<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED November 19,1998
$127,400,000
TRIAD AUTO RECEIVABLES OWNER TRUST 1999-1
$71,100,000 5.626% ASSET BACKED NOTES, CLASS A-1
$56,300,000 6.090% ASSET BACKED NOTES, CLASS A-2
[LOGO]
Triad Financial Corporation
Seller and Servicer
Asset Backed Securities Corporation
Company
The notes will be issued by a trust. The sources for payment of the notes are a
pool of non-prime auto loans held by the issuing trust, cash held by the
issuing trust and, in the case of the class A-1 notes and class
A-2 notes, a financial guaranty insurance policy
issued by:
[LOGO]
There are three classes of notes, the class A-1 notes, the class A-2 notes and
the class B notes. Only the class A-1 notes and class A-2 notes are offered
hereby. The initial principal amount of the class A-1 notes is $71,100,000
and the initial principal amount of the class A-2 notes is $56,300,000.
The interest rate on the class A-1 notes is 5.626% and the interest
rate on the class A-2 notes is 6.090%. The class B notes are
subordinated to the class A notes to the extent described herein.
Interest and principal on the notes are scheduled to be paid
monthly, on the 17th day of the month. The first
scheduled payment date is April 19, 1999.
Credit Suisse First Boston will purchase the class A-1 notes from the issuing
trust at approximately 100% of the principal amount of the class A-1 notes
plus accrued interest from March 1, 1999 and the class A-2 notes at
approximately 99.986% of the principal amount of the class A-2 notes
plus accrued interest from March 1, 1999. Credit Suisse First Boston
will offer the class A-1 notes and class A-2 notes from time to time
in negotiated transactions or at varying prices which will be
determined at the time of sale. The aggregate proceeds to
the issuing trust, before deducting expenses payable by
or on behalf of the issuing trust
estimated at $400,000, will be $127,392,120.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the prospectus to which it relates is truthful
or complete. Any representation to the contrary is a criminal offense.
Consider carefully the risk factors beginning on page S-6 of this Prospectus
Supplement and page 11 of the Prospectus. The notes are asset backed notes
issued by a trust. The notes are not interests in or obligations of Triad
Financial Corporation, Asset Backed Securities Corporation or any of their
affiliates. This Prospectus Supplement may be used to offer and sell the notes
only if accompanied by the Prospectus.
Delivery of the class A-1 notes and the class A-2 notes, in book-entry form
only, will be made through the Depository Trust Company on or about March 25,
1999, against payment in immediately available funds.
Credit Suisse First Boston
Prospectus Supplement dated March 16, 1999
<PAGE>
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE
HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL
THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE
DATE OF THIS DOCUMENT.
We provide information to you about the class A-1 notes and class A-2 notes
in two separate documents that progressively provide more detail: (a) the
accompanying prospectus, which provides general information, some of which may
not apply to your class A-1 notes and class A-2 notes and (b) this prospectus
supplement, which describes the specific terms of your class A-1 notes and class
A-2 notes.
IF THERE IS A CONFLICT BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents provides the pages on which
these captions are located.
We have filed preliminary information regarding the trust's assets and the
class A-1 notes and class A-2 notes with the SEC. The information contained in
this document supersedes all of that preliminary information, which was prepared
by the underwriters for prospective investors.
Until June 17, 1999 all dealers that effect transactions in the class A-1
notes and class A-2 notes, whether or not participating in this offering, may be
required to deliver a prospectus and prospectus supplement. This requirement is
in addition to the dealer's obligation to deliver a prospectus and prospectus
supplement when acting as underwriters with respect to their unsold allotments
or subscriptions.
We are not offering the class A-1 notes and class A-2 notes in any state
where the offer is not permitted.
We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
<S> <C>
Summary............................... S-1
Risk Factors.......................... S-6
The Seller and the Servicer........... S-10
The Trust............................. S-10
Trust Property........................ S-11
Triad's Automobile Financing
Program............................. S-12
The Backup Servicer................... S-19
The Receivables....................... S-19
Yield Considerations.................. S-29
Use of Proceeds....................... S-29
The Insurer........................... S-29
Incorporation of Certain Documents by
Reference........................... S-31
The Notes............................. S-32
Description of The Transaction
Documents........................... S-45
The Policy............................ S-52
Material Federal Income Tax
Consequences........................ S-54
Certain State Tax Consequences........ S-57
ERISA Considerations.................. S-57
Ratings............................... S-58
Underwriting.......................... S-58
Experts............................... S-59
Legal Matters......................... S-59
Glossary.............................. S-60
Index Of Terms........................ S-63
PROSPECTUS
Prospectus Supplement................. 2
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........................... 18
The Receivables Pools................. 18
The Collateral Certificates........... 20
The Government Securities............. 21
Weighted Average Life of the
Securities.......................... 28
Pool Factors and Trading
Information......................... 29
The Seller and the Servicer........... 30
Use of Proceeds....................... 30
Description of the Notes.............. 30
Description of the Certificate........ 35
Certain Information Regarding the
Securities.......................... 36
Description of the Transfer and
Servicing Agreement................. 39
Certain Matters Regarding the
Servicer............................ 46
Certain Legal Aspects of the
Receivables......................... 50
Material Federal Income Tax
Consequences........................ 54
State and Local Tax Consequences...... 73
ERISA Considerations.................. 74
Plan of Distribution.................. 80
Legal Matters......................... 80
Index of Terms........................ 81
Global Clearance, Settlement and
Documentation Procedures............ A-1
</TABLE>
iii
<PAGE>
SUMMARY
- - - This summary highlights selected information from this prospectus supplement
and does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of the
offering of the notes, read carefully this entire prospectus supplement and
the accompanying prospectus.
- - - This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
- - - You can find a listing of the pages where capitalized terms used in this
summary are defined under the caption "Index of Terms" beginning on page S-63
in this prospectus supplement.
PARTIES
THE TRUST
Triad Auto Receivables Owner Trust 1999-1 is a Delaware business trust. The
trust will issue the notes and be liable for their payment. The issuing trust's
principal asset will be a pool of auto loans.
SELLER AND SERVICER
Triad Financial Corporation is a California corporation. It will sell the auto
loans to Asset Backed Securities Corporation. Triad Financial Corporation will
also service the auto loans held by the issuing trust.
COMPANY
Asset Backed Securities Corporation is a special purpose Delaware corporation.
Asset Backed Securities Corporation is an indirect, wholly owned subsidiary of
Credit Suisse First Boston, Inc. Asset Backed Securities Corporation will sell
the auto loans to the issuing trust.
THE INSURER
Financial Security Assurance Inc. is a New York financial guaranty insurance
company. Financial Security Assurance Inc. will issue a policy, which will
guarantee the payment of timely interest and principal due on the class A-1
notes and class A-2 notes but only as set forth in the section of this
prospectus supplement titled "The Policy."
THE OWNER TRUSTEE
Wilmington Trust Company is a Delaware banking corporation. Wilmington Trust
Company will be the owner trustee.
THE INDENTURE TRUSTEE
The Chase Manhattan Bank is a New York banking corporation. The Chase Manhattan
Bank will be the indenture trustee and the backup servicer.
DATES
INITIAL CUTOFF DATE
- - - February 28, 1999. The issuing trust will receive payments due on, or received
with respect to, the auto loans after this date.
CLOSING DATE
- - - On or about March 25, 1999.
DESCRIPTION OF THE SECURITIES
GENERAL
The issuing trust will issue three classes of asset backed notes. The class A-1
notes will be designated as the "Class A-1 Notes" and the class A-2 notes will
be designated as the "Class A-2 Notes". The Class A-1 Notes together with the
Class A-2 Notes will be designated as the "Class A Notes". The class B notes
will be designated as the "Class B Notes." Only the Class A Notes are offered to
you pursuant to this prospectus supplement. Any information in this prospectus
supplement relating to the Class B Notes is presented solely to provide you with
a better understanding of the Class A Notes.
Each of the Class A-1 Notes and Class A-2 Notes will have the initial principal
amount and the interest rate set forth in the following table. The dates on
which the final payment of principal and
S-1
<PAGE>
interest on each of the Class A-1 Notes and Class A-2 Notes is scheduled to be
made are also set forth in the following table.
<TABLE>
<CAPTION>
FINAL
INITIAL NOTE SCHEDULED
PRINCIPAL INTEREST PAYMENT
CLASS BALANCE RATE DATE
- - ------------------ ------------- ----------- -----------
<S> <C> <C> <C>
A-1............... $ 71,100,000 5.626% 6/17/2002
A-2............... $ 56,300,000 6.090% 9/19/2005
</TABLE>
The Class A Notes will initially be issued in book-entry form only. The Class A
Notes will be issued in minimum denominations of $1,000 and multiples of $1,000
in excess thereof.
You may hold your Class A Notes through The Depository Trust Company in the
United States.
The notes will be secured solely by the pool of non-prime auto loans and the
other assets of the issuing trust which are described under the section entitled
"The Trust Property."
A collection period means, with respect to a payment date, the calendar month
prior to the month in which the payment date occurs.
The Class A-2 Notes will not receive any payment of principal on a payment date
until the full amount of the Class A-1 Notes principal has been paid in full. On
each payment date, the Class B Notes will not receive any payment of interest or
principal until all amounts due the Class A Notes on such payment date have been
paid in full.
PAYMENT DATES
- - - The payment date will be the 17th day of each month, or, if such day is not a
business day, on the next succeeding business day. The first payment date will
be April 19, 1999.
- - - The record date for all payment dates is the 16th day of each month, or, if
such day is not a business day, on the prior business day.
INTEREST
- - - In the case of the first payment date, interest will accrue from March 1, 1999
through and excluding the first payment date of April 19, 1999. For any
payment thereafter interest will accrue on the Class A Notes during the month
preceding each payment date. Interest on the notes will be calculated on a
"30/360" basis.
PRINCIPAL
- - - Prior to achieving a required level of overcollateralization, the amount of
principal available to be distributed to the Class A Notes is generally equal
to (i) the amount of collections on the auto loan pool allocable to principal
during the prior calendar month plus any losses recognized on the auto loan
pool during the prior calendar month and (ii) a specified amount of excess
interest received on the auto loan pool during the prior calendar month (after
paying certain expenses of the trust, interest on the Class A Notes and
funding the reserve account to the required level) necessary to achieve the
required level of overcollateralization.
- - - Once the required level of overcollateralization has been reached, the amount
of principal available to be distributed to the Class A Notes will be equal to
(i) the amount of collections on the auto loan pool allocable to principal
during the prior calendar month plus any losses recognized on the auto loan
pool during the prior calendar month less (ii) the excess of (a) the amount of
overcollateralization on such payment date less (b) the required level of
overcollateralization on such payment date. Additionally, once the required
level of overcollateralization has been reached, excess interest will no
longer be used to create any further overcollateralization.
- - - Principal distributable to the Class A Notes will be distributed first to the
Class A-1 Notes until its principal balance is reduced to zero and then will
be distributed to the Class A-2 Notes until its principal balance has been
reduced to zero.
- - - In addition, the outstanding principal amount of the Class A-1 Notes and the
Class A-2 Notes, to the extent not previously paid, will be payable on the
final scheduled payment date of the related class of notes.
S-2
<PAGE>
THE TRUST ASSETS
GENERAL
The issuing trust's assets will include:
- - - certain non-prime motor vehicle retail installment sale contracts secured by
new and used automobiles and light-duty trucks;
- - - certain monies due on, or received thereunder, after February 28, 1999;
- - - an assignment of the security interests in the vehicles securing the auto loan
pool;
- - - the related files;
- - - all rights to proceeds from claims on certain physical damage, credit life and
disability insurance policies covering the vehicles or the obligors;
- - - all rights to liquidation proceeds with respect to the auto loan pool;
- - - an assignment of the rights of Asset Backed Securities Corporation under a
receivables purchase agreement with Triad Financial Corporation;
- - - an assignment of the rights of Triad Financial Corporation against dealers
under agreements between Triad Financial Corporation and such dealers;
- - - certain bank accounts;
- - - all proceeds of the foregoing; and
- - - certain rights under the principal transaction documents for this offering.
THE AUTO LOAN POOL
GENERAL
The auto loans consist of non-prime motor vehicle retail installment sale
contracts originated by dealers and then acquired by Triad Financial Corporation
pursuant to its contract acquisition program. The motor vehicle retail
installment sale contracts consist primarily of contracts with individuals with
less than perfect credit due to various factors. These factors include the
manner in which such individuals have handled previous credit, the limited
extent of their prior credit history and/or their limited financial resources.
STATISTICAL INFORMATION
The statistical information in this prospectus supplement is based on the auto
loans in the pool as of February 28, 1999. It is expected that the composition
and characteristics of the pool of auto loans on the closing date will be
similar to the information set forth in this prospectus supplement. However,
certain auto loans in the pool may be excluded on the closing date as a result
of certain administrative considerations. In particular, auto loans with
obligors whose addresses are in Pennsylvania, constituting approximately 1.29%
of the aggregate principal balance of the auto loans as of February 28, 1999,
are expected to be excluded from the trust on the closing date for such reasons.
As a result, it is expected that the aggregate principal balance of the auto
loans on the closing date will be decreased and the pre-funding amount will be
correspondingly increased from the amounts presented in this prospectus
supplement by approximately $1.3 million. Triad Financial Corporation does not
believe that the characteristics of the auto loans included in the trust on the
closing date in the aggregate will differ materially from the information set
forth in this prospectus supplement.
- - - As of February 28, 1999 the auto loans in the pool have:
-- an aggregate principal balance of $105,075,342.62;
-- a weighted average annual percentage rate of approximately 19.12%;
-- a weighted average original term to scheduled maturity of approximately
60 months;
-- a weighted average remaining term to scheduled maturity of
approximately 59 months; and
-- a remaining term to scheduled maturity of not more than 72 months and
not less than 28 months (each).
S-3
<PAGE>
PRE-FUNDING FEATURE
Approximately $34,924,657.38 of the proceeds of the notes will be held by The
Chase Manhattan Bank in an account which is formed solely to hold this money,
and used to purchase additional auto loans with the prior written consent of
Financial Security Assurance Inc. in each case. The issuing trust will purchase
from Asset Backed Securities Corporation additional non-prime auto loans from
time to time on or before May 17, 1999, from funds on deposit in this account.
The obligation of Asset Backed Securities Corporation to sell additional auto
loans to the trust is conditioned on such loans having been sold to Asset Backed
Securities Corporation from Triad Financial Corporation.
The auto loans acquired by the issuing trust during the period between the day
of the closing and May 17, 1999, will also be originated or acquired by Triad
Financial Corporation. The characteristics of the subsequently-acquired auto
loans are not expected to differ to any great extent from the auto loans
acquired by the issuing trust on the day of the closing.
THE INSURANCE POLICY
On the day of the closing, Financial Security Assurance Inc. will issue a
financial guaranty insurance policy for the benefit of the Class A noteholders.
Pursuant to this policy, Financial Security Assurance Inc. will unconditionally
and irrevocably guarantee the payments of interest and principal for each
payment date with respect to the Class A Notes required to be made during the
term of such policy, subject to the further provisions of the policy as
described herein. The Class B Notes do not have the benefit of the policy.
OPTIONAL REDEMPTION
The notes, if still outstanding, may be redeemed in whole, but not in part, on
any payment date on which Triad Financial Corporation exercises its "clean-up
call" option to purchase the auto loan pool. This can only occur after the pool
balance declines to 10% or less of the original pool balance. Triad Financial
Corporation's exercise of the "clean-up call" is also subject to the
satisfaction of certain conditions, including obtaining the prior written
consent, in certain circumstances, of Financial Security Assurance Inc. The
redemption price is equal to the unpaid principal amount of the notes plus
accrued and unpaid interest thereon.
MANDATORY REDEMPTION
IF PRE-FUNDING ACCOUNT IS NOT DEPLETED
Each of the Class A-1 Notes and Class A-2 Notes will be redeemed in part on a
pro rata basis if any portion of the approximately $34,924,657.38 deposited in a
segregated pre-funding account with The Chase Manhattan Bank remains on deposit
in such account on May 17, 1999, or prior to such date if the amount remaining
in such account is less than $100,000, provided, however if the amount remaining
in the pre-funding account is less than $100,000, only the Class A-1 Notes will
be redeemed.
UPON EVENT OF DEFAULT
The notes may be accelerated and subject to immediate payment at par upon the
occurrence of an event of default under the indenture. So long as Financial
Security Assurance Inc. is not in default, the power to declare an event of
default will be held by Financial Security Assurance Inc. In the case of such an
event of default, the notes will automatically be accelerated and subject to
immediate payment at par. The policy issued by Financial Security Assurance Inc.
does not guarantee payment of any amounts that become due on an accelerated
basis, unless Financial Security Assurance Inc. elects, in its sole discretion,
to pay such amounts in whole or in part.
RATING OF THE NOTES
The Class A Notes must receive at least the following ratings from Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and Moody's
Investors Service, Inc. ("Moody's") in order to be issued.
<TABLE>
<CAPTION>
RATING
----------------------
CLASS S&P MOODY'S
- - ------------------------------------- --------- -----------
<S> <C> <C>
A-1.................................. AAA Aaa
A-2.................................. AAA Aaa
</TABLE>
S-4
<PAGE>
TAX STATUS
Dechert Price & Rhoads, special federal tax counsel, will deliver an opinion of
counsel that, for federal income tax purposes, the Class A Notes will be treated
as indebtedness. Each noteholder, by accepting a Class A Note, will agree to
treat the notes as indebtedness.
ERISA CONSIDERATION
Subject to certain considerations discussed in this Prospectus Supplement under
"ERISA Considerations," the Class A Notes are eligible for purchase by employee
benefit plans.
S-5
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER, IN ADDITION TO THE FACTORS DESCRIBED UNDER "RISK
FACTORS" IN THE PROSPECTUS, THE FOLLOWING RISK FACTORS IN CONNECTION WITH THE
PURCHASE OF THE CLASS A NOTES:
TRIAD FINANCIAL CORPORATION HAS A LIMITED OPERATING HISTORY AND THE
INFORMATION RELATING TO THE AUTO LOANS MAY NOT REFLECT ACTUAL EXPERIENCE.
Triad Financial Corporation has acquired all of the auto loans in its normal
course of business and in accordance with its credit underwriting criteria.
Triad Financial Corporation commenced operations in 1989 as a prime automobile
lender, but changed its focus to the non-prime market in 1993. Triad Financial
Corporation began servicing all new contract purchases in June 1996. Triad
Financial Corporation therefore has limited historical performance data with
respect to the motor vehicle retail installment sale contracts it purchases and
services. There can be no assurance that the net loss experience calculated and
presented herein by Triad Financial Corporation with respect to its portfolio of
serviced contracts will reflect actual experience with respect to the auto loans
included in the issuing trust. In addition, there can be no assurance that the
future delinquency or loan loss experience of the servicer with respect to the
auto loans will be better or worse than that set forth herein with respect to
Triad Financial Corporation's servicing portfolio. It is likely, however, that
delinquencies and loan losses will increase in the portfolio as the receivables
become more seasoned. Triad Financial Corporation is at an early stage of its
servicing operation.
THE TRIAD FINANCIAL CORPORATION FINANCE PROGRAM AND THE NATURE OF OBLIGORS
MAY INCREASE THE RISK OF DELINQUENCIES AND LOSSES.
Triad Financial Corporation purchases loans generally originated by
automobile dealers for sale and assignment to Triad Financial Corporation. Triad
Financial Corporation purchases retail automobile installment sale contracts
which may not meet the credit standards of traditional primary lenders. As a
result, the underwriting standards applied by Triad Financial Corporation are
not as stringent as those of the finance companies of motor vehicle
manufacturers or other financial institutions. The Triad Financial Corporation
finance program focuses on the non-prime market, including borrowers with
sub-standard credit profiles who may not be able to receive financing from more
traditional sources. The borrowers may have had credit problems in the past,
including prior delinquencies, repossessions, bankruptcy filings or charge-offs
by other credit companies. Accordingly, borrowers may have greater difficulty or
be less likely to make their scheduled payments. The number of delinquencies and
losses on the auto loans is expected to be higher than would be the case with
lower risk borrowers. Due to the credit quality of these borrowers, the auto
loans have been originated with higher annual percentage interest rates than
more traditional lenders charge lower risk borrowers. Any increase in losses on
the auto loans will result in accelerated prepayments on the Class A Notes. Any
reinvestment risks associated with such prepayment will be borne by the
noteholders. Additionally, if Financial Security Assurance Inc., as the security
insurer, defaults under the policy, you will bear the risk of loss on the auto
loans. You are urged to consider the credit quality of the auto loans when
analyzing an investment in the notes.
TRIAD FINANCIAL CORPORATION'S DEPENDENCE ON EXTERNAL FINANCING FACILITIES
Triad Financial Corporation's ability to continue to originate, acquire and
service its portfolio is dependent on continued access to short- and long-term
sources of funding. Triad Financial Corporation's ability to obtain funding
sources is dependent on the ability of ContiFinancial Corporation, and its
affiliates to access financing sources for Triad Financial Corporation. Certain
recent developments, some of which are market related and not under
ContiFinancial Corporation's control, have adversely impacted ContiFinancial
Corporation's access to such financing sources. Triad Financial Corporation's
principal warehouse facility is provided by an affiliate of the underwriter and
terminates on June 1, 1999. This warehouse facility is fully guaranteed by
ContiFinancial Corporation. If Triad Financial Corporation is unable to
refinance the warehouse facility or find alternative sources of funding, it
could impair the ability
S-6
<PAGE>
of Triad Financial Corporation to satisfy its obligations under the sale and
servicing agreement, including its ability to repurchase the auto loans for
breaches of representatives and warranties and may allow the Class A Notes
insurer upon such a breach to remove Triad Financial Corporation as servicer.
Any such impairment or removal could result in losses on the auto loans and/or
delays in distributions.
A CHANGE IN SERVICER MAY ADVERSELY AFFECT COLLECTIONS ON THE AUTO LOANS.
Triad Financial Corporation believes that its credit loss and delinquency
experience reflect in part its trained staff and collection procedures. If a
servicer termination event occurs under the sale and servicing agreement and
Triad Financial Corporation is removed as servicer, or if Triad Financial
Corporation resigns or is terminated as servicer, the backup servicer has agreed
to assume the obligations of successor servicer. Typically, a change in
servicers results in a temporary disruption of servicing. There can be no
assurance, however, that collections with respect to the auto loans will not be
adversely affected by any change in servicer.
THE ISSUING TRUST HAS ONLY LIMITED ASSETS.
The sole sources for repayment of the notes are payments on the auto loans,
amounts on deposit in the pre-funding account, other cash accounts held by The
Chase Manhattan Bank, proceeds from the repossession and sale of related
financed vehicles that secure defaulted auto loans and payments made under the
insurance policy. The money in the pre-funding account will be used solely to
purchase additional auto loans or, in limited circumstances, redeem a portion of
the Class A Notes and is not available to cover losses on the auto loan pool.
The capitalized interest account is designed to cover obligations of the issuing
trust relating to the portion of its assets not invested in auto loans and is
not designed to provide protection against losses on the auto loan pool.
Although the insurance policy will be available to cover shortfalls in
distributions of the payments due on the Class A Notes, pursuant to, and in
accordance with, the insurance policy, the issuing trust will depend on current
distributions on the auto loan pool (including certain amounts otherwise payable
to the Class B Notes) and amounts, if any, available in certain collateral
accounts maintained for the benefit of Financial Security Assurance Inc. to make
payments on the Class A Notes. The Class A Notes represent limited obligations
of the issuing trust, and the Class A Notes will not be insured or guaranteed by
Triad Financial Corporation, Asset Backed Securities Corporation, The Chase
Manhattan Bank or any other person or entity. If The Chase Manhattan Bank has
not perfected security interests in the related financed vehicles, its ability
to realize on the collateral securing the auto loans may be affected and the
proceeds to be distributed to the noteholders on a current basis may be reduced.
GEOGRAPHIC CONCENTRATION OF AUTO LOANS MAY INCREASE CONCENTRATION RISKS.
Obligors with respect to approximately 31.9% of the auto loans were located
in California as of February 28, 1999 (based on current principal balance as of
the Initial Cutoff Date and the address of the Obligor). Adverse economic
conditions or other factors affecting California could increase the delinquency,
loan loss or repossession experience of the issuing trust with respect to the
auto loans.
LIMITED ABILITY TO RESELL CLASS A NOTES.
The underwriter may assist in resales of the Class A Notes, but they are not
required to do so. A secondary market for the Class A Notes may not develop. If
a secondary market does develop, it might not continue or it might not be
sufficiently liquid to allow you to resell any of your Class A Notes.
THE RATE AT WHICH THE CLASS A NOTES WILL AMORTIZE CANNOT BE PREDICTED.
Interest on the auto loans will be payable to the holders of the Class A-1
Notes and Class A-2 Notes on each payment date. Such amount will equal
one-twelfth of the interest rate on the note balance of such
S-7
<PAGE>
class as of the close of business on the last day of the month immediately
preceeding such payment date. The auto loans have different APRs.
All of the auto loans are prepayable at any time. The rate of prepayments on
the auto loans may be influenced by a variety of economic, social and other
factors. These factors include the fact that a consumer obligor generally may
not sell or transfer the related financed vehicle securing an auto loan without
the consent of Triad Financial Corporation unless the loan is repaid by the
Obligor at the time of such sale or transfer. The rate of prepayment on the auto
loans may also may be influenced by the structure of the loan, the nature of the
consumer obligors and the related financed vehicles and servicing decisions. In
addition, under certain circumstances, Triad Financial Corporation is obligated
to purchase auto loans as a result of breaches of certain representations and
warranties, pursuant to the sale and servicing agreement and the receivables
purchase agreement. Under certain circumstances, the servicer is obligated to
purchase auto loans pursuant to the sale and servicing agreement as a result of
specified uncured breaches of covenants by it. The servicer may also purchase
all the auto loans if the pool balance has declined to less than 10% of the
original pool balance, subject to specified limitations in the sale and
servicing agreement.
Triad Financial Corporation has limited historical experience with respect
to prepayments. Triad Financial Corporation is not aware of publicly available
industry statistics that set forth principal prepayment experience for motor
vehicle retail installment contracts similar to the auto loans. None of the
issuing trust, Asset Backed Securities Corporation or Triad Financial
Corporation make any representation as to the actual prepayment rates on the
auto loans. Triad Financial Corporation, however, believes that the actual rate
of prepayments will result in the Class A Notes being repaid prior to their
respective final scheduled payment date. The amounts paid to noteholders will
include prepayments on the auto loans. The noteholders will bear all
reinvestment risk resulting from the timing of payments on the notes.
EFFECT OF LITIGATION ON TRIAD FINANCIAL CORPORATION'S FINANCIAL CONDITION.
Due to the consumer-oriented nature of Triad Financial Corporation's
industry and the application of certain laws and regulations, industry
participants are regularly named as defendants in litigation alleging violations
of federal and state laws and regulations and consumer law torts, including
fraud. Many of these actions involve alleged violations of consumer protection
laws. A significant judgment against Triad Financial Corporation or others
within the industry could have a material adverse effect on Triad Financial
Corporation. It could affect Triad Financial Corporation's financial condition,
results of operations and/or its ability to perform its obligations under the
receivables purchase agreement, the sale and servicing agreement and the trust
agreement.
RATINGS OF THE CLASS A NOTES ARE NOT GUARANTEED TO REMAIN IN PLACE.
