Grantor Trust certificates representing interests in
Collateral Certificates that constitute indebtedness for federal income tax
purposes). See "Prepayments" below.
Stripped Certificates. Certain classes of Certificates may be subject to the
stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates". In general, a
Stripped Certificate will be subject to the stripped bond rules where there
has been a separation of ownership of the right to receive some or all of the
principal payments on a Primary Asset from ownership of the right to receive
some or all of the related interest payments. In general, where such
separation has occurred, under the stripped bond rules of Section 1286 of the
Code the holder of a right to receive a principal or interest payment on the
bond is required to accrue into income, on a constant yield basis under rules
governing original issue discount (see "Owner Trust--Tax Consequences to Note
Owners--Original Issue Discount"), the difference between the holder's initial
purchase price for such right and the principal or interest payment to be
received with respect to such right.
Certificates will constitute Stripped Certificates and will be subject to
these rules under various circumstances, including the following: (i) if any
servicing compensation is deemed to exceed a reasonable amount (see "Taxation
of Grantor Trust Certificateholders--General", above); (ii) if the Company or
any other party retains a retained yield with respect to the Primary Assets
held by the Trust; (iii) if two or more classes of Certificates are issued
representing the right to non-pro rata percentages of the interest or
principal payments on the Contracts; or (iv) if Certificates are issued which
represent the right to interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the Trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect
to a Stripped Certificate must be included in ordinary gross income for
federal income tax purposes as it accrues in accordance with the constant
yield method that takes into account the compounding of interest and such
accrual of income may be in advance of the receipt of any cash attributable to
such income. See "Owner Trust--Tax Consequences to Note Owners--Original Issue
Discount" above; however, Grantor Trust Certificateholders generally are
required to take into account the Prepayment Assumption in computing original
issue discount. See "Prepayments" below. For purposes of applying the original
issue discount provisions of the Code, the issue price of a Stripped
Certificate will be the purchase price paid by each holder thereof and the
stated redemption price at maturity may include the aggregate amount of all
payments to be made with respect to the Stripped Certificate whether or not
denominated as interest. The amount of original issue discount with respect to
a Stripped Certificate may be treated as zero under the original issue
discount de minimis rules described above.
When an investor purchases more than one class of Stripped Certificates it
is currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above. The Trustee
intends in reporting
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information relating to original issue discount to Grantor Trust
Certificateholders to provide such information on an aggregate poolwide basis.
Subordinated Certificates. In the event the Trust issues two classes of
Grantor Trust Certificates that are identical except that one class is a
subordinate class (with a relatively high Certificate Pass Through Rate) and
the other is a senior class (with a relatively low Certificate Pass Through
Rate (referred to herein as the "Subordinate Certificates" and "Senior
Certificates", respectively), the Trust will be deemed to have acquired the
following assets: (i) the principal portion of each Primary Asset plus a
portion of the interest due on each Primary Asset (the "Trust Stripped Bond"),
and (ii) a portion of the interest due on each Primary Asset equal to the
difference between the Certificate Pass Through Rate on the Subordinate
Certificates and the Certificate Pass Through Rate on the Senior Certificates,
if any, which difference is then multiplied by the Subordinate Class
Percentage (the "Trust Stripped Coupon"). The "Subordinate Class Percentage"
equals the initial aggregate principal amount of the Subordinate Certificates
divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates. The "Senior Class
Percentage" equals the initial aggregate principal amount of the Senior
Certificates divided by the sum of the initial aggregate principal amount of
the Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior Class
Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of such asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder
will be treated as owning its pro rata share in both such assets. The Trust
Stripped Bond will be treated as a "stripped bond" and the Trust Stripped
Coupon will be treated as "stripped coupons" within the meaning of Section
1286 of the Code. Because the purchase price paid by each Subordinate
Certificateholder will be allocated between that Certificateholder's interest
in the Trust Stripped Bond and the Trust Stripped Coupon based on the relative
fair market value of each asset on the date such Subordinate Certificate is
purchased, the Trust Stripped Bond may be issued with original issue discount.
Except to the extent modified below, the income of the Trust Stripped Bond
represented by a Certificate will be reported in the same manner as described
generally above for holders of Certificates. The interest income on the
Subordinate Certificates at the Senior Certificate Pass-Through Rate and the
portion of the Servicing Fee that does not constitute excess servicing will be
treated as qualified stated interest.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
such Trust Stripped Coupon (based on the prepayment assumption used in pricing
the Certificates) over the portion of the purchase price allocated thereto.
The sum of the daily portions of original issue discount on the Trust Stripped
Coupon for each day during a year in which the Subordinate Certificateholder
holds the Trust Stripped Coupon will be included in the Subordinate
Certificateholder's income.
If the Subordinate Certificateholders receive distribution of less than
their share of the Trust's receipts of principal or interest (the "Shortfall
Amount") because of the subordination of the Subordinate Certificates, holders
of Subordinate Certificates would probably be treated for federal income tax
purposes as if they had (i) received as distributions their full share of such
receipts, (ii) paid over to the Senior Certificateholders an amount equal to
such Shortfall Amount and (iii) retained the right to reimbursement of such
amounts to the extent such amounts are otherwise available as a result of
collections on the Primary Assets or amounts available from a Reserve Account
or other form of credit enhancement, if any.