A rating is not a recommendation to purchase, hold or sell notes. The
ratings of the Class A Notes address the likelihood of the payment of principal
and interest on the Class A Notes pursuant to their terms. There is no assurance
that a rating will remain in effect 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 any ratings
initially assigned to the Class A Notes are subsequently lowered or withdrawn
for any reason, including by reason of a downgrading of the claims-paying
ability of Financial Security Assurance Inc., no person or entity will be
obligated to provide any additional credit enhancement with respect to the Class
A Notes. Any reduction or withdrawal of a rating may have an adverse effect on
the liquidity and market price of the Class A Notes.
EVENTS OF DEFAULT UNDER THE INDENTURE MAY RESULT IN AN ACCELERATION.
Upon the occurrence of an event of default under the indenture (so long as
Financial Security Assurance Inc. shall not have defaulted and such default is
not continuing), The Chase Manhattan Bank as
S-8
<PAGE>
indenture trustee, will continue to submit claims under the insurance policy as
necessary in accordance with the terms thereof to enable the issuing trust to
continue to make payments due with respect to the Class A Notes on each payment
date. However, following the occurrence of an event of default, Financial
Security Assurance Inc. may, at its option, elect to cause the liquidation of
the assets of the issuing trust, in whole or in part, and pay all or any portion
of the outstanding amount of the Class A Notes, plus accrued interest thereon.
IF THE ISSUING TRUST DOES NOT USE ALL OF THE MONEY IN THE PRE-FUNDING
ACCOUNT A MANDATORY REDEMPTION OF A PORTION OF THE CLASS A NOTES COULD RESULT.
If the issuing trust has not used all of the money deposited in the
pre-funding account to purchase additional auto loans by May 17, 1999, then the
holders of each of the Class A-1 Notes and the Class A-2 Notes will receive a
pro rata prepayment of principal in an amount equal to the unused amount or if
the amount remaining in the pre-funding account is less than $100,000, only the
Class A-1 Notes will be redeemed. Any reinvestment risk from the mandatory
redemption of a portion of the Class A Notes from such unused amount will be
borne by the holders of the Class A Notes.
TRIAD FINANCIAL CORPORATION MAY NOT BE ABLE TO ORIGINATE SUFFICIENT AUTO
LOANS TO USE ALL MONEYS IN THE PRE-FUNDING ACCOUNT.
The ability of Triad Financial Corporation to acquire or originate
sufficient additional auto loans may be affected by a variety of social and
economic factors including: interest rates; unemployment levels; the rate of
inflation and consumer perception of economic conditions generally. If Triad
Financial Corporation does not originate sufficient additional auto loans then
the money deposited in the pre-funding account will not be completely used and a
mandatory redemption of a portion of the Class A Notes will result.
THE YEAR 2000 ISSUE.
The Year 2000 issue is whether Triad Financial Corporation's or its vendors'
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or fail.
Triad Financial Corporation has developed a comprehensive project plan for
achieving Year 2000 readiness. An inventory of critical hardware and software
has been completed and information technology components have been assessed.
This assessment included major suppliers and business partners and Triad
Financial Corporation is monitoring their continued progress toward Year 2000
compliance. Triad Financial Corporation is currently in the process of
renovating or replacing critical systems that are not currently Year 2000
compliant and has substantially completed this phase as of December 31, 1998.
Integrated testing and installation of all renovated mission critical systems is
planned for mid-calendar 1999 with an estimated completion date of August 31,
1999. In addition, Triad Financial Corporation developed contingency plans for
mission critical systems as of December 31, 1998.
Triad Financial Corporation presently believes that with modifications to
existing systems and/or conversion to new systems, the Year 2000 issue will not
pose significant operational problems for Triad Financial Corporation. However,
if such modifications and conversions are not made, or are not completed in a
timely manner, or are not completed successfully, the Year 2000 issue could have
a material impact on the operations of Triad Financial Corporation. In addition,
there can be no assurance that unforeseen problems in the Triad Financial
Corporation systems, or the systems of third parties on which the Triad
Financial Corporation computers rely, would not have an adverse effect on Triad
Financial Corporation systems or operations.
S-9
<PAGE>
THE SELLER AND THE SERVICER
Triad Financial Corporation ("Triad") was incorporated in California in
1989. Triad is the initial servicer (in such capacity, the "Servicer") and
seller (in such capacity, the "Seller") of the Receivables (as defined below) to
Asset Backed Securities Corporation (the "Company"). Triad purchases and
services motor vehicle retail installment sales contracts secured by new and
used automobiles and light-duty trucks financed thereby which are originated and
assigned to Triad, by automobile dealers, other specialty finance companies or
other originators. Triad will initially service the Receivables pursuant to a
sale and servicing agreement, dated as of March 1, 1999, (the "Sale and
Servicing Agreement") among the Trust (as defined below), the Company, the
Servicer, and The Chase Manhattan Bank (the "Indenture Trustee" and "Backup
Servicer") and will be compensated for acting as the Servicer.
Triad was founded by James M. Landy and Helen R. Kraus, who now serve Triad
as Chief Executive Officer and Executive Vice President, respectively.
ContiFinancial Corporation ("CFN"), acquired 53.5% of the common stock of Triad
in November 1996, acquired an additional 2.5% in January 1997 and acquired the
remaining common stock in March 1998. Triad's Board of Directors consists of
four executives of CFN, Mr. Landy and Ms. Kraus. Since its formation, Triad has
purchased approximately $985 million of auto loans and leases, of which
approximately $763 million have been non-prime contracts. As of March 9, 1999,
Triad had 378 full-time employees. The chief executive office of Triad is
located at 7711 Center Avenue, Suite 100, Huntington Beach, California 92647.
The telephone number of such office (714) 373-8300.
THE TRUST
GENERAL
The issuing trust, Triad Auto Receivables Owner Trust 1999-1 (the "Trust" or
the "Issuer"), is a business trust formed under the laws of the State of
Delaware pursuant to the trust agreement for the transactions described in this
Prospectus Supplement. On or about March 25, 1999 (the "Closing Date"), the
Trust will issue Class A-1 5.626% Asset Backed Notes (the "Class A-1 Notes"),
Class A-2 6.090% Asset Backed Notes (the "Class A-2 Notes", and together with
the Class A-1 Notes, the "Class A Notes") and Class B 11.000% Asset Backed Notes
(the "Class B Notes" and, together with the Class A Notes, the "Notes.") The
Class A-1 Notes will have an aggregate original principal amount of $71,100,000,
the Class A-2 Notes will have an aggregate original principal amount of
$56,300,000 and the Class B Notes will have an aggregate original principal
amount of $12,600,000. Only the Class A Notes are offered to you pursuant to
this prospectus supplement. Any information in this prospectus supplement
relating to the Class B Notes is presented solely to provide you with a better
understanding of the Class A Notes. On the Closing Date, the Trust will also
issue an Asset Backed Certificate (the "Certificate") which represents the
equity ownership in the trust and is subordinate in right of payment to the
Notes. The Certificate is not being offered hereby.
After its formation, the Trust will not engage in any activity other than
(i) acquiring, holding and managing motor vehicle retail installment sales
contracts secured by new and used automobiles and light-duty trucks financed
thereby (the "Receivables") and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificate, (iii) making payments on
the Notes, and (iv) engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or connected
therewith.
The proceeds from the initial sale of the Notes will be used by the Trust to
purchase the Initial Receivables from the Company pursuant to the Sale and
Servicing Agreement and to fund deposits in the Pre-Funding Account and the
Capitalized Interest Account. 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 Transaction Documents--Servicing Compensation"
herein.
S-10
<PAGE>
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address listed below under
"--The Owner Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Initial Cutoff Date (as defined below), as if the issuance and sale of the Notes
had taken place on such date:
<TABLE>
<S> <C>
Class A-1 Notes............................................... $71,100,000
-----------
Class A-2 Notes............................................... $56,300,000
-----------
Class B Notes................................................. $12,600,000
-----------
Total..................................................... $140,000,000
-----------
-----------
</TABLE>
THE OWNER TRUSTEE
Wilmington Trust Company, the Owner Trustee (the "Owner Trustee") under the
Trust Agreement dated as of March 1, 1999, as amended as of March 1, 1999
between Triad, the Company and the Owner Trustee (the "Trust Agreement") is a
Delaware banking corporation and its principal offices are located at 1100 North
Market Street, Wilmington, Delaware 19890. The Owner Trustee will perform
limited administrative functions under the Trust Agreement. 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 INDENTURE TRUSTEE
The Chase Manhattan Bank will be the Indenture Trustee under the Indenture
dated as of March 1, 1999, among the Trust and the Indenture Trustee (the
"Indenture"). The Chase Manhattan Bank is a New York banking corporation, the
corporate trust office of which is located at 450 West 33rd Street, New York,
New York 10001.
TRUST PROPERTY
Each Note represents a limited obligation of the Trust secured by the
property of the Trust (the "Trust Property"). The Trust Property will include,
among other things, the following: (i) non-prime motor vehicle retail
installment sale contracts (the "Initial Receivables") secured by new and used
automobiles and light-duty trucks (the "Initial Financed Vehicles"); (ii)
certain monies due or received thereunder (a) with respect to the Initial
Receivables, after February 28, 1999 (the "Initial Cutoff Date"), or (b) with
respect to the Subsequent Receivables (as defined below) after the related
cutoff date (each a "Subsequent Cutoff Date"); (iii) such amounts as from time
to time may be held in one or more separate trust accounts established and
maintained by the Indenture Trustee, including the Collection Account, the
Pre-Funding Account and the Capitalized Interest Account, and the proceeds of
such accounts, as described below (see "Description of the Transaction
Documents--Accounts"); (iv) security interests in the Financed Vehicles granted
by the obligors (the "Obligors") pursuant to the Receivables and any accessions
thereto; (v) the interest of the Seller in any proceeds from claims on any
credit life, credit disability, and physical damage insurance policies or other
insurance policies covering the Financed Vehicles or Obligors; (vi) certain
rights under the Sale and Servicing Agreement and the Receivables Purchase
Agreement; (vii) amounts payable to the Seller under all Dealer Recourse
(defined herein) obligations; (viii) all items contained in the related
receivable files and any and all other documents that the Seller keeps on file
in accordance with its customary procedures relating to the Receivables; (ix)
property (including the right to receive future Liquidation Proceeds) that
secures any of the Receivables and that has been acquired pursuant to the
liquidation of any such Receivable; and (x) any and all payments on and proceeds
of the foregoing.
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<PAGE>
Additional non-prime motor vehicle retail installment sale contracts (the
"Subsequent Receivables") secured by new and used automobiles and light-duty
trucks (the "Subsequent Financed Vehicles") and related property are intended to
be purchased by the Trust from the Seller from time to time on or before May 17,
1999, from funds on deposit in the Pre-Funding Account. The Subsequent
Receivables will be purchased by the Company from Triad pursuant to one or more
subsequent purchase agreements (each, a "Subsequent Purchase Agreement") between
the Company and Triad, and from the Company by the Trust pursuant to one or more
subsequent transfer agreements. The purchase by the Trust of the Initial
Receivables and the Subsequent Receivables are hereinafter referred to as the
"Receivables," and the Initial Financed Vehicles and the Subsequent Financed
Vehicles are hereinafter referred to as the "Financed Vehicles."
Pursuant to the dealer agreement between the Dealer and Triad, a Dealer
generally is obligated to pay Triad for the unpaid balance of those Receivables
which do not meet certain limited representations made by the Dealers (such
obligations referred to herein as "Dealer Recourse"). Such representations and
warranties relate primarily to the origination of the contracts and the
perfection of the security interests in the related Financed Vehicles, and do
not typically relate to the creditworthiness of the related Obligors or the
collectability of such contracts. Although the Dealer Agreements with respect to
the Receivables will not be assigned to the Trust or Indenture Trustee, the
Receivables Purchase Agreement and the Sale and Servicing Agreement will require
the Seller to cause the amount of any recovery in respect to any Receivable
pursuant to any Dealer Recourse to be deposited in the Collection Account in
satisfaction of the Seller's obligations under the Sale and Servicing Agreement.
The sales by the Dealers of installment sale contracts to Triad do not generally
provide for recourse against the Dealers for unpaid amounts in the event of a
default by an Obligor thereunder, other than in connection with the breach of
the foregoing representations and warranties. There can be no assurance that
Triad will pursue all claims under the Dealer Agreements nor that Triad will
prevail if any such claim is made.
The Receivables were generally originated by Dealers in accordance with the
Seller's requirements under agreements with Dealers for assignment to the Seller
and were so assigned. All the Initial Receivables will be sold and assigned by
the Seller to the Company pursuant to the Receivables Purchase Agreement and by
the Company to the Trust pursuant to the Sale and Servicing Agreement on or
prior to the Closing Date. The Subsequent Receivables will be sold and assigned
on one or more future dates occurring no later than May 17, 1999 (each, a
"Subsequent Transfer Date"). The Indenture Trustee, as custodian, will hold the
original installment sales contract or promissory note as well as copies of
documents and instruments relating to each Receivable (the "Receivables File").
Pursuant to the Indenture, the Trust will grant a security interest in the
Trust Property in favor of the Indenture Trustee on behalf of the Noteholders
and for the benefit of the Financial Security Assurance Inc. (the "Insurer") in
support of the obligations owing to it under the Insurance and Indemnity
Agreement, dated as of March 1, 1999, between the Seller, the Trust, the
Certificateholder and the Insurer. Any proceeds of such security interest in the
Trust Property would be distributed according to the Indenture as described
under "The Notes--Priority of Distribution Amounts." The Insurer would be
entitled to such distributions only after payment of amounts owing to, among
others, Noteholders.
TRIAD'S AUTOMOBILE FINANCING PROGRAM
GENERAL
Triad engages primarily in the business of purchasing, selling and servicing
retail automobile installment sales contracts ("Contracts") originated by
Dealers. Triad currently has relationships with approximately 2,500 Dealers
operating in 30 states (Arizona, California, Colorado, Florida, Georgia, Idaho,
Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota,
Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio,
Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia
and Washington). Each Dealer has executed a Dealer Agreement which provides
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<PAGE>
representations and warranties with respect to each Contract sold to Triad.
Dealer relationships are developed and maintained by Triad-employed sales
representatives. Triad currently employs 38 market representatives, 9 of whom
serve the California market. Triad specializes in Contracts with borrowers
("Non-prime Borrowers") who generally would not be expected to qualify for
traditional financing such as that provided by commercial banks or automobile
manufacturers' captive finance companies. Non-prime Borrowers generally have
limited credit history, lower than average income or past credit problems. Triad
offers five distinct automobile financing programs to its Dealers. The offerings
vary based upon the Obligor's overall credit quality and the pricing established
by Triad. These variations affect the coupon charged on the contract. For all
such programs, the maximum loan to wholesale value ratio, is equal to 115%,
excluding such approved items as taxes, license fees and warranties. In
determining the value of a vehicle, Triad may rely upon the wholesale price
reported in the most recent edition of the Kelley Blue Book in addition to the
other guides described in the Prospectus under "The Receivables Pools--New and
Used Financed Vehicles."
UNDERWRITING
Loan underwriting is centralized at Triad's headquarters in Huntington
Beach, California. Dealers typically remit applications to the operations center
via facsimile. Credit analysts underwrite each application using Triad's written
underwriting guidelines. After completion of the credit analysis, the
underwriter makes a final decision regarding the application; such decision may
include an approval, a conditional approval or a turndown. A conditional
approval is an agreement by Triad to fund the application under certain specific
conditions as determined by Triad. Once a Dealer chooses Triad as its funding
source, it assembles the financing package in accordance with Triad's
requirements. The primary elements of the standard package include the contract,
credit application, proof of residence, proof of income, an agreement to provide
insurance, and titling paperwork. Packages are generally delivered via overnight
mail. To minimize dealer misrepresentations, Triad conducts five independent
verifications for each package: (1) application information, generally verified
directly with the Obligor; (2) mortgage or rental information, generally
verified directly with the Obligor's mortgage holder or landlord, as
appropriate; (3) insurance, verified directly with the insurance agent; (4)
employment and income levels, verified directly with the Obligor's employer; and
(5) reference information. Triad also reviews each contract for completeness and
accuracy. Triad attempts to maintain a two-day turn-around time from when it
receives a complete funding package until it purchases the contract from the
Dealer. Funding packages with deficiencies are not funded and are returned to
the submitting Dealer. Triad's quality control department performs an additional
review of a significant sample of the financing packages, which Triad's
management believes enhances its origination procedures.
SERVICING AND COLLECTIONS
Triad's servicing responsibilities consist of collecting, accounting for and
posting of all payments received with respect to its servicing portfolio,
responding to borrower inquiries, taking steps to maintain the security interest
granted in Financed Vehicles or other collateral, investigating delinquencies,
communicating with the Obligors, repossessing and liquidating collateral when
necessary, and generally monitoring each loan and the related collateral. Triad
began servicing all new contract purchases in June 1996.
Triad currently performs all servicing and collection functions from its
centralized operations center in Huntington Beach, California. Triad sends
payment invoices to Obligors each month for amounts due under the Contracts,
including amounts past due and late charges thereon, if any. Each Obligor has
been instructed to make payments with respect to the Contracts to a Lockbox
maintained by the Lockbox Bank. See "Description of the Transaction
Documents--Accounts." Subject to applicable law, Triad's current collection
policies establish the following procedures described below. Triad initiates
collection activities once a payment is five days contractually past due. The
initial contacts are made through phone calls, with continued attempts to
contact the Obligor for payment at least every two days thereafter. In cases
where an
S-13
<PAGE>
Obligor has broken a promise to make a payment by a certain date, such Obligor
is called within a day. If Triad's collection department is unsuccessful in
contacting an Obligor by phone, alternative methods of contact, such as the use
of outside agent field calls or location gathering via references, employers,
landlords, or other credit references are pursued, generally within 15 to 20
days of the account becoming delinquent. Triad presently intends to maintain a
ratio of one collector for approximately every 600 contracts serviced, with one
supervisor for approximately every 10 collectors.
The decision to repossess a vehicle is influenced by many factors, such as
previous account history, reasons for delinquency and cooperation of the
Obligor. As part of the collection process, all practical means of contacting
the Obligor are attempted. If, at any point, a collector feels that there is
little or no chance that Triad will be able to establish contact with the
Obligor or that the Obligor will not make the required payments, the collector
will submit such contract for repossession. All contracts submitted are
evaluated by collection supervisors to determine if more follow-up work is
needed prior to repossession. If so determined, the supervisor provides
suggestions to assist the collector in further efforts to locate the Obligor. If
the supervisor feels all leads have been exhausted, the contract will be
forwarded to the collection manager for review. If the collection manager agrees
with the supervisor, it will be returned to the collector "approved" for
repossession.
Once the decision to repossess a vehicle is made, the account is referred to
an outside agency which handles the actual repossession. Most state laws require
that the Obligor be sent a "Notice of Intent to Sell," which informs the Obligor
of the lender's intent to sell the vehicle. The various states provide for a
period of time, generally 15 to 20 days, during which the Obligor may have the
right, depending on the applicable statute, either to reinstate the contract by
making all past due payments and paying the repossession and storage expenses,
or to redeem the vehicle by paying the contract in full, plus expenses
associated with repossession and storage of the vehicle. If the Obligor does not
exercise his right to reinstate the contract or redeem the vehicle, as provided
by the applicable statute, Triad immediately begins the process to sell the
vehicle at public auction. The vehicle is usually sold within 31 to 45 days
after being repossessed. After a repossessed vehicle is sold, Triad's collection
staff applies for rebates on any extended warranty or life, accident and health
insurance policies that may have been financed as part of the vehicle purchase.
Triad's collection policies generally do not allow for loan extensions;
PROVIDED, HOWEVER, in those circumstances where extensions are granted, Triad
typically does not (a) grant more than three extensions with respect to a
Receivable, (b) grant more than one extension per calendar year with respect to
a Receivable or (c) grant an extension for more than one calendar month with
respect to a Receivable.
INFORMATION TECHNOLOGY AND SYSTEMS
Triad's information technology needs are met with a system consisting of
client servers, a personal computer local area network and a mainframe computer
provided by a vendor. Triad's loan accounting and collections systems, Shaw IL
2000 and CS 2000, are housed on a mainframe computer provided by Affiliated
Computer Services, Inc. ("ACS"). ACS's mainframe is located in Dallas, Texas,
and communicates with Triad's operation center through a dedicated, leased
telephone line. Triad's credit application processing system, APPRO, is
maintained on a client server at Triad's operations center in Huntington Beach.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth information relating to the delinquency and
loss experience of Triad for the periods indicated. From and after May 30, 1998,
Contract Scheduled Payments made by the Obligor must be at least 90% of such
Contract Scheduled Payment for a contract to be considered current with respect
to such Contract Scheduled Payment. The data presented in the delinquency and
loss tables below are for illustrative purposes only. There is no assurance that
the delinquency and credit loss experience
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<PAGE>
with respect to Triad's automobile, light-duty truck and sports utility vehicle
installment contracts in the future, or that the experience of the Trust
Property with respect to the Receivables pledged to the Indenture Trustee for
the benefit of the Noteholders, will be similar to that set forth below. Losses
and delinquencies are affected by, among other things, general and regional
economic conditions and the supply of and demand for automobiles, light-duty
trucks and sports utility vehicles. It should be noted that the Servicer
commenced its servicing activities in June 1996. Accordingly, the Servicer has
limited historical delinquency, bankruptcy repossession or default experience
that may be referred to for estimating the future delinquency and loss
experience of the Receivables. The delinquency and loss percentages may be
affected by the increase in size of, and the relative lack of seasoning of, a
substantial portion of the portfolio. THE INFORMATION IN THE TABLE BELOW IS NOT
INTENDED TO INDICATE OR PREDICT THE EXPECTED DELINQUENCY EXPERIENCE ON PAST,
CURRENT OR FUTURE POOLS OF AUTOMOBILE LOANS FOR WHICH THE SERVICER IS THE
PRIMARY SERVICER. See "Risk Factors--Triad Financial Corporation has a limited
operating history and the information relating to the auto loans may not reflect
actual experience."
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<PAGE>
TRIAD FINANCIAL CORPORATION
HISTORICAL DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF JUNE 30, 1997
--------------------------------------- ---------------------------------------
% OF % OF
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE RECEIVABLES BALANCE BALANCE
----------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Principal Balance at Period
End(1), (2)............................... 3,365 $ 45,623,250 100.00% 8,195 $ 105,465,298 100.00%
Delinquencies(3)
31-60 Days................................ 32 $ 414,393 0.91% 106 $ 1,374,687 1.30%
61-90 Days................................ 5 75,124 0.16 23 287,357 0.27
91+ Days.................................. -- -- 0.00 8 126,995 0.12
----------- ------------- ----------- ----------- ------------- -----------
Total Delinquencies......................... 37 $ 489,517 1.07% 137 $ 1,789,039 1.70%
Amount in Repossession(4)................... 15 209,320 0.46 96 1,051,533 1.00
----------- ------------- ----------- ----------- ------------- -----------
Total Delinquencies and Amount in
Repossession.............................. 52 $ 698,837 1.53% 233 $ 2,840,572 2.69%
----------- ------------- ----------- ----------- ------------- -----------
----------- ------------- ----------- ----------- ------------- -----------
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------
% OF
NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE
----------- ------------- -----------
<S> <C> <C> <C>
Aggregate Principal Balance at Period
End(1), (2)............................... 14,239 $ 178,820,032 100.00%
Delinquencies(3)
31-60 Days................................ 283 $ 3,536,717 1.98%
61-90 Days................................ 91 1,175,834 0.66
91+ Days.................................. 49 612,742 0.34
----------- ------------- -----------
Total Delinquencies......................... 423 $ 5,325,293 2.98%
Amount in Repossession(4)................... 271 3,325,167 1.86
----------- ------------- -----------
Total Delinquencies and Amount in
Repossession.............................. 694 $ 8,650,460 4.84%
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------------------
% OF
NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE
----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Principal Balance at Period End(1), (2).................................... 23,278 $ 275,701,781 100.00%
Delinquencies(3)
31-60 Days......................................................................... 544 $ 6,504,170 2.36%
61-90 Days......................................................................... 125 1,471,899 0.53
91+ Days........................................................................... 42 519,163 0.19
----------- ------------- -----------
Total Delinquencies.................................................................. 711 $ 8,495,232 3.08%
Amount in Repossession(4)............................................................ 273 3,082,642 1.12
----------- ------------- -----------
Total Delinquencies and Amount in Repossession....................................... 984 $ 11,577,874 4.20%
----------- ------------- -----------
----------- ------------- -----------
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------------------
% OF
NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE
----------- ------------- -----------
<S> <C> <C> <C>
Aggregate Principal Balance at Period End(1) 33,881 $ 418,552,110 100.00%
Delinquencies(3)
31-60 Days................................ 721 $ 8,559,384 2.04%
61-90 Days................................ 225 2,723,368 0.65
91+ Days.................................. 109 1,341,198 0.32
----------- ------------- -----------
Total Delinquencies......................... 1,055 $ 12,623,950 3.02%
Amount in Repossession(4)................... 388 4,700,541 1.12
----------- ------------- -----------
Total Delinquencies and Amount in Repossessi 1,443 $ 17,324,491 4.14%
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
- - --------------------------
(1) The aggregate principal balance is equal to the gross receivable less
unearned finance charges on Precomputed Receivables plus the principal
balance on Simple Interest Receivables.
(2) Represents the aggregate principal balance of all contracts purchased and
serviced by Triad.
(3) Prior to May 30, 1998, Contract Scheduled Payments not made by the Obligors
must be less than $40 for a contract to be considered current.
(4) Represents the aggregate principal balance as of the repossession date.
S-16
<PAGE>
TRIAD FINANCIAL CORPORATION
HISTORICAL NET LOSS EXPERIENCE
<TABLE>
<CAPTION>
DURING THE THREE-MONTH PERIOD ENDED
--------------------------------------------------------------
3/31/98 6/30/98 9/30/98 12/31/98
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Average Aggregate Principal
Balance(1)(2)............................................. $ 200,583,686 $ 245,536,237 $ 313,099,067 $ 383,909,071
Gross Charge-Offs(3)........................................ 4,102,536 3,226,167 4,507,140 5,985,493
Recoveries(4)............................................... 632,487 535,192 665,445 1,138,259
-------------- -------------- -------------- --------------
Net Losses.................................................. $ 3,470,049 $ 2,690,975 $ 3,841,695 $ 4,847,234
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net Losses as a Percentage of Average Aggregate Principal
Balance(5)................................................ 1.73% 1.10% 1.23% 1.26%
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
YEAR ENDED
------------------------------
12/31/97 12/31/98
-------------- --------------
<S> <C> <C>
Average Aggregate Principal
Balance(1)(2)............................................. $ 106,452,717 $ 286,839,820
Gross Charge-Offs(3)........................................ 4,897,578 17,821,336
Recoveries(4)............................................... 808,410 2,971,383
-------------- --------------
Net Losses.................................................. $ 4,089,168 $ 14,849,953
-------------- --------------
-------------- --------------
Net Losses as a Percentage of Average Aggregate Principal
Balance(5)................................................ 3.84% 5.18%
-------------- --------------
-------------- --------------
</TABLE>
- - ------------------------
(1) The aggregate principal balance is equal to the gross receivable less
unearned finance charges on Precomputed Receivables plus the principal
balance on Simple Interest Receivables.
(2) Other than for the Year Ended December 31, 1997 and the Year Ended December
31, 1998, represents the three-month average for the related period of the
aggregate principal balance of all contracts purchased and serviced by
Triad.
(3) Gross Charge-Offs are defined as the remaining principal balance of the
charged-off contract less the net proceeds of the liquidation of the related
vehicle.
(4) Recoveries include post-liquidation amounts received on previously
charged-off contracts, including deficiency payments, rebates on related
extended service contracts and insurance policies.
(5) Other than for the Year Ended December 31, 1997 and the Year Ended December
31, 1998, net loss percentages are not annualized.
S-17
<PAGE>
CHARGE-OFF POLICIES AND NET LOSSES
Triad's charge-off policy relating to repossessed vehicles, bankruptcy,
"skip" accounts and thefts or collisions is as follows:
REPOSSESSIONS. When a financed vehicle has been repossessed and sold, the
proceeds from the sale of the vehicle, net of the costs incurred in its
repossession, storage and disposition, will be applied against the outstanding
balance of the Receivable. A charge-off will be made in an amount equal to the
Principal Balance of the Receivable less the net proceeds of the liquidation of
the related financed vehicle.
BANKRUPTCIES. If Triad receives a bankruptcy notice with respect to an
Obligor, the contract will be charged-off in an amount equal to the current
outstanding principal balance of the contract at the time of charge-off. The
charge-off is actually taken upon the earlier of (a) the month in which the
Obligor allows the contract to become 120 days or more delinquent in the case of
an Obligor that files for protection under Chapter 7 or Chapter 13 of the United
States Bankruptcy Code, 11 U.S.C. 101 et seq. (the "Bankruptcy Code") or (b)
Triad's receipt of notice of the results of the bankruptcy proceedings. The
initial charge-off is adjusted, if necessary, to reflect the results of the
bankruptcy proceedings.
"SKIP" ACCOUNTS. Triad defines "skip" accounts as contracts for which (a)
Triad is unable to contact or locate an Obligor for a period of 120 days or more
and (b) Triad is unable to locate the related financed vehicle. Triad charges
off the contract, with a charge-off equal to the current outstanding principal
balance of the contract, and continues collection efforts. If Triad subsequently
makes contact with the Obligor and the financed vehicle is repossessed and sold,
proceeds from the disposition of the collateral, net of the costs incurred in
repossessing, storing and disposing of the financed vehicle, and/or rebates from
the cancellation of outstanding insurance policies and/or extended service
contracts are recorded as recoveries.
THEFTS OR COLLISIONS. Theft or collision contracts are charged-off upon the
earlier of (a) Triad's receipt of proceeds from the Obligor's insurance policy
if the account becomes more than 30 days past due and (b) the month in which the
contract becomes 120 days delinquent. The charge-off is equal to the amount of
the net deficiency resulting from the application of insurance proceeds to the
current outstanding principal balance of the contract. Insurance proceeds
received after a contract is charged-off are recorded as recoveries.
Where permitted by local statute, charged-off Receivables are pursued for
any deficiencies by Triad's loss prevention staff. A deficiency letter is sent
to the Obligor within five days of the deficiency being established. A follow-up
call to the Obligor is made within ten days after the deficiency letter has been
sent. During this call, an attempt is made to negotiate a settlement of the
deficiency balance. The first offer is generally made in an amount equal to 85%
of the deficiency balance, but a 65% settlement is acceptable. Triad generally
prefers to avoid establishing a monthly payment plan, as its experience has been
that the Obligor will typically only make payments until such time as he is able
to purchase a replacement vehicle. Triad will generally garnish the salary of a
defaulted Obligor in states in which salary garnishment for recovery of
deficiency balances is permitted.
INSURANCE
In addition to the physical damage insurance policies maintained by the
Obligors naming Triad as the loss payee, Triad may maintain collateral
protection for uninsured physical damage in a manner that is customary and
standard for servicers of receivables in the same general area as the Servicer
and for receivables comparable to the Receivables, which may include
self-insurance. Triad also maintains fidelity coverage insuring against losses
through wrongdoing of its officers and employees.
S-18
<PAGE>
THE BACKUP SERVICER
If a Servicer Termination Event occurs and remains unremedied and Triad is
terminated as Servicer or resigns as Servicer, in each case in accordance with
the Sale and Servicing Agreement, The Chase Manhattan Bank, a New York banking
corporation, will serve as Backup Servicer.
The Backup Servicer will receive a fee on each Payment Date equal to
one-twelfth the product of 1.75 basis points and the then outstanding Note
Balance as compensation for, among other things, (i) standing by to act as
successor Servicer and (ii) confirming certain calculations made by the Servicer
on the monthly statement to Noteholders, including but not limited to (a)
interest and principal payments due to the Noteholders and (b) certain
Receivables performance ratios.
THE RECEIVABLES
Pursuant to the Receivables Purchase Agreement, Triad will sell and assign
to the Company all of its right, title and interest in and to the Receivables
and the other Trust Property, and the Company, pursuant to the Sale and
Servicing Agreement, will sell and assign to the Trust all of its right, title
and interest in and to the Receivables and such other Trust Property. The Trust
will then pledge all of its right, title and interest in and to the Receivables
to the Indenture Trustee for the benefit of the Noteholders and the Insurer
pursuant to the Indenture. The Receivables consist of non-prime motor vehicle
retail installment sales contracts. The Receivables were purchased by Triad in
the ordinary course of its business pursuant to its finance programs and
underwriting standards. As detailed herein, such credit guidelines may be less
stringent than those applied in the origination of other automobile loans by
other lenders. See "Triad's Automobile Financing Program--General."
No selection procedures adverse to the Noteholders or the Insurer were
utilized in selecting the Initial Receivables sold and assigned to the Company
and then sold and assigned to the Trust. The Receivables existing as of the
Initial Cutoff Date were selected from Triad's portfolio according to several
criteria. Among such criteria, each Receivable (1) arises from the delivery and
acceptance of a Financed Vehicle and which delivery and acceptance has been
fully performed by the Obligor and the Dealer party thereto, (2) arises from the
normal course of the Dealer's business, (3) is not in default, (4) the Obligor
of which is a natural person residing in any state or the District of Columbia,
(5) the Obligor of which is not a government or a governmental subdivision or
agency, (6) met Triad's underwriting criteria at the time of purchase, (7) is
denominated and payable in Dollars in the United States, (8) is in full force
and effect and constitutes the legal, valid and binding obligation of the
Obligor in accordance with its terms, (9) is not subject to any dispute,
litigation, counterclaim or defense, or any offset or right of offset at the
time of purchase by Triad, any exercisable right of recission, (10) is not more
than 30 days past due, (11) has an original term to scheduled maturity of not
less than 24 or more than 72 months, (12) has a remaining term to scheduled
maturity of not less than 12 months or greater than 72 months, (13) provides for
equal monthly payments which will cause the Receivable to fully amortize during
its term, (14) has a remaining principal balance of not less than $1,000 or more
than $35,000 and (15) has an APR of not less than 9% and (16) the model year of
the related Financed Vehicle is not earlier than 1991.
PAYMENTS ON THE RECEIVABLES
All of the Receivables provide for the payment by the related Obligor of a
specific total amount of payments, payable in substantially equal monthly
installments on each scheduled payment date, which total represents the amount
financed plus interest charges on the amount financed for the term of such
Receivable. Each Receivable provides for repayment of the Amount Financed by an
Obligor according to (i) the Rule of 78's (a "Rule of 78's Receivables"), (ii)
the actuarial method (an "Actuarial Receivable" and together with Rule of 78's
Receivables, the "Precomputed Receivables") or (iii) the simple interest method
(a "Simple Interest Receivable").
S-19
<PAGE>
Under a Rule of 78's Receivable, the rate at which the amount of finance
charges is earned and, correspondingly, the amount of each scheduled monthly
payment allocated to reduction of the outstanding principal balance of the
related Receivable are calculated in accordance with the "Rule of 78's". Under
the Rule of 78's, the portion of a payment allocable to interest earned during
that month is determined by multiplying the total amount of interest payable
over the term of the Receivable by a fraction, the denominator of which is equal
to the sum of a series of numbers beginning with one and ending with the number
of scheduled monthly payments due under the related Receivable, and the
numerator of which is the number of payments remaining under such Receivable
before giving effect to the payment to which the fraction is being applied. The
difference between the amount of the scheduled monthly payment made by the
Obligor and the amount of earned interest calculated for the month is applied to
principal reduction.
An Actuarial Receivable provides for amortization of the loan over a series
of fixed level monthly installments. Each scheduled monthly payment is deemed to
consist of an amount of interest equal to one-twelfth of the stated APR of the
Receivable multiplied by the outstanding principal balance of the Receivable and
an amount of principal equal to the remainder of such scheduled monthly payment.
All payments received by the Servicer on or in respect of Precomputed
Receivables, including the final scheduled payment, will be allocated pursuant
to the Sale and Servicing Agreement on an actuarial basis. No adjustment will be
made in the event of early or late payments, although in the latter case, the
Obligor may be subject to a late charge.
"Simple Interest Receivables" provide for the amortization of the amount
financed under the Receivable over a series of fixed level monthly payments.
However, unlike the monthly payment under Rule of 78s Receivables, each monthly
payment consists of an installment of interest which is calculated on the basis
of the outstanding principal balance of the receivable multiplied by the stated
APR 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 is applied first to
interest accrued to the date immediately preceding 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 pays a fixed
monthly installment until the final scheduled payment date, at which time the
amount of the final installment is increased or decreased as necessary to repay
the then outstanding principal balance.
In the event of a prepayment in full (voluntarily or by acceleration) of a
Precomputed Receivable, a "rebate" in the loan accounting records of the
Servicer may be made to the Obligor of that portion of the total amount of
payments under such Receivable allocable to "unearned" finance charges. In the
event of the prepayment in full (voluntarily or by acceleration) of a Simple
Interest Receivable, a "rebate" will not be made to the Obligor, but the Obligor
will be required to pay interest only to the date immediately preceding the date
of prepayment. The amount of such rebate under a Precomputed Receivable
generally will be less than or equal to the remaining scheduled payments of
interest that would have been due under a Simple Interest Receivable for which
all remaining payments were made on schedule.
The amount of a rebate under a Rule of 78's Receivable calculated in
accordance with the Rule of 78's generally will be less than the amount of a
rebate on an Actuarial Receivable calculated in accordance with the actuarial
method. Distributions to Noteholders will not be affected by Rule of 78's
rebates under the Rule of 78's Receivables because pursuant to the Sale and
Servicing Agreements such distributions will be determined using the actuarial
method. Amounts received upon prepayment in full of a Rule of 78's
S-20
<PAGE>
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 passed through to Noteholders.
PURCHASE OR REPLACEMENT OBLIGATIONS
Pursuant to the Receivables Purchase Agreement and the Sale and Servicing
Agreement, Triad will be obligated to repurchase or replace, subject to limits
on replacement set forth in the Sale and Servicing Agreement, any Receivable
sold and assigned to the Trust as to which a breach has occurred as to certain
representations or warranties made by the Seller with respect to the Receivable,
if such breach has not been cured by the last day of the first full calendar
month following the discovery by or notice to the Seller of the breach, if such
breach will materially and adversely affect the interests of the Noteholders,
the Insurer or the Trust in such Receivable. The Indenture Trustee will also
have certain rights to enforce such obligations of the Seller under the
Receivables Purchase Agreement. See "Description of the Transaction
Documents--Sale and Assignment of Receivables" and "Trust Property" herein.
The Sale and Servicing Agreement also provides that if the Servicer breaches
certain of its servicing obligations thereunder (including but not limited to
its obligation to maintain perfection of the first priority security interest of
the Seller created by each Receivable in the related Financed Vehicle) or
certain other covenants with regard to the Servicer, in each case only in a
manner that materially and adversely affects the interests of the Noteholders,
the Insurer or the Trust in any Receivable, the Servicer will purchase or
replace such Receivable from the Trust, unless such breach has been cured by the
last day of the first full calendar month following the discovery by or notice
to the Servicer of the breach.
COMPOSITION OF THE POOL OF INITIAL RECEIVABLES
The tables below set forth information regarding the composition and
characteristics of the pool of Receivables as of the Initial Cutoff Date. It is
expected that the composition and characteristics of the Receivables on the
Closing Date will be similar to the information set forth below. However,
certain Receivables may be excluded on the Closing Date as of a result of
certain administrative considerations. In particular, Receivables with Obligors
whose addresses are in Pennsylvania, constituting approximately 1.29% of the
Original Pool Balance, are expected to be excluded from the Trust on the Closing
Date for such reasons. As a result, it is expected that the Aggregate Principal
Balance of the Receivables on the Closing Date will be decreased and the
Pre-Funded Amount will be correspondingly increased from the amounts presented
herein by approximately $1.3 million. The Seller does not believe that the
characteristics of the Receivables included in the Trust on the Closing Date in
the aggregate will differ materially from the information set forth herein.
COMPOSITION OF THE INITIAL RECEIVABLES
<TABLE>
<S> <C>
Aggregate Principal Balance.......................... $105,075,342.62
Number of Receivables................................ 7,425
Average Amount Financed.............................. $14,330.42
$5,872.85 to
Range of Amounts Financed............................ $35,052.00
Average Current Principal Balance.................... $14,151.56
$5,125.37 to
Range of Current Principal Balances.................. $34,997.87
Weighted Average APR................................. 19.12%
Range of APRs........................................ 10.95% to 25.00%
Weighted Average Original Term to Scheduled
Maturity(1)........................................ 60 months
Range of Original Terms to Scheduled Maturity........ 30 to 72 months
Weighted Average Remaining Term to Scheduled
Maturity(1)........................................ 59 months
Range of Remaining Terms to Scheduled Maturity....... 28 to 72 months
</TABLE>
- - ------------------------
(1) Rounded to the nearest month.
S-21
<PAGE>
DISTRIBUTION OF RECEIVABLES BY CURRENT PRINCIPAL BALANCE
(AS OF THE INITIAL CUTOFF DATE)
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL NUMBER CURRENT OF AGGREGATE
CURRENT PRINCIPAL NUMBER OF OF PRINCIPAL PRINCIPAL
BALANCE RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- - ------------------------------ ------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
$ 5,000.00 to 9,999.99....... 877 11.81% $ 7,771,651.15 7.40%
10,000.00 to 14,999.99....... 3,996 53.82 50,151,328.68 47.73
15,000.00 to 19,999.99....... 1,919 25.85 32,723,086.73 31.14
20,000.00 to 24,999.99....... 548 7.38 12,059,788.85 11.48
25,000.00 to 29,999.99....... 70 0.94 1,877,227.08 1.79
30,000.00 to 34,999.99....... 15 0.20 492,260.13 0.47
----- ------ ----------------- ------
TOTAL....................... 7,425 100.00% $ 105,075,342.62 100.00%
----- ------ ----------------- ------
----- ------ ----------------- ------
</TABLE>
DISTRIBUTION OF RECEIVABLES BY AMOUNT FINANCED
(AS OF THE INITIAL CUTOFF DATE)
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL NUMBER CURRENT OF AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
AMOUNT FINANCED RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- - ------------------------------ ------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
$ 5,000.00 to 9,999.99....... 806 10.86% $ 7,072,745.24 6.73%
10,000.00 to 14,999.99....... 3,946 53.14 49,060,360.42 46.69
15,000.00 to 19,999.99....... 1,992 26.83 33,566,939.91 31.95
20,000.00 to 24,999.99....... 582 7.84 12,659,874.79 12.05
25,000.00 to 29,999.99....... 84 1.13 2,223,162.13 2.12
30,000.00 to 34,999.99....... 14 0.19 457,864.43 0.44
35,000.00 to 39,999.99....... 1 0.01 34,395.70 0.03
----- ------ ----------------- ------
TOTAL....................... 7,425 100.00% $ 105,075,342.62 100.00%
----- ------ ----------------- ------
----- ------ ----------------- ------
</TABLE>
- - ------------------------
(1) Percentages may not add to 100.00% due to rounding.
S-22
<PAGE>
DISTRIBUTION OF RECEIVABLES BY APR
(AS OF THE INITIAL CUTOFF DATE)
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL NUMBER CURRENT OF AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
RANGE OF APRS (%) RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- - ------------------------------ ------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
10.00 to 10.99................ 3 0.04% $ 85,285.03 0.08%
11.00 to 11.99................ 52 0.70 957,935.72 0.91
12.00 to 12.99................ 89 1.20 1,726,602.89 1.64
13.00 to 13.99................ 88 1.19 1,602,187.70 1.52
14.00 to 14.99................ 101 1.36 1,669,438.45 1.59
15.00 to 15.99................ 144 1.94 2,549,168.01 2.43
16.00 to 16.99................ 449 6.05 6,943,678.38 6.61
17.00 to 17.99................ 1,065 14.34 16,583,977.22 15.78
18.00 to 18.99................ 1,147 15.45 16,162,402.95 15.38
19.00 to 19.99................ 1,091 14.69 15,585,437.49 14.83
20.00 to 20.99................ 969 13.05 12,684,930.73 12.07
21.00 to 21.99................ 1,862 25.08 23,999,857.02 22.84
22.00 to 22.99................ 158 2.13 2,088,933.94 1.99
23.00 to 23.99................ 154 2.07 1,807,701.52 1.72
24.00 to 24.99................ 52 0.70 614,137.94 0.58
25.00 to 25.99................ 1 0.01 13,667.63 0.01
----- ------ ----------------- ------
TOTAL....................... 7,425 100.00% $ 105,075,342.62 100.00%
----- ------ ----------------- ------
----- ------ ----------------- ------
</TABLE>
DISTRIBUTION OF RECEIVABLES BY MODEL YEAR OF FINANCED VEHICLE
(AS OF THE INITIAL CUTOFF DATE)
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL NUMBER CURRENT OF AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
MODEL YEAR RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- - ------------------------------ ------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
1999.......................... 540 7.27% $ 10,150,464.93 9.66%
1998.......................... 1,462 19.69 22,746,682.86 21.65
1997.......................... 1,761 23.72 24,785,751.61 23.59
1996.......................... 1,712 23.06 23,572,514.16 22.43
1995.......................... 1,267 17.06 16,103,189.83 15.33
1994.......................... 425 5.72 4,957,989.52 4.72
1993.......................... 183 2.46 1,988,873.94 1.89
1992.......................... 74 1.00 763,268.29 0.73
1991.......................... 1 0.01 6,607.48 0.01
----- ------ ----------------- ------
TOTAL....................... 7,425 100.00% $ 105,075,342.62 100.00%
----- ------ ----------------- ------
----- ------ ----------------- ------
</TABLE>
- - ------------------------
(1) Percentages may not add up to 100.00% due to rounding.
S-23
<PAGE>
DISTRIBUTION OF RECEIVABLES BY REMAINING TERM TO SCHEDULED MATURITY
(AS OF THE INITIAL CUTOFF DATE)
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL NUMBER CURRENT OF AGGREGATE
RANGE OF REMAINING NUMBER OF OF PRINCIPAL PRINCIPAL
TERMS RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- - ------------------------------ ------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
24 to 29 months............... 2 0.03% $ 16,946.23 0.02%
30 to 35 months............... 91 1.23 804,425.21 0.77
36 to 41 months............... 112 1.51 1,138,987.81 1.08
42 to 47 months............... 498 6.71 5,544,248.34 5.28
48 to 53 months............... 361 4.86 4,333,239.17 4.12
54 to 59 months............... 4,068 54.79 57,616,616.04 54.83
60 to 65 months............... 1,610 21.68 23,225,922.88 22.10
66 to 71 months............... 455 6.13 8,140,947.28 7.75
72 months..................... 228 3.07 4,254,009.66 4.05
----- ------ ----------------- ------
TOTAL....................... 7,425 100.00% $ 105,075,342.62 100.00%
----- ------ ----------------- ------
----- ------ ----------------- ------
</TABLE>
DISTRIBUTION OF RECEIVABLES BY ORIGINAL TERM TO SCHEDULED MATURITY
(AS OF THE INITIAL CUTOFF DATE)
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL NUMBER CURRENT OF AGGREGATE
RANGE OF ORIGINAL NUMBER OF OF PRINCIPAL PRINCIPAL
TERMS RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- - ------------------------------ ------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
30 to 35 months............... 2 0.03% $ 16,946.23 0.02%
36 to 41 months............... 123 1.66 1,099,014.84 1.05
42 to 47 months............... 119 1.60 1,254,001.02 1.19
48 to 53 months............... 582 7.84 6,476,172.02 6.16
54 to 59 months............... 360 4.85 4,461,027.32 4.25
60 to 65 months............... 5,245 70.64 73,842,880.69 70.28
66 to 71 months............... 572 7.70 9,943,279.21 9.46
72 months..................... 422 5.68 7,982,021.29 7.60
----- ------ ----------------- ------
TOTAL....................... 7,425 100.00% $ 105,075,342.62 100.00%
----- ------ ----------------- ------
----- ------ ----------------- ------
</TABLE>
- - ------------------------
(1) Percentages may not add up to 100.00% due to rounding.
S-24
<PAGE>
DISTRIBUTION OF RECEIVABLES BY ADDRESS OF OBLIGOR
(AS OF THE INITIAL CUTOFF DATE)
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL NUMBER CURRENT OF AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
STATE RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- - ------------------------------ ------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
California.................... 2,246 30.25% $ 33,486,875.06 31.87%
Texas......................... 701 9.44 10,481,440.70 9.98
North Carolina................ 721 9.71 10,319,222.10 9.82
Georgia....................... 527 7.10 7,170,245.22 6.82
Florida....................... 345 4.65 4,803,734.52 4.57
Nevada........................ 314 4.23 4,308,884.73 4.10
New Jersey.................... 306 4.12 4,095,383.69 3.90
Ohio.......................... 288 3.88 3,728,293.53 3.55
Illinois...................... 255 3.43 3,390,096.42 3.23
Virginia...................... 200 2.69 2,902,437.93 2.76
Arizona....................... 176 2.37 2,560,479.51 2.44
Maryland...................... 165 2.22 2,557,044.13 2.43
Iowa.......................... 181 2.44 2,249,644.08 2.14
Tennessee..................... 116 1.56 1,601,983.67 1.52
South Carolina................ 128 1.72 1,598,991.94 1.52
Indiana....................... 115 1.55 1,498,533.06 1.43
Missouri...................... 105 1.41 1,361,371.52 1.30
Pennsylvania.................. 103 1.39 1,356,811.91 1.29
New York...................... 111 1.49 1,342,106.16 1.28
Washington.................... 93 1.25 1,188,539.35 1.13
Minnesota..................... 77 1.04 1,089,729.69 1.04
Colorado...................... 62 0.84 837,673.90 0.80
Kansas........................ 48 0.65 603,426.50 0.57
Mississippi................... 15 0.20 214,345.75 0.20
Michigan...................... 8 0.11 106,541.18 0.10
Nebraska...................... 8 0.11 94,677.78 0.09
Oregon........................ 5 0.07 61,911.24 0.06
Kentucky...................... 4 0.05 42,880.19 0.04
Utah.......................... 2 0.03 22,037.16 0.02
----- ------ ----------------- ------
TOTAL....................... 7,425 100.00% $ 105,075,342.62 100.00%
----- ------ ----------------- ------
----- ------ ----------------- ------
</TABLE>
- - ------------------------
(1) Percentages may not add up to 100.00% due to rounding.
MATURITY AND PREPAYMENT CONSIDERATIONS
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 the fact that an Obligor generally may not sell or transfer
the Financed Vehicle securing a Receivable without the consent of Triad unless
the loan is repaid by the Obligor at the time of such sale or transfer. (For
this purpose the term "prepayments" includes prepayments in full, or in part,
including, without limitation, certain partial prepayments related to refunds of
extended service contract costs and unearned insurance premiums, liquidations
due to default, as well as receipts of proceeds from physical damage, credit
life and credit accident and health insurance policies and certain other
Receivables repurchased for administrative reasons.) The rate of prepayment on
the Receivables may also be influenced by the structure of the loan, the nature
of the
S-25
<PAGE>
Obligors and the Financed Vehicles and servicing decisions as discussed above.
In addition, under certain circumstances, Triad is obligated to repurchase or
replace Receivables as a result of breaches of representations and warranties
pursuant to the Sale and Servicing Agreement and the Receivables Purchase
Agreement, and under certain circumstances, the Servicer is obligated to
purchase Receivables pursuant to the Sale and Servicing Agreement as a result of
breaches of certain covenants. Subject to certain conditions, the Servicer has
the option to purchase the Receivables when the aggregate principal balance
thereof is 10% or less of the Original Pool Balance (as defined herein).
If prepayments are received on the Receivables, the actual weighted average
life of the Receivables may be shorter than the scheduled weighted average life
(i.e., the weighted average life assuming that payments will be made as
scheduled and that no prepayments will be made). "Weighted Average Life" means
the average amount of time during which each dollar of principal on a Receivable
is outstanding.
Any reinvestment risks resulting from a faster or slower incidence of
prepayment of Receivables will be borne by the Noteholders. See also "The
Notes--Optional Purchase of Receivables" regarding the Servicer's right to
purchase the Receivables and the other Trust Property on any Determination Date
as of which the Aggregate Principal Balance has declined to less than 10% of the
Original Pool Balance.
Prepayments on automobile 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.
The tables captioned "Percent of Initial Note Principal Balance at Various
ABS Percentages" ("ABS Tables") have been prepared on the basis of the following
assumptions: (i) the Trust includes two pools of Receivables with the
characteristics set forth in the following table; (ii) the Receivables prepay in
full at the specified constant percentage of ABS monthly, with no defaults,
losses or repurchases, (iii) each scheduled monthly payment on the Receivables
is made on the last day of each month and each month has 30 days; (iv) the
initial principal amount of each of the Class A-1 Notes and Class A-2 Notes are
as set forth on the cover page hereof; (v) interest accrues during each Interest
Period at the following assuming coupon rates; Class A-1 Notes, 5.626% and Class
A-2 Notes, 6.090%; (vi) payments on the notes are made on the 17(th) of each
month whether or not a Business Day; (vii) the Class A Notes are purchased on
March 25, 1999; (viii) the scheduled monthly payment for each Receivable has
been calculated on the basis of the assumed characteristics in the following
table such that each Receivable will amortize in amounts sufficient to repay the
Principal Balance of such Receivable by its indicated remaining term to
maturity; (ix) the first due date for each Receivable is the last day of the
month of the assumed cutoff date for such Receivable as set forth in the
following table; (x) the entire Pre-Funded Amount is used to purchase Subsequent
Receivables; (xi) the Servicer does exercise its option to purchase the
Receivables; and (xii) the difference between the gross
S-26
<PAGE>
APR and the net APR is equal to the Servicer Fee, and the net APR is further
reduced by the fees due to the Indenture Trustee, the Backup Servicer and the
Insurer.
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM TO
AGGREGATE TERM TO SCHEDULED
PRINCIPAL ASSUMED MATURITY (IN MATURITY (IN
POOL BALANCE GROSS APR(%) CUTOFF DATE MONTHS) MONTHS)
- - ------------------ ----------------- --------------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
1 $ 105,075,342.62 19.12 2/28/99 60 59
2 34,924,657.38 19.12 3/31/99 60 60
-----------------
Total $ 140,000,000.00
</TABLE>
The ABS Tables indicate, based on the assumptions set forth above, the
percentages of the initial principal amount of the Class A-1 Notes and Class A-2
Notes that would be outstanding after each of the Payment Dates shown at various
percentages of ABS and the corresponding weighted average lives of such Notes.