Under this analysis, (a) Subordinate Certificateholders would be required to
accrue as current income any interest income or original issue discount of the
Trust that was a component of the Shortfall Amount, even though such amount
was in fact paid to the Senior Certificateholders, (b) a loss would only be
allowed to the Subordinate Certificateholders when their right to receive
reimbursement of such Shortfall Amount became worthless (i.e.,
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when it becomes clear that amount will not be available from any source to
reimburse such loss) and (c) reimbursement of such Shortfall Amount prior to
such a claim of worthlessness would not be taxable income to Subordinate
Certificateholders because such amount was previously included in income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The OID
regulations permit a Grantor Trust Certificateholder to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income as interest, based on a constant yield method. If such
an election were to be made with respect to an interest in a Primary Asset
with market discount, the Certificate Owner would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such Grantor Trust
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Grantor Trust Certificateholder that makes this election for an
interest in a Primary Asset that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Grantor Trust
Certificateholder owns or acquires. See "--Premium" above. The election to
accrue interest, discount and premium on a constant yield method with respect
to a Grantor Trust Certificate is irrevocable.
Prepayments. The Taxpayer Relief Act of 1997 (the "1997 Act") contains a
provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated
taking into account the Prepayment Assumption and requiring such discount to
be taken into income on the basis of a constant yield to assumed maturity
taking into account of actual prepayments. The legislative history to the 1986
Act states that similar rules apply with respect to market discount and
amortizable bond premium on such debt instruments.
Sale or Exchange of a Grantor Trust Certificate. Sale or exchange of a
Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount realized (exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary income) allocable to the Primary Asset and the owner's adjusted basis
in the Grantor Trust Certificate. Such adjusted basis generally will equal the
Seller's cost for the Grantor Trust Certificate, increased by the original
issue discount and any market discount included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced (but not below
zero) by any premium amortized by the Seller and by principal payments on the
Grantor Trust Certificate previously received by the seller. Such gain or loss
will, except as discussed below, be capital gain or loss to an owner for which
the Primary Assets represented by a Grantor Trust Certificate are "capital
assets" within the meaning of Section 1221, except that gain will be treated
in whole or in part as ordinary interest income to the extent of the Seller's
interest in accrued market discount not previously taken into income on
underlying Primary Assets having a fixed maturity date of more than one year
from the date of origination. A capital gain or loss will be long-term or
short-term depending on whether or not the Grantor Trust Certificate has been
owned for the long-term capital gain holding period (currently more than one
year).
Notwithstanding the foregoing, any gain realized on the sale or exchange of
a Grantor Trust Certificate will be ordinary income to the extent of the
seller's interest in accrued market discount on Primary Assets not previously
taken into income. See "--Market Discount", above.
Non-United States Grantor Trust Certificate Owners. Amounts paid to Non-
United States Owners of Grantor Trust Certificates will be treated as interest
for purposes of United States withholding tax. Such interest attributable to
the underlying Primary Assets will not be subject to the normal 30% (or such
lower rate provided for by an applicable tax treaty) withholding tax imposed
on such amounts provided that (i) the Non-U.S.
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Certificate Owner does not own, directly or indirectly, 10% or more of, and is
not a controlled foreign corporation (within the definition of Section 957)
related to each of the issuers of the Primary Assets and (ii) such Certificate
Owner fulfills certain certification requirements. Under these requirements,
the Certificate Owner must certify, under penalty of perjury, that it is not a
"United States person" and must provide its name and address. "United States
person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust the
income of which is includible in gross income for United States federal income
tax purposes, without regard to its source. To the extent that the Primary
Assets were originated on or before July 18, 1984, Non-United States Owners of
Grantor Trust Certificates may be subject to withholding. If, however,
interest or gain is effectively connected to the conduct of a trade or
business within the United States by such Certificate Owner, such owner will
be subject to United States federal income tax thereon at graduated rates and,
in the case of a corporation, to a possible branch profits tax, and will not
be subject to withholding tax provided that the owner meets applicable
documentation requirements. Potential investors who are not United States
persons should consult their own tax advisors regarding the specific tax
consequences of owning a Certificate.
On October 6, 1997, final Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-
United States Owners of Grantor Trust Certificates. The 1997 Withholding
Regulations are generally effective for payments after December 31, 1999,
regardless of the issue date of the Primary Assets with respect to which such
payments are made, subject to certain transition rules. For further
discussion, see "Owner Trusts--Tax Consequences to Note Owners--Taxation of
Certain Foreign Note Owners" above.
Backup Withholding. Distributions made on the Grantor Trust Certificates and
proceeds from the sale of such Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Grantor Trust Certificateholder
fails to comply with certain identification procedures, unless such holder is
an exempt recipient under applicable provisions of the Code. See "Owner
Trusts--Tax Consequences to Note Owners--Backup Withholding and Information
Reporting" above.
STATE AND LOCAL TAX CONSIDERATIONS
An investment in the Securities may have state or local income, franchise,
personal property or other tax consequences. Such consequences may depend
upon, among other things, the tax laws of the jurisdiction where the Security
Owners reside or are doing business, the characterization of the Trust (e.g.,
as a trust, partnership or other entity) for state or local tax purposes,
whether the Trust is considered to be doing business in a particular
jurisdiction, and the classification of the Securities as equity or debt or as
an undivided interest in the underlying Primary Assets under the laws of a
jurisdiction.
Generally, the tax treatment of the Securities for federal income tax
purposes should apply for state and local tax purposes. Thus, if the
Certificates or Notes are treated as indebtedness for federal income tax
purposes, they should likewise be treated as indebtedness for state and local
tax purposes. In such case, Certificate Owners and Note Owners not otherwise
subject to state or local tax would not become subject to such tax solely
because of their ownership of the Securities. However, except as described in
the following paragraph, a Security Owner already subject to tax in a state or
locality could be required to pay additional tax as a result of such holder's
ownership or disposition of Securities.
Interest income (including original issue discount) earned on obligations of
the United States Treasury Department and of certain government sponsored
enterprises generally is exempt from state and local income taxation.
Therefore, where a Grantor Trust holds Government Securities as part of the
Trust Property, interest income attributable to Government Securities earned
on the Certificates may be exempt from state and local taxation, depending on
the form of the Government Security. However, certain states or localities may
take a contrary position. Investors should consult with their own tax advisors
concerning the exemptions from state and local income taxes.
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If some or all of the Securities are treated as equity interest in a
partnership (not treated as a publicly traded partnership taxable as a
corporation) for federal income tax purposes, such Securities generally should
be treated as partnership interests for state and local income tax purposes.
In such case, the partnership should be viewed as a passive holder of
investments and, as a result, should not be subject to state or local taxation
and the Security Owners should not be subject of taxation on income received
through the partnership unless they are already subject to tax in such
jurisdiction. However, if the state or local jurisdiction viewed such
partnership as doing business in such jurisdiction, Security Owners would
normally be subject to taxation in such jurisdiction on their allocable share
of the partnership's income even though they otherwise had no contact with
such jurisdiction. Furthermore, depending on the specific allocation and
apportionment formula, if any, use by such jurisdiction, it is possible that
Security Owners in such case may be subject to tax in such jurisdiction on
their income from other sources. Additionally, notwithstanding the flow-
through treatment that generally applies to partnerships, some states and
localities impose an entity level tax on partnerships and trusts doing
business within their jurisdiction.
The foregoing discussion presents some of the state and local tax
consequences that might apply to Security Owners. However, because of the
variation in each state's and locality's tax laws based in whole or in part
upon income, it is impossible to predict tax consequences to Note Owners and
Certificate Owners all of the taxing jurisdictions in which they are already
subject to tax. Accordingly, Security Owners are strongly urged to consult
their own tax advisors with respect to state and local tax consequences
arising out of the purchase, ownership and disposition of Securities.
* * *
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE
PURCHASERS OF NOTES OR CERTIFICATES SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF NOTES AND CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL AND FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
GENERAL
Set forth below are certain consequences under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the Code that a
fiduciary (a "Plan Fiduciary") of an "employee benefit plan" (as defined in
and subject to ERISA) or of a "plan" (as defined in Section 4975 of the Code)
who has investment discretion should consider before deciding to invest the
plan's assets in Securities. The following summary is intended to be a summary
of certain relevant ERISA issues and does not purport to address all ERISA
considerations that may be applicable to a particular plan.
In general, the terms "employee benefit plan" as defined in ERISA and "plan"
as defined in Section 4975 of the Code (a "Plan") refer to any plan or account
of various types which provide retirement benefits or welfare benefits to an
individual or to an employer's employees and their beneficiaries. Plans
include corporate pension and profit-sharing plans, "simplified employee
pension plans", Keogh plans for self-employed individuals (including partners
in a partnership), individual retirement accounts described in Section 408 of
the Code and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts and
circumstances that are relevant to an investment in the Securities plays in
the Plan's investment portfolio. Each Plan Fiduciary before deciding to invest
in the Securities, must be satisfied that investment in the Securities is a
prudent investment for the Plan,
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that the investments of the Plan, including the investment in the Securities,
are diversified so as to minimize the risks of large losses and that an
investment in the Securities complies with the Plan and related trust
documents.
Each Plan considering acquiring a Security should consult its own legal and
tax advisors before doing so.
EXEMPT PLANS
ERISA and Section 4975 of the Code do not apply to governmental plans and
certain church plans, each as defined in Section 3 of ERISA and Section
4975(g) of the Code. However, fiduciaries with respect to these plans may be
subject to federal, state or other laws similar in effect to ERISA and Section
4975 of the Code. The discussion below does not purport to address
considerations under such federal, state or other laws.