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 the varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity, that all of the Receivables will prepay at the same
level of ABS or that the coupon rates on the Notes will remain constant.
Moreover, the diverse terms of Receivables could produce slower or faster
principal distributions than indicated in the ABS Tables at the various constant
percentage of ABS specified, even if the original and remaining terms of
maturity of the Receivables are as assumed. Any difference between such
assumptions and the actual characteristics and performance of the Receivables,
including actual prepayment experience or losses, will affect the percentages of
initial balances outstanding over time and the weighted average lives of the
Class A-1 Notes and Class A-2 Notes.
S-27
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PAYMENT
DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- - ---------------- --------- --------- --------- --------- --------- --------- --------- ---------
INITIAL 100 100 100 100 100 100 100 100
4/17/99 97 96 95 94 100 100 100 100
5/17/99 92 90 88 85 100 100 100 100
6/17/99 87 84 80 76 100 100 100 100
7/17/99 82 78 74 69 100 100 100 100
8/17/99 79 75 69 63 100 100 100 100
9/17/99 76 71 65 57 100 100 100 100
10/17/99 73 68 60 52 100 100 100 100
11/17/99 71 65 56 46 100 100 100 100
12/17/99 68 61 52 40 100 100 100 100
1/17/00 65 58 47 35 100 100 100 100
2/17/00 63 55 43 30 100 100 100 100
3/17/00 60 51 39 24 100 100 100 100
4/17/00 57 48 35 19 100 100 100 100
5/17/00 55 45 30 14 100 100 100 100
6/17/00 52 41 26 9 100 100 100 100
7/17/00 49 38 22 4 100 100 100 100
8/17/00 46 35 18 0 100 100 100 99
9/17/00 44 31 14 0 100 100 100 93
10/17/00 41 28 10 0 100 100 100 87
11/17/00 38 25 7 0 100 100 100 82
12/17/00 35 22 3 0 100 100 100 76
1/17/01 32 19 0 0 100 100 99 71
2/17/01 30 15 0 0 100 100 94 65
3/17/01 27 12 0 0 100 100 90 60
4/17/01 24 9 0 0 100 100 85 55
5/17/01 21 6 0 0 100 100 81 50
6/17/01 18 3 0 0 100 100 77 45
7/17/01 15 0 0 0 100 100 72 41
8/17/01 12 0 0 0 100 96 68 36
9/17/01 10 0 0 0 100 92 64 32
10/17/01 7 0 0 0 100 89 60 28
11/17/01 4 0 0 0 100 85 57 24
12/17/01 1 0 0 0 100 81 53 0
1/17/02 0 0 0 0 97 77 49 0
2/17/02 0 0 0 0 94 74 46 0
3/17/02 0 0 0 0 90 70 42 0
4/17/02 0 0 0 0 86 67 39 0
5/17/02 0 0 0 0 83 63 36 0
6/17/02 0 0 0 0 79 60 33 0
7/17/02 0 0 0 0 75 56 30 0
8/17/02 0 0 0 0 71 53 27 0
9/17/02 0 0 0 0 68 50 24 0
10/17/02 0 0 0 0 64 46 0 0
11/17/02 0 0 0 0 60 43 0 0
12/17/02 0 0 0 0 56 40 0 0
1/17/03 0 0 0 0 52 37 0 0
2/17/03 0 0 0 0 49 34 0 0
3/17/03 0 0 0 0 45 31 0 0
4/17/03 0 0 0 0 41 28 0 0
5/17/03 0 0 0 0 37 25 0 0
6/17/03 0 0 0 0 33 22 0 0
7/17/03 0 0 0 0 29 0 0 0
8/17/03 0 0 0 0 25 0 0 0
9/17/03 0 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted Average
Life in Years(2) 1.34 1.09 0.84 0.66 3.84 3.49 2.83 2.18
</TABLE>
- - ------------------------------
(1) The percentages in this table have been rounded to nearest whole number.
(2) The weighted average life of a note is determined by (i) multiplying the
amount of each principal payment on a note by the number of years from the
date of the Issuance of the note to the related Payment Date, (ii) adding
the results and (iii) dividing the sum by the related initial principal
amount of the note.
S-28
<PAGE>
YIELD CONSIDERATIONS
Other than on the first Payment Date, on each Payment Date, interest on the
Receivables will be passed through to the Class A-1 and Class A-2 Noteholders in
an amount equal to one-twelfth of the Interest Rate multiplied by the Note
Balance of the applicable Class on the last day of the immediately preceding
Collection Period. In the event of prepayments on Receivables, Noteholders will
nonetheless be entitled to receive interest for the full month on the Notes. See
also "The Receivables--Payments on the Receivables" herein.
USE OF PROCEEDS
The Trust will use the net proceeds from the sale of the Notes to purchase
Receivables from the Company and to make the initial deposit into the
Capitalized Interest Account and the Pre-Funding Account. The Company will use
the net proceeds paid to the Company by the Trust to purchase Receivables from
Triad, which in turn will use such proceeds to pay related expenses and repay
certain warehouse loans with ContiTrade Services L.L.C. ("CTS") an affiliate of
CFN and Triad. CTS will use such monies to repay certain warehouse loans with an
affiliate of the underwriter, and any additional proceeds will be added to
Triad's general funds and used for its general corporate purposes.
THE INSURER
The following information has been obtained from Financial Security
Assurance Inc. (hereinafter in this section, "Financial Security"), and has not
been verified by the Seller, the Company or the Underwriter. No representations
or warranty is made by the Seller, the Company or the Underwriter with respect
thereto.
GENERAL
Financial Security is a monoline insurance company incorporated in 1984
under the laws of the State of New York. Financial Security is licensed to
engage in the financial guaranty insurance business in all 50 states, the
District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities-- thereby enhancing the credit rating of those
securities--in consideration for the payment of a premium to the Insurer.
Financial Security and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. Financial Security insures both newly issued securities
sold in the primary market and outstanding securities sold in the secondary
market that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co., Ltd. and
XL Capital Ltd. No shareholder of Holdings is obligated to pay any debt of
Financial Security or any claim under any insurance policy issued by Financial
Security or to make any additional contribution to the capital of Financial
Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100.
S-29
<PAGE>
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by Financial Security or its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security reinsures
a portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by Financial
Security as a risk management device and to comply with statutory and rating
agency requirements; it does not alter or limit Financial Security's obligations
under any financial guaranty insurance policy.
RATING OF CLAIMS-PAYING ABILITY
Financial Security's insurance financial strength is rated "Aaa" by Moody's
Investors Service, Inc. Financial Security's insurer financial strength is rated
"AAA" by Standard & Poor's, a division of The McGraw-Hill Company and Standard &
Poor's (Australia) Pty. Ltd. Financial Security's claims-paying ability is rated
"AAA" by Fitch IBCA, Inc. and Japan Rating and Investment Information, Inc. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies. See "Risk Factors--ratings on
the notes are not guaranteed to remain in place" herein.
CAPITALIZATION
The following table sets forth the capitalization of Financial Security and
its wholly-owned subsidiaries on the basis of generally accepted accounting
principles as of September 30, 1998, as well as such capitalization as adjusted
to give effect to certain transactions entered into during November 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(1)
------------ --------------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Deferred Premium Revenue (net of prepaid Reinsurance
premiums)..................................................... $ 480,089 $ 480,089
------------ --------------
Surplus Notes................................................... 50,000 130,000
------------ --------------
Minority Interest............................................... 20,000
--------------
Shareholder's Equity:
Common Stock.................................................. 15,000 15,000
Additional Paid-In Capital.................................... 614,787 684,787
Accumulated Other Comprehensive Income (net of deferred income
taxes)...................................................... 41,923 41,923
Accumulated Earnings.......................................... 326,145 326,145
------------ --------------
Total Shareholder's Equity...................................... 997,855 1,067,855
------------ --------------
Total Deferred Premium Revenue, Surplus Notes, Minority Interest
and Shareholder's Equity...................................... $ 1,527,944 $ 1,697,944
------------ --------------
------------ --------------
</TABLE>
- - ------------------------
(1) Adjusted to give effect to the November 1998 (a) purchase by Holdings of $80
million of surplus notes from Financial Security in connection with the
formation of a new indirect Bermuda subsidiary of Financial Security,
initially capitalized with $100 million, including a $20 million minority
interest owned by XL Capital Ltd., and (b) contribution by Holdings to the
capital of Financial Security of approximately $70 million, representing a
portion of the proceeds from the sale by Holdings of $100 million of 6.950%
Senior Quarterly Income Debt Securities due 2098.
S-30
<PAGE>
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security and Subsidiaries, and the notes
thereto, incorporated by reference herein. Financial Security's financial
statements are included as exhibits to the Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q filed with the Commission by Holdings and may be
reviewed at the EDGAR website maintained by the Commission and at Holdings'
website, http://www.FSA.com. Copies of the statutory quarterly and annual
statements filed with the State of New York Insurance Department by Financial
Security are available upon request to the State of New York Insurance
Department.
INSURANCE REGULATION
Financial Security is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York,
Financial Security is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liabilities
for borrowings.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the Prospectus under
"Incorporation of Certain Documents by Reference," the consolidated financial
statements of the Insurer and its subsidiaries included in, or as exhibits to,
the following documents which have been filed with the Commission by Holdings,
are hereby incorporated by reference in this Prospectus Supplement:
(a) Annual Report on Form 10-K for the year ended December 31, 1997,
(b) Quarterly Report on Form 10-Q for the period ended March 31, 1998,
(c) Quarterly Report on Form 10-Q for the period ended June 30, 1998, and
(d) Quarterly Report on Form 10-Q for the period ended September 30, 1998.
All financial statements of the Insurer included in documents filed by
Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act") subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Class A Notes shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing of such documents.
The Seller will provide without charge to any person to whom this Prospectus
Supplement is delivered, upon the oral or written request of such person, a copy
of any or all of the foregoing financial statements incorporated herein by
reference. Requests for copies should be directed to: Triad Financial
Corporation, 7711 Center Avenue, Suite 100, Huntington Beach, California 92647;
telephone (714) 373-8300.
S-31
<PAGE>
The Seller on behalf of the Trust hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Trust's annual report pursuant to section 13(a) or section 15(d) of the Exchange
Act and each filing of the financial statements of Financial Security included
in or as an exhibit to the annual report of Holdings filed pursuant to section
13(a) or section 15(d) of the Exchange Act that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the Class A Notes offered hereby, and the offering of such Class A
Notes at that time shall be deemed to be the initial bona fide offering thereof.
All documents filed by the Company with respect to the Registration
Statement, either on its own behalf or on behalf of the Trust, relating to the
Class A Notes, with the Securities and Exchange pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this Prospectus
Supplement and prior to the termination of any offering of the Class A Notes
offered hereby, shall be deemed to be incorporated by reference in this
Prospectus Supplement and to be a part of this Prospectus Supplement from the
date of the 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 Supplement
to the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein, modifies or replaces 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 Supplement.
THE NOTES
The Notes will be issued pursuant to the Indenture, a form of which has been
filed as an exhibit to the Registration Statement. The following summary
describes certain terms of the Class A Notes and the Indenture. The summary does
not purport to be complete and 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
in the accompanying Prospectus, to which description reference is hereby made.
GENERAL
The Class A Notes initially will be represented by notes registered in the
name of Cede & Co., as the nominee of The Depository Trust Company ("DTC"), and
will only be available in the form of book-entries on the records of DTC and
participating members thereof in denominations of $1,000. All references to
"Holders" or "Noteholders" and to authorized denominations, when used with
respect to the Notes, shall reflect the rights of Note Owners, and limitations
thereof, as they may be indirectly exercised through DTC and its participating
members, except as otherwise specified herein. See "Certain Information
Regarding the Securities--Book-Entry Regulation" in the Prospectus Supplement
and Annex I to the Prospectus.
In general, the Class A-1 Noteholders will be entitled to receive, on each
Payment Date, the Class A-1 Principal Payment Amount and the Class A-1 Interest
Payment Amount and the Class A-2 Noteholders will be entitled to receive, on
each Payment Date, the Class A-2 Principal Payment Amount and the Class A-2
Interest Payment Amount, subject to the priority of payments as described in
"--Priority of Distribution Amounts." Payments on the Notes will be made from
the Note Distribution Account (as defined herein).
MANDATORY REDEMPTION
The Class A Notes will be redeemed in part on the Mandatory Redemption Date
in the event that any portion of the Pre-Funded Amount remains on deposit in the
Pre-Funding Account at the end of the Funding Period. The aggregate principal
amount of the Class A Notes to be redeemed will be an amount equal to the
remaining Pre-Funded Amount on such date (the "Class A Mandatory Redemption
Amount"). The Class A Mandatory Redemption Amount will be distributed pro rata
to each of the Class A-1 Notes and the Class A-2 Notes, based on the current
principal balance of each such Class,
S-32
<PAGE>
provided, however, that if the amount remaining in the Pre-Funding Account is
less than $100,000, only the Class A-1 Notes will be redeemed.
OPTIONAL PURCHASE OF RECEIVABLES
As an administrative convenience, the Servicer may purchase all the
Receivables and other Trust Property on any Payment Date if, as of the last day
of the related Collection Period, the Aggregate Principal Balance has declined
to less than 10% of the sum of (i) the Aggregate Principal Balance as of the
Initial Cutoff Date plus (ii) the aggregate principal balances of the Subsequent
Receivables added to the Trust as of their respective Cutoff Dates (the
"Original Pool Balance"). To exercise such option, the Servicer must pay the
aggregate Purchase Amounts for the Receivables and obtain the prior written
consent of the Insurer, or if such redemption would result in a claim under the
Policy or if such redemption would result in any amount owing to the Insurer
remaining unpaid. Upon exercising such option, the Servicer will succeed to all
interests in and to the Trust Property. The purchase price paid by the Servicer
will be deposited into the Collection Account and distributed pursuant to
"--Priority of Distribution Amounts" below. See "Certain Matters Regarding the
Servicer--Termination" in the accompanying Prospectus.
Such purchase will cause a redemption of the Notes; provided, however, that
the Servicer will provide the Indenture Trustee, the Backup Servicer, the
Insurer and the Rating Agencies at least 10 days' prior written notice of any
redemption. The Indenture Trustee will give notice to each Noteholder at least
five days prior to any such redemption. The redemption price for each Note will
be no less than the outstanding principal balance of such Note on the date of
redemption plus accrued and unpaid interest thereon (the "Redemption Price").
The Servicer will deposit the Redemption Price into the Collection Account, and
the Indenture Trustee will distribute the amounts so deposited in accordance
with the "Priority of Distribution Amounts" below.
DISTRIBUTIONS FROM THE TRUST
No later than 12:00 p.m. New York City time on each Determination Date, the
Servicer will inform the Indenture Trustee of the amount of aggregate
collections on the Receivables and the aggregate Purchase Amount of Receivables
to be purchased by the Servicer with respect to the related Collection Period.
The Servicer will determine prior to such Determination Date, the Class A-1
Interest Payment Amount, the Class A-1 Principal Payment Amount, the Class A-2
Interest Payment Amount, the Class A-2 Principal Payment Amount, the Payment
Amount, the amounts, if any, required to be deposited in the Class A Reserve
Account, the Class A Overcollateralization Amount and the Class A Target
Overcollateralization Amount.
For purposes hereof, the following terms shall have the following meanings:
"Additional Funds Available" means, with respect to any Payment Date the sum
of (i) the Deficiency Claim Amount, if any, received by the Indenture Trustee
with respect to such Payment Date plus (ii) the Insurer Optional Deposit, if
any, received by the Indenture Trustee with respect to such Payment Date.
"Class A Interest Carryover Shortfall" means, as of the close of business on
any Payment Date, the sum of (i) the Class A-1 Interest Carryover Shortfall and
(ii) the Class A-2 Interest Carryover Shortfall.
"Class A Interest Payment Amount" means, with respect to any Payment Date,
the sum of (i) the Class A-1 Interest Payment Amount and (ii) the Class A-2
Interest Payment Amount.
"Class A Mandatory Redemption Amount" means the amount, if any, remaining of
the Pre-Funded Amount on the Mandatory Redemption Date.
"Class A Overcollateralization Amount" means, with respect to any Payment
Date, an amount equal to the excess, if any, of (i) the sum of (a) the remaining
Aggregate Principal Balance as of the last day of the related Collection Period
and (b) all amounts, if any, in the Pre-Funding Account, over (ii) the
S-33
<PAGE>
remaining Class A Note Balance, after giving effect to the amounts payable on
the Payment Date pursuant to clauses (i) through (v) under "--Priority of
Distribution Amounts" on such Payment Date.
"Class A Principal Payment Amount" means, with respect to any Payment Date,
the sum of the Class A-1 Principal Payment Amount and the Class A-2 Principal
Payment Amount.
"Class A Target Overcollateralization Amount" means, with respect to any
Payment Date, an amount equal to the product of (i) 13.5% (or such lesser
percentage as the Insurer may decide in its sole discretion), and (ii) the sum
of (a) the remaining Aggregate Principal Balance, and (b) amounts, if any, in
the Pre-Funded Account, each determined as of the last day of the related
Collection Period.
"Class A-1 Interest Carryover Shortfall" means, as of the close of business
on any Payment Date, the excess of (a) the Class A-1 Interest Payment Amount for
such Payment Date and any outstanding Class A-1 Interest Carryover Shortfall
from the immediately preceding Payment Date plus interest on such outstanding
Class A-1 Interest Carryover Shortfall, to the extent permitted by law, at the
Class A-1 Interest Rate from such preceding Payment Date through the current
Payment Date (calculated on the basis of a 360-day year consisting of twelve
30-day months), over (b) the amount of interest that the Holders of the Class
A-1 Notes actually received on such current Payment Date.
"Class A-1 Interest Payment Amount" means, with respect to any Payment Date,
30 days' interest (calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including March 1, 1999, to but excluding
April 19, 1999) at the Class A-1 Interest Rate on the Class A-1 Note Balance as
of the close of business on the last day of the related Collection Period.
"Class A-1 Mandatory Redemption Amount" means, (i) with respect to the
Mandatory Redemption Date on which the Class A Mandatory Redemption Amount is
less than $100,000, the Class A Mandatory Redemption Amount, and (ii) with
respect to any Payment Date on which the Class A Mandatory Redemption Amount is
greater than $100,000, the product of (A) the Class A Mandatory Redemption
Amount and (B) a fraction, the numerator of which is the Class A-1 Note Balance
as of the close of business on the date prior to the related Payment Date and
the denominator of which is the Class A Note Balance as of the close of business
on the date prior to the related Payment Date.
"Class A-1 Principal Carryover Shortfall" means, as of the close of business
on any Payment Date, the excess of (a) the Class A-1 Principal Payment Amount
and any outstanding Class A-1 Principal Carryover Shortfall from the immediately
preceding Payment Date, over (b) the amount of principal that the Holders of the
Class A-1 Notes actually received on such current Payment Date.
"Class A-1 Principal Payment Amount" means (a) with respect to any Payment
Date other than the Class A-1 Final Scheduled Payment Date: the lesser of (i)
the Class A-1 Note Balance immediately prior to such Payment Date and (ii) the
sum of (A) the Principal Payment Amount and (B) the Class A-1 Mandatory
Redemption Amount and (b) with respect to the Class A-1 Final Scheduled Payment
Date, the then outstanding Class A-1 Note Balance.
"Class A-2 Interest Carryover Shortfall" means, as of the close of business
on any Payment Date, the excess of (a) the Class A-2 Interest Payment Amount for
such Payment Date and any outstanding Class A-2 Interest Carryover Shortfall
from the immediately preceding Payment Date plus interest on such outstanding
Class A-2 Interest Carryover Shortfall, to the extent permitted by law, at the
Class A-2 Interest Rate from such preceding Payment Date through the current
Payment Date (calculated on the basis of a 360-day year consisting of twelve
30-day months), over (b) the amount of interest that the Holders of the Class
A-2 Notes actually received on such current Payment Date.
"Class A-2 Interest Payment Amount" means, with respect to any Payment Date,
30 days' interest (calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including March 1, 1999, to but
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excluding April 19, 1999) at the Class A-2 Interest Rate on the Class A-2 Note
Balance as of the close of business on the last day of the related Collection
Period.
"Class A-2 Mandatory Redemption Amount" means, with respect to the Mandatory
Redemption Payment Date, the positive difference, if any, between the Class A
Mandatory Redemption Amount and the Class A-1 Mandatory Redemption Amount.
"Class A-2 Principal Carryover Shortfall" means, as of the close of business
on any Payment Date, the excess of (a) the Class A-2 Principal Payment Amount
and any outstanding Class A-2 Principal Carryover Shortfall from the immediately
preceding Payment Date, over (b) the amount of principal that the Holders of the
Class A-2 Notes actually received on such current Payment Date.
"Class A-2 Principal Payment Amount" means (a) with respect to any Payment
Date other than the Class A-2 Final Scheduled Payment Date: the lesser of (i)
the Class A-2 Note Balance immediately prior to such Payment Date, and (ii) the
difference between (A) the sum of the Principal Payment Amount and the Class A-2
Mandatory Redemption Amount and (B) the Class A-1 Principal Payment Amount and
(b) with respect to the Class A-2 Final Scheduled Payment Date, the then
outstanding Class A-2 Note Balance.
"Class B Interest Carryover Shortfall" means, as of the close of business on
any Payment Date, the excess of (a) the Class B Interest Payment Amount for such
Payment Date and any outstanding Class B Interest Carryover Shortfall from the
immediately preceding Payment Date plus interest on such outstanding Class B
Interest Carryover Shortfall, to the extent permitted by law, at the Class B
Interest Rate from such preceding Payment Date through the current Payment Date
(calculated on the basis of a 360-day year consisting of twelve 30-day months),
over (b) the amount of interest that the Holders of the Class B Notes actually
received on such current Payment Date.
"Class B Interest Payment Amount" means, with respect to any Payment Date,
30 days' interest (calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including March 1, 1999 to but excluding
April 19, 1999) at the Class B Interest Rate on the Class B Note Balance as of
the close of business on the last day of the related Collection Period.
"Class B Principal Payment Amount" means (a) with respect to any Payment
Date other than the Class B Final Scheduled Payment Date: the lesser of (i) the
Class B Note Balance immediately prior to such Payment Date, and (ii) amounts
remaining from the sum of (A) Available Funds and (B) amounts available from the
Class A Reserve Account in accordance with the terms of the Sale and Servicing
Agreement, after application of priorities First through Ninth under "--Priority
of Distribution Amounts," and (b) with respect to the Class B Final Scheduled
Payment Date, the then outstanding Class B Note Balance.
"Contract Scheduled Payment" means, for any Collection Period for any
Receivable, the amount indicated in such Receivable as required to be paid by
the Obligor in such Collection Period (without giving effect to deferments of
payments granted to Obligors by the Servicer pursuant to the Sale and Servicing
Agreement or any rescheduling of payments in an insolvency or similar
proceeding).
"Defaulted Receivable" means any Receivable with respect to which any of the
following shall have occurred: (a) for which the related Financed Vehicle has
been repossessed by the Servicer; or (b) for which all or more than 10% of any
payment is 120 days or more past due; or (c) a Contract with respect to which
the Servicer has determined in good faith that all amounts expected to be
recovered have been received.
"Draw Date" means, with respect to any Payment Date the third business Day
(as defined in the Policy) immediately preceeding such Payment Date.
"Excess Overcollateralization Amount" means, with respect to any Payment
Date, the excess, if any, of (x) the Class A Overcollateralization Amount
calculated for this purpose only without deduction for any Excess
Overcollateralization Amount (I.E., assuming that the entire amount described in
clause (x) of the
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definition of "Principal Payment Amount" is distributed as principal on the
Class A Notes) over (y) the Class A Target Overcollateralization Amount on such
Payment Date.
"Insurer Optional Deposit" means, with respect to any Payment Date, an
amount delivered by the Insurer, at its sole option, other than amounts in
respect of a Policy Claim Amount, for deposit into the Collection Account for
any of the following purposes: (i) to provide funds in respect of the payment of
fees or expenses of any provider of services to the Trust with respect to such
Payment Date; or (ii) to include such amount as part of the Additional Funds
Available for such Payment Date to the extent that without such amount a draw
would be required to be made on the Policy.
"Liquidated Receivable" means any Receivable with respect to which any of
the following shall have occurred with respect to any Collection Period: (i) the
sale of the Financed Vehicle; (ii) for which all or more than 10% of any
Contract Scheduled Payment is 120 days or more past due, except in the case of
repossessed Financed Vehicles, (iii) the Servicer has determined in good faith
that all amounts it expects to be recovered have been received, or (iv) 90 days
have elapsed since the Servicer repossessed the Financed Vehicle.
"OC Stabilization Date" means the first Payment Date on which the Class A
Overcollateralization Amount equals the Class A Target Overcollateralization
Amount.
"Policy Claim Amount" means, for any Payment Date, the excess, if any, of
(i) the sum of the Class A Interest Payment Amount and the Class A Principal
Payment Amount for such Payment Date over (ii) the sum of (a) the amounts
actually deposited into the Class A Note Distribution Account on such related
Payment Date and (b) the Additional Funds Available to pay the Class A Interest
Payment Amount or the Class A Principal Payment Amount if any, for such Payment
Date.
"Principal Balance" of a Receivable (a) as of the Cutoff Date, means the
Amount Financed minus (i) in the case of a Precomputed Receivable, that portion
of all payments (including all Contract Scheduled Payments and any prepayments
in full or partial prepayments) actually received on or prior to such date and
allocable to principal in accordance with the actuarial method and (ii) in the
case of a Simple Interest Receivable, that portion of all payments (including
all Contract Scheduled Payments and any prepayments in full or partial
prepayments) actually received on or prior to such date and allocable to
principal in accordance with the simple interest method, and (b) as of any date
after the Cutoff Date, means the Principal Balance as of the Cutoff Date minus
(1) in the case of a Precomputed Receivable, that portion of all payments
(including all Contract Scheduled Payments and any prepayments in full or
partial prepayments) actually received on or prior to such date (but after the
Cutoff Date) and allocable to principal in accordance with the actuarial method,
(2) in the case of a Simple Interest Receivable, that portion of all payments
(including all Contract Scheduled Payments and any prepayments in full or
partial prepayments) actually received on or prior to such date (but after the
Cutoff Date) and allocable to principal in accordance with the simple interest
method and (3) any Cram Down Loss in respect of such Receivable. The Principal
Balance of a Liquidated Receivable for purposes other than the definition of
Principal Payment Amount shall be equal to $0.
"Principal Payment Amount" means the amount equal to the excess, if any, of
(x) the sum of the following amounts, without duplication: (a) the principal
portion of all Contract Scheduled Payments received during such Collection
Period on Precomputed Receivables (calculated in accordance with the actuarial
method) and all payments of principal received on Simple Interest Receivables
(calculated in accordance with the simple interest method) during such
Collection Period; (b) the principal portion of all prepayments received during
the related Collection Period; (c) the portion of the Purchase Amount allocable
to principal of each Receivable that became a Purchased Receivable as of the
last day of the related Collection Period and, at the option of the Insurer, the
Principal Balance of each Receivable that was required to be but was not so
purchased or repurchased; (d) the Principal Balance of each Receivable that
first became a Liquidated Receivable during the related Collection Period; and
(e) the aggregate
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amount of Cram Down Losses with respect to the Receivables that have occurred
during the related Collection Period, over (y) the Excess Overcollateralization
Amount, if any, for such Payment Date.