INELIGIBLE PURCHASERS
Securities may not be purchased with the assets of a Plan that is sponsored
by or maintained by the Company, the Trustee, the Indenture Trustee, the
Trust, the Servicer or any of their respective affiliates. Securities may not
be purchased with the assets of a Plan if the Company, the Trustee, the
Indenture Trustee, the Trust, the Servicer or any of their respective
affiliates or any employees thereof: (i) has investment discretion with
respect to the investment of such Plan assets; or (ii) has authority or
responsibility to give or regularly gives investment advice with respect to
such Plan assets for a fee, pursuant to an agreement or understanding that
such advice will serve as a primary basis for investment decisions with
respect to such Plan assets and that such advice will be based on the
particular investment needs of the Plan. A party that is described in clause
(i) or (ii) of the preceding sentence is a fiduciary under ERISA and the Code
with respect to the Plan, and any such purchase might result in a "prohibited
transaction" under ERISA and the Code.
PLAN ASSETS
It is possible that the purchase of a Security by a Plan will cause, for
purposes of Title I of ERISA and Section 4975 of the Code, the related assets
of a Trust to be treated as assets of that Plan. A regulation (the "DOL
Regulation") issued under ERISA by the United States Department of Labor (the
"DOL") contains rules for determining when an investment by a Plan in an
entity will result in the underlying assets of the entity being plan assets.
The rules provide that the assets of an entity will not be "plan assets" of a
Plan that purchases an interest therein if such interest is not an "equity
interest". The DOL Regulation defines an equity interest as an interest other
than an instrument that is treated as indebtedness under applicable local law
and that has no substantial equity features. The DOL Regulation provides with
respect to the purchase of an equity interest by a Plan, that the assets of an
entity will not be plan assets of a Plan that purchases an interest therein if
certain exceptions apply including the following: (i) the investment by all
"benefit plan investors" is not "significant"; or (ii) the security issued by
the entity is a "publicly offered security". The Prospectus Supplement will
specify whether any of the exceptions set forth in the regulation under ERISA
may apply with respect to a Series of Securities.
With respect to clause (i) of the preceding paragraph, the term "benefit
plan investors" includes all plans and accounts of the types described above
under "General" as employee benefit plans and accounts, whether or not subject
to ERISA, as well as entities that hold "plan assets" due to investments made
in such entities by any of such plans or accounts. Investments by benefit plan
investors will be deemed not significant if benefit plan investors own, in the
aggregate, less than a 25% interest in the entity, determined without regard
to the investments of persons with discretionary authority or control over the
assets of such entity, of any person who provides investment advice for a fee
with respect to such assets and of "affiliates" of such persons (within the
meaning of the DOL Regulation). Because the availability of this exception to
any Trust depends upon the identity of the Certificateholders of the
applicable Series at any time, there can be no assurance that any Series or
class of Certificates will qualify for this exception.
With respect to clause (ii) of the second preceding paragraph, a publicly
offered security is one which is (a) "freely transferable," (b) part of a
class of securities that is "widely held" and (c) either (1) part of a class
of
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securities registered under Section 12(b) or 12(g) of the Exchange Act, or (2)
sold to the Plan as part of a public offering pursuant to an effective
registration statement under the securities Act and registered under the
Exchange Act within 120 days (or such later time as may be allowed by the
Securities and Exchange Commission) after the end of the fiscal year of the
issuer in which the offering of such security occurred. Whether a security is
"freely transferable" is based on all relevant facts and circumstances. A
class of securities is "widely held" only if it is of a class of securities
owned by 100 or more investors independent of the issuer and of each other.
If none of the exceptions set forth in the DOL Regulation apply, the assets
of a Trust will be deemed to be the assets of each Plan investor for the
purposes of ERISA and Section 4975 of the Code. In such a case, the discussion
set forth in the following sections will apply.
Consequences of Characterization as Plan Assets.
If the assets of a Trust are plan assets, the Trustee will be a fiduciary
under ERISA with respect to Plan investors and its duties and liabilities will
be subject to the provisions of ERISA.
In addition, Section 406 of ERISA will prohibit the Trustee, among others,
from causing the assets of the Trust to be involved, directly or indirectly,
in certain types of transactions with "parties in interest" to investing Plans
unless statutory or administrative exemption applies. If the prohibited
transaction restrictions of Section 406 of ERISA are violated, ERISA generally
provides for criminal and civil penalties upon the Plan Fiduciary and possibly
other persons. Section 4975(c) of the Code generally imposes excise tax on
"disqualified persons" who engage, directly or indirectly, in similar types of
transactions with the assets of Plans subject to such Section (except that an
IRA that engages in a prohibited transaction may instead forfeit its tax
exempt status) and also requires recession of such transaction.
If the Trust assets are plan assets, Section 406 of ERISA will prohibit the
Trustee, among others, from causing the assets of the Trust to be involved,
directly or indirectly, in certain types of transactions with "parties in
interest" to investing Plans unless a statutory or administrative exemption
applies. If the prohibited transaction restrictions of Section 406 of ERISA
are violated, ERISA generally provides for criminal and civil penalties upon
the Plan Fiduciary and possibly other persons. Section 4975(c) of the Code
generally imposes an excise tax on "disqualified persons" who engage, directly
or indirectly, in similar types of transactions with the assets of Plans
subject to such Section (except that an IRA that engages in a prohibited
transaction may instead forfeit its tax-exempt status) and also requires
recision of such transaction.
The types of transactions subject to the prohibited transaction restrictions
of ERISA and Section 4975(c) of the Code include: (i) sales, exchanges or
leases of property (such as the Securities), (ii) loans or other extensions of
credit and (iii) the furnishing of goods and services. As described in Section
406(b)(1) or Section 4975(c)(1)(E) of the Code, the use of plan assets by or
for the benefit of parties in interest or disqualified persons may also
constitute a prohibited transaction.
The Company, the Trustee, the Indenture Trustee, the Trust, the Servicer and
certain other persons and certain affiliates thereof, might be considered or
might become a party in interest or disqualified person with respect to a
Plan. If so, the acquisition, holding or disposition of Securities by or on
behalf of such Plan could give rise to one or more "prohibited transactions"
within the meaning of Section 406 ERISA and Section 4975(c) of the Code unless
an exemption described below or some other exemption is available. In
particular, the sale of a Security by the Underwriters or the services
provided by the Trustee to such Plan would appear in certain circumstances to
be a prohibited transaction unless an exemption applies.
PROHIBITED TRANSACTION EXEMPTION FOR SENIOR CERTIFICATES ISSUED BY GRANTOR
TRUSTS
The following discussion applies only to nonsubordinated Certificates
(referred to herein as "Senior Certificates") issued by a Grantor Trust.
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The U.S. Department of Labor has granted to the underwriter (or in the case
of series offered by more than one underwriter, the lead underwriter) named in
each Prospectus Supplement an exemption (the "Exemption") from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates representing
interests in asset-backed pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption
include motor vehicle installment sales contracts such as the Receivables. The
Exemption will apply to the acquisition, holding and resale of the Senior
Certificates by a Plan, provided that certain conditions (certain of which are
described below) are met.
Among the conditions that must be satisfied for the Exemption to apply to
the Senior Certificates are the following:
(1) The acquisition of the Senior Certificates by a Plan is on terms
(including the price for the Senior Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Senior certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Senior Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors
Services, L.P.;
(4) The related Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the underwriters in connection with
the distribution or placement of the Senior Certificates represents not
more than reasonable compensation for underwriting or placing the Senior
Certificates; the sum of all payments made to and retained by the Seller
pursuant to the sale of the Contracts to the related Trust represents not
more than the fair market value of such Contracts; and the sum of all
payments made to and retained by the Servicer represents not more than
reasonable compensation for the Servicer's services under the related
Pooling and Servicing Agreement and reimbursement of the Servicer's
reasonable expenses in connections therewith; and
(6) The Plan investing in the Senior Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act.
Moreover, the Exemption would provide relief from certain self-dealing or
conflict of interest prohibited transactions applicable to a Plan whose Plan
Fiduciary is an obligor with respect to more than five percent of the fair
market value of the Contracts, or an affiliate of such person, if, among other
requirements, (i) in the case of the acquisition of Senior Certificates in
connection with the initial issuance, at least fifty percent of each class of
Senior Certificates in which Plans have invested are acquired by persons
independent of the Restricted Group (as defined below) and at least fifty
percent of the aggregate interest in the Trust is acquired by persons
independent of the Restricted Group (as defined below), (ii) the Plan's
investment in any class of Senior Certificates does not exceed twenty-five
percent of that class of Senior Certificates outstanding at the time of the
acquisition and (iii) immediately after the acquisition, no more than twenty-
five percent of the assets of the benefit Plan with respect to which the
investing fiduciary has discretionary authority or renders investment advice
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to Plans sponsored by any underwriter, the related Trustee, the related
Seller, the related Servicer, any obligor with respect to Contracts included
in the related Trust constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust, or any affiliate of
such parties (the "Restricted Group").
Whether the conditions in the Exemption will be satisfied as to Certificates
or any particular class will depend upon the relevant facts and circumstances
existing at the time the Plan acquires Certificates of that class. Any Plan
Fiduciary who proposes to acquire Certificates on behalf of a Plan in reliance
upon the Exemption
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should determine whether the Plan satisfies all of the applicable conditions
of the Exemption and consult with its counsel regarding other factors that may
affect the applicability of the Exemption.
If for any reason the Exemption does not provide an exemption for a
particular Plan, one of three prohibited transaction class exemptions ("PTCE")
issued by the DOL might apply, i.e., PTCE 91-38 (Class Exemption for Certain
Transactions Involving Bank Collective Investment Funds), PTCE 90-1 (Class
Exemption for Certain Transactions Involving Insurance Company Pooled Separate
Accounts) or PTCE 84-14 (Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional Asset Managers). There can be
no assurance that any of these class exemptions will apply with respect to any
particular Plan or, even if it were to apply, that the exemption would apply
to all transactions involving the applicable Trust.