"Purchase Amount" means, with respect to a Receivable, the Principal Balance
plus interest thereon at the respective APR from the last day through which
interest has been paid to the last day of the immediately preceding Collection
Period if purchased prior to the Determination Date immediately following the
end of such Collection Period, and otherwise through the last day of the month
of repurchase.
CALCULATION OF PAYMENT AMOUNTS. The Class A-1 Noteholders will be entitled
to receive, to the extent funds are available therefor, the Class A-1 Principal
Payment Amount and the Class A-1 Interest Payment Amount with respect to each
Payment Date. The Class A-2 Noteholders will be entitled to receive to the
extent funds are available therefor, the Class A-2 Principal Payment Amount and
the Class A-2 Interest Payment Amount with respect to each Payment Date, subject
to the priority of payments as described in "--Priority of Distribution
Amounts". The "Class A-1 Note Balance" will initially represent $71,100,000, and
thereafter, an amount equal to the initial Class A-1 Note Balance reduced by all
amounts distributed to the Noteholders that are allocable to principal. The
"Class A-2 Note Balance" will initially represent $56,300,000, and thereafter,
an amount equal to the initial Class A-2 Note Balance reduced by all amounts
distributed to the Class A-2 Noteholders that are allocable to principal.
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PRIORITY OF DISTRIBUTION AMOUNTS
On each Payment Date, the Indenture Trustee will (based on the information
contained in the Servicer's Certificate delivered on the related Determination
Date) distribute the following amounts in the following order of priority:
(i) first, from the Available Funds, to the Servicer, the Servicer Fee (as
defined herein) for the related Collection Period, and any Servicer
Expenses for the related or any prior Collection Period and certain
other amounts mistakenly deposited in the Collection Account belonging
to the Servicer, if any, or otherwise required to be distributed to the
Servicer in accordance with the Sale and Servicing Agreement;
(ii) second, from the remaining Available Funds, to the Lockbox Bank, the
Indenture Trustee, the Owner Trustee and the Backup Servicer, any
accrued and unpaid fees and in the case of the Backup Servicer,
Servicer Transition Expenses, if any, up to an amount specified in the
Sale and Servicing Agreement, in each case, to the extent such Person
(as defined herein) has not previously received such amount from the
Servicer;
(iii) third, from the remaining Available Funds, pro rata in respect of the
amounts due thereto, (a) to the Class A-1 Noteholders, the Class A-1
Interest Payment Amount for such Payment Date and the Class A-1
Interest Carryover Shortfall, if any, and (b) to the Class A-2
Noteholders, the Class A-2 Interest Payment Amount for such Payment
Date and the Class A-2 Interest Carryover Shortfall, if any;
(iv) fourth, from the remaining Available Funds, to the Class A-1
Noteholders, the Class A-1 Principal Payment Amount for such Payment
Date, and the Class A-1 Principal Carryover Shortfall, if any;
(v) fifth, from the remaining Available Funds, to the Class A-2 Noteholders,
the Class A-2 Principal Payment Amount for such Payment Date, and the
Class A-2 Principal Carryover Shortfall, if any;
(vi) sixth, from the remaining Available Funds, to the Insurer to the extent
of any amounts owing the Insurer under the Insurance Agreement;
(vii) seventh, from the remaining Available Funds, to the Class A Reserve
Account to the extent necessary to increase the amount on deposit
therein to its then required level;
(viii) eighth, on or prior to the OC Stabilization Date, from the remaining
Available Funds, and together with amounts, if any, available in
accordance with the terms of the Class A Reserve Account Agreement,
sequentially, to the Class A-1 Noteholders and to the Class A-2
Noteholders, as principal, until the Class A Target
Overcollateralization Amount is achieved;
(ix) ninth, from the remaining Available Funds, to the Class B Noteholders,
the Class B Interest Payment Amount for such Payment Date and the Class
B Interest Carryover Shortfall, if any;
(x) tenth, from the remaining Available Funds, and together with amounts, if
any, available from the Class A Reserve Account in accordance with the
terms of the Sale and Servicing Agreement, to the Class B Noteholders,
the Class B Principal Payment Amount; and
(xi) eleventh, from the remaining Available Funds, to the Class A Reserve
Account, or as otherwise specified in the Transaction Documents, any
remaining funds.
PAYMENT DATE CALCULATIONS AND PAYMENTS
In the event that any Servicer's Certificate delivered by the Servicer
indicates that the Available Funds with respect to a Payment Date are
insufficient to fund in full the related Scheduled Payments plus the amounts
described in clauses (i), (ii) and (vi) above in "--Priority of Distribution
Amounts", the Indenture
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Trustee shall request the Deficiency Claim Amount from the Class A Reserve
Account, at the time required by and pursuant to, the Class A Reserve Account
Agreement. Any funds received by the Indenture Trustee pursuant to such request
will be deposited in the Collection Account and paid on the related Payment Date
to the persons entitled thereto, in the amounts described in clauses (i) through
(vi) of "--Priority of Distributions" in accordance with such priority of
payment. Further, in the event that any Servicer's Certificate delivered by the
Servicer indicates that the sum of (i) the Available Funds with respect to a
Payment Date, plus (ii) any related Deficiency Claim Amount funds deposited in
the Collection Account or otherwise received by the Indenture Trustee is
insufficient to fund in full the related Scheduled Payments, the Indenture
Trustee shall furnish to the Insurer no later than 12:00 noon New York City time
on the related Draw Date a completed notice of claim in the amount of the Policy
Claim Amount. Amounts paid by the Insurer pursuant to any such notice of claim
shall be deposited by the Insurer into the Note Distribution Account for payment
to Noteholders on the Payment Date.
STATEMENTS TO NOTEHOLDERS
On each Payment Date, the Indenture Trustee must provide to each Class A
Noteholder, the Insurer and the Rating Agencies a statement prepared by the
Servicer based on the information in the related Servicer's Certificate, which
statement sets forth certain information required under the Sale and Servicing
Agreement. Each such statement will include the following information with
respect to such Payment Date or the immediately preceding Collection Period, as
applicable:
(i) the amount of such payment allocable to interest with respect to the
Class A-1 Notes, the Class A-2 Notes and the Class B Notes, as
applicable;
(ii) the amount of such payment allocable to principal on or with respect to
the Class A-1 Notes, the Class A-2 Notes and the Class B Notes;
(iii) the amount of such payment pursuant to a claim on the Policy;
(iv) the amount of fees paid by the Trust with respect to such Collection
Period, including any Servicer Fee and Servicer Expenses;
(v) the Class A-1 Note Balance, the Class A-2 Note Balance and the Class B
Note Balance;
(vi) the Class A-1 Interest Carryover Shortfall, the Class A-2 Interest
Carryover Shortfall and the Class B Interest Carryover Shortfall, if
any, and the Class A-1 Principal Carryover Shortfall, the Class A-2
Principal Carryover Shortfall and the Class B Principal Carryover
Shortfall, if any;
(vii) the Class A-1 Note Factor, the Class A-2 Note Factor and the Class B
Note Factor;
(viii) for each date during the Pre-Funding Period, the remaining Pre-Funded
Amount, the amount in the Pre-Funding Account and the amount remaining
the Capitalized Interest Account;
(ix) the number of Receivables and the aggregate Principal Balance due
thereof, for which the related Obligors are delinquent in making
Contract Scheduled Payments (A) between 31 and 60 days, (B) between 61
and 90 Days, (C) between 91 and 120 days and (D) more than 120 days;
(x) the number of Receivables which became Liquidated Receivables, and the
aggregate principal amount thereof net of Recoveries;
(xi) the number of Receivables which became Defaulted Receivables, and the
aggregate principal amount thereof;
(xii) the number and the aggregate Purchase Amount of Receivables that became
Purchased Receivables during the related Collection Period and the
number and aggregate Purchase Amount of Receivables that were required
to be repurchased during the related Collection Period but were not so
repurchased;
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(xiii) the Principal Balance, APR and model year of each Receivable that was
replaced and the Principal Balance, APR and model year of the
corresponding Replacement Receivable;
(xiv) the number and the aggregate Principal Balance of Receivables with
respect to which, to the knowledge of the Servicer, Obligors became the
subject of bankruptcy proceedings during such Collection Period (or
during a prior Collection Period, if the Servicer first became aware of
such proceeding during the current Collection Period);
(xv) the amount of any Deficiency Claim Amounts deposited in the Collection
Account from the Class A Reserve Account;
(xvi) the Class A Overcollateralization Amount and the Class A Target
Overcollateralization Amount; and
(xvii) the beginning balance, amount of claims paid, amount of deposits made,
and ending balance of the applicable collateral self-insurance fund, if
any.
Each amount set forth pursuant to subclauses (i), (ii) and (v) will be
expressed as a dollar amount per $1,000 of the initial principal amount of a
Note.
Unless and until Definitive Notes are issued, such reports will be sent on
behalf of the Trust to Cede & Co., as registered holder of the Class A Notes and
the nominee of DTC. See "Reports to Securityholders" and "Description of the
Notes" in the prospectus. Within the required period of time after the end of
each calendar year, the Indenture Trustee will furnish to each person who at any
time during such calendar year was a Noteholder, a statement as to the aggregate
amounts of interest and principal paid to such Noteholder and such other
information as the Servicer deems necessary to enable such Noteholder to prepare
its tax returns. See "Certain Federal Income Tax Consequences."
CREDIT SUPPORT
The Class A Overcollateralization Amount and the Class A Reserve Account (a
funded cash reserve account (the "Class A Reserve Account")), result in credit
support for the Class A Notes. This credit support is required to be increased
to, and thereafter maintained at, a level established by the Insurer. This level
changes over time. The Insurer may permit the required level of credit support
provided by the Class A Reserve Account and the Class A Overcollateralization
Amount to be reduced, or "step down", over time without the consent of
Noteholders.
OVERCOLLATERALIZATION. Overcollateralization for the Class A Notes is
created as a result of the application of "excess interest" and "excess
principal" to the payment of principal on the Class A Notes. The "excess
interest" is interest which is collected on the Receivables in excess of the
amount of interest that is paid on the Class A Notes, used to pay certain fees,
or, under certain circumstances, deposited to the Class A Reserve Account. This
application of excess interest results in the outstanding principal balance of
the Class A Notes amortizing more quickly than the Pool Balance. The "excess
principal" is the principal allocated to the Class A Notes which is in excess of
the principal the Class A Notes would receive if the principal collected on the
Receivables were distributed pro rata to the Class A Notes and Class B Notes
based on their relative outstanding principal balances. This application of the
"excess principal" results in the outstanding principal balance on the Class A
Notes amortizing more quickly than the Aggregate Principal Balance on a
percentage basis.
If the Insurer permits the required level of overcollaterization to step
down, principal collections which would otherwise be paid through to the Class A
Noteholders as part of the Class A Principal Payment Amount may be instead
released to the Class B Noteholders or the Certificateholder.
SUBORDINATION. As of the Closing Date, the principal balance of the Class B
Notes equals 9% of the Note Balance. The transaction is structured so that until
the OC Stabilization Date, the Class B Note Balance will grow as a percentage of
the Note Balance. The Class B Notes are subordinated in right of
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payment to the payment of the Class A Notes. No payments of principal will be
made to the Class B Notes until the OC Stabilization Date. Payment of interest
on the Class B Notes is subordinated to payment of interest and principal on the
Class A Notes, the funding of the Class A Reserve Account and, until the OC
Stabilization Date, the payment of excess interest as additional principal to
the Class A Notes. If there are losses on the Receivables, those losses will be
borne entirely by the Certificateholder and by the Class B Notes before there
are any losses on the Class A Notes.
CLASS A RESERVE ACCOUNT. The Class A Reserve Account will be funded with an
initial cash deposit on the Closing Date. On each Payment Date thereafter, the
Indenture Trustee will be required to deposit additional amounts into the Class
A Reserve Account from payments on the Receivables as described under "The
Notes--Priority of Distribution Amounts" above to the extent that the balance on
deposit therein is below the then required level. Amounts, if any, on deposit in
the Class A Reserve Account on a Payment Date will be available to the extent
provided in the Class A Reserve Account Agreement to fund any Deficiency Claim
Amount with respect to such Payment Date. Amounts on deposit in the Class A
Reserve Account on any Payment Date on or prior to the OC Stabilization Date
(after giving effect to all distributions made on such Payment Date) in excess
of the specified Class A Reserve Account Requirements for such Payment Date
shall be distributed to Class A Noteholders as a prepayment of principal on the
Class A Notes. On any Payment Date after the OC Stabilization Date, such excess
funds may be released to the Class B Noteholders or the Certificateholder
without the consent of the Class A Noteholders.
In addition, the Certificateholder, the Insurer and the Collateral Agent
under the Class A Reserve Account Agreement may amend the Class A Reserve
Account Agreement (and any provisions in the Insurance Agreement relating to the
Class A Reserve Account) in any respect (including, without limitation, reducing
or eliminating the funding requirements of the Class A Reserve Account or
permitting such funds to be used for the benefit of persons other than Class A
Noteholders) without the consent of, or notice to, the Trustee, the Owner
Trustee or the Noteholders. The Collateral Agent shall not withhold or delay its
consent with respect to any amendment that does not adversely affect the
Collateral Agent in its individual capacity. Notwithstanding any reduction in or
elimination of the funding requirements of the Class A Reserve Account or the
depletion thereof, the Insurer will be obligated on each Payment Date to fund
the full amount of each Scheduled Payment required to be paid by such Payment
Date, and which would not be in the absence of a payment under the Policy. If
the Insurer breaches its obligations, any losses on the Receivables will be
borne first by the Class B Noteholders and then by the Noteholders.
THE INDENTURE
THE INDENTURE TRUSTEE. The Chase Manhattan Bank is the Indenture Trustee
under the Indenture. For the purpose of meeting the legal requirements of
certain jurisdictions, the Indenture Trustee may appoint co-trustees or separate
trustees of all or any part of the trust estate and confer upon such party such
powers, duties, obligations, rights and trusts as the Indenture Trustee deems
necessary, or desirable. In the event of such appointment, all rights, powers,
duties and obligations conferred or imposed upon the Indenture Trustee by the
Indenture will be conferred or imposed upon the Indenture Trustee and such
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
Indenture Trustee shall be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who will exercise and perform
such rights, powers, duties, and obligations solely at the direction of the
Indenture Trustee.
The Indenture Trustee may resign at any time after 60 days' written notice
to the Issuer, the Insurer and Noteholders in which event the Controlling Party
will be obligated to appoint a successor trustee. The Controlling Party may
remove the Indenture Trustee if, among other reasons, the Indenture Trustee
ceases to be eligible to continue as such under the Indenture, becomes legally
unable to act or becomes insolvent. In such circumstances, the Controlling Party
will be obligated to appoint a successor trustee. Any
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resignation or removal of the Indenture Trustee and appointment of a successor
trustee will not become effective until acceptance of the appointment of a
successor trustee.
The Sale and Servicing Agreement will provide that the Indenture Trustee
will be entitled to indemnification by the Servicer for, and will be held
harmless against, any loss, liability, fee, disbursement or expense incurred by
the Indenture Trustee not resulting from the Indenture Trustee's own willful
misfeasance, bad faith or negligence and other than by reason of a breach of any
of the Indenture Trustee's representations or warranties set forth in the Sale
and Servicing Agreement. The Sale and Servicing Agreement will further provide
that the Servicer will indemnify the Indenture Trustee for certain taxes that
may be asserted in connection with the transaction.
The Indenture Trustee makes no representations as to the validity or
sufficiency of the Sale and Servicing Agreement, the Notes (other than the
authentication of the Notes) or any Receivables or the Related Documents and is
not accountable for the use or application by the Seller or the Servicer of any
funds paid to the Seller or the Servicer in respect of the Notes or the
Receivables, or the investment of any monies received by the Servicer before
such monies are deposited in the Collection Account. The Indenture Trustee has
not independently verified the Receivables. The Indenture Trustee is required to
perform only those duties specifically required of it under the Sale and
Servicing Agreement and the Indenture. The Indenture Trustee shall determine
whether the certificates, reports or other instruments required to be furnished
to the Indenture Trustee under the Sale and Servicing Agreement and the
Indenture conform to the requirements of the Sale and Servicing Agreement and
the Indenture, respectively.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT. The Trust and
Indenture Trustee may, with the prior written consent of the Insurer (prior to
the occurrence and continuance of an Insurer Default) but without consent of the
Noteholders, enter into one or more supplemental indentures for any of the
following purposes: (i) to correct or amplify the description of the property
subject to the lien of the Indenture or add additional property thereto; (ii) to
evidence the succession of another Person to the Trust and the assumption by
such successor of the covenants of the Trust; (iii) to add additional covenants
for the benefit of the Noteholders or to surrender any right or power conferred
on the Trust; (iv) to convey, transfer, assign, mortgage or pledge any
additional property to or with the Indenture Trustee; (v) to cure any ambiguity,
or to correct or supplement any provision in the Indenture or in any
supplemental indenture that may be inconsistent with any other provision of the
Indenture or any supplemental indenture; (vi) to add to or change any of the
provisions of the Indenture as shall be necessary and permitted to facilitate
the administration by more than one trustee; and (vii) to add any provisions to,
change in any manner or eliminate any of the provisions of the Indenture or
modify in any manner the rights of Noteholders under such Indenture; provided
that any such action must not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any Noteholder.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT. With the prior written
consent of the Insurer (prior to the occurrence and continuance of an Insurer
Default) and the Note Majority, the Trust and the Indenture Trustee may execute
one or more supplemental indentures to add, change or eliminate any other
provisions of the Indenture, modify in any manner the rights of the Noteholders
or provide for the acceptance of the appointment of a successor Indenture
Trustee. Without the prior written consent of the Insurer (prior to the
occurrence and continuance of an Insurer Default) and the Holder of each
outstanding related Note affected thereby, however, no supplemental indenture
will: (i) change the due date of any installment of principal of or interest on
any Note or reduce the principal amount thereof, the interest rate thereon or
the redemption price with respect thereto, change the provisions of the
Indenture relating to the application of collections on, or the proceeds of the
sale of, the collateral to the payment of principal of or interest on the Notes,
change any place of payment where or the coin or currency in which any Note or
any interest thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate amount of the outstanding Notes the
consent of the Holders of which is required for any such supplemental
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indenture or the consent of the Holders of which is required for any waiver of
compliance with certain provisions of the Indenture or of certain defaults
thereunder and their consequences as provided for in the Indenture; (iv) modify
or alter the provisions of the Indenture regarding certain aspects of what
constitutes an "Outstanding" Note; (v) reduce the percentage of the aggregate
outstanding amount of the Notes the consent of the Holders of which is required
to direct the Indenture Trustee to sell or liquidate the Receivables if the
proceeds of such sale would be insufficient to pay the principal amount and
accrued but unpaid interest on the outstanding Notes; (vi) modify the provision
of the Indenture requiring consent of Noteholders except to increase the
percentage of the aggregate principal amount of the Notes required to amend the
sections of the Indenture or to provide additional provisions requiring the
consent of each Noteholder prior to modification or waiver; (vii) modify any of
the provisions of the Indenture affecting the calculation of the amount of any
payment of interest or principal due on any Note on any Payment Date; (viii)
permit the creation of any lien ranking prior to or on a parity with the lien of
the Indenture with respect to any of the collateral for the Notes or, except as
otherwise permitted or contemplated in the Indenture, terminate the lien of the
Indenture on any such collateral or deprive the Holder of any Note of the
security afforded by the lien of the Indenture; or (ix) become effective if the
Rating Agency Condition in respect thereof has not been satisfied.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. Unless an Insurer Default
shall have occurred and be continuing, "Events of Default" under the Indenture
will consist of those events defined in the Insurance Agreement as Insurance
Agreement Indenture Cross Defaults, and will constitute an Event of Default
under the Indenture only if the Insurer shall have delivered to the Indenture
Trustee, and not rescinded, a written notice specifying that any such Insurance
Agreement Indenture Cross Default constitutes an Event of Default under the
Indenture. "Insurance Agreement Indenture Cross Defaults" consist of: (i) any
payment being made under the Policy; (ii) certain events of bankruptcy,
insolvency, receivership or liquidation of the Trust, Triad or the
Certificateholder; (iii) the Trust becoming taxable as an association (or
publicly traded partnership) taxable as a corporation for federal or state
income tax purposes; (iv) the Class A Notes not being treated as indebtedness
for federal or applicable state income tax purposes and such characterization's
having a material adverse effect on the Trust and the Noteholders or the
Insurer; (v) the sum of the Available Funds with respect to any Payment Date
plus the amount (if any) available from certain collateral accounts maintained
for the benefit of the Insurer is less than the sum of the amounts described in
clauses (i)-(vi) under "The Notes--Priority of Distribution Amounts" herein; and
(vi) any failure to perform in any material respect any other covenants or
agreements in the Indenture, or any representation or warranty of the Trust made
in the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith proving to have been incorrect in any
material respect when made, and such failure continuing or not being cured, or
the circumstances or condition in respect of which such misrepresentation or
warranty was incorrect not having been eliminated or otherwise cured, for 30
days after the giving of written notice of such failure or incorrect
representation or warranty to the Trust and the Indenture Trustee by the
Insurer.
Upon the occurrence of an Event of Default, so long as an Insurer Default
shall not have occurred and be continuing, the Insurer will have the right, but
not the obligation, to cause the Indenture Trustee to liquidate the Trust
Property in whole or in part, on any date or dates following the acceleration of
the Class A Notes due to such Event of Default as the Insurer, in its sole
discretion, shall elect, and to deliver the proceeds of such liquidation to the
Indenture Trustee for distribution to the Class A-1 Noteholders and Class A-2
Noteholders on a pro rata basis based on the Class A-1 Note Balance and the
Class A-2 Note Balance then outstanding, in accordance with the terms of the
Indenture. The Insurer may not, however, cause the Indenture Trustee to
liquidate the Trust Property in whole or in part if the proceeds of such
liquidation would not be sufficient to pay all outstanding principal of and
accrued interest on the Notes, unless such Event of Default arose from an event
specified in (i), (ii), (iii), or (iv) in the immediately preceding paragraph.
Following the occurrence of any Event of Default, the Indenture Trustee will
continue to submit claims under the Policy for any shortfalls in the Scheduled
Payments on the Class A Notes in accordance with the terms of the Policy.
Following any Event of Default under the Indenture, the
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Insurer, in its sole discretion, may elect to pay all or any portion of the
outstanding amount of the Class A Notes, plus accrued interest thereon. See "The
Policy" herein.
If an Insurer Default has occurred and is continuing, "Events of Default"
under the Indenture will consist of the Events of Default described in the
accompanying Prospectus under "Description of the Notes--Provisions of the
Indenture" and "--Events of Default; Rights Upon Events of Default"; and the
Indenture Trustee and the Noteholders have the rights under the Indenture
described therein.
NOTE FACTORS; STATEMENT TO NOTEHOLDERS; SERVICER REPORTS TO THE INDENTURE
TRUSTEE
The "Class A-1 Note Factor" will be a seven-digit decimal number that the
Servicer will compute each month indicating the Class A-1 Note Balance as of the
close of business on the last day of the related Collection Period in that month
as a fraction of the respective original outstanding principal balance of the
Class A-1 Notes. The Class A-1 Note Factor will be 1.0000000 as of the Cutoff
Date; thereafter, the Class A-1 Note Factor will decline to reflect reductions
in the Class A-1 Note Balance as a result of scheduled payments collected,
partial prepayments, prepayments and liquidations of the Receivables. The amount
of a Class A-1 Noteholder's pro rata share of the Class A-1 Note Balance can be
determined on any date by multiplying the original denomination of the Holder's
Note by the Class A-1 Note Factor as of the close of business on the most recent
Payment Date.
The "Class A-2 Note Factor" will be a seven-digit decimal number that the
Servicer will compute each month indicating the Class A-2 Note Balance as of the
close of business on the last day of the related Collection Period in that month
as a fraction of the respective original outstanding principal balance of the
Class A-2 Notes. The Class A-2 Note Factor will be 1.0000000 as of the Cutoff
Date; thereafter, the Class A-2 Note Factor will decline to reflect reductions
in the Class A-2 Note Balance as a result of scheduled payments collected,
partial prepayments, prepayments and liquidations of the Receivables. The amount
of a Class A-2 Noteholder's pro rata share of the Class A-2 Note Balance can be
determined on any date by multiplying the original denomination of the Holder's
Note by the Class A-2 Note Factor as of the close of business on the most recent
Payment Date.
Under the Sale and Servicing Agreement, the Servicer will perform certain
monitoring and reporting functions for the Trust, including the preparation and
delivery of the Servicer's Certificate on each Determination Date to the
Indenture Trustee, the Backup Servicer, the Insurer, and the Rating Agencies
setting forth specified information with respect to the preceding Collection
Period.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Sale and Servicing Agreement,
the Indenture Trustee will be required to mail to each person who at any time
during such calendar year will have been a Noteholder, a statement containing
certain information related to such Noteholder's preparation of federal income
tax returns.
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DESCRIPTION OF THE TRANSACTION DOCUMENTS
The following summary describes certain terms of the Transaction Documents.
Forms of the Transaction Documents have been filed as exhibits to the
Registration Statement. This summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions in
the Transaction Documents. The following summary supplements the description of
the general terms and provisions of the Transfer and Servicing Agreements (as
such term is used in the Prospectus) set forth in the Prospectus, to which
description reference is hereby made.
SALE AND ASSIGNMENT OF RECEIVABLES
Certain information with respect to the Receivables by the Seller 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" herein and "The Receivables Pools" in the Prospectus for
additional information regarding the Receivables and certain obligations of the
Seller and the Servicer with respect to the Receivables.
At the time of issuance of the Notes, the Seller will sell and assign to the
Company, the Seller's entire interest in the Receivables, including its security
interests in the Financed Vehicles, and the Company will sell and assign to the
Trust the Company's entire interest in the Receivables, including the security
interests in the Financed Vehicles. On or before the Closing Date, the Trust
will pledge the Receivables to the Indenture Trustee for the benefit of the
Noteholders and the Insurer pursuant to the Indenture. Each Receivable will be
identified in a schedule to the Sale and Servicing Agreement. The Indenture
Trustee will, concurrently with such pledge, authenticate and deliver the Notes,
which have been executed on behalf of the Trust.