PURCHASE OF NOTES
If Notes are treated as indebtedness under applicable local law and have no
substantial equity features, the assets of the relevant Trust will not be
treated for purposes of ERISA or Section 4975 of the Code as assets of any
Plan. As a result, the prohibited transactions provisions of ERISA and Section
4975 of the Code will not apply to transactions involving the underlying
assets of the Trust. However, as is the case with Certificates, if the Trust
is or becomes a "party in interest" or "disqualified person" with respect to a
Plan (for example, if such Trust were owned at least 50% by a service provider
to a Plan), the purchase or holding of such Note could give rise to a
prohibited transaction under ERISA or Section 4975 of the Code.
GENERAL CONSIDERATIONS
Before a Plan Fiduciary decides to purchase Certificates on behalf of a
Plan, the Plan Fiduciary should determine whether the Exemption is applicable,
whether any other prohibited transaction exemption (if required) is available
under ERISA and Section 4975 of the Code or whether an exemption from "plan
asset" treatment is available to the applicable Trust. The Plan Fiduciary
should also consult the ERISA discussion in the applicable Prospectus
Supplement for further information regarding the application of ERISA to any
class of Certificates.
Subordinated Certificates are not available for purchase by any Plan.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A
REPRESENTATION BY THE COMPANY, THE SERVICER, THE TRUSTEE OR ANY OTHER PARTY
THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO
INVESTMENTS BY ANY PARTICULAR PLAN OR THAT SUCH INVESTMENT IS APPROPRIATE FOR
ANY PARTICULAR PLAN. EACH PLAN FIDUCIARY SHOULD CONSULT WITH ITS ATTORNEYS AND
FINANCIAL ADVISORS AS TO THE PROPRIETY OF SUCH AN INVESTMENT IN LIGHT OF THE
CIRCUMSTANCES OF THE PARTICULAR PLAN AND THE RESTRICTIONS OF ERISA AND SECTION
4975 OF THE CODE.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes, if any, of a given Series and an underwriting agreement
with respect to the Certificates of such Series (collectively, the
"Underwriting Agreements"), the Company will agree to cause the related Trust
to sell to the underwriters named therein and in the related Prospectus
Supplement, and each of such underwriters will severally agree to purchase,
the principal amount of each class of Notes and Certificates, as the case may
be, of the related Series set forth therein and in the related Prospectus
Supplement.
In the Underwriting Agreements with respect to any given Series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all of the Notes and Certificates,
as the
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case may be, described therein that are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may
be, are purchased.
Each Prospectus Supplement will either (i) set forth the price at which each
class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to
certain dealers participating in the offering of such Notes and Certificates,
as the case may be, or (ii) specify that the related Notes and Certificates,
as the case may be, are to be resold by the underwriters in negotiated
transactions at varying prices to be determined at the time of such sale.
After the initial public offering of any such Notes and Certificates, as the
case may be, such public offering prices and such concessions may be changed.
Pursuant to the Receivables Purchase Agreement between the Seller (or its
affiliate) and the Company, the Seller will indemnify the Company and the
related underwriters against certain civil liabilities, including liabilities
under the Securities Act, or contribute to payments the Company and the
several underwriters may be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust Accounts in
Eligible Investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
Series of Securities, the closing of the sale of any class of Securities will
be conditioned on the closing of the sale of all other such classes under such
Underwriting Agreement.
The place and time of delivery for the Notes and Certificates, as the case
may be, in respect of which this Prospectus is delivered will be set forth in
the related Prospectus Supplement.
If and to the extent required by applicable law or regulation, this
Prospectus and the Prospectus Supplement will also be used by the Underwriter
after the completion of the offering in connection with offers and sales
related to market-making transactions in the offered Securities in which the
Underwriter acts as principal. The Underwriter may also act as agent in such
transactions. Sales will be made at negotiated prices determined at the time
of sale.
LEGAL MATTERS
Certain legal matters relating to the Securities of any Series will be
passed upon by the law firms specified in the related Prospectus Supplement.
Certain federal income tax and other matters will be passed upon for the Trust
and the Seller, by the law firms specified in the related Prospectus
Supplement.
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INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
1996 Contingent Debt Regulations......................................... 52
1997 Act................................................................. 68
1997 Withholding Regulations............................................. 57, 69
Actuarial Receivables.................................................... 18
adjusted issue price..................................................... 55
Advance.................................................................. 10
APR...................................................................... 10
Cede..................................................................... 16
Certificate Balance...................................................... 6
Certificate Distribution Account......................................... 39
Certificate Owners....................................................... 51
Certificate Pass-Through Rate............................................ 6
Certificate Pool Factor.................................................. 29
Certificateholder........................................................ 12
Certificates............................................................. 1
Check-the-Box Regulations................................................ 60
Closing Date............................................................. 7
Code..................................................................... 51
Collection Account....................................................... 39
Collection Period........................................................ 16
Commission............................................................... 2
Company.................................................................. 1
Cutoff Date.............................................................. 7
Dealers.................................................................. 7
Definitive Certificates.................................................. 36
Definitive Notes......................................................... 36
Definitive Securities.................................................... 36
Depository............................................................... 29
Distribution Date........................................................ 35
DOL...................................................................... 71
DOL Regulation........................................................... 71
DTC...................................................................... 16
Eligible Deposit Account................................................. 40
Eligible Institution..................................................... 40
Eligible Investment...................................................... 40
Eligible Investments..................................................... 40
ERISA.................................................................... 70
Events of Default........................................................ 31
Exchange Act............................................................. 2
Exemption................................................................ 73
Fannie Mae............................................................... 22
Farm Credit Act.......................................................... 25
FCA...................................................................... 25
FCBs..................................................................... 25
Federal Tax Counsel...................................................... 51
FFCB..................................................................... 22
FFEL..................................................................... 24
FHLB..................................................................... 22, 24
FHLMC Act................................................................ 23
</TABLE>
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<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Final Scheduled Maturity Date............................................ 10
Financed Vehicles........................................................ 7
financial institution.................................................... 58
FIRREA................................................................... 24
Fiscal Agent............................................................. 22
Freddie Mac.............................................................. 22
FTC Rule................................................................. 50
Funding Corporation...................................................... 26
Government Securities.................................................... 8, 21
Grantor Trust............................................................ 4
Grantor Trust Certificateholders......................................... 64
Grantor Trust Certificates............................................... 65
GSE Bonds................................................................ 8
GSE Issuer............................................................... 22
GSEs..................................................................... 8, 21
GSEs Bonds............................................................... 21
Indenture................................................................ 5
Indenture Trustee........................................................ 4
Indirect Participants.................................................... 35
Interest Component....................................................... 27
Interest Rate............................................................ 5
Investment Earnings...................................................... 40
IRS...................................................................... 51
issue price.............................................................. 54
MBS...................................................................... 23
Motor Vehicle Installment Contracts...................................... 7
Non-United States Holder................................................. 57
Non-United States Owner.................................................. 64
Non-United States Person................................................. 57
Note Distribution Account................................................ 39
Note Owners.............................................................. 51
Note Pool Factor......................................................... 29
Noteholder............................................................... 12
Notes.................................................................... 1
Obligor.................................................................. 7
OID Regulations.......................................................... 53
Owner Trust.............................................................. 4
Participants............................................................. 35
Payahead Account......................................................... 39
Payaheads................................................................ 42
Plan..................................................................... 70
Plan Fiduciary........................................................... 70
Pooling and Servicing Agreement.......................................... 4
Pre-Funded Amount........................................................ 8, 40
Pre-Funding Account...................................................... 8, 40
Pre-Funding Period....................................................... 8, 40
Precomputed Advance...................................................... 10
Precomputed Receivables.................................................. 18
prepayment............................................................... 15
Prepayment Assumption.................................................... 54
Principal Component...................................................... 27
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Private Label Custody Receipt Securities................................. 8, 26
Private Label Custody Strips............................................. 8, 26
Prospectus Supplement.................................................... 1
PTCE..................................................................... 74
Receivables.............................................................. 1
REFCO.................................................................... 8, 26
REFCO Strip.............................................................. 27
REFCO Strips............................................................. 8, 26
Registration Statement................................................... 2
Related Documents........................................................ 32
Repurchase Amount........................................................ 39
Reserve Account.......................................................... 44
Restricted Group......................................................... 73
RTC...................................................................... 24
Rule of 78s Receivables.................................................. 18
Rules.................................................................... 36
Sale and Servicing Agreement............................................. 10
Sallie Mae............................................................... 22
Schedule of Receivables.................................................. 38
Securities............................................................... 1
Securities Act........................................................... 2
Security Owners.......................................................... 35
Seller................................................................... 7
Senior Certificates...................................................... 67, 72
Senior Class Percentage.................................................. 67
Series................................................................... 1
Servicer................................................................. 4
Servicer Default......................................................... 45
Servicing Fee............................................................ 43
Servicing Fee Rate....................................................... 43
Short-Term Note.......................................................... 57
Shortfall Amount......................................................... 67
Simple Interest Advance.................................................. 10
Simple Interest Receivables.............................................. 18
stated redemption price at maturity...................................... 54
Strip Certificates....................................................... 6
Strip Notes.............................................................. 5
Stripped Certificates.................................................... 65
Subordinate Certificates................................................. 65
Subordinate Class Percentage............................................. 67
System................................................................... 25
Systemwide Debt Securities............................................... 25
TEFRA.................................................................... 27
TIN...................................................................... 59
Transfer and Servicing Agreements........................................ 38
Treasury Bonds........................................................... 8, 21
Treasury Strips.......................................................... 8, 21
Trust.................................................................... 1, 4
Trust Accounts........................................................... 40
Trust Agreement.......................................................... 4
Trust Stripped Bond...................................................... 67
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Trust Stripped Coupon...................................................... 67
Trustee.................................................................... 4
TVA........................................................................ 22
TVA Act.................................................................... 25
UCC........................................................................ 35
Underlying Agreement....................................................... 8
Underlying Issuer.......................................................... 20
Underlying Servicer........................................................ 20
Underlying Trust Agreement................................................. 20
Underlying Trust Fund...................................................... 8
Underlying Trustee......................................................... 20
Underwriting Agreements.................................................... 75
United States person....................................................... 59
United States Trust........................................................ 57
</TABLE>
79
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Securities
(the "Global Securities") will be available only in book-entry form. Unless
otherwise specified in the related Prospectus Supplement, investors in the
Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), Cedel or Euroclear. Unless otherwise
specified in the related Prospectus Supplement, Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Unless otherwise specified in the related Prospectus Supplement,
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
Cedel and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Securities will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Securityholders' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Securityholders electing to hold their Global Securities through DTC will
follow the settlement practices applicable to U.S. corporate debt obligations.