Any conveyance of Subsequent Receivables is subject to the satisfaction, on
or before the related Subsequent Transfer Date, of the following conditions,
among others: (i) each such Subsequent Receivable satisfies the eligibility
criteria specified in the Sale and Servicing Agreement; (ii) the Insurer (so
long as no Insurer Default shall have occurred and be continuing) shall in its
absolute and sole discretion have approved the transfer of such Subsequent
Receivables to the Trust; (iii) the Seller will not have selected such
Subsequent Receivable in a manner that it believes is adverse to the interests
of the Noteholders or the Insurer; (iv) as of each applicable Subsequent Cutoff
Date, the Receivables in the Trust together with the Subsequent Receivables to
be conveyed by the Seller as of such Subsequent Cutoff Date, meet the following
criteria (computed based on the characteristics of the Initial Receivables on
the Initial Cutoff Date and any Subsequent Receivables on the related Subsequent
Cutoff Date): (a) the weighted average APR of such Receivables will not be less
than one percent less than the weighted average APR of the Initial Receivables
on the Initial Cutoff Date; (b) the remaining term of such Receivables will not
be greater than 72 months nor less than 12 months; (c) not more than 87% of the
Principal Balances of such Receivables will be attributable to Loans for the
purchase of used Financed Vehicles; (d) the APR is not less than 9% nor more
than 25%; and (e) no vehicle is older than a 1991 model year, and the Trust, the
Indenture Trustee, the Owner Trustee and the Insurer shall have received written
confirmation from a firm of certified independent public accountants as to the
satisfaction of the criteria in clauses (a) through (e) above; (iv) the Seller
shall have executed and delivered to the Trust (with a copy to the Indenture
Trustee) a Subsequent Transfer Agreement conveying such Subsequent Receivable to
the Trust (including a schedule identifying such Subsequent Receivables; (v) the
Seller shall have delivered certain opinions of counsel to the Indenture
Trustee, the Insurer, the Owner Trustee and the Rating Agencies with respect to
the validity of the conveyance of such Subsequent Receivables; and (vi) the
Rating Agencies shall have each notified the Seller, the Owner Trustee, the
Indenture Trustee and the Insurer in writing that, following the addition of all
such Subsequent Receivables, each of the Class A-1 Notes and the Class A-2 Notes
will be rated AAA by S&P and Aaa by Moody's.
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Pursuant to the Receivables Purchase Agreement and the Sale and Servicing
Agreement, the Seller will represent and warrant that, among other things: (i)
as of each Cutoff Date, the information provided in the schedule to the Sale and
Servicing Agreement with respect to the Receivables is correct in all material
respects; (ii) at the date of issuance of the Notes and any Subsequent Transfer
Date, the Receivables are free and clear of all liens or claims and no right of
setoff, counterclaim or rescission has been asserted or, to the best of its
knowledge, threatened with respect to the Receivables; (iii) at the date of
issuance of the Notes and any Subsequent Transfer Date, each of the Receivables
is secured by (or will be when all necessary steps have been taken to result in)
a first priority perfected security interest in the Financed Vehicle in favor of
Triad and such security interest has been validly assigned to the Seller, the
Trust and the Indenture Trustee; and (iv) each Receivable, at the time it was
originated, complied, and at the date of issuance of the Notes and any
Subsequent Transfer Data, complies in all material respects with applicable
federal, state and local laws, including consumer credit, truth in lending,
equal credit opportunity and disclosure laws.
Pursuant to the Receivables Purchase Agreement and the Sale and Servicing
Agreement, the Seller will be obligated to repurchase or replace subject to
limits on replacement set forth in the Sale and Servicing Agreement a Receivable
from the Trust, if the interests of the Noteholders, the Insurer or the Trust in
such Receivable are materially adversely affected by a breach of any
representation or warranty made by the Seller, with respect to the Receivable,
if such breach has not been cured following discovery by or notice to the Seller
of the breach. Pursuant to the Sale and Servicing Agreement, the Servicer will
be obligated to purchase or replace a Receivable from the Trust if the interests
of the Noteholders, the Insurer or the Trust in such Receivable are materially
adversely affected by a breach of certain of its servicing obligations under the
Sale and Servicing Agreement (including its obligation to maintain perfection of
the first priority security interest created by each Receivable in the related
Financed Vehicle or certain other covenants with respect to the Servicer), if
the breach has not been cured following the discovery or notice to the Servicer
of the breach. Each Receivable will be purchased from the Trust or replaced by
the Seller or the Servicer, as the case may be, at a price equal to the Purchase
Amount. The purchase or replacement obligations will constitute the sole remedy
available to the Noteholders or the Indenture Trustee for any such uncured
breaches.
Pursuant to the Sale and Servicing Agreement, the Servicer will service and
administer the Receivables. The documents evidencing the Initial Receivables and
Subsequent Receivables will be delivered to the Indenture Trustee on the Closing
Date and Subsequent Transfer Date. In addition, Triad's accounting records and
computer systems will be marked to reflect such sale and assignment, and UCC
financing statements reflecting such sale and assignment will be filed. See
"Certain Legal Aspects of the Receivables--Security Interests in Financed
Vehicles" in the accompanying Prospectus.
ACCOUNTS
Each Obligor has been instructed to make payments with respect to the
Receivables after the applicable Cutoff Date to a Lockbox which has been
established and will be maintained by Mellon Bank, N.A. (the "Lockbox Bank").
Upon receipt of payments in the Lockbox, the Lockbox Bank will deposit funds
into an account maintained by the Lockbox Bank at a depository institution (the
"Lockbox Account") acceptable to the Insurer. The Indenture Trustee will
establish the Collection Account (the "Collection Account") in the name of the
Indenture Trustee for the benefit of the Noteholders and the Insurer. All
payments made on or with respect to the Receivables previously deposited in the
Lockbox Account will be transferred to the Collection Account within two
Business Days of the receipt of available funds therein. Upon receipt, but in no
event later than two Business Days after the receipt thereof, each of the
Servicer and the Seller will remit all amounts received by it in respect of the
Receivables in the form of checks with payment coupons directly to the Lockbox.
Other payments received by each of the Servicer and the Seller will be deposited
into a local servicing account for processing, and then transferred to the
Collection Account within two Business Days of the receipt of available funds
therein. The Collection
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Account will be maintained with the Indenture Trustee as long as the Indenture
Trustee's deposits have a rating acceptable to the Insurer and the Rating
Agencies. If the deposits of the Indenture Trustee no longer have such
acceptable rating, the Indenture Trustee shall cause such accounts to be moved
to a bank or trust company having such acceptable ratings.
The Indenture Trustee will also establish and maintain an account, in its
name, on behalf of Noteholders and the Insurer, in which amounts released from
the Collection Account for distribution to Noteholders will be deposited and
from which all distributions to Noteholders will be made (the "Note Distribution
Account").
On the Closing Date, a cash amount equal to approximately $34,924,657.38
(the "Initial Pre-Funded Amount") will be deposited in an account (the
"Pre-Funding Account") which will be established with the Indenture Trustee. The
"Funding Period" is the period from the Closing Date until the earliest of the
date on which (i) the amount on deposit in the Pre-Funding Account is less than
$100,000, (ii) a Servicer Termination Event occurs under the Sale and Servicing
Agreement or an Insurance Agreement Event of Default occurs, or (iii) the
Payment Date in May 1999. The Initial Pre-Funded Amount, as reduced from time to
time during the Funding Period by the amount thereof used to purchase Subsequent
Receivables in accordance with the Sale and Servicing Agreement, is referred to
herein as the "Pre-Funded Amount." The Seller expects that the Pre-Funded Amount
will be reduced to less than $100,000 on or before the Payment Date in May 1999.
Any Pre-Funded Amount remaining at the end of the Funding Period will be payable
to the Noteholders as described herein. The "Mandatory Redemption Date" is the
earlier of (i) the Payment Date in May 1999 and (ii) if the last day of the
Funding Period occurs on or prior to the Determination Date in April 1999, then
the April 1999 Payment Date.
On the Closing Date, a cash amount shall be deposited in an account (the
"Capitalized Interest Account") which will be established with the Indenture
Trustee. The amount, if any, deposited in the Capitalized Interest Account will
be applied on the Payment Dates occurring in April 1999, May 1999 and June 1999,
and to fund an amount (the "Monthly Capitalized Interest Amount") equal to the
amount of interest accrued for each such Payment Date at the excess of the
weighted average interest rate on the Class A Notes and (ii) 2.5%, on the
portion of the Class A Notes having a principal balance in excess of the
Aggregate Principal Balances of the Receivables. Any amounts remaining in the
Capitalized Interest Account on the Mandatory Redemption Date and not used for
such purposes are required to be paid to the Class A Noteholders on such date.
See "Description of the Transaction Documents--Accounts."
All such Accounts shall be Eligible Deposit Accounts (as defined in the
Prospectus) acceptable to the Insurer (so long as no Insurer Default has
occurred and is continuing).
Consistent with the Sale and Servicing Agreement and its normal collection
practices and procedures, the Servicer may, in its discretion, arrange with the
Obligor on a Receivable to extend or modify the payment schedule, subject to
certain limitations. No such extension or modification in accordance with the
Sale and Servicing Agreement will result in a repurchase obligation for the
Servicer.
SERVICING PROCEDURES
The Servicer will make all reasonable efforts to collect all payments due
with respect to the Receivables and will continue such collection procedures as
it follows with respect to all comparable motor vehicle receivables that it
services for itself or others, in a manner consistent with the Sale and
Servicing Agreement. If the Servicer determines that eventual payment in full of
a Receivable is unlikely, the Servicer will follow its normal collection
practices and procedures, including the repossession and disposition of the
Financed Vehicle securing the Receivable at a public or private auction, or the
taking of any other action permitted by applicable law.
The Servicer will not be required under the Sale and Servicing Agreement to
make any advances of principal or interest due on any Receivable.
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COLLECTIONS
The Servicer or the Seller, as the case may be, will remit or cause to be
remitted the aggregate Purchase Amount of any Receivables required to be
purchased by it from the Trust to the Collection Account. Under the Sale and
Servicing Agreement, the amounts of any recoveries in respect of any Receivables
repurchased by Dealers pursuant to any Dealer Recourse constitute collections on
the Receivables.
For purposes of the Sale and Servicing Agreement, collections on a
Receivable (other than a Receivable purchased by the Servicer or the Seller)
which are not late fees or other administrative fees and expenses collected
during a Collection Period are required to be applied first to the Contract
Scheduled Payment. To the extent that such collections on a Receivable during a
Collection Period exceed the Contract Scheduled Payment on such Receivable, the
collections are required to be applied to prepay the Receivable in full. If the
collections are insufficient to prepay the Receivable in full, any partial
prepayment of principal during a Collection Period will be immediately applied
to reduce the principal balance of the Receivable during such Collection Period.
SERVICING COMPENSATION
The Servicer is entitled under the Sale and Servicing Agreement to receive
on each Payment Date a fee (the "Servicer Fee") equal to the sum of (a) the
product of one-twelfth and 2.25% (the "Servicing Fee Rate") and the Principal
Balance outstanding at the beginning of the calendar month immediately preceding
the month in which such Payment Date occurs and (b) any late fees. If the Backup
Servicer, or any other entity becomes the successor Servicer, it will receive
compensation at the Servicing Fee Rate. The Servicer will also be reimbursed for
certain expenses related to the repossession of Financed Vehicles (the "Servicer
Expenses"). The Servicer Fee and Servicer Expenses will be paid out of
collections from the Receivables pursuant to the distribution described under
"The Notes--Priority of Distribution Amounts".
The Servicer Fee and the Servicer Expenses will compensate the Servicer for
performing the functions of a third-party servicer of the Receivables as an
agent for the Trust, including collecting and posting all payments, responding
to inquiries of Obligors on the Receivables, investigating delinquencies,
reporting any required tax information to Obligors, paying costs of collections
and monitoring the collateral. In addition, the Servicer Fee will (a) compensate
the Servicer for administering the Receivables, including accounting for
collections, furnishing monthly and annual statements with respect to payments
and generating federal income tax information, if any, and (b) reimburse the
Servicer for certain taxes, independent accountants' fees and other costs
incurred in connection with administering the Receivables.
BACKUP SERVICING AND BACKUP SERVICING COMPENSATION
Pursuant to the Sale and Servicing Agreement, The Chase Manhattan Bank will
perform certain duties as the Backup Servicer. In addition, following the
resignation or removal of the Servicer, the Backup Servicer has agreed to serve
as the successor Servicer under the Sale and Servicing Agreement. The Backup
Servicer will be required to carry out its duties in accordance with the
customary and usual procedures of institutions which perform similar functions.
On each Payment Date, the Backup Servicer will be entitled to receive a fee for
acting as Backup Servicer (the "Backup Servicer Fee") equal to one-twelfth the
product of 1.75 basis points and the outstanding Note Balance. In addition,
following the resignation or removal of the Servicer, the Backup Servicer will
be reimbursed for certain costs and expenses associated with the transition of
the Backup Servicer to Servicer (the "Servicer Transition Expenses").
The Sale and Servicing Agreement will provide that the Backup Servicer may
not resign from its obligations and duties as Backup Servicer thereunder, except
upon determination that, by reason of a change in legal requirements, the Backup
Servicer's performance of such duties would be in violation of such legal
requirements and the Controlling Party does not elect to waive the obligations
of the Backup
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Servicer to perform the duties that render it legally unable to act or to
delegate those duties to another Person. No such resignation will become
effective until a successor backup servicer has assumed the Backup Servicer's
servicing obligations and duties under the Sale and Servicing Agreement.
Notwithstanding the foregoing, the Backup Servicer may resign for any reason,
provided an entity acceptable to the Controlling Party has assumed the Backup
Servicer's obligations and duties under the Sale and Servicing Agreement prior
to the effectiveness of any such resignation and the Rating Agency Condition is
satisfied with respect thereto.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that the Servicer will cause a
firm of nationally recognized independent certified public accountants to
deliver to the Servicer, on or before June 30 of each year, commencing June 30,
1999, a statement to the effect that such firm has audited the books and records
of the Servicer and issued its report thereon from the fiscal year ended on the
immediately preceding March 31. The Servicer will deliver a copy of such report
to the Indenture Trustee, the Insurer, the Backup Servicer and the Rating
Agencies.
The Sale and Servicing Agreement will also provide for delivery to the
Indenture Trustee, the Insurer, the Backup Servicer and the Rating Agencies, on
or before June 30 of each year, commencing June 30, 1999, of a certificate
signed by an officer of the Servicer stating that, to such officer's knowledge,
the Servicer has fulfilled its obligations under the Sale and Servicing
Agreement throughout the preceding 12 months (or, for the initial report, for
such longer period as will have elapsed from the date of issuance of the Notes)
or, if there has been a default in the fulfillment of any such obligation,
describing each such default. A copy of such certificate may be obtained by any
Noteholder by a request in writing to the Indenture Trustee addressed to the
Corporate Trust Office.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement will provide that the Servicer may not
resign from its obligations and duties as Servicer thereunder, except (i) upon
determination that, by reason of a change in legal requirements, the Servicer's
performance of such duties would be in violation of such legal requirements and
(ii) the Insurer, or, if an Insurer Default has occurred and is continuing, a
Note Majority, does not elect to waive the obligations of the Servicer to
perform the duties that render it legally unable to act or to delegate those
duties to another Person. No such resignation will become effective until the
Backup Servicer or a successor servicer has assumed the Servicer's servicing
obligations and duties under the Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither the
Servicer nor any of its stockholders, directors, officers, employees or agents,
will be liable to the Trust or the Indenture Trustee for taking any action or
for refraining from taking any action pursuant to the Sale and Servicing
Agreement; provided, however, that neither the Servicer nor any such Person will
be protected against any liability that would otherwise be imposed by reason of
the Servicer's material breach of the Sale and Servicing Agreement, willful
misfeasance, bad faith or negligence (other than errors in judgment) in the
performance of its duties.
Subject to the provisions of the Sale and Servicing Agreement, any entity
into which the Servicer may be merged or consolidated, resulting from any
merger, conversion or consolidation to which the Servicer is a party, which
acquires all or substantially all of the assets of the Servicer, or succeeding
to the business of the Servicer, which in any case assumes the obligations of
the Servicer, will be the successor of the Servicer, under the Sale and
Servicing Agreement. The Servicer may at any time perform certain specific
duties as Servicer through other subcontractors with the prior written consent
of the Insurer.
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SERVICER TERMINATION EVENTS; RIGHTS UPON SERVICER TERMINATION EVENT
A "Servicer Termination Event" under the Sale and Servicing Agreement will
include: (i) the Servicer's failure to make deposits into the Collection Account
or to deliver to the Indenture Trustee any proceeds or payments payable to the
Noteholders or the Insurer required to be so deposited or delivered in
accordance with the Sale and Servicing Agreement, which failure continues
unremedied for a period of two Business Days (one Business Day with respect to
payment of Purchase Amounts) after the earlier of (x) discovery of such failure
by the Servicer and (y) notice of such failure is given by the Indenture Trustee
to the Servicer; (ii) the Servicer's failure or failures to satisfy any other
covenant or agreement set forth in the Sale and Servicing Agreement, which
failure or failures, individually or in the aggregate, materially and adversely
affect the rights of Noteholders or the Insurer and remains uncured for a period
of 60 days after the earlier of the date on which (a) it obtains actual
knowledge of such failure or (b) it receives written notice of such failure from
(1) the Insurer or the Indenture Trustee or (2) if an Insurer Default has
occurred and is continuing, the Note Majority; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings with respect to the Servicer indicating its insolvency; (iv)
so long as an Insurer Default shall not have occurred and be continuing, the
Insurer shall not have delivered an extension notice, (v) so long as an Insurer
Default shall not have occurred and be continuing, an Insurance Agreement Event
of Default shall have occurred or an event of default under any other Insurance
Agreement relating to any series of securities shall have occurred; (vi) a claim
is made under the Policy; or (vii) any representation or warranty shall prove to
be incorrect in any material respect and such incorrectness shall have a
material adverse effect on the interest of the Trust, the Noteholders or the
Insurer in the Receivables, which has not been cured within 30 days.
"Insurer Default" shall mean the occurrence and continuance of any of the
following events:
(a) the Insurer shall have failed to make a payment required under the
Policy in accordance with its terms;
(b) the Insurer shall have (i) filed a petition or commenced any case or
proceeding under any provision or chapter of the United States Bankruptcy
Code or any similar federal or state law relating to the insolvency,
bankruptcy, rehabilitation, liquidation or reorganization, (ii) made a
general assignment for the benefit of its creditors, or (iii) had an
order for relief entered against it under the United States Bankruptcy
Code or any other similar federal or state law relating to insolvency,
bankruptcy, rehabilitation, liquidation or reorganization which is final
and nonappealable; or
(c) a court of competent jurisdiction, the New York Department of Justice or
other competent regulatory authority shall have entered a final and
nonappealable order, judgment or decree (i) appointing a custodian,
trustee, agent or receiver for the Insurer or for all or any material
portion of its property or (ii) authorizing the taking of possession by a
custodian, trustee, agent or receiver of the Insurer (or the taking of
possession of all or any material portion of the property of the
Insurer).
As long as a Servicer Termination Event under the Sale and Servicing
Agreement remains unremedied, (x) provided that no Insurer Default shall have
occurred and be continuing, the Insurer in its sole and absolute discretion, or
(y) if an Insurer Default shall have occurred and be continuing, then the Note
Majority may terminate all of the rights and obligations of the Servicer under
the Sale and Servicing Agreement. Upon such termination, all authority, power,
obligations and responsibilities of the Servicer under the Sale and Servicing
Agreement (other than obligations and responsibilities arising prior to such
termination) will automatically pass to the Backup Servicer (or such other
successor servicer appointed by the Insurer, provided that no Insurer Default
shall have occurred and be continuing).
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WAIVER OF PAST DEFAULTS
As set forth under "Certain Matters Regarding Servicer--Waiver of Past
Defaults" in the Prospectus, the Insurer may, so long as no Insurer Default
shall have occurred and be continuing, on behalf of the Noteholders, waive any
default by the Servicer in the performance of its obligations under the Sale and
Servicing Agreement and its consequences. No such waiver will impair the
Noteholders' rights with respect to subsequent defaults.
AMENDMENT
The Sale and Servicing Agreement may be amended by the Issuer, the Seller,
the Servicer, the Company, the Indenture Trustee and the Backup Servicer, with
the prior written consent of the Insurer (so long as no Insurer Default has
occurred and is continuing) but without the consent of any of the
Certificateholders or the Noteholders, to cure any ambiguity, to correct or
supplement any provision therein or for the purpose of adding any provision to
or changing in any manner or eliminating any provision thereof or modifying in
any manner the rights of the Noteholders; PROVIDED, HOWEVER, that such action
must not, as evidenced by an opinion of counsel, adversely affect in any
material respect the interests of the Noteholders. The Seller, the Issuer, the
Servicer, the Company, the Backup Servicer and the Indenture Trustee may also
amend the Sale and Servicing Agreement with the prior written consent of the
Insurer (so long as no Insurer Default has occurred and is continuing) and a
Note Majority to add, change or eliminate any provisions of the Sale and
Servicing Agreement or to modify the rights of the Noteholders; provided,
however, that such action will not: (i) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, collections of payments on
Receivables or distributions that are required to be made for the benefit of the
Noteholders or Certificateholders; (ii) reduce the aforesaid percentage of the
Noteholders or Certificateholders which is required to consent to any such
amendment, without, in either case, the consent of the Holders of all Notes and
Certificates outstanding; PROVIDED, FURTHER, that if an Insurer Default has
occurred and is continuing, such action shall not materially adversely affect
the interest of the Insurer; or (iii) result in a downgrade or withdrawal of the
then current rating of the Notes by the Rating Agencies without the consent of
each Noteholder. The above should in no way be construed to require the consent
of the Noteholders or Certificateholders to a reduction in the Target
Overcollateralization Amount or the required level of the Class A Reserve
Account.
LIST OF NOTEHOLDERS; VOTING OF NOTES
Upon written request by three or more Noteholders or any one or more
Noteholders with an aggregate principal balance evidencing not less than 25% of
the Note Balance and upon compliance by such Noteholders with certain other
provisions of the Sale and Servicing Agreement, the Indenture Trustee will
afford such Noteholders, within five Business Days after receipt of such
request, access during business hours to the current list of Noteholders for
purposes of communicating with other Noteholders with respect to their rights
under the Sale and Servicing Agreement and the Notes.
If Triad, the Seller or any of their affiliates owns any Notes, such Note
will not have voting rights under the Sale and Servicing Agreement or the other
Related Documents.
The Sale and Servicing Agreement will not provide for the holding of any
annual or other meetings of Noteholders.
TERMINATION
The respective obligations of the Issuer, the Seller, the Servicer, the
Company, the Backup Servicer and the Indenture Trustee pursuant to the Sale and
Servicing Agreement will terminate upon the latest of: (i) the maturity or other
liquidation of the last Receivable and the payment to Noteholders and the
Insurer of amounts required to be paid under the Notes, the Indenture and the
Insurance Agreement; (ii) the expiration of the Policy in accordance with its
terms; or (iii) the payment to Noteholders of all amounts
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required to be paid to them pursuant to the Indenture and the expiration of any
preference period related thereto.
In order to avoid excessive administrative expense, the Servicer has the
option to purchase from the Trust, as of the last day of any month as of which
the Aggregate Principal Balance with respect to the Receivables is less than or
equal to 10% of the Original Pool Balance, all remaining Receivables at a price
equal to the aggregate of the Purchase Amounts thereof as of such last day, plus
the appraised value of any other property held by the Trust (with the prior
written consent of the Insurer, if such redemption would result in a claim under
the Policy or if such redemption would result in any amount owing to the Insurer
remaining unpaid). The Indenture Trustee will give written notice of termination
to each Noteholder of record. The final distribution to any Noteholder will be
made only upon surrender and cancellation of such Holder's Note at the office or
agency of the Indenture Trustee specified in the notice of termination;
PROVIDED, HOWEVER, that if on the Payment Date upon which final payment of the
Notes is to be made, there are five or fewer Noteholders of record, such final
payment to such Noteholder will be made by check or wire transfer as described
above and each such Noteholder shall present and surrender its Note at the
office or agency designated in the notice of final distribution referred to
above within 30 days after such Payment Date.
THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy.
Simultaneously with the issuance of the Class A Notes, the Insurer will
deliver the Policy to the Indenture Trustee for the benefit of each Class A
Noteholder. Under the Policy, the Insurer will unconditionally and irrevocably
guarantee to the Indenture Trustee, on each Payment Date, for the benefit of
each Class A Noteholder the full and complete payment of (i) Scheduled Payments
(as defined below) on the Class A Notes and (ii) the amount of any Scheduled
Payment which subsequently is avoided in whole or in part as a preference
payment under applicable law. In the event the Indenture Trustee fails to make a
claim under the Policy, Class A Noteholders do not have the right to make a
claim directly under the Policy, but may sue to compel the Indenture Trustee to
do so.
"Scheduled Payments" means payments which are scheduled to be made on the
Class A Notes during the term of the Policy in accordance with the original
terms of the Class A Notes when issued and without regard to any subsequent
amendment or modification of the Class A Notes, the Sale and Servicing Agreement
or the Indenture that has not been consented to by the Insurer, which "Scheduled
Payments", are (i) the Class A Interest Payment Amount, with respect to a
Payment Date and (ii) the Class A Principal Payment Amount with respect to a
Payment Date. Scheduled Payments do not include payments which become due on an
accelerated basis as a result of (a) a default by the Trust, (b) an election by
the Trust to pay principal on an accelerated basis, (c) the occurrence of an
Event of Default under the Indenture or (d) any other cause, unless the Insurer
elects, in its sole discretion, to pay in whole or in part such principal due
upon acceleration, together with any accrued interest to the date of
acceleration. In the event the Insurer does not so elect, the Policy will
continue to guarantee Scheduled Payments due on the Class A Notes in accordance
with their original terms. Scheduled Payments shall not include (x) any portion
of a Class A Interest Payment Amount due to the Class A Noteholders because the
appropriate notice and certificate for payment in proper form was not timely
Received (as defined below) by the Insurer, (y) any portion of a Class A
Interest Payment Amount due to Class A Noteholders representing interest on any
Class A Interest Carryover Shortfall or (z) any Class A Mandatory Redemption
Amounts, unless the Insurer elects, in its sole discretion, to pay such amount
in whole or in part. Scheduled Payments shall not include, any amounts due in
respect of the Class A Notes attributable to any increase in interest rate,
penalty or other sum payable by the Trust by reason of any default or event of
default in respect of the Class A Notes or by reason of any deterioration of the
creditworthiness of the Trust nor shall coverage be provided under the Policy in
respect of any taxes, withholding or other charge imposed with respect to any
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Noteholder by any governmental authority due in connection with the payment of
any Scheduled Payment to a Class A Noteholder.
Payment of claims on the Policy made in respect of Scheduled Payments will
be made by the Insurer following Receipt (as defined below) by the Insurer of
the appropriate notice for payment on the later to occur of (i) 12:00 noon, New
York City time, on the third Business Day following Receipt of such notice for
payment, and (ii) 12:00 noon, New York City time, on the date on which such
payment was due on the Class A Notes.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, the Insurer shall cause such payment to be made on the later of (a)
the date when due to be paid pursuant to the Order referred to below or (b) the
first to occur of (i) the fourth Business Day following Receipt by the Insurer
from the Indenture Trustee of (A) a certified copy of the order (the "Order") of
the court or other governmental body that exercised jurisdiction to the effect
that the Class A Noteholder is required to return Scheduled Payments made with
respect to the Class A Notes during the term of the Policy because such payments
were avoidable as preference payments under applicable bankruptcy law, (B) a
certificate of the Class A Noteholder that the Order has been entered and is not
subject to any stay and (C) an assignment duly executed and delivered by the
Class A Noteholder, in such form as is reasonably required by the Insurer and
provided to the Class A Noteholder by the Insurer, irrevocably assigning to the
Insurer all rights and claims of the Class A Noteholder relating to or arising
under the Class A Notes against the Trust or otherwise with respect to such
preference payment, or (ii) the date of Receipt (as defined below) by the
Insurer from the Indenture Trustee of the items referred to in clauses (A), (B)
and (C) above if, at least four Business Days prior to such date of Receipt, the
Insurer shall have Received (as defined below) written notice from the Indenture
Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Indenture Trustee or any Class A Noteholder directly (unless a
Class A Noteholder has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Indenture Trustee for distribution to
such Class A Noteholder upon proof of such payment reasonably satisfactory to
the Insurer). In connection with the foregoing, the Insurer shall have the
rights provided pursuant to the Sale and Servicing Agreement including, without
limitation, the right to direct all matters relating to any preference claim and
subrogation to the rights of the Indenture Trustee and each Class A Noteholder
in the conduct of any proceeding with respect to a preference claim.
OTHER PROVISIONS OF THE POLICY
The terms "Receipt" and "Received" with respect to the Policy shall mean
actual delivery to the Insurer and to its fiscal agent, if any, prior to 12:00
noon, New York City time, on a Business Day; delivery either on a day that is
not a Business Day or after 12:00 noon, New York City time, shall be deemed to
be Received on the next succeeding Business Day. If any notice or certificate
given under the Policy by the Indenture Trustee is not in proper form or is not
properly completed, executed or delivered, it shall be denied not to have been
Received, and the Insurer or its fiscal agent shall promptly so advise the
Indenture Trustee, and the Indenture Trustee may submit an amended notice.
Under the Policy, "Business Day" means any day other than a Saturday,
Sunday, legal holiday or other day on which commercial banking institutions in
Wilmington, Delaware, the City of New York or any other location of any
successor Servicer, successor Owner Trustee or successor Indenture Trustee are
authorized or obligated by law, executive order or governmental decree to be
closed.
The Insurer's obligations under the Policy in respect of Scheduled Payments
shall be discharged to the extent funds are transferred to the Indenture Trustee
as provided in the Policy whether or not such funds are properly applied by the
Indenture Trustee.
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The Insurer shall be subrogated to the rights of each Class A Noteholder to
receive payments of principal and interest to the extent of any payment by the
Insurer under the Policy.
Claims under the Policy constitute direct, unsecured and unsubordinated
obligations of the Insurer ranking not less than pari passu with other unsecured
and unsubordinated indebtedness of the Insurer for borrowed money. Claims
against the Insurer under the Policy and each other financial guaranty insurance
policy issued thereby constitute pari passu claims against the general assets of
the Insurer. The terms of the Policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
Trust. The Policy may not be canceled or revoked prior to distribution in full
of all Scheduled Payments with respect to the Notes. THE POLICY IS NOT COVERED
BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE
NEW YORK INSURANCE LAW. The Policy is governed by the laws of the State of New
York.
It is a condition to issuance that the Class A Notes be rated AAA by S&P and
Aaa by Moody's. The ratings by the Rating Agencies of the Class A Notes will be
based on the issuance of the Policy. A rating is not a recommendation to
purchase, hold or sell Class A Notes. In the event that the rating initially
assigned to any of the Class A Notes is subsequently lowered or withdrawn for
any reason, including by reason of a downgrading of the claims-paying ability of
the Insurer, no person or entity will be obligated to provide any additional
credit enhancement with respect to the Class A Notes. Any reduction or
withdrawal of a rating may have an adverse effect on the liquidity and market
price of the Notes. See "Ratings" herein.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain Federal income tax
consequences of the purchase, ownership and disposition of the Class A Notes.
This discussion does not address every aspect of the Federal income tax laws
that may be relevant to holders of Class A Notes in light of their personal
investment circumstances or to certain types of Class A Noteholders subject to
special treatment under the Federal income tax laws (including, without
limitation, banks and thrifts, insurance companies, dealers in securities,
foreign investors, regulated investment companies, individuals, trusts and
estates and pass-through entities, the equity holders of which are any of the
foregoing). This discussion is directed to prospective purchasers who purchase
Class A Notes in the initial distribution thereof and who hold the Class A Notes
as "capital assets" within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code"). Prospective purchasers 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 Class A 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 Issuer 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 Revenue Service (the "IRS") or
the courts. Moreover, there are no cases or IRS rulings on similar transactions
with terms similar to those of the Class A 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 ISSUER
Dechert Price & Rhoads will deliver its opinion that the Issuer will not be
classified as an association (or publicly traded partnership) taxable as a
corporation for Federal income tax purposes. This opinion will be based on the
assumption of compliance by all parties with the terms of the Trust Agreement
and related documents.
If the Issuer were taxable as a corporation for Federal income tax purposes,
the Issuer would be subject to corporate income tax on its taxable income. The
Issuer's taxable income would include all its
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income on the Receivables, possibly reduced by its interest expense on the Class
A Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Class A Notes and distributions on the Certificates, and
Certificateholders (and possibly Class A Noteholders) could be liable for any
such tax that is not paid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE CLASS A NOTES
TREATMENT OF THE CLASS A NOTES AS INDEBTEDNESS. The Issuer will agree, and
the Class A Noteholders will agree by their purchase of Class A Notes, to treat
the Class A Notes as debt for Federal, state and local income and franchise tax
purposes. Federal Tax Counsel will advise the Issuer that in its opinion the
Class A Notes will be classified as debt for Federal income tax purposes.
OID, INDEXED SECURITIES, ETC. It is not anticipated that the Class A Notes
will be issued with original issue discount ("OID") within the meaning of
Section 1273 of the Code.
INTEREST INCOME ON THE CLASS A NOTES. Based on the above assumptions,
except as discussed below, the Class A Notes will not be considered issued with
OID. If the Class A Notes were treated as being issued with OID, the excess of
the "stated redemption price at maturity" of the Class A Notes over their issue
price would constitute OID. The stated interest thereon will be taxable to a
Class A Noteholder as ordinary interest income when received or accrued in
accordance with such Class A Noteholder's method of tax accounting. Under the
OID Regulations, a holder of a Class 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 Class A Note. A purchaser who buys a Class 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.
SALE OR OTHER DISPOSITION. If a Class A Noteholder sells a Class 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 Class A Note. The adjusted tax basis of a Class A Note to a particular Class
A Noteholder will equal the holder's cost for the Class A Note, increased by any
market discount, and gain previously included by such Class A Noteholder in
income with respect to the Class A Note and decreased by the amount of premium
(if any) previously amortized and by the amount of principal payments previously
received by such Class A Noteholder with respect to such Class A Note. Any such
gain or loss will 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.
Alternatively, if, contrary to the opinion of Federal Tax Counsel, the
Issuer were treated as a publicly traded partnership taxable as a corporation,
it would be subject to Federal income tax (and any similar state or local taxes)
at corporate tax rates on its taxable income generated by ownership of the
Receivables. Such a tax could result in reduced distributions to Class A
Noteholders. Distributions to Class A Noteholders generally would not be
deductible in computing the taxable income of the publicly traded partnership.
In addition, all or a portion of any such distributions would, to the extent of
the current and accumulated earnings and profits of such corporation, be treated
as dividend income to the Class A Noteholders, and in the case of Class A
Noteholders that are foreign persons would be subject to withholding tax.
FOREIGN HOLDERS. Interest paid (or accrued) to a Class 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) does not own actually or constructively 10% or more of the
capital or profits of interests in the Issuer and is not actually or
constructively a "10 percent shareholder"
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of the Trust, Triad or the Seller (including a 10% owner of the Certificates) or
"controlled foreign corporation" with respect to which the Issuer, Triad, or the
Seller is a "related person" within the meaning of the Code and (ii) provides
the Trustee or other person who is otherwise required to withhold U.S. tax with
respect to the Class A Notes with an appropriate statement (on Form W-8 or a
similar form), signed under penalties of perjury, certifying that the beneficial
owner of the Class A Note is a Foreign Person and providing the foreign person's
name and address. If the information provided in this statement changes, the
Foreign Person must inform the Issuer within 30 days of such change. If a Class
A Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
Foreign Person that owns the Class A Note. Under recently finalized Treasury
regulations (the "Final Regulations") this statement requirement may also be
satisfied with certain other documentary evidence with respect to an offshore
account or through certain foreign intermediaries. Those regulations will apply
for payments made after December 31, 1999. If such interest is not portfolio
interest, then it will be subject to United States Federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
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 (a) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (b) 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.
If a Foreign Person is engaged in a trade or business and interest on the
Class A 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 if such Foreign Person properly executed IRS Form 4224 annually. 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.
If the IRS were to contend successfully that the Class A Notes are interests
in a partnership (not taxable as a corporation), a Class A Noteholder that is a
foreign person might be required to file a U.S. Federal income tax return and
pay tax on its share of partnership income at regular U.S. rates, including the
branch profits tax, and would be subject to withholding tax on its share of
partnership income. If the Class A Notes were recharacterized as interests in a
"publicly traded partnership" taxable as a corporation, distributions on the
Class A Notes treated as dividends would generally be subject to withholding tax
on the gross amount of such dividends at the rate of 30% unless such rate were
reduced by an applicable treaty. If the Class A Notes are recharacterized as
equity interests in a partnership, or, contrary to the opinion of Federal Tax
Counsel, in a publicly traded partnership taxable as a corporation, any taxes
required to be so withheld will be treated for all purposes of the Class A Notes
as having been paid to the related Class A Noteholder.
BACKUP WITHHOLDING. Each holder of a Class 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 Class A
Noteholder fail to provide the required certification, the Issuer 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 should
consult their own advisors as to the application of the Final Regulations.
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CERTAIN STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences" above, potential purchasers should consider the
state income tax consequences of the acquisition, ownership and disposition of
the Class A Notes. State income tax law may vary substantially from state to
state, and this discussion does not purport to describe any aspect of the income
tax laws of any state. Therefore, potential purchasers should consult their own
tax advisors with respect to the various tax consequences of an investment in
the Class A Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension, profit
sharing, or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans subject to those provisions, and
entities deemed to hold plan assets of such plans (each, a "Benefit Plan"), from
engaging in certain transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to the Benefit Plan. A violation of these "prohibited transaction" rules
may generate excise tax and other penalties and liabilities under ERISA and the
Code for such persons. ERISA also imposes certain duties on persons who are
fiduciaries of Benefit Plans subject to ERISA. Under ERISA, any person who
exercises any authority or control respecting the management or disposition of
the assets of a Benefit Plan is considered to be a fiduciary of such Benefit
Plan (subject to certain exceptions not here relevant).
Certain transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchases Class A Notes if assets of the Issuer were deemed to be assets of
the Benefit Plan. Under a regulation issued by the United States Department of
Labor (the "Plan Assets Regulation"), the assets of the Issuer 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 Issuer and none of the
exceptions contained in the Plan Assets Regulation was applicable. An "equity
interest" is defined under the Plan Assets 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 Issuer believes that, at the time of their issuance the Class A
Notes should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. The debt status of the Class A Notes
could be affected subsequent to their issuance by certain changes in the
financial condition of the Issuer.
Without regard to whether Class A Notes are treated as an equity interest
under the Plan Assets Regulation, the acquisition or holding of the Class A
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Issuer, Triad, the Servicer, the Backup Servicer,
the Indenture Trustee or the Owner Trustee is or becomes a party in interest or
a disqualified person with respect to such Benefit Plan or in the event that a
subsequent transfer of a Class A Note occurs between a Benefit Plan and a party
in interest or disqualified person with respect to such Plan. Certain exemptions
from the prohibited transaction rules could be applicable to the purchase and
holding of Class A Notes by a Benefit Plan depending on the type and
circumstances of the plan fiduciary making the decision to acquire such Class A
Notes. Included among these exemptions, each of which contains several
conditions which must be satisfied before the exemption applies, are: PTCE 90-1,
regarding certain transactions entered into by insurance company pooled separate
accounts; PTCE 95-60, regarding certain transactions entered into by insurance
company general accounts; PTCE 96-23, regarding certain transactions effected by
"in-house asset managers"; PTCE 91-38 regarding certain transactions entered
into by bank collective investment funds; and PTCE 84-14, regarding certain
transactions effected by "qualified professional asset managers." By acquiring a
Class A Note, each purchaser and each transferee of a Class A Note shall be
deemed to represent and warrant that either (i) it is not acquiring a Class A
Note with the assets of a Benefit Plan; or (ii) its purchase and holding of the
Class A Notes will qualify for prohibited transaction
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exemptive relief under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14
or some other applicable exemption.
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)
may not be subject to ERISA requirements. However, governmental plans can be
subject, under federal, fiduciary, state or local law, to restrictions which are
similar to ERISA and church plans may be subject to other types of prohibited
transaction restrictions under the Code.
A Benefit Plan fiduciary considering the purchase of Class A Notes should
consult its tax and/or legal advisors regarding whether the assets of the Issuer
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential consequences.
RATINGS
It is a condition to issuance that each of the Class A-1 Notes and the Class
A-2 Notes be rated AAA by S&P and Aaa by Moody's. The ratings by the Rating
Agencies of the Class A Notes will be based on the issuance of the Policy. A
rating is not a recommendation to purchase, hold or sell Class A Notes. In the
event that the rating initially assigned to any of the Class A Notes is
subsequently lowered or withdrawn for any reason, including by reason of a
downgrading of the claims-paying ability of the Insurer, no person or entity
will be obligated to provide any additional credit enhancement with respect to
the Class A Notes. Any reduction or withdrawal of a rating may have an adverse
effect on the liquidity and market price of the Class A Notes.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated March 16, 1999 (the "Underwriting Agreement"), the Company has agreed to
cause the Trust to sell to Credit Suisse First Boston Corporation (the
"Underwriter"), and the Underwriter has agreed to purchase, all of the Class A
Notes.
Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all the Class A Notes offered
hereby, if any are taken.
The Seller has been advised by the Underwriter that the Underwriter proposes
to offer the Class A Notes from time to time for sale in negotiated transactions
or otherwise, at prices determined at the time of sale. The Underwriter may
effect such transactions by selling Class A Notes to or through dealers and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter and any purchasers of Class A
Notes for whom they may act as agents. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Class A Notes may be
deemed to be underwriters, and any discounts or commissions received by them and
any profit on the resale of Class A Notes by them may be deemed to be
underwriting discounts or commissions under the Securities Act of 1933, as
amended (the "Securities Act").
The Class A Notes are a new issue of securities with no established trading
market. The Trust has been advised by the Underwriter that it intends to make a
market in the Class A Notes, but the Underwriter is not 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 Class A
Notes.
An affiliate of the underwriter provides a warehouse facility to Triad.
The Seller has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
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<PAGE>
EXPERTS
The consolidated balance sheets of Financial Security and Subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of income,
changes in shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1997, incorporated by reference in this prospectus
supplement, have been incorporated herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the Class A Notes and certain federal
income tax and other matters will be passed upon for the Seller and Triad by
Dechert Price & Rhoads, New York, New York. Certain legal matters under
California law will be passed upon for the Seller and Triad by California
counsel, by Hudson Cook, LLP and Helen R. Kraus, General Counsel of Triad.
Certain legal matters relating to the Class A Notes will be passed upon for the
Underwriter by Stroock & Stroock & Lavan LLP, New York, New York. Certain legal
matters will be passed upon for the Insurer by Brian Mellstrom, Assistant
General Counsel to the Insurer.
S-59
<PAGE>
GLOSSARY
AGGREGATE PRINCIPAL BALANCE: With respect to the Closing Date, the Cutoff
Date Principal Balance, and with respect to any Determination Date, the sum of
the Principal Balances (computed as of the last day of the related Collection
Period end date) for all Receivables (other than Liquidated Receivables and
Purchased Receivables).
AMOUNT FINANCED: With respect to a Receivable, the aggregate amount
advanced extended under such Receivable toward the purchase price of the
Financed Vehicle and related costs, including amounts of credit extended in
respect of accessories, insurance premiums, service and warranty policies or
contracts and other items customarily financed as part of motor vehicle retail
installment contracts or promissory notes, and related costs.
AVAILABLE FUNDS: With respect to any Determination Date, the sum of (i) the
"Collected Funds" received by the Servicer during the related Collection Period,
(ii) all Purchase Amounts deposited in the Collection Account for the related
Collection Period, (iii) all income received from investments of funds in the
Collection Account during the related Collection Period, (iv) the Monthly
Capitalized Interest Amount with respect to such Payment Date, (v) the Insurer
Optional Deposit, if any, and (vi) any remaining Pre-Funded Amount applied to
the mandatory redemption of Notes.
CERTIFICATEHOLDER: The holder of a Certificate
CLASS: A class of Notes.
CLASS A NOTE BALANCE: The sum of (i) the Class A-1 Note Balance and (ii)
the Class A-2 Note Balance.
CLASS A-1 FINAL SCHEDULED PAYMENT DATE: June 17, 2002, or, if such day is
not a Business Day, the next succeeding Business Day.
CLASS A-2 FINAL SCHEDULED PAYMENT DATE: September 17, 2005, or, if such day
is not a Business Day, the next succeeding Business Day.
CLASS B NOTE BALANCE: An amount equal to $12,600,000 on the Closing Date
and thereafter, an amount equal to the initial Class B Note Balance reduced by
all amounts distributed to the Class B Noteholders that are allocable to
principal.
COLLECTED FUNDS: With respect to any Determination Date, the amount of
funds in the Collection Account representing collections on the Receivables
received by the Servicer during the related Collection Period, including all
Liquidation Proceeds collected during the related Collection Period (but
excluding any Purchase Amounts) and all amounts paid by Dealers under Dealer
Agreements or Dealer Assignments with respect to the Receivables during the
related Collection Period.
COLLECTION PERIOD: With respect to any Payment Date or Determination Date,
the calendar month preceding the month in which such Payment Date or
Determination Date occurs.
CONTROLLING PARTY: The Insurer, so long as an Insurer Default shall not
have occurred and be continuing, otherwise, the Indenture Trustee for the
benefit of the Noteholders; provided, however, that the Owner Trustee for the
benefit of the Certificateholder will be the Controlling Party after all unpaid
principal and interest on the Notes shall have been paid in full and all amounts
due to the Insurer have been paid and the Policy has expired in accordance with
its terms.
CORPORATE TRUST OFFICE: The office of the Indenture Trustee at which its
corporate trust business shall be principally administered, which office as of
the date hereof is located at 450 West 33rd Street, New York, New York 10001.
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<PAGE>
CRAM DOWN LOSS: With respect to a Receivable, if a court of appropriate
jurisdiction in an insolvency proceeding shall have issued an order reducing the
amount owed on a Receivable or otherwise modifying or restructuring the Contract
Scheduled Payments to be made on a Receivable, an amount equal to (i) the excess
of the Principal Balance of such Receivable immediately prior to such order over
the Principal Balance of such Receivable as so reduced and/or (ii) if such court
shall have issued an order reducing the effective rate of interest on such
Receivable, the net present value (using as the discount rate the higher of the
APR on such Receivable or the rate of interest, if any, specified by the court
in such order) of the Contract Scheduled Payments as so modified or
restructured. A Cram Down Loss shall be deemed to have occurred on the date of
issuance of such order.
CUTOFF DATE: With respect to the Initial Receivables, the Initial Cutoff
Date, and with respect to the Subsequent Receivables, the Subsequent Cutoff
Date.
DEALER AGREEMENT: An agreement generally between Triad and a Dealer
relating to the sale of retail installment contracts to Triad and all documents
and instruments relating thereto.
DEALER ASSIGNMENT: With respect to a Receivable, the executed assignment
conveying such Receivable to Triad.
DEFICIENCY CLAIM AMOUNT: With respect to any Determination Date, the
positive difference, if any, of (i) the sum of the related Scheduled Payments
plus the amounts described in clauses (i), (ii) and (vi) under the heading "The
Notes--Priority of Distribution Amounts" minus (ii) the amount of Available
Funds with respect to such Determination Date, which amount will be withdrawn
from the Class A Reserve Account to the extent funds are on deposit therein in
accordance with the terms of the Class A Reserve Account Agreement and deposited
into the Collection Account on the related Payment Date.
DETERMINATION DATE: With respect to a Collection Period, the 5th Business
Day preceding the Payment Date in the next calendar month; provided, however
that the first Determination Date will be the Closing Date.
HOLDER OR NOTEHOLDER: The Person in whose name a Note is registered in the
Note Register.
LIQUIDATION PROCEEDS: With respect to a Liquidated Receivable, (i) proceeds
from the disposition of Financed Vehicles securing the Liquidated Receivables,
(ii) any insurance proceeds or rebates, or (iii) other monies received from the
Obligor or otherwise, less amounts required to be refunded to the Obligor.
MANAGED RECEIVABLE: Any retail installment contract (including any related
promissory note) for a Financed Vehicle, and all rights and obligations
thereunder, generally originated by and currently serviced by Triad for
Obligors.
NOTE BALANCE: The sum of the Class A Note Balance and Class B Note Balance.
NOTE MAJORITY: As of any date of determination, Holders of Class A-1 Notes
and Class A-2 Notes and Class B Notes representing more than 50% of the Note
Balance.
PAYMENT AMOUNT: With respect to a Payment Date, the sum of (i) the
Available Funds as of the last day of a Collection Period, plus (ii) the
Deficiency Claim Amount, if any, with respect to such Payment Date.
PERSON: Any legal person, including any individual, corporation, limited
liability company, partnership, joint venture, estate, association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof or any other entity.
PURCHASED RECEIVABLE: A Receivable that was purchased as of the close of
business on the last day of a Collection Period by the Seller or the Servicer as
the result of the violation of certain representations or
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<PAGE>
warranties of the Seller under the Sale and Servicing Agreement or a breach by
the Servicer of certain of the Servicer's obligations.
RATING AGENCY CONDITION: With respect to any action, that the Rating Agency
has been given prior notice thereof and that the Rating Agency has notified
Triad, the Seller, the Servicer and the Indenture Trustee in writing that such
action will not result in a reduction or withdrawal of the then current rating
of the Notes.
SALE AND SERVICING AGREEMENT: The Sale and Servicing Agreement between
Triad, in its individual capacity and as Servicer, Asset Backed Securities
Corporation, as Company, Triad Auto Receivables Owner Trust 1999-1 as purchaser,
and The Chase Manhattan Bank, as Indenture Trustee and Backup Servicer.
SERVICER'S CERTIFICATE: With respect to each Collection Period, a
certificate, completed by and executed on behalf of the Servicer, in accordance
with the applicable Sale and Servicing Agreement provisions.
SERVICER RECEIVABLES FILES: The following documents or instruments in the
Servicer's possession with respect to each Receivable: (i) documents evidencing
or relating to any Insurance Policy; and (ii) any and all other documents (in
original or electronic form) that the Servicer keeps on file in accordance with
its customary procedures relating to the individual Receivable, Obligor or
Financed Vehicle.
STATE: Any state of the United States or the District of Columbia.
TRANSACTION DOCUMENTS: The Sale and Servicing Agreement, the Indenture, the
Trust Agreement, the Notes, the Receivables Purchase Agreement, the Underwriting
Agreement and the other agreements executed in connection with the closing of
the transactions described herein.
TRUST AGREEMENT: The Trust Agreement between Asset Backed Securities
Corporation, the Certificateholder, Triad, and Wilmington Trust Company, as
Owner Trustee.
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<PAGE>
INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and the pages on which the definitions of such terms may be found.
<TABLE>
<S> <C>
ABS.............................................................................. S-26
ABS Tables....................................................................... S-26
ACS.............................................................................. S-14
Actuarial Receivable............................................................. S-19
Additional Funds Available....................................................... S-33
Aggregate Principal Balance...................................................... S-60
Amount Financed.................................................................. S-60
Available Funds.................................................................. S-60
Backup Servicer.................................................................. S-10
Backup Servicer Fee.............................................................. S-48
Bankruptcy Code.................................................................. S-18
Benefit Plan..................................................................... S-57
Business Day..................................................................... S-53
Capital Assets................................................................... S-54
Capitalized Interest Account..................................................... S-47
Certificate...................................................................... S-10
Certificateholder................................................................ S-60
CFN.............................................................................. S-10
Class............................................................................ S-60
Class A Mandatory Redemption Amount.............................................. S-32
Class A Notes.................................................................... S-10
Class A Note Balance............................................................. S-60
Class A Overcollateralization Amount............................................. S-33
Class A Interest Carryover Shortfall............................................. S-33
Class A Interest Payment Amount.................................................. S-33
Class A Principal Payment Amount................................................. S-34
Class A Reserve Account.......................................................... S-40
Class A Target Overcollateralization Amount...................................... S-34
Class A-1 Final Scheduled Payment Date........................................... S-60
Class A-1 Interest Carryover Shortfall........................................... S-34
Class A-1 Interest Payment Amount................................................ S-34
Class A-1 Mandatory Redemption Amount............................................ S-34
Class A-1 Notes.................................................................. S-10
Class A Note Balance............................................................. S-60
Class A-1 Note Balance........................................................... S-37
Class A-1 Note Factor............................................................ S-44
Class A-1 Principal Carryover Shortfall.......................................... S-34
Class A-1 Principal Payment Amount............................................... S-34
Class A-2 Final Scheduled Payment Date........................................... S-60
Class A-2 Interest Carryover Shortfall........................................... S-34
Class A-2 Interest Payment Amount................................................ S-34
Class A-2 Mandatory Redemption Amount............................................ S-35
Class A-2 Notes.................................................................. S-10
Class A-2 Note Balance........................................................... S-37
Class A-2 Note Factor............................................................ S-44
Class A-2 Principal Carryover Shortfall.......................................... S-35
Class A-2 Principal Payment Amount............................................... S-35
Class B Notes.................................................................... S-10
Class B Note Balance............................................................. S-60
</TABLE>
S-63
<PAGE>
<TABLE>
<S> <C>
Class B Interest Carryover Shortfall............................................. S-35
Class B Interest Payment Amount.................................................. S-35
Class B Principal Payment Amount................................................. S-35
Clean-up Call.................................................................... S-4
Closing Date..................................................................... S-10
Code............................................................................. S-54
Collected Funds.................................................................. S-60
Collection Account............................................................... S-46
Collection Period................................................................ S-60
Company.......................................................................... S-10
Contract Scheduled Payment....................................................... S-35
Contracts........................................................................ S-12
Controlled Foreign Corporation................................................... S-55
Controlling Party................................................................ S-60
Corporate Trust Office........................................................... S-60
Cram Down Loss................................................................... S-61
CTS.............................................................................. S-29
Cutoff Date...................................................................... S-61
Dealer Agreement................................................................. S-61
Dealer Assignment................................................................ S-61
Dealer Recourse.................................................................. S-12
Defaulted Receivable............................................................. S-35
Deficiency Claim Amount.......................................................... S-61
Determination Date............................................................... S-61
Disqualified Persons............................................................. S-57
Draw Date........................................................................ S-35
DTC.............................................................................. S-32
Equity Interest.................................................................. S-57
Events of Default................................................................ S-43
Excess Overcollateralization Amount.............................................. S-35
Exchange Act..................................................................... S-31
Final Regulations................................................................ S-56
Financed Vehicles................................................................ S-12
Financial Security............................................................... S-29
Foreign Person................................................................... S-55
Funding Period................................................................... S-47
S-32,
Holder........................................................................... S-61
Holdings......................................................................... S-29
Indenture........................................................................ S-11
Indenture Trustee................................................................ S-10
In-house Asset Managers.......................................................... S-57
Initial Cutoff Date.............................................................. S-11
Initial Financed Vehicles........................................................ S-11
Initial Pre-Funded Amount........................................................ S-47
Initial Receivables.............................................................. S-11
Insurance Agreement Indenture Cross Defaults..................................... S-43
Insurer.......................................................................... S-12
Insurer Default.................................................................. S-50
Insurer Optional Deposit......................................................... S-36
IRS.............................................................................. S-54
Issuer........................................................................... S-10
Liquidated Receivable............................................................ S-36
Liquidation Proceeds............................................................. S-61
</TABLE>
S-64
<PAGE>
<TABLE>
<S> <C>
Lockbox Account.................................................................. S-46
Lockbox Bank..................................................................... S-46
Managed Receivable............................................................... S-61
Mandatory Redemption Date........................................................ S-47
Monthly Capitalized Interest Amount.............................................. S-47
Moody's.......................................................................... S-4
Non-prime Borrowers.............................................................. S-13
Note Balance..................................................................... S-61
Note Distribution Account........................................................ S-47
Note Majority.................................................................... S-61
S-32,
Noteholder....................................................................... S-61
Notes............................................................................ S-10
Obligors......................................................................... S-11
OC Stabilization Date............................................................ S-36
OID.............................................................................. S-55
Order............................................................................ S-53
Original Pool Balance............................................................ S-33
Owner Trustee.................................................................... S-11
Payment Amount................................................................... S-61
Person........................................................................... S-61
Plan Assets...................................................................... S-57
Plan Assets Regulation........................................................... S-57
Policy Claim Amount.............................................................. S-36
Portfolio Interest............................................................... S-55
Precomputed Receivables.......................................................... S-19
Pre-Funded Amount................................................................ S-47
Pre-Funding Account.............................................................. S-47
Principal Balance................................................................ S-36
Principal Payment Amount......................................................... S-36
Publicly Traded Partnership...................................................... S-56
Purchase Amount.................................................................. S-37
Purchased Receivable............................................................. S-61
Rating Agency Condition.......................................................... S-62
Receipt.......................................................................... S-53
Receivables...................................................................... S-10
Receivables File................................................................. S-12
Received......................................................................... S-53
Redemption Price................................................................. S-33
Related Person................................................................... S-55
Rule of 78's Receivables......................................................... S-19
S&P.............................................................................. S-4
Sale and Servicing Agreement..................................................... S-10
Scheduled Payments............................................................... S-52
Securities Act................................................................... S-58
Seller........................................................................... S-10
Servicer......................................................................... S-10
Servicer's Certificate........................................................... S-62
Servicer Expenses................................................................ S-48
Servicer Fee..................................................................... S-48
Servicer Receivables Files....................................................... S-62
Servicer Termination Event....................................................... S-50
Servicer Transition Expenses..................................................... S-48
Servicer's Certificate........................................................... S-62
</TABLE>
S-65
<PAGE>
<TABLE>
<S> <C>
Servicing Fee Rate............................................................... S-48
Simple Interest Receivable....................................................... S-19
State............................................................................ S-62
Subsequent Cutoff Date........................................................... S-11
Subsequent Financed Vehicles..................................................... S-12
Subsequent Purchase Agreement.................................................... S-12
Subsequent Receivables........................................................... S-12
Subsequent Transfer Date......................................................... S-12
Transaction Documents............................................................ S-62
Triad............................................................................ S-10
Trust............................................................................ S-10
S-11,
Trust Agreement.................................................................. S-62
Trust Property................................................................... S-11
Underwriter...................................................................... S-58
Underwriting Agreement........................................................... S-58
Weighted Average Life............................................................ S-26
</TABLE>
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<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, boats, boat motors, motorcycles, jet skis, waverunners,
all-terrain-vehicles, snowmobiles, and 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.