Securityholder securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Securityholders electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment
date to and excluding the settlement date. Payment will then be made by the
respective Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or
Euroclear Participant's account. The Global Securities credit will appear the
next day (European time) and the cash debit will be back-valued to, and the
interest on the Global Securities will accrue from, the value date (which
would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Cedel or Euroclear cash debit will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited
to their accounts. However, interest on the Global Securities would accrue
from the value date. Therefore, in many cases the investment income on the
Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each Cedel Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participant a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
Cedel or Euroclear will instruct the respective Depositary, as appropriate, to
deliver the bonds to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date. The payment
will then be reflected in the account of the Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debit in
anticipation of receipt of the sale proceeds in its account, the back-
valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date. Finally, day traders that use Cedel or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Cedel
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale
A-2
<PAGE>
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Securities
that are non-U.S. Persons can obtain a complete exemption from the withholding
tax by filing a signed Form W-8 (Certificate of Foreign Status). If the
information shown on Form W-8 changes, a new Form W-8 must be filed within 30
days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are beneficial owners of Securities
residing in a country that has a tax treaty with the United States can obtain
an exemption or reduced tax rate (depending on the treaty terms) by filing
Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that rate
unless the filer alternatively files Form W-8. Form 1001 may be filed by the
Securityholder or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes,
regardless of its source. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Securityholders are advised to consult their own tax
advisers for specific tax advice concerning their holding and disposing of the
Global Securities.
A-3
<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY COMPASS BANK OR THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF COMPASS BANK OR THE RECEIVABLES SINCE THE DATE THEREOF. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLIC-
ITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AU-
THORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI-
FIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICI-
TATION.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Reports to Noteholders..................................................... S-2
Summary of Terms........................................................... S-3
Risk Factors............................................................... S-11
The Trust.................................................................. S-15
The Receivables Pool....................................................... S-16
Weighted Average Life of the Notes......................................... S-24
The Sellers and the Servicer............................................... S-29
Use of Proceeds............................................................ S-29
Description of the Notes................................................... S-29
Description of the Certificates............................................ S-32
Description of the Transfer and Servicing Agreements....................... S-33
Certain Legal Aspects of the Receivables................................... S-41
Material Federal Income Tax Consequences................................... S-46
Certain State Tax Consequences............................................. S-49
ERISA Considerations....................................................... S-49
Underwriting............................................................... S-50
Legal Opinions............................................................. S-51
Glossary of Terms.......................................................... S-52
PROSPECTUS
Reports to Securityholders................................................. 2
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Summary of Terms........................................................... 4
Risk Factors............................................................... 14
The Trusts................................................................. 16
The Trustee................................................................ 17
The Receivables Pools...................................................... 18
The Collateral Certificates................................................ 19
The Government Securities.................................................. 21
Weighted Average Life of the Securities.................................... 28
Pool Factors and Trading Information....................................... 29
The Seller and the Servicer................................................ 29
Use of Proceeds............................................................ 29
Description of the Notes................................................... 29
Description of the Certificates............................................ 34
Certain Information Regarding the Securities............................... 35
Description of the Transfer and Servicing Agreements....................... 38
Certain Matters Regarding the Servicer..................................... 45
Certain Legal Aspects of the Receivables................................... 48
Material Federal Income Tax Consequences................................... 51
State and Local Tax Considerations......................................... 69
ERISA Considerations....................................................... 70
Plan of Distribution....................................................... 74
Legal Matters.............................................................. 75
Index of Terms............................................................. 76
Global Clearance, Settlement and Documentation Procedures.................. A-1
</TABLE>
-----------
UNTIL SEPTEMBER 22, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLE-
MENT) ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT
AND A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
$379,380,000
COMPASS AUTO RECEIVABLES TRUST 1998-A
$127,235,000 5.659% CLASS A-1
ASSET BACKED NOTES
$81,700,000 5.709% CLASS A-2
ASSET BACKED NOTES
$170,445,000 5.900% CLASS A-3
ASSET BACKED NOTES
COMPASS BANK,
an Alabama state banking corporation,
Seller and Servicer
COMPASS BANK,
a Texas state bank,
Seller
ASSET BACKED SECURITIES CORPORATION,
Company
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
COMPASS BANK
as Placement Agent
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