<PAGE>
Credit Suisse First Boston
This date of this Prospectus is November 19, 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 a statement contained herein (or in the
accompanying
2
<PAGE>
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".
<TABLE>
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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
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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, boats, boat motors,
motorcycles, jet skis, waverunners, all-terrain-vehicles,
snowmobiles, and 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 (including motor homes, van campers,
boats, boat motors, motorcycles, jet skis, waverunners,
all-terrain-vehicles, snowmobiles, and trailers), 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".
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Collateral Certificates....... The Collateral Certificates, if any, consist of certain
asset backed certificates or notes, each issued pursuant to
a pooling and servicing agreement, sale and servicing
agreement, trust agreement or 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 (including motor
homes, van campers, boats, boat motors, motorcycles, jet
skis, waverunners, all-terrain-vehicles, snowmobiles, and
trailers), 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
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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 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
Agreements.................... The Primary Assets either will be sold to the Trust 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
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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 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, unless otherwise specified in the related
Prospectus Supplement.
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
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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 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,
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the Seller will be obligated to repurchase any Receivable
that fails to comply with such requirements. See "Certain
Legal Aspects of the Receivables".
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 and (ii) the
Certificates of any Series 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 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 of the 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 made 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.
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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 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
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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 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 or such other period as specified in the related Prospectus Supplement.
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
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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 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 and unless otherwise specified in the related Prospectus
Supplement, 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.
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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.
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.
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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 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
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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 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.
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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.
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
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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.
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.
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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.
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
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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
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.
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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 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
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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 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
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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
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
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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.
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
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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.
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".
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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 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
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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.
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
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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, 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,
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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 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;
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(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.
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.
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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 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
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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").
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
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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 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
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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 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.
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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.
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.
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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 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
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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 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
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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. The Prospectus
Supplement will specify that 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, if inconsistent with its normal procedures, 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 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".
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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 or
such other period as specified in the related Prospectus Supplement. 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
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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.
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 may also 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.
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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 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.
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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 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.
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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 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 50% 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
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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.
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.
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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 latest 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. However, security interests in boats may be perfected in
one of three ways: in certificate of title states, a security interest is
perfected as described above; in other states, a security interest may be
perfected by filing a UCC-1 financing statement, however, a purchase money lien
in consumer goods is perfected without any filing requirement and if a boat is
required to be documented under Federal law, a preferred mortgage may be
obtained under the Ship Mortgage Act by filing the mortgage with the Coast
Guard, which is the exclusive method for perfecting security interests in
documented boats. The applicable Seller will represent and warrant in the
Agreement that none of the Receivables are required to be documented under the
Ship Mortgage Act.
Generally 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 or file a UCC-1 Financing Statement. 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. Unless
otherwise specified in the related Prospectus Supplement, 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
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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 in which a perfected security interest is
governed by a certificate of title statute, 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
owner re-registers such motor vehicle in the new state. A majority of these
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.
In states which the perfection of a security interest is governed by the
filing of a UCC-1 financing statement, or the Obligor moves from a title state
to a non-title state, the Servicer will file a UCC-1 financing statement in the
new state of the Obligor as soon as possible after receiving notice of the
Obligor's change of residence. UCC-1 financing statements expire after five
years. When the term of a loan exceeds five years, the filing must be continued
in order to maintain the Servicer's perfected security interest. The Servicer
takes steps to effect such continuation. In the event that an Obligor moves to a
state other than the state in which the UCC-1 financing statement is filed or in
certain states to a different county in such state, under the laws of most
states the perfection of the security interest in the boat would continue for
four months after such relocation, unless the perfection in the original
jurisdiction would have expired earlier. A new financing statement must be filed
in the state of relocation or, if such state is a title state, a notation on the
certificate of title must be made in order to continue the security interest.
The Servicer generally takes steps to effect such re-perfection upon
notification of an address change. Generally, in both title states and in
non-title states, the Servicer will not re-perfect a state law security interest
which has expired or where the Obligor has moved if the Receivable has a small
balance, a short remaining term and the Obligor has a good payment record.
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
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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 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.
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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".
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".
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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 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
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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 treated as a
publicly traded partnership that would be taxable as a corporation unless it met
certain qualifying income tests (and the resulting taxable corporation would not
be able to reduce its taxable income by deductions for interest expense on Notes
recharacterized as equity). 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 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
includable 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 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 Treasury Regulations issued under Sections 1271-1275 of
the Code (the "OID Regulations") 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 (or under rules
similar to) the 1996 Contingent Debt Regulations, or in some other manner.
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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 0.65, 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 less than or equal to 0.65, however, such
rate will generally constitute an objective rate, described more fully below.
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 a
related party 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 inversely reflect 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 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 (or under rules similar to) the 1996 Contingent Debt Regulations, or in
some other manner.
ORIGINAL ISSUE DISCOUNT. Notes may be issued with "original issue
discount". Rules governing original issue discount are set forth in Sections
1271-1275 of the Code and the OID Regulations. The discussion herein is based in
part on the OID Regulations. 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 (as specially defined for tax purposes). Because of the possibility of
prepayments, it is not clear how the DE MINIMIS rules will apply to the Notes.
It is likely that
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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, a 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 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
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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 or qualified
inverse floating rate, equals the value of such qualified floating rate or
qualified inverse floating rate as of the issue date of the Note, or, in the
case of an objective rate other than a qualified floating 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 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 its weighted average remaining life as computed for tax
purposes. 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 is made.
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The Code grants authority to the Treasury Department to issue regulations
providing for the computation of accrued market discount on debt instruments
such as 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 under Code Section 171 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. 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. However, by analogy to such regulations, any premium in excess of
interest income may be deductible to the extent of prior accruals of interest.
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.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit an election to accrue all interest, discount (including de
minimus market or original issue discount) (reduced by any premium) in income as
interest, based on a constant yield method. If such an election were to be made
with respect to a Note, the Note 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 Note Owner acquires during the year
of the election or thereafter. See "--Market Discount" above. Similarly, a Note
Owner that makes this election for a Note that is acquired as 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 Note Owner owns at
the beginning of the first taxable year to which the election applies or
acquires thereafter. See "--Amortizable Premium" above. The election to accrue
interest, discount and premium on a constant yield method with respect to a Note
is irrevocable.
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 or loss if the Note is held as a capital asset and as long-term
capital gain or loss if the Note Owner's holding period exceeded one year.
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.
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
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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 person other than a "United States Person".
A "United States Person" is an individual who is a citizen or resident of the
United States, a corporation, partnership or other entity treated as such
created or organized in or under the laws of the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source and any trust with respect to
which (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. A "Non-United States Holder" means a Non-United States Person who is a
Note Owner.
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 penalties of perjury, to
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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 by 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. The
foregoing 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 an 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
restated forms and standardize the period of time for which withholding agents
can 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.
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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 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 such individual has a "tax home"
(as defined in Section 911(d)(3) of the Code) 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.
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 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, 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 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
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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.
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. 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.
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
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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. Losses will generally be allocated in the manner in
which they are borne.
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 (other than interest) 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 ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) 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. For taxable
years beginning after December 31, 1997 in the case of a partnership that has
100 or more partners and elects to be treated as an "electing large
partnership;" 70% of such partnership's miscellaneous
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itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2%
floor that would otherwise be applicable to individual partners.
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.
Any such gain or loss would be long-term capital gain or loss if the Certificate
Owner's holding period exceeded one year. 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 or losses allocated 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
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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 laws, regulations or
other IRS guidance.
SECTION 754 ELECTION. In the event that a Certificate Owner sells its
Certificates at a profit (or loss), the purchasing Certificate Owner will have a
higher (or 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. 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 timely 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 certain disputes 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 the later of three years after the date
on which the partnership information return is filed or the last day for filing
such return for such year (determined without regard to extensions). 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.
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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 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 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 on the Trust's gross income (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, if any, 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
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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 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 ($100,000 (or $50,000 in the case of a separate return by a married
individual), adjusted for changes in the cost of living subsequent to 1990) 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. For taxable years beginning after
December 31, 1997, in the case of a partnership that has 100 or more partners
and elects to be treated as an "electing large partnership," 70% of such
partnership's miscellaneous itemized deductions will be disallowed, although the
remaining deductions will generally be allowed at the partnership level and will
not be subject to the 2% floor that would otherwise be applicable to individual
partners.
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
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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 discount rules under the Code, see "Owner Trusts--Tax
Consequences to Note Owners--Market Discount" above.
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.
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
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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. 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.
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 Grantor Trust Certificateholders 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
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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., 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)
(reduced by any 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.
See "--Market Discount" above. 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 at the beginning of the first taxable year
to which the election applies or acquires thereafter. 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 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
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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. 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 any 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 includable in
gross income for United States federal income tax purposes, without regard to
its source. 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.
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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.
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 to 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, used 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 the tax consequences to Note Owners and
Certificate Owners in 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.
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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, 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")
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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
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
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"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.
PROHIBITED TRANSACTION EXEMPTIONS FOR CERTIFICATES
Credit Suisse First Boston Corporation ("First Boston") is the recipient of
a final prohibited transaction exemption, 54 Fed. Reg. 42597 (Oct. 17, 1989)
(the "Underwriter's PTE" or "Credit Suisse First Boston Corporation's PTE" if
specified in the applicable Prospectus Supplement), which may accord protection
from violations under Sections 406 and 407 of ERISA and Section 4975 of the Code
for Plans that acquire Certificates. The Underwriter's PTE applies to
Certificates (a) which represent (1) a beneficial ownership interest in the
assets of a trust and entitle the holder to pass-through payments of principal,
interest and/or other payments made with respect to the assets of the trust, or
(2) an interest in a REMIC if the Certificates are issued by and are obligations
of a trust; and (b) with respect to which First Boston or any of its affiliates
is either the sole underwriter, the manager or co-manager of the underwriting
syndicate or a selling or placement agent. The corpus of a trust to which the
Underwriter's PTE applies include (i) obligations which bear interest or are
purchased at a discount and which are secured by (A) single-family residential,
multifamily residential or commercial real property (including obligations
secured by leasehold interests on commercial real property) or (B) shares issued
by a cooperative housing association; (ii) "guaranteed governmental mortgage
pool certificates" (as defined in the Final Regulation) and (iii) undivided
fractional interests in the above.
Plans acquiring Certificates may be eligible for protection under the
Underwriter's PTE if:
(a) assets of the type included as Primary Assets have been included in
other investment pools ("Other Pools");
(b) Certificates evidencing interests in Other Pools have been both (1)
rated in one of the three highest generic rating categories by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc., Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. and
(2) purchased by investors, other than Plans, for at least one year prior
to a Plan's acquisition of Certificates in reliance upon the
Underwriter's PTE;
(c) at the time of such acquisition, the Class of Certificates acquired by
the Plan has received a rating in one of the rating categories referred
to in condition (b) above;
(d) the Trustee is not an affiliate of any member of the Restricted Group
(as defined below);
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(e) the Class of Certificates acquired by the Plan are not subordinated to
other Classes of Certificates of that Series with respect to the right to
receive payment in the event of defaults or delinquencies on the
underlying Primary Assets;
(f) the Plan is an "accredited investor" (as defined in Rule 501(a)(1) of
Regulation D under the Securities Act);
(g) the acquisition of the Certificates by a Plan is on terms (including the
price for the Certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party; and
(h) the sum of all payments made to and retained by the Underwriter or
members of any underwriting syndicate in connection with the distribution
of the Certificates represents not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and
retained by the Seller pursuant to the sale of the Primary Assets to the
Trust represents not more than the fair market value of such Primary
Assets; and the sum of all payments made to and retained by the Servicer
and all subservicers represents not more than reasonable compensation for
the Servicer's services under the Pooling and Servicing Agreement or Sale
and Servicing Agreement and reimbursement of the Servicer's reasonable
expenses in connection therewith.
In addition, the Underwriter's PTE will not apply to a Plan's investment in
Certificates if the Plan fiduciary responsible for the decision to invest in a
Class of Certificates is an Obligor with respect to more than 5% of the fair
market value of the obligations constituting the Primary Assets or an affiliate
of such person and will not apply, unless:
(1) in the case of an acquisition in connection with the initial
issuance of any Series of Certificates, at least 50% of each Class of
Certificates in which Plans have invested is acquired by persons independent
of the Restricted Group and at least 50% of the aggregate interest in the
Trust is acquired by persons independent of the Restricted Group;
(2) the Plan's investment in any Class of Certificates does not exceed
25% of the outstanding Certificates of that Class at the time of
acquisition;
(3) immediately after such acquisition, no more than 25% of the Plan
assets with respect to which the investing fiduciary has discretionary
authority or renders investment advice are invested in Certificates
evidencing interest in trusts sponsored or containing assets sold or
serviced by the same entity; and
(4) the Plan is not sponsored by the Company, any Underwriter, the
Trustee, the Servicer, any subservicer, any credit enhancer or the obligor
under any other credit support mechanism, an Obligor with respect to
obligations constituting more than 5% of the aggregate unamortized principal
balance of the Primary Assets on the date of the initial issuance of
Certificates, or any of their affiliates (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Underwriter's PTE which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment generally allows a portion of the receivables
("Loans") supporting payments to Certificateholders and having a principal
amount equal to no more than 25% of the total principal amount of the
Certificates to be transferred to the Trust within a 90-day or three-month
period following the Closing Date ("Pre-Funding Period"), instead of requiring
that all such Loans be either identified or transferred on or before the Closing
Date. The relief, is effective for transactions occurring on or after May 23,
1997, provided that the following conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered ("Pre-Funding
Limit") must not exceed 25%;
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(2) all Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original
Loans used to create the Trust, which terms and conditions have been
approved by the Rating Agency;
(3) the transfer of such Additional Loans to the Trust during the
Pre-Funding Period must not result in the Certificates receiving a lower
credit rating from the Rating Agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial issuance
of the Certificates by the Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
Loans in the Trust at the end of the Pre-Funding Period must not be more
than 100 basis points lower than the average interest rate for the Loans
which were transferred to the Trust on the Closing Date;
(5) in order to ensure that the characteristics of the Additional Loans
are substantially similar to the original obligations which were transferred
to the Trust, either: (i) the characteristics of the Additional Loans must
be monitored by an insurer or other credit support provider which is
independent of the Company or (ii) an independent accountant retained by the
Company must provide the Company with a letter (with copies provided to the
Rating Agency, the Underwriter and the Trustee) stating whether or not the
characteristics of the Additional Loans conform to the characteristics
described in the Prospectus, Prospectus Supplement, Private Placement
Memorandum ("Offering Documents") and/or Pooling and Servicing Agreement or
Sale and Servicing Agreement ("Pooling Agreement"); in preparing such
letter, the independent accountant must use the same type of procedures as
were applicable to the Loans which were transferred as of the Closing Date;
(6) the Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier, in certain circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Pooling Agreement or an event of default occurs under
the Pooling Agreement;
(7) amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in certain permitted investments;
(8) the Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the Pre-Funding Period; (iii) the percentage
and/or dollar amount of the Pre-Funding Limit for the Trust; and (iv) that
the amounts remaining in the Pre-Funding Account at the end of the
Pre-Funding Period will be remitted to Certificateholders as repayments of
principal; and
(9) the Pooling and Servicing Agreement or Sale and Servicing Agreement
must describe the permitted investments for the Pre-Funding Account and
Capitalized Interest Account and, if not disclosed in the Offering
Documents, the terms and conditions for eligibility of the Additional Loans.
Whether the conditions in the Underwriter's PTE (in addition to, and
including those, relating to pre-funding) 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
investor who proposes to use "plan assets" of a Plan to acquire Certificates in
reliance upon the Underwriter's PTE should determine whether the Plan satisfies
all of the applicable conditions and consult with its counsel regarding other
factors that may affect the applicability of the Underwriter's PTE.
If for any reason the Underwriter's PTE does not provide an exemption for a
particular Plan's purchase of Certificates, some other individual or class
exemption may be applicable, including but not limited to: Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 91-38 regarding investments by bank
collective investment funds; PTCE 95-60, regarding investments by insurance
company general accounts; PTCE 96-23, regarding
78
<PAGE>
transactions affected by in-house asset managers; and PTCE 84-14, regarding
transactions effected by "qualified professional asset managers" ("Investor
Based Exemptions"). There can be no assurance that any of these exemptions will
apply with respect to any Plan, or even if it were to apply, that the exemption
would cover all transactions involving the applicable Trust.
PURCHASE OF NOTES
Certain transactions involving the purchase of Securities which are Notes
might be deemed to constitute prohibited transactions under ERISA and the Code
if the Primary Assets were deemed to be assets of a Plan. Under the DOL
Regulation, the Trust treated as plan assets of a Plan for the purposes of ERISA
and the Code only if the Plan acquires an equity interest in the Trust fund and
none of the exceptions contained in the DOL Regulation is applicable. The
Prospectus Supplement will indicate whether the Notes will be treated as
indebtedness without substantial equity features for purposes of the DOL
Regulation.
Without regard to whether the Notes are characterized as equity interests,
the acquisition, transfer or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Trust Fund, the
Trustee, the Indenture Trustee or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to such Plan
or in the event that a Note is purchased in the secondary market and such
purchase constitutes a sale or exchange between a Plan and a party in interest
or disqualified person with respect to such Plan. However, one or more of the
Investor Based Exemptions may be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
GENERAL CONSIDERATIONS
Before a Plan Fiduciary decides to purchase Securities 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.
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.
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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 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..................................................... 55
1997 Act............................................................................. 71
1997 Withholding Regulations......................................................... 60
Actuarial Receivables................................................................ 18
Additional Loans..................................................................... 78
Adjusted Issue Price................................................................. 57
Advance.............................................................................. 10
APR.................................................................................. 11
Average Interest Rate................................................................ 78
Cede................................................................................. 16
Certificate Balance.................................................................. 6
Certificate Distribution Account..................................................... 40
Certificate Owners................................................................... 54
Certificate Pass-Through Rate........................................................ 6
Certificate Pool Factor.............................................................. 29
Certificateholder.................................................................... 12
Certificates......................................................................... Cover
Check-the-Box Regulations............................................................ 63
Closing Date......................................................................... 7
Code................................................................................. 54
Collection Account................................................................... 40
Collection Period.................................................................... 16
Commission........................................................................... 2
Company.............................................................................. Cover
Cutoff Date.......................................................................... 7
Dealers.............................................................................. 7
Definitive Certificates.............................................................. 37
Definitive Notes..................................................................... 37
Definitive Securities................................................................ 37
Depository........................................................................... 30
Distribution Date.................................................................... 35
DOL.................................................................................. 74
DOL Regulation....................................................................... 74
DTC.................................................................................. 16
Eligible Deposit Account............................................................. 41
Eligible Institution................................................................. 41
Eligible Investment.................................................................. 41
Eligible Investments................................................................. 40
ERISA................................................................................ 74
Events of Default.................................................................... 31
Exchange Act......................................................................... 2
Fannie Mae........................................................................... 23
Farm Credit Act...................................................................... 26
FCA.................................................................................. 26
FCBs................................................................................. 26
Federal Tax Counsel.................................................................. 54
FFCB................................................................................. 23
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FFEL................................................................................. 24
FHLB................................................................................. 23
FHLMC Act............................................................................ 24
Final Scheduled Maturity Date........................................................ 11
Financed Vehicles.................................................................... 7
Financial Institution................................................................ 61
FIRREA............................................................................... 25
First Boston......................................................................... 76
Fiscal Agent......................................................................... 23
Freddie Mac.......................................................................... 23
FTC Rule............................................................................. 53
Funding Corporation.................................................................. 26
Global Securities.................................................................... A-1
Government Securities................................................................ 8
Grantor Trust........................................................................ 4
Grantor Trust Certificateholders..................................................... 67
Grantor Trust Certificates........................................................... 68
GSE Bonds............................................................................ 8
GSE Issuer........................................................................... 23
GSEs................................................................................. 8
GSEs Bonds........................................................................... 21
Indenture............................................................................ 5
Indenture Trustee.................................................................... 4
Indirect Participants................................................................ 36
Interest Component................................................................... 28
Interest Rate........................................................................ 5
Investment Earnings.................................................................. 41
Investor Based Exemptions............................................................ 79
IRS.................................................................................. 54
Issue Price.......................................................................... 57
MBS.................................................................................. 23
Motor Vehicle Installment Contracts.................................................. 7
Non-United States Holder............................................................. 60
Non-United States Owner.............................................................. 67
Non-United States Person............................................................. 60
Note Distribution Account............................................................ 40
Note Owners.......................................................................... 54
Note Pool Factor..................................................................... 29
Noteholder........................................................................... 12
Notes................................................................................ Cover
Obligor.............................................................................. 7
Offering Documents................................................................... 78
OID Regulations...................................................................... 55
Other Pools.......................................................................... 78
Owner Trust.......................................................................... 4
Participants......................................................................... 36
Payahead Account..................................................................... 40
Payaheads............................................................................ 43
Plan................................................................................. 74
Plan Fiduciary....................................................................... 74
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Pooling Agreement.................................................................... 78
Pooling and Servicing Agreement...................................................... 4
Pre-Funded Amount.................................................................... 8
Pre-Funding Account.................................................................. 8
Pre-Funding Limit.................................................................... 77
Pre-Funding Period................................................................... 9
Precomputed Advance.................................................................. 10
Precomputed Receivables.............................................................. 18
Prepayment........................................................................... 15
Prepayment Assumption................................................................ 57
Principal Component.................................................................. 28
Private Label Custody Receipt Securities............................................. 8
Private Label Custody Strips......................................................... 8
Prospectus Supplement................................................................ Cover
PTCE................................................................................. 78
Receivables.......................................................................... Cover
REFCO................................................................................ 8
REFCO Strip.......................................................................... 28
REFCO Strips......................................................................... 8
Registration Statement............................................................... 2
Related Documents.................................................................... 33
Repurchase Amount.................................................................... 39
Reserve Account...................................................................... 45
Restricted Group..................................................................... 77
RTC.................................................................................. 25
Rule of 78s Receivables.............................................................. 18
Rules................................................................................ 36
Sale and Servicing Agreement......................................................... 10
Sallie Mae........................................................................... 23
Schedule of Receivables.............................................................. 39
Securities........................................................................... Cover
Securities Act....................................................................... 2
Security Owners...................................................................... 36
Seller............................................................................... 7
Senior Certificates.................................................................. 70
Senior Class Percentage.............................................................. 70
Series............................................................................... Cover
Servicer............................................................................. 4
Servicer Default..................................................................... 47
Servicing Fee........................................................................ 44
Servicing Fee Rate................................................................... 44
Short-Term Note...................................................................... 59
Shortfall Amount..................................................................... 70
Simple Interest Advance.............................................................. 10
Simple Interest Receivables.......................................................... 18
Stated Redemption Price at Maturity.................................................. 57
Strip Certificates................................................................... 6
Strip Notes.......................................................................... 5
Stripped Certificates................................................................ 68
Subordinate Certificates............................................................. 68
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Subordinate Class Percentage......................................................... 70
System............................................................................... 26
Systemwide Debt Securities........................................................... 26
TEFRA................................................................................ 27
TIN.................................................................................. 62
Transfer and Servicing Agreements.................................................... 39
Treasury Bonds....................................................................... 8
Treasury Strips...................................................................... 8
Trust................................................................................ Cover
Trust Accounts....................................................................... 40
Trust Agreement...................................................................... 4
Trust Stripped Bond.................................................................. 70
Trust Stripped Coupon................................................................ 70
Trustee.............................................................................. 4
TVA.................................................................................. 23
TVA Act.............................................................................. 25
UCC.................................................................................. 36
Underlying Agreement................................................................. 8
Underlying Issuer.................................................................... 20
Underlying Servicer.................................................................. 20
Underlying Trust Agreement........................................................... 8
Underlying Trust Fund................................................................ 8
Underlying Trustee................................................................... 20
Underwriter's PTE.................................................................... 76
Underwriting Agreements.............................................................. 80
United States Person................................................................. 60
</TABLE>
84
<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.
A-2
<PAGE>
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(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.
A-3
<PAGE>
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-4
<PAGE>
